Matt Yglesias recently directed me to this tweet: Conor Sen may well be correct about the need for further rate cuts.  But I worry about a Fed policy that focuses more on the unemployment rate than the GDP growth rate.  (Sen may have been referring to real GDP growth, but I’ll focus on NGDP growth, which is clearly the right variable for monetary policy.) Fed policy between the late 1960s and 1981 was extremely unstable, leading to an inflation burst that was far greater than the recent episode.  The cause of this policy disaster is clear; the Fed focused on the unemployment rate and largely ignored the growth rate of nominal GDP.   To be effective, monetary policy needs a nominal anchor.  That’s because policymakers do not know the natural rate of unemployment, or the natural rate of output.  Even a slight error in estimating the natural rate of unemployment can cause inflation to spiral out of control.  In contrast, while NGDP targeting may not be precisely optimal, any policy errors resulting from NGDP targeting are likely to be relatively small. Between the late 1960s and the 1980s, estimates of the natural rate of unemployment crept steadily higher.  In 1960s textbooks, the natural rate of unemployment was estimated to be roughly 4%.  By the 1980s, estimates were closer to 6%.  It seems likely that the natural unemployment rate was rising, and that Fed policymakers were chasing an impossible goal.  I don’t know if there has been a recent increase in the natural rate of unemployment, but it is certainly possible.  Targeting NGDP entirely avoids the need to estimate the natural rate of unemployment.  There is no natural rate of NGDP growth—it is entirely a policy choice. You might wonder if inflation provides a nominal anchor for monetary policy.  Why not have the Fed put equal weight on inflation and unemployment?  That sort of policy would certainly be better than a single-minded focus of unemployment, and indeed may have been what Sen had in mind.  But inflation is a flawed indicator because it is impacted by both supply and demand shocks.  NGDP is a cleaner measure of demand shocks, and thus a better target for monetary policy.   (0 COMMENTS)

If I were invited to a Golden State Warriors’ party and I were the only non-player invited, as soon as I entered the room the average height of people in the room would fall. But no player would lose height. Why do I mention this? Because in an otherwise excellent analysis of the causes of Canada’s decline in real GDP per capita since 2022, author Philip Smith decries the result but doesn’t consider Canada’s equivalent of the Warriors in the room. Smith points to a number of factors explaining Canada’s recent fall in GDP per capita. One of the main factors is the huge number of non-permanent residents (NPR) who have entered Canada in the last few years. Many of them are students who are not working; many of them are working part-time; and many of them are working in low-productivity jobs. Put all those factors together, as Smith does, and you can see why per capita GDP might decline. But Canadian citizens and permanent residents (PR) who have been in Canada for quite a while are higher productivity. So while the low productivity of the NPR segment brings down the Canadian average, it’s quite conceivable that the citizens and the PR segment have higher GDP per capita than they had. I don’t know that they do because the data are not broken down enough. But here’s a back-of-the-envelope attempt. The number of NPRs in Canada rose from 3.5% of the population in 2022 to 6.5% by January 2024. That’s a 3.0 percentage point increase. Because these NPRs were disproportionately students and because the ones employed were disproportionately in low-productivity jobs, a generous assumption, I believe, is that they raised GDP by 1.0% over those 2 years. So if, all else equal, the numerator, GDP, rises by 1.0% and the denominator, the number of people, rises by 3.0%, GDP per capita will fall by 2.0%. In short, these non-permanent residents bring down GDP per capita. But the rest of Canada could be experiencing an increase in GDP per person. I’m not dismissing other causes. I think Canada’s economy is in bad shape. But it’s hard to see how more NPRs are making it worse. Go back to my analogy with my entering the Warriors party: the average fell but none of them lost height. One could argue that the NPR students, a large portion of the NPRs, are getting subsidized by going to school; Canada has very few private universities and tuitions at the government universities are still relatively low. But that’s a different problem and an easier one to solve, at least conceptually: have a higher non-resident rate, as many state schools do in the United States. Towards the end of his analysis, Smith writes: Real GDP growth remains positive and unemployment is still low, although rising. The drop in GDP per capita is, rather, accounted for by: • the diminishing share of the most experienced labour force cohort due to ongoing baby-boomer retirements; • decreasing labour productivity, a complex and high-priority longer-term problem with no simple or immediate solution in sight, although in the short term it is re- lated to the next driver; and • a burgeoning NPR population, a factor for which relatively quick fixes are fortunately available, but which require difficult political decisions and imply a short-term dampening effect on GDP growth. Why does Smith think this needs a “fix?” (0 COMMENTS)

Sometimes, fiction can be used to effectively communicate ideas from economics. Other times, the economics you see in fiction make no sense. This post is another example of the latter, from a fictional series I generally like – Star Trek. (For the record, Deep Space Nine was objectively the best Star Trek series.) One of the distinctive traits of the Star Trek universe is how, among all of the most prominent and regularly featured species, it seems like only humans are multifaceted. Every other of the major Star Trek species is fundamentally built around a single trait, taken to extreme degrees. Warrior culture is a component of humanity’s culture, but it is the entirety of Klingon culture. (How Klingons ever developed faster than light travel is a mystery to me.) Logic, too, is part of how humans operate, but it is the end-all-be-all for Vulcans. Both Cardassian and Romulan society seem to be built entirely around militarism. And Ferengi are supposed to be a society entirely dedicated to the relentless pursuit of profits. The Ferengi are guided in their behavior by The Rules of Acquisition. As the name suggests, this is a list of rules that are supposed to help a Ferengi acquire as much wealth as possible. But in reality, the actual rules are a terrible guide to how one should run a profitable business. To be fair, a few of the rules are pretty sensible. “Small print leads to large risk” seems like a decent rule of thumb. So does “Never gamble with a telepath.” (It’s also advice I follow by default, because for me that rule just ends at the second word.) But overall, any real-world business that tried to operate by these rules would quickly fail. The first (and presumably, most important) of these rules is “Once you have their money, you never give it back.” According to this rule, the way to maximize profits is by having a strict policy of no returns and no refunds. But compare that to what we see in the real world. Huge – and hugely successful – companies not only don’t follow this rule, they often go out of their way to highlight how accommodating their return and refund policy is. Online brands that want to attract new customers often bend over backwards to reassure customers that trying the product is risk-free – if you don’t like it, you can easily return it, with the company paying for the shipping costs to have it returned. If you were looking to buy a product from two different companies, with one company declaring “once we have your money you’ll never get it back” while the second company says “If you’re not 100% satisfied you can get a full refund”, which would you choose? Clearly the second is a more attractive prospect. Following the first rule of acquisition would be shooting yourself in the foot. The fundamental mistake in thinking behind most of these rules is a failure to appreciate the difference between finite and infinite games. Finite games are close-ended with a specific, final “winner.” Infinite games are not literally infinite – what distinguishes them is that they are open-ended with no defined final state, and are meant to be carried on indefinitely. Or, as James Carse put it, the point of an infinite game isn’t to finish, it’s to keep the game going. In this sense, operating a successful business is an infinite game rather than a finite one. A successful business isn’t one that reaches some pre-determined end point, at which point business activity ceases. A successful business is one that is able to operate continuously over time. Perhaps in a finite game, consisting of a single interaction, the first rule of acquisition might yield better results. But for an infinite game, it’s much better to have a generous refund policy. Thomas Sowell called this error “one-stage thinking” in his book Applied Economics: When I was an undergraduate studying economics under Professor Arthur Smithies of Harvard, he asked me in class one day what policy I favored on a particular issue of the times. Since I had strong feelings on that issue, I proceeded to answer him with enthusiasm, explaining what beneficial consequences I expected from the policy I advocated. “And then what will happen?” he asked. The question caught me off guard. However, as I thought about it, it became clear that the situation I described would lead to other economic consequences, which I then began to consider and to spell out. “And what will happen after that?” Professor Smithies asked. As I analyzed how the further economic reactions to the policy would unfold, I began to realize that these reactions would lead to consequences much less desirable that those at the first stage, and I began to waver somewhat. “And then what will happen?” Smithies persisted. By now I was beginning to see that the economic reverberations of the policy I advocated were likely to be pretty disastrous – and, in fact, much worse than the initial situation that it was designed to improve. Casting aside the few sensible bits of advice in the Ferengi Rules of Acquisition, these rules all immediately fail if you view business as an infinite game, as an ever-continuing process rather than a static interaction. If you view the world in static terms and entirely through the lens of one-stage, finite games, you might think the Ferengi rules would lead to profit maximization, and that businesses will all behave this way if given the chance. But when you cease to think in static terms and think dynamically, things look very different. Think of a company that operated by rules like “A deal is a deal, until a better one comes along” and “The flimsier the product, the higher the price” and “Once you have their money, you never give it back.” This is a company that will renege on their contracts, sell overpriced junk, and decline all returns and refunds. As soon as you ask “And then what will happen?” you can see why any company that wants to be successful and maximize their profits would commit the Ferengi Rules of Acquisition to the flames. (0 COMMENTS)

Herbert Stein, an economist who served in the Nixon Administration, wrote a memoir in which he looked back on his experience. He wrote that two main lessons he had learned were: 1. Economists do not know very much. 2. Other people, including politicians who make economic policy, know even less about economics than economists do.1 In my own experience, non-economists often have some natural economic misconceptions. Below, I will spell out some important misconceptions and the basic insights from economics needed to clear them up. Unfortunately, trained economists are often eager to go beyond basic insights to theories that are more speculative. There are two ways that these “advanced” economic ideas can cause non-economists to fall back on their natural economic misconceptions. The “advanced” ideas can turn out to be unreliable, causing the economics profession to lose credibility, or the speculative theories themselves can serve to reinforce natural economic misconceptions. Price-Setting One natural misconception is that prices are set by individuals, and in particular the individuals who run businesses. After all, most businesses have a price list for the goods and services that they offer. This misconception shows up when people see business as inherently profitable, with complete power over its consumers. If profitability were a given, then no firm would ever fail. The power of any one business is constrained by other businesses competing for its customers. This misconception is evident when a politician blames high prices on “price-gouging,” or “greed.” In fact, prices emerge from the interplay between supply and demand. Each greedy business is held back by greedy consumers unwilling to pay too much and by greedy competitors trying to woo those consumers. This misconception extends to general inflation. One might think that inflation spikes when there is a sudden outbreak of greed, or that inflation recedes when greed dies down. But a little bit of economic reasoning would show that high inflation comes from government putting too much money into circulation, and inflation comes down when government manages its finances more responsibly. Job Creation One natural misconception is that jobs are created by specific businesses. Hence, people complain about firms “sending jobs overseas.” In fact, job creation does not come from a single firm. It comes from the combined actions of many people, enabling specialization and trade. If you and I each live on the food that we grow on our separate farms, there is no specialization and trade. But if you grow grain and I raise cows, and we trade with one another, we now have market exchange. In the modern economy, the process of creating new forms of market exchange involves many, many people, leading to complex patterns of specialization and trade. These patterns are sustainable only if everyone involved achieves a net gain. New patterns are constantly being developed and tested, and other patterns become unsustainable and disappear. Patterns of specialization and trade incorporate businesses that are located overseas, but no one firm determines these patterns. Economic analysis shows that changes in the location of production reflect the evolution of skills, production techniques, and household behavior. On the latter point, suppose that China as a nation saves at a higher rate than the United States. Then Chinese purchases of American assets will raise the value of the dollar, making Chinese goods’ production more competitive, causing manufacturing jobs to increase in China, with American workers moving to different industries. “Since American budget deficits contribute to our low national saving, a Congressman who blames a business for “sending jobs to China” should instead be looking in the mirror.” Since American budget deficits contribute to our low national saving, a Congressman who blames a business for “sending jobs to China” should instead be looking in the mirror. It is the budget deficit that leads to the trade deficit, not any one individual business. Many discussions of the labor market ignore the complexity of specialization and trade. Instead, they view aggregate job creation in simple terms: jobs create spending, and spending creates jobs. This simplistic, misleading idea is unfortunately very widespread, even in elementary macroeconomics courses. It leads to the idea that government deficits are good for job creation, and that austerity will cause recessions. In fact, the relationship between government fiscal policy and the process of creating patterns of sustainable specialization and trade is indirect and highly uncertain. A related misconception is that President ____ created X million jobs. Political leaders do not create jobs. They do not control the complex process of evolving patterns of specialization and trade. Policies do influence this process, but in ways that are difficult to precisely measure. Production Recipes Another misconception is that production recipes are fixed. That is, outputs require a given set of inputs. In reality, there are abundant opportunities for substitution. Wants can be satisfied in many different ways. Final goods and services can be produced by many different means. In foreign policy, decision-makers with the fixed-recipe misconception will tend to over-estimate the effectiveness of bombing a factory or imposing economic sanctions. They will be surprised by the ability of the other country to adapt. The fixed-recipe misconception also distorts domestic policy. We think that resources have to be managed, or else we will run out of something. Fifty years ago, we were worried about running out of oil. But today oil and other resources remain cheap. For more on these topics, see Arnold Kling on Specialization and Trade. EconTalk. Tyler Cowen on Big Business. EconTalk. “The Virtues of Big Business in America,” by Arnold Kling. Library of Economics and Liberty, May 6, 2019. Ryan Bourne on the War on Prices. Great Antidote Podcast, AdamSmithWorks.org, August, 2024. Also, policy makers under the fixed-recipe misconception think that in order to achieve objectives (such as reduced carbon emissions), we need to mandate specific characteristics of products and processes. Instead, market incentives are often sufficient. The carbon intensity of our GDP has been shrinking, primarily because of natural market evolution. We could have better economic policies if fewer people held these misconceptions about the economy. Economists should try harder to explain and debunk these misconceptions. Footnotes [1] Herbert Stein, Washington Bedtime Stories: The Politics of Money and Jobs, p. xi *Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is the author of several books, including Crisis of Abundance: Rethinking How We Pay for Health Care; Invisible Wealth: The Hidden Story of How Markets Work; Unchecked and Unbalanced: How the Discrepancy Between Knowledge and Power Caused the Financial Crisis and Threatens Democracy; and Specialization and Trade: A Re-introduction to Economics. He contributed to EconLog from January 2003 through August 2012. Read more of what Arnold Kling’s been reading. For more book reviews and articles by Arnold Kling, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

It is not trite to say that businesses are only as good or as bad as their members. Businesses are, after all, human endeavors, and their success or failure depends on the competence and good will of their members. Yet the assaults on hierarchical firms and market economies, often in the form of philippics that seem ceaselessly to gush forth from news media, Hollywood, and beyond, often have little to say about the particular nature of firms and their members, except perhaps to single out a few bad actors in a firm’s C-suite. One hears so much about how businesses are greedy, selfish, wasteful, and evil, with little reference to the nature and value of firms, that one might understandably begin to think that business itself, among human institutions, is especially susceptible to grave immorality. Not so. Businesses are clearly immoral at times, sometimes grievously so. But they should not be singled out as especially bad or evil. Among other reasons, it is governments, not businesses, that have killed over a hundred million people in the past century. Many firms do mistreat their employees or communities or act in other morally objectionable ways. But what do we mean by “many”? There are over 300 million firms in the world today. If 100,000 firms, say, are “bad,” is that many? Suppose there is incontrovertible evidence of their bad activity and character. Does this impugn business as such? Does it put in doubt the moral character of even the whole global system of firms? Considering that we are discussing 0.03% of firms, the answer must be no. Firms—or, more strictly, a subset of their members—do make employees work long and difficult hours sans moral justification. Firms do control employees’ lives outside of work, destroy the environment, manipulatively advertise products, and much else besides. Concerning commercial activity is, however, nothing new. People in commercial societies have been mistreating each other as long as societies with firms have existed. But suppose we could arrive at a general moral verdict on the longstanding, pervasive human phenomenon known as “business.” If we could, we presumably would need to understand all of the key plusses and minuses of business in full relevant detail. Society-wide wealth increases are a major plus of “business” that are of recent vintage, following the development of industrial capitalism: a system of decentralized markets with profit-seeking firms that are hierarchically structured and privately owned (see Gaus 2009). Jason Brennan (2014: 3-4) observes that, Many accept a common historical account: In the 20th century, the world experimented with two great social systems. The countries that tried different forms of capitalism—the United States, Denmark, Sweden, Australia, Japan, Singapore, Hong Kong, and South Korea—became rich. In contrast, the countries that tried socialism, the Soviet Union, China, Cuba, Vietnam, Cambodia, and North Korea—were hellholes. Socialist governments murdered about 100 million (and perhaps many more) of their own citizens. “When markets and the firms within capitalism were busy enriching, including—and, in many cases, especially—the least well-off, socialist governments were wreaking havoc in the lives of innocent citizens.” When markets and the firms within capitalism were busy enriching, including—and, in many cases, especially—the least well-off, socialist governments were wreaking havoc in the lives of innocent citizens. “What is striking” here, says Gerald Gaus (2009: 86, italics mine) on this massive increase in human prosperity, “is not simply the difference in the absolute level of wealth, but in the range of options—the jobs one can perform, the goods one can consume, the lives one can have.” Despite the fact that business in this political-economic system has made possible such an explosion of wealth, many scholars recommend that we deviate considerably, even radically, by trying different forms of economic systems or substituting the judgments of “expert” bureaucrats for the judgments of millions of decentralized market actors who usually know their own situations best. Perhaps the idea is that if we can keep markets in place, but “discipline” or “temper” or “supplement” or “restrain” them, then we can preserve their core benefits while avoiding their costs. On first glance, this sounds eminently reasonable. For perhaps we could then prevent the rather unfortunate worker abuse and other objectionable features of some businesses while still enabling millions of people to reach prosperity or at least avoid the evil of poverty. I like the idea, but there is a problem. The problem concerns our reasoning. How can we reason well about a whole system of political economy when making such recommendations? Critics of markets and the firms that partly constitute them have long argued for sweeping assessments of “business” under capitalistic political economy. Elizabeth Anderson (2017: 37-38), for instance, objects to U.S.-style capitalism as such. She claims that corporations, like communist dictatorships, include … a government that assigns almost everyone a superior whom they must obey. Although superiors give most inferiors a routine to follow, there is no rule of law. Orders may be arbitrary and can change any time, with- out prior notice or opportunity to appeal. Superiors are unaccountable to those they order around. They are neither elected nor removable by their inferiors. Inferiors have no right to complain in court about how they are being treated, except in a few narrowly defined cases…. The most highly ranked individual takes no orders but issues many. The lowest-ranked may have their bodily movements and speech minutely regulated for most of the day…. This government does not recognize a personal or private sphere of autonomy free from sanction. Similarly, G. A. Cohen (2009: 44-45) claims that, … motivation in market exchange consists largely of greed and fear, a person typically does not care fundamentally, within market interaction, about how well or badly anyone other than herself fares. We have, here and elsewhere, claims about corporations as such and market exchange as such. Yet there is a real question of whether any of these claims is based on a sufficient sample of business activity that could justify moral verdicts about business as such or a whole system of political economy. To begin with, we abstractly represent “business” like we do “government” or “religion.” Think, though, about the innumerable and varied forms each of these takes. Think of the seemingly countless cultures and eras in which businesses, governments, and religions have been active. Abstraction helps us to arrive at generalized judgments about activities and structures of various forms. But abstraction can be both a blessing and a curse. Abstraction is not only a crucial epistemic capacity but also a way of moving an evaluation along too quickly—often without one’s realizing it. Ask a chemist about the value or disvalue of profitable business or religion, and she might consider it abstractly and say: “It’s a key part of civilization!” or “Oh, the problem is…!” Ask the proverbial man on the street about government, and he might say: “Look, what we (government) should do is…!” Ask me, a philosopher, about a car problem, and I might say too confidently, “Well it’s probably the…!” Epistemic dangers pervade such thinking seemingly at every turn. We need clarifications. Does abstraction really let all people talk in depth and well about nearly all governments and businesses and religions? Does it enable people with training and deep expertise in subject A (e.g., chemistry) reliably to opine on subject B (business or religion), or experts in B reliably to opine on A? There is an acute difficulty that besets understanding business in particular, infecting much thinking in the related fields of political economy and business ethics. This problem is the pattern of speaking about what “the” firm should do. What, exactly, is the referent? Is it not better to ask, indexically, what these firms, or those firms, or this firm, should do? If it is better, notice this: We then find ourselves needing to select among millions of firms in our speech (e.g., the over 30 million firms in the United States today). We then need to discuss some particular subset of those businesses, and it is unclear that we can select the right number and kind of businesses to justify a general conclusion about “business.” At bottom, though, if we want to understand and morally assess business or firms, it is crucial to ask whether there is something stable and fundamental in all firms—from small bakeries to massive oil companies. Otherwise, we are left trying to apply a property “do X” (e.g., maximize shareholder value or benefit all stakeholders) to a potentially ever-fluid target: firms that make different things in different cultures for different people at different times and for different reasons. I suggest that if we are to evaluate “business,” we must start with businesspeople and their nature as individual persons. But what is a person? Why do persons form businesses? What ought businesspeople to do and avoid doing qua persons? What kinds of persons should businesspeople aspire to be on the job? The answers, I suspect, are at once stunningly complicated and arrestingly simple. Human societies are rather complex because individual human beings are very complex. But perhaps we all want one thing, to unite ourselves to the good. And, in our lives, perhaps it is part of our nature to flourish if we do this well and languish if we do not. If so, the question how to assess businesses becomes a question of how and how much businesses advance the good, if at all. Do they help people lead better lives? What counts as “better”? When important scholars such as Anderson and others explore arguments about whole political-economic systems of firms, they make judgments about millions of firms—and many more persons—all at once. The answers to the above queries seem, however, to be more likely a matter of the particular circumstances of firms and their treatment of all affected parties. The answers should perhaps focus less on firms as such, as if firms, which are artifacts with different forms rather than natural kinds with stable structures, were morally assessable as such. We understandably wish to assess business via that stunning tool we call abstract reasoning. But we should avoid being misled by easy abstraction to assume that we can generalize about millions of human communities (e.g., firms) just by thinking hard about even many particular cases of bad business activity. If “many” cases here means 1,000, this is 1,000 cases of worker treatment relative to many millions of firms and many more instances of such mistreatment. Even the lamentable occurrence of mistreatment does not entitle us to infer that capitalistic firms are morally objectionable as such. The point, then, is not that businesses are morally pristine—far from it. The point is that to impugn either business as such or a whole system of political economy, we need to reason carefully and comprehensively about many more facts than commentators often realize. In fact, the very idea of understanding business as such is even itself a bit mystifying. We are often opaque to ourselves and do not fully understand our local communities, much less our nation-states. How, then, can we understand well, and morally assess, an entire commercial system of many millions of firms that spans many cultures, continents, and eras? Of course, to say it is hard to object to business as such is not to say that businesses are unobjectionable or provide all key human goods. In fact, focusing too much on one’s role as consumer, income earner, or employee can distract one from what matters most. For more on these topics, see Elizabeth Anderson on Worker Rights and Private Government. EconTalk. Tyler Cowen on Big Business. EconTalk. “The Political Economy of Morality: Political Pretense vs. Market Performance,” by Dwight R. Lee. Library of Economics and Liberty, December 6, 2010. We should be willing to call out bad behaviors by firms and other human communities when we see them, as, alas, we inevitably will. But we should also have epistemic humility when trying to morally assess “business” as such on the basis of cases of unethical business practices. Our assessment risks systematically overlooking a real danger of selection bias. After all, news media, Hollywood, and the like, as well as some scholarly business journals, usually say comparatively little about the millions of businesses that are consistently doing good in the world. This omission is understandable at times insofar as it makes sense to prioritize identifying and fixing problem cases. But it is an omission we should be aware of, one that cannot be overlooked in any justified moral assessment of “business.” References Anderson, E. (2017). Private government: How employers rule our lives (and why we don’t talk about it). Princeton University Press. Brennan, J. (2014). Why not capitalism? New York: Routledge. Gaus, G. (2009). “The idea and ideal of capitalism.” In G. George (Ed.), The Oxford handbook of business ethics (pp. 73–99). Oxford University Press. Otteson, James R. (2019). Honorable business: a framework for business in a just and humane society. Oxford University Press. Robson, Gregory. (2019). “To profit maximize, or not to profit maximize?: For Firms, this is a valid question.” Economics & Philosophy, 35 (2019), 307–320. Robson, Gregory. “How to Object to the Profit System (and How Not To).” Journal of Business Ethics, vol. 188 (2023): 205-219. Robson, Gregory. “The Profit System: How (and Why) to Deflect the Radical Critique.” Constitutional Political Economy, vol. 35 (2024): 109-122. *Gregory Robson teaches and writes in business ethics, technology ethics, and Christian ethics and is working on a second edition of Technology Ethics: A Philosophical Introduction and Readings (Routledge 2023). His latest articles are on social media firms, virtue, justice, and the ethics of profitable business. (0 COMMENTS)

Book Review of What Went Wrong with Capitalism? by Ruchir Sharma.1 Capitalism has a “Pretty Pig” problem. The reference is to a state fair livestock contest, where there is a judging of the beauty of adult swine. There are only two entrants, because adult swine just aren’t pretty. The first pig is brought out, and the judges are horrified, because it’s ugly. The judges give the “Pretty Pig” award to the second pig, sight unseen.2 Much of the political support for state intervention in, or outright replacement of, market processes is based on the same kind of shallow logic. Markets have “failures,” are sometimes chaotic, and seem to exacerbate inequalities. The problem is that that second ugly pig, the state, is never subjected to the same scrutiny. In fact, state “failures” are often attributed to problems with the market. Recently, price controls and restrictions on new housing starts have driven up the costs of homes and apartments. But instead of blaming misguided state policy, many commenters blame “greed” in the marketplace, advocating for even more state intervention. To be fair, capitalism does have genuine problems. The focus on “market perfection” by some advocates has cost classical liberals a lot of credibility. We should all be “comparativists,” meaning that markets as they are should be compared to state regulations as they are. My Duke colleague Richard Salsman and I have tried to make some honest comparisons along these lines. I have argued that capitalism has an inherent, and quite dangerous, tendency toward “cronyism.”3 The pursuit of profit is limited by law, not morality, in a system where competition for managers will select for those who are willing to seek the favor of government, in the form of subsidies, entry barriers, and trade protection. Richard Salsman has pointed out that pressures for cronyism may well originate with state actors, for whom the “selling” of rents can be very beneficial.4 Regardless of the direction of causation—whether corporations seek rents, and turn away from making better, cheaper products, or whether politicians sell rents as a way of accumulating power and influence—capitalism in a democracy is precarious. There must be rules, preferably at the constitutional level, that limit the ability of government to pick winners and losers, and to use subsidies or industrial policy to increase the accounting profits of corruption. Ruchir Sharma’s book, What Went Wrong with Capitalism? takes another step, one that seems obviously correct on reflection, but which had not occurred to me. Sharma heads Rockefeller Capital Management’s international branch, and is a columnist for the Financial Times. He takes on the fundamental narrative, a story told by nearly everyone who writes about American capitalism, and reminds us that very little of it is true. What is true is that debt, and government spending, have grown essentially without pause or downturn over the past 125 years. His title for the first part of the book, “The Rise and Rise Again of Big Government,” illustrates this point nicely. There was never a golden age where government was small and shrinking.5 The point that had not occurred to me, the point that Sharma makes persuasively and in considerable detail, is that the expansion of government, and especially the expansion of spending based on government debt, has changed the very nature of capitalism. The form of the argument is striking: Sharma begins with a partly autobiographical account of the Indian experience, trying to achieve economic development in a democracy. He summarizes India’s problem this way: Too often, Indian politicians sell aid to select businesses or industries as economic reform, when the measures in fact retard competition and growth. Pro-business is not the same as pro-capitalism, and the distinction continues to elude us. The result: despite all of India’s inherent strengths, from a strong entrepreneurial culture to world-class human capital, it will take longer to become a developed nation than it could have. In pursuit of the unreachable socialist ideal—equality of outcomes—India long denied itself the very real promise of capitalism—equality of opportunity. Today the developed capitalist societies are turning onto the path that slowed progress in India, speeding the expansion of welfare and regulatory states. (p. xiii) The problem, then, is to explain the surprising, outlying event. That’s not India, since the move toward regulation, planning, and “management” of prices and the economy are the normal state of democratic governance. The thing to be explained is how and why some nations, at least until recently, managed to avoid the desire of politicians to exploit the inherent weakness of capitalism to defend itself. “Politicians who promise equality and social justice reform can obtain more votes than politicians who promise only continued economic growth.” Capitalism’s weakness, in a democracy, is the political concern for “equality of outcomes.” This basic impulse is often costumed as “social justice” or “the politics of equity.” What’s interesting is that this political impulse appears to be what economists call a “normal good.” Very poor nations that develop market systems can often make significant strides toward development, and the promise of the next generation having a motorcycle, electricity, a refrigerator, and a washing machine can satisfy the desire for improvement. But in a democracy, at some point along the path to economic development, increased income increases the demand for equality. Politicians who promise equality and social justice reform can obtain more votes than politicians who promise only continued economic growth. However, the political system that actually tries to provide social justice will kill economic growth. The question is simple: Is effective, dynamic capitalism sustainable, in a democracy? Sharma thinks the answer is yes, but with some qualifications. The Wrong Story, What Really Went Wrong, and Why That’s Important The narrative that says capitalism needs corrective policies and that market failures need government regulation and taxation is based on a mistaken historical account. That account claims that, sometime after the New Deal of the 1930s and the highly successful “Great Society” programs of the 1960s, there was a retrenchment that caused disaster. Government programs were shrunk, industries were excessively deregulated, and taxes were largely eliminated, starving governments of needed resources. Almost no part of this narrative is correct, according to Sharma (and he’s quite right). There was no great retrenchment; in fact government spending as a proportion of GDP has been consistently increasing steadily since 1948, when the figure was 12%. Government spending had increased to about 35% of GDP when Ronald Reagan took office. The proportion went up, not down, during the Reagan presidency, and increased further during the Bush I term. The percentage went as high as 45% during the pandemic of 2020-2021, and has fallen back only to about 38% now. In short, government control and management of the economy has more than tripled, as a proportion of GDP, in the past 75. But this increase in total government spending, even when stated as a proportion of GDP, is dwarfed by the increase in the annual government deficits, resulting in an accumulation of debt that is unprecedented in peacetime. Debt, of course, is the accumulation of deficits and surpluses over time, adjusting for the portion that is paid off each year by bonds that are maturing. Of course, it is possible also to reduce debt by printing new money and using that to buy existing debt. The temptation to do just that, and use inflation as a tool in public finance, is the ostensible reason why the United States has an independent central bank, the Federal Reserve. Government debt in the United States has gone up by even more than spending, rising to more than 110% of GDP in 2022. That figure was only 50% as recently as 2008. Finally, legions of new bureaucrats and new regulatory and reporting requirements have been imposed on almost every part of the American economy, slowing innovation and sharply reducing job creation. The painfully slow recoveries from the economic recessions of 2009 and 2021 are likely largely attributable to a combination of government competing with private business for credit, and new regulations that make starting and running a small business almost impossible. As Sharma points out, these facts are important for understanding what is wrong, so that solutions to our problems can be found. There are real problems, but the notion that the problem has been a sharp shrinking of government spending and regulation is not only wrong, but is precisely backwards. There is one part of the standard narrative, however, that holds up under scrutiny. That is the claim that, in spite of the overall lethargy of the economy, some corporate sectors, including the financial industry, have produced consistent and substantial profits. If capitalism is suffering from excessive government interference, why are corporate profits robust? The answer Sharma gives is that capitalism has allowed itself to become addicted to deficit spending, artificially low interest rates, and the promises of enormous subsidies and bailouts. As Sharma puts it: When government becomes the dominant buyer and seller in the market—as it has in recent decades—it distorts the price signals that normally guide capital. Money starts to flow down the paths of least regulatory resistance, or most government support. Each crisis brings bigger bailouts, leaving capitalism mired in debt, more dysfunctional and fragile. In the 2000s, and even more in the 2010s, the governments of advanced countries began injecting money into economies that were not in crisis. They were in recovery. Disappointingly slow recovery, but still. Intended to boost the pace of growth in those economies, these experiments had the opposite effect…The periodic financial crises—erupting in 2001, 2008, and 2020—now unfold against the background of a permanent, daily crisis of colossal capital misallocation. (pp. 3-4) The result is that very substantial parts of the world’s financial capital—and this is true in the United States most of all—are invested in the wrong activities, and the amount of both public and private debt that has financed this unsound scaffolding means that it is simply not possible to end the cascade of new debt, because that is the only thing that props up the whole unstable structure. Given the ever-growing web of regulations and government requirements, it is not possible to start new businesses, or expand existing enterprises, enough to increase productivity by an amount that could pay off this debt. More and more companies are on the threshold of being unable to pay even the interest on their debt, and can survive as “zombie companies” only by issuing new debt, with the confidence that it will be purchased by the Federal Reserve and held on the bank’s balance sheet at par. As long as that process continues, the system appears to be alive, and in many cases healthy. But it is not. It is dying. The book has very interesting chapters on the history and development of this problem, some of the features of the financial system that have made the problem worse, and on some more hopeful courses of action that might at least begin to chip away at the severity of the coming correction. But I want to close with a short summary of Sharma’s diagnosis, because it brings together a number of elements that are worth considering. • First, analysts, pundits, government officials, and even many people in industry have embraced a false narrative, which claims that deregulation and shrinking government have caused instability in capitalism. It is true that capitalism has become unstable, but regulations have expanded, not shrunk, and the size of government has consistently grown. The narrative is simply false. • Second, giant corporations dominate the economy, and this process is accelerating. Total stock valuations are at unprecedented heights, CEO pay and compensation for Wall Street operatives are at shockingly high levels. But since the standard narrative, described above, is false, there has to be another explanation. That explanation is an asset inflation, or financial bubble, caused by excessive government spending, expanding debt, and profligate expansion of the money supply. • Third, the conflict between the standard narrative and the truth will cause a cataclysmic showdown between pretense and reality. If, as our leaders say and our young people are convinced, the problem is an unwise shrinking of government, the answer must be larger government, and fast. The cataclysm will be caused by the collision between the grossly inflated values of financial assets and derivatives whose value depends on those assets, and the mistaken prescription that the solution is even more spending, and more regulation. The correction, when it comes, will be devastating. For more on these topics, see Michael Munger on Crony Capitalism. EconTalk. Don Boudreaux on Public Debt. EconTalk. “Rent Seek and You Will Find,” by Michael Munger. Library of Economics and Liberty, July 3, 2006. Sharma’s book is not without problems, but the basic message is both clear and persuasive. It is a mistake to blame capitalism for the problems created, and expanded, by government action. Particularly damaging is the misconception that markets are like “machines” to be fine-tuned, rather than a “natural ecosystem” to be nurtured and left to grow on their own. (P. 288-289). But though one could plausibly say this is not all capitalism’s fault, it is capitalism’s problem. That should be the basis for trying to figure out what to do next. Footnotes [1] What Went Wrong with Capitalism? by Ruchir Sharma. [2] Michael Munger, “Is Capitalism Worth Saving?” AIER, Mar. 14, 2019. [3] Michael Munger and Mario Villarreal-Diaz, “The Road to Crony Capitalism.” The Independent Review, 23(3): 331–344. Winter 2018/2019. [4] Richard Salsman, 2022, “Rent-Selling Countries Are More Corrupt and Less Wealthy.” AIER, May 13, 2022. [5] This is a trade book, written by a journalist, so it is unsurprising that Sharma does not avail himself of the standard reference on this point, Robert Higgs’ “ratchet theory.” (Robert Higgs. 1987. Crisis and Leviathan: Critical Episodes in the Growth of American Government. New York: Oxford University Press.] *Michael Munger teaches at Duke University and is Director of the interdisciplinary program in Philosophy, Politics, and Economics (PPE) at Duke University. He is a frequent guest on EconTalk. Read more of Michael Munger’s writing at the Econlib Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

A Book Review of The Road to Freedom: Economics and the Good Society, by Joseph E. Stiglitz.1 Introduction Columbia University economics professor Joseph E. Stiglitz has recently published a book titled The Road to Freedom: Economics and the Good Society. In it, Stiglitz, who shared the 2001 Nobel Prize in economics with George Akerlof and Michael Spence, criticizes what he calls “neoliberalism” and singles out Milton Friedman and Friedrich Hayek as two prominent neoliberals. Stiglitz argues that Friedman, Hayek, and others failed to recognize the importance of market failure and were too optimistic about how competitive an economy would be without government intervention. Whereas Friedman argued that economic freedom is a necessary, though not sufficient, condition for political freedom, Stiglitz turns the argument on its head. In his view, the kind of economic freedom that Friedman advocated would lead to less political freedom. Interestingly, though, Stiglitz himself advocates less freedom of speech for people with certain views and he claims that it was good for governments to have suppressed what he thinks of as misleading speech about the COVID-19 pandemic and masks. Throughout the book, Stiglitz makes strong assertions with little or no evidence. Although the book is heavily footnoted, the footnotes are mainly to explain some of his ideas further or to reference other books or articles, disproportionately written by Stiglitz. There are few hard numbers, and he makes little attempt to cite writings by those he criticizes. He also shows a stunning ignorance of economic history and, in discussing price gouging, shows no awareness of the downside of price controls. His criticism of communism doesn’t even mention the millions of deaths it led to. At times, as when he discusses climate change, he is completely one-sided and seems completely unaware that he is. Moreover, Stiglitz is not shy about engaging in stunning personal attacks on Friedman and Hayek. The result is a book that preaches only to people who (1) already agree with him and (2) don’t need to see good evidence or arguments to support their views. Neoliberalism and Trickle-Down Economics In his Preface, Stiglitz defines neoliberalism as “the belief in unregulated, unfettered markets.” In a footnote he promises to provide a “more extensive definition” in the first chapter, but a careful reading of that chapter shows no such attempt. Stiglitz, like many other critics of free-market economists, uses a term to describe them that almost none of them uses. The only economist I know who calls himself a neoliberal is EconLog co-blogger Scott Sumner. And the only evidence of Milton Friedman mentioning the word “neoliberal” was in a 1951 essay in a Norwegian magazine. Even there, Friedman didn’t claim the label for himself. In none of his subsequent non-academic writing—and I have read virtually all of it—did Friedman call himself a neoliberal. Similarly, Stiglitz refers to people on the “Right” (he capitalizes the word) as advocates of “trickle-down economics.” They argue, he says, that “if we made the economic pie larger, all would eventually be better off.” (italics in original) Yet, I’ve never been able to find people on the “Right,” whether classical liberal, conservative, or libertarian, using the term “trickle-down economics” to refer to what they believe in. When someone uses terms to describe people’s beliefs, terms that those people never use to describe their own beliefs, we should be suspicious. While we’re discussing it, though, it’s important to point out that the last two centuries of economic growth completely justify the idea that steady economic growth in a society does make virtually everyone better off. J. Bradford DeLong, an economist at the University of California, Berkeley—and certainly no one whom Stiglitz would regard as a “neoliberal”—beautifully documented that fact in a 2000 National Bureau of Economic Research study aptly titled “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” This isn’t trickle-down economics; it’s gush-down economics. Economic Concentration and the 19th Century Trusts “In criticizing Hayek and Friedman, Stiglitz claims that they thought that markets on their own would remain competitive without government intervention and forgot or ignored “the experiences of monopolization and concentration of economic power that led to competition laws” in the late 19th and early 20th century.” In criticizing Hayek and Friedman, Stiglitz claims that they thought that markets on their own would remain competitive without government intervention and forgot or ignored “the experiences of monopolization and concentration of economic power that led to competition laws” in the late 19th and early 20th century. There are two problems with this claim. First, both Hayek and Friedman did favor some version of antitrust. In his 1962 classic, Capitalism and Freedom, Friedman wrote, “The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition.” And in his 1979 volume 3 of his Law, Legislation, and Liberty, Hayek wrote that monopolists’ ability to price discriminate “ought to be curbed by appropriate rules of conduct” in cases where “market power consists in a power of preventing others from serving the customer better.” It’s not clear that Hayek had in mind antitrust statutes, He more likely was thinking of common law rules against monopolistic private-market actions. I don’t completely defend Friedman’s and Hayek’s views. I simply defend them from Stiglitz’s false charge. Second and more important, Stiglitz shows his own ignorance of how competitive the “trusts” of the late 19th century were. In a pathbreaking study that Stiglitz doesn’t mention, economist Thomas DiLorenzo showed that in the six “trusts” he examined, between 1880 and 1890 real output increased by 175 percent at a time when the trusts were gaining market share and the economy’s overall output increased by only 24 percent. In his article, “The Origins of Antitrust: An Interest-Group Perspective,” published in the International Review of Law and Economics, DiLorenzo found that real prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal. What about oil, which was produced by that famous trust, Standard Oil of New Jersey? In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, noted that during that same decade (1880-1890), the output of petroleum products rose 393 by percent and the price fell 61 percent. The only conclusion consistent with those facts are these two sentences from Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.” But you won’t find any mention of this in Stiglitz’s book. Stiglitz’s Personal Attacks While we’re on the issue of false, or at least specious, charges, it’s worth pointing out Stiglitz’s personal attacks on Friedman and Hayek. In his Chapter One, Stiglitz writes, “Friedman and Hayek, like many other conservatives, have an unfailingly dismal view of human nature. It may have been because of deep introspection that they arrived at their extreme views about individual selfishness, which they the generalized to everyone.” I can’t speak for Hayek. I spent about a week at a conference with him in June 1975 and didn’t get to know him well, but I certainly didn’t observe an obviously selfish person. The main thing I observed was his utter delight in finding young economists who were more free-market-oriented than he was. I did know Milton Friedman well, though, having interacted with him on numerous occasions between 1970 and the early 2000s. What I observed was a man with a large generosity of spirit. That simply doesn’t fit Stiglitz’s image of someone generalizing from his own selfishness to that of people in general. On a related note, Stiglitz accuses Friedman of having been “a key adviser to the notorious Chilean military dictator Augusto Pinochet.” This claim has been refuted countless times. Friedman himself noted—and no one contradicted his claim—that Friedman spent about 45 minutes talking to Pinochet. Does that constitute key advice? And what is one to say about Stiglitz’s own close consulting relationship with Venezuelan strongman Hugo Chavez? Price Gouging One thing that tends to separate economists from non-economists is the economists’ understanding of the positive effects of allowing so-called “price gouging.” For purposes of this discussion, I’ll define price gouging as raising a good’s price quickly and substantially when the demand for the good suddenly rises or the supply suddenly falls. A 2012 poll of prominent economists found that only 8 percent agreed or strongly agreed with the idea of passing a law preventing price gouging during “a severe weather event or emergency” while 51 percent disagreed or strongly disagreed.2 Weighted by confidence in their views, the results were even more lopsided. Only 7 precent agreed or strongly agreed while 77 percent disagreed or strongly disagreed. Why do so many economists think that allowing price gouging is a good idea? For three main reasons. First, even if higher prices don’t elicit higher output, they do cause the suddenly scarcer good to be sold to those who value it most. We measure value by willingness to pay. That may sound problematic, but it’s not always true that the wealthier people are the ones who are willing to pay more. During a hurricane, for example, although the wealthier person will certainly get plywood to cover up the windows of his mansion, the person who lives in a trailer might outbid the wealthier person for plywood for his trailer so that the wealthier person doesn’t get the plywood for his tool shed. Second, if suppliers know that they can raise prices when there’s a sudden increase in demand or decrease in supply, they are more likely to stockpile goods than if they know they won’t be able to raise prices. Third, outside suppliers, if they can charge unusually high prices, will be motivated to ship goods into the area where there is a sudden scarcity. There are actual cases of lumber sellers in Georgia getting ready to ship lumber to Florida if they’re assured of being able to get high prices. Where does Stiglitz stand? He’s in the 7 or 8 percent. In addressing the issue of umbrella prices during rainstorms, he advocates a “simple coercive rule—no price gouging when it rains.” His argument for that rule is that it will cause people not to invest in information about the weather. He thinks that’s good. But he doesn’t even bother addressing the issues I discussed above: the allocation of a given number of umbrellas, the incentive to stockpile, and the shipment of umbrellas from other areas. (This last, admittedly, is probably not important for sudden rainstorms.) Climate Change Stiglitz calls climate change “an existential threat.” He writes: Climate change is about more than the heating of the planet a few degrees; it is about the increase in extreme weather events. More droughts, more floods, more hurricanes, more extreme heat and more extreme cold spells, rising sea levels and increasing ocean acidity, and all the dire consequences that will ensue, from dying seas to forest fires to the loss of life and property. Such strong empirical claims cry out for strong empirical support. Stiglitz gives none. Yet physicist Steven Koonin, in his 2021 book, Unsettled: What Climate Science Tells Us, What it Doesn’t, and Why it Matters, presents solid data, much of it from the federal government’s National Climate Assessment that undercuts claims like those quoted above. I discuss a number of these in my 2022 review of Unsettled.3 COVID, Masks, Censorship, and Communism This same confidence without evidence infuses Stiglitz’s discussion of the efficacy of wearing masks during COVID. He claims that “[S]cientists found that, holding all else constant, masking and social distancing make a difference.” The good news is that he footnotes this claim; the bad news is that the footnote doesn’t give evidence for the claim. More ominously, Stiglitz comes out strongly for censoring people whose views on COVID differ from his. He writes: When individuals believe wrong information—when there is a demonstrable inability of many to identify laws and false information—there may have to be restrictions on its dissemination. We did that during the pandemic; it would have been foolish—socially harmful—if we had not. That raises other issues. People acting on Marxist ideas, which were clearly wrong, put into power governments into power that murdered tens of millions of people. Would Stiglitz have censored Karl Marx? I would bet that he would answer “No” and that part of the reason is that he doesn’t feel strongly about Communism. Here’s his summary statement about the downsides of Communism: Communism succeeded in generating greater equality and more security in material goods but failed on other counts, including low economic growth, an absence of freedom in all dimensions, a concentration of power, and a greater inequality in standards of living than Communist rulers would admit. Put aside the fact that there were great inequalities under Communism. As my co-authors and I pointed out in our article “The Hidden Inequality in Socialism,” Leonid Brezhnev, general secretary of the Soviet Communist Party and president of the USSR, “had Rolls Royce, Mercedes, Cadillac, Lincoln Continental, Monte Carlo, Matra, and Lancia Beta automobiles.”4 Much more important, what’s missing? How about Joseph Stalin’s purposeful starving of millions of Ukrainians in the early 1930s. Has Stiglitz, a smart man, never heard of the Holodomor? Getting Coase Wrong One of the major players among free-market economists in the last century was the late Ronald Coase, who was even a player into the 21st century. Coase famously established that lighthouses in Britain, which so many economists—famously including Stiglitz’s own teacher, Paul Samuelson—assumed had to be provided by government, were actually provided privately. Coase never argued, though, that private producers could feasibly provide all public goods. Yet in a table summarizing various “neoliberal” views, Stiglitz writes, “[The] Coase theorem says that market will efficiently solve public goods problems.” Has he read Coase? Is there anything to like? There are so many other parts of the book to criticize. They include Stiglitz’s idea that the U.S. economy has deindustrialized—it hasn’t; an attack on Republicans for gerrymandering even though Democrats do so also; and a criticism of the idea of letting people sell their body parts in which he forgets to argue why they shouldn’t be so allowed. That is by far from a complete list of remaining weaknesses in the book. I’ve been more critical of Stiglitz’s book than I normally am of other books by economists who are left of center. That raises a question: is there anything valuable in his book? Yes. There are two main things. First, on immigration, Stiglitz criticizes the media for showing “waves of refugees trying to cross the border.” He claims that this occurs “relatively rarely.” I’m not sure he’s right. But I do agree that the showings on media probably exaggerate the problem. Even on immigration, though, Stiglitz misses an opportunity to make a bigger point. He writes: The libertarian claims [about people deserving their incomes] are even weaker once we think about what their incomes would have been had they been born in a poor country, without the rule of law or the institutions, infrastructure, and human capital that make the economies of advanced countries work so well. It is not enough to have assets such as entrepreneurial talents. If you are born into the wrong environment, those assets mean nothing. The way I’ve summed up that point in speaking to American audiences is to tell them that for most of them, the most valuable asset they have is their American citizenship. But there’s a straightforward solution, one that many libertarians advocate but Stiglitz fails to: let more people immigrate. Throughout the book, Stiglitz expresses concern for people in poor countries. The quote above shows that he understands how to help millions of them. But he doesn’t bother to say so. For more on these topics, see Joseph Stiglitz on Inequality. EconTalk. “The Unacknowledged Success of Neoliberalism,” by Scott Sumner. Library of Economics and Liberty, June 5, 2010. Michael Munger on Antitrust. EconTalk. “Price Gouging is Fine but Humans Are Better,” by Michael L. Davis. Library of Economics and Liberty, November 6, 2017. Bjorn Lomborg on the Costs and Benefits of Attacking Climate Change. EconTalk. The other area in which he expresses some good thoughts is on trade policy. Stiglitz writes, “The US [government] talks about the international rule of law in trade, but nothing is done when Trump or Biden violate these rules, whether by imposing unjustified tariffs, by subsidizing its chip industry, or by passing Buy America provisions.” But those are two rare points of light. Stiglitz’s book is, in short, full of important errors and deeply unsatisfying. Footnotes [1] Joseph E. Stiglitz, The Road to Freedom: Economics and the Good Society. W. W. Norton & Company, 2024. [2] Kent A. Clark Center for Global Markets poll, “Price Gouging.” May 2, 2012. [3] David R. Henderson, “Good Reasoning on Global Warming.” Financial and Economic Review. June 2022, 203-209. [4] David R. Henderson, Robert M. McNab, and Tamás Rózsás, “The Hidden Inequality in Socialism.” The Independent Review, Volume IX, Number 3, Winter 2005. *David R. Henderson is Emeritus Professor of Economics with the Graduate School of Business and Public Policy, Naval Postgraduate School in Monterey, California. He is also a Research Fellow with the Hoover Institution and a Senior Fellow with the Fraser Institute. He blogs at EconLog. For more articles by David R. Henderson, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Is tribalism destroying democracy? According to cultural psychologist Michael Morris of Columbia University, just the opposite may be the case. As he explains in his new book, Tribal, our tribal instincts can also be the source of our success–in politics, society, business, and even professional sports. Listen as Morris and EconTalk’s Russ Roberts discuss real examples of […] The post Reclaiming Tribalism (with Michael Morris) appeared first on Econlib.

  A Pro-Immigrant Party Wouldn’t Want To Revive the Failed Senate Border Bill by Fiona Harrigan, Reason, October 2, 2024. Excerpt: The bill did include some reforms, such as additional employment- and family-based visas and work authorizations for the family members of certain visa holders. It would have helped protect Documented Dreamers, who were brought to the U.S. legally as children by parents on nonimmigrant visas and may need to self-deport if they don’t secure a green card before turning 21. It also included protections for the Afghans evacuated to the U.S. following the August 2021 Taliban takeover of Afghanistan. But it also would have ravaged the asylum-seeking process—which is certainly flawed—and likely jeopardized due process and humanitarian protection for vulnerable migrants. The bill’s main provision would have significantly limited access to asylum if border crossings exceeded a certain threshold. It would have given Immigration and Customs Enforcement billions to fund more detention capacity and deportation flights. It would have created a hasty screening process and deprived migrants of the opportunity to appear before an immigration judge. DRH comment: Fiona Harrigan is one of my favorite writers at Reason. She does a consistently good job of reporting on immigration issues.   What populists don’t understand about tariffs (but economists do) by Kimberly Clausing and Maurice Obstfeld, Peterson Institute for International Economics, October 1, 2024. Excerpt: Costs of tariffs. Tariffs are a tax on imports, and they will raise prices for households and, crucially, for businesses that rely on imported inputs to make their products. Not only will prices rise for the imported products, so will the prices of goods produced at home that compete with imports. Simply put, protectionism reduces the gains from trade; we choose to pay more than necessary for some goods (imports and their domestic substitutes) instead of focusing on those goods that we produce more efficiently than foreigners. One clarification: When they say “we choose to pay more than necessary for some goods,” what they really mean is that because our government imposes these taxes called tariffs, we do pay more. But “we” aren’t choosing the tariffs. It’s true that we choose to pay those higher prices when we buy, but I think that’s not what they’re getting at. I think they’re writing as if they think that Americans and government are one. It’s a typically collectivist language that creeps into an otherwise excellent analysis. Obstfeld, by the way, is co-author, with Paul Krugman and Marc Melitz, of the textbook International Economics: Theory and Policy, one of the leading textbooks in international economics. Americans Grow Increasingly Dependent on Government Payments by J.D. Tuccille, Reason, October 4, 2024 Excerpt: “Income from government transfers is the fastest-growing major component of Americans’ personal income,” according to a September report from the bipartisan Economic Innovation Group (EIG). “Nationally, Americans received $3.8 trillion in government transfers in 2022, accounting for 18 percent of all personal income in the United States. That share has more than doubled since 1970.” And: Separately, the Foundation for Government Accountability finds that “total spending on Medicaid expansion has surpassed $1 trillion nationwide—$574 billion more than expected.” Even so, the EIG report emphasizes that “Medicaid expansion had only three quarters the effect on transfer spending annually as a single percentage point increase in the share of the population aged 65 and over.” Seniors are growing as a share of the U.S. population, cashing in on Social Security and Medicare, and that’s the main driver of dependency on government payments. Guantanamo: Deal or No Deal? by Andrew P. Napolitano, antiwar.com, October 4, 2024. Moreover, the Pentagon’s own team of prosecutors have warned against the public revelation of “all” the evidence in the case because the evidence of stomach-churning torture will expose war crimes for which there is no statute of limitations. Stated differently, if this case is tried in the traditional way as opposed to the entry of a plea agreement with the defendants’ recitation under oath of their knowledge of the crimes, George W. Bush himself and others in his administration, in the CIA and in the military could be indicted and tried in foreign countries for war crimes.   Protectionism is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift toward Trade Wars and Industrial Policy by Michael R. Strain, in Strengthening America’s Economic Dynamism, edited by Melissa S. Kearney and Luke Pardue. Washington, DC: Aspen Institute. Excerpt: Much of the rise in protectionism owes to the view that free trade has led to substantial employment reductions. This conclusion is incorrect. Economic theory suggests that trade liberalization should have no effect on the level of employment. And the evidence from the “China shock,” taken as a whole, suggests that trade with China did not affect the aggregate number of jobs in the United States. It is also predicated on the wrongheaded assumption held by many elected officials and commentators that free trade is about jobs. But open trade is not about jobs. It is about wages and consumption. Leveraging comparative advantage allows nations to specialize in their productive activities. Specialization makes their workers more productive, putting upward pressure on their wages and incomes. Specialization increases world output, raising the level of consumption and the quality and variety of consumer goods and services. (0 COMMENTS)

As we dig into the Fall semester, thousands of students will begin their first economics course and be exposed to the world of economic thinking. I used to be a drumming instructor with a music lessons company. One thing I enjoyed doing as a teacher was leaving the student with the capability of performing and practicing a full, simple drum pattern after the very first lesson, such as the main rhythm to AC/DC’s Back in Black or The Beatles’ Yellow Submarine. Since I decided on the life of an economist, I like to think about what an analogous good first lesson in economics would be. What exercise in economic thinking could students put to use after their very first lesson? One of my favorite first lessons is an exercise with the concept of comparative advantage. This concept explains a lot about the world with some extremely simple logic, but that can be quite unintuitive for the beginning student. It explains why people would exchange things with one another in the first place. Years ago, I had a conversation with another drumming instructor. I mentioned that I was turning my attention to economics in graduate school. “Oh” he said approvingly, “I took an undergraduate class in economics once. I don’t remember very much, but I learned how to do my taxes.” I nodded along with him, though internally mortified. However practical, one should not learn how to do one’s taxes in an economics class. A primary takeaway should be an understanding of why it is that so many individuals pay others to do their taxes for them. The reason is comparative advantage.  Professors often show this with the hypothetical trade of coconuts and bananas on a deserted island or the trade of cloth for wine between Britain and Portugal. Here is the example I would have liked to provide for my friend, the drum teacher. I believe it provides a great concrete lesson for beginning economics students.  Imagine an economy with only two individuals and two goods: music and accounting services (we make believe that citizens in this economy can subsist on these two goods alone). We further posit that within each day, an individual has some capacity to produce either of these goods in different bundles. Our two individuals, Brutto and Bella, differ in productive ability. If Brutto focuses all of his energy on accounting services, he can produce 5 units. If he focuses on music, he can produce 10 songs. Bella, on the other hand, is much more productive. If she focuses on accounting, she can make 10 units, and if she spends her time only on music, she can produce a whopping 30 songs. Here are their productive capacities, showing some of the bundles they can produce in autarky: Abilities of Brutto and Bella in Producing Either Songs or Accounting Services in A Single Day Brutto Bella Songs Accounting Services Songs Accounting Services 0 5 30 0 2 4 27 1 4 3 24 2 6 2 21 3 8 1 18 4 10 0 15 5 – – 12 6 – – 9 7 – – 6 8 – – 3 9 – – 0 10   For some exogenous reason, Bella is endowed with a greater opportunity for consumption of both goods. She has an absolute advantage over Brutto. Seemingly, Brutto could use help from Bella, but Bella has no need for Brutto.  One should notice though, that at a production ratio of 30 S per 10 A, it costs Bella 3 songs every time she produces a unit of accounting services. It costs Brutto only 2. When Bella produces one song, she gives up only 1/3 of a unit of accounting services, whereas Butto gives up 1/2 of a unit. Brutto would be willing to trade an accounting service for any amount of songs greater than 2, and Bella would be willing to trade a song for any amount of accounting services greater than 1/3.  If both Bella and Brutto are rational and willing to engage in trade, opportunities exist for them both to become richer because Bella has a comparative advantage in producing songs and Brutto has a comparative advantage in producing accounting services. The range of exchange ratios that would make them better off is anywhere between 2 and 3 S per 1 A. We could imagine that they settle on a price of 2.5 S per A.  Here is a list of how the distribution of the goods in this economy would look with and without trade between the two individuals.  Production of Music and Accounting Without Trade and With Trade at a Price of 2.5 S / 1 A Brutto Bella Without Trade With Trade Without Trade With Trade Songs Accounting Services Songs Accounting Services Songs Accounting Service Songs Accounting Services 0 5 0 5 30 0 30 0 2 4 2.5 4 27 1 27.5 1 4 3 5 3 24 2 25 2 6 2 7.5 2 21 3 22.5 3 8 1 10 1 18 4 20 4 10 0 12.5 0 15 5 17.5 5 – – – – 12 6 15 6 – – – – 9 7 12.5 7 – – – – 6 8 10 8 – – – – 3 9 7.5 9 – – – – 0 10 5 10   When trade takes place, both Bella and Brutto reach higher levels of consumption. Even though Bella is better at everything, she can still get richer by trading with Brutto. In fact, even if Bella becomes more skilled, they can still benefit from trade.  Imagine now that Bella engages in capital investment. She spends time practicing and becomes even better at producing songs. Now she can produce 40 songs in a single day if she focuses her energies on music. This greater production of songs makes accounting services relatively scarcer, and Bella would now be willing to let go of a song for anything greater than 1/4 of a unit of accounting services. If the price is renegotiated, they might land on a new price. Here is what happens to the trade possibilities if they reach a new price of 3.5 S per 1 A.  Production of Music and Accounting Without Trade and With Trade at a Price of 3.5 S / 1 A Brutto Bella Without Trade With Trade Without Trade With Trade Songs Accounting Services Songs Accounting Services Songs Accounting Service Songs Accounting Services 0 5 0 5 40 0 40 0 2 4 3.5 4 36 1 36.5 1 4 3 7 3 32 2 33 2 6 2 10.5 2 28 3 29.5 3 8 1 14 1 24 4 26 4 10 0 17.5 0 20 5 22.5 5 – – – – 16 6 19 6 – – – – 12 7 15.5 7 – – – – 8 8 12 8 – – – – 4 9 8.5 9 – – – – 0 10 5 10   If Bella becomes better at producing songs, she not only becomes richer, but Brutto also becomes even richer than before! This is where the “ah-ha” moment sets in for some students.  This example involves many assumptions, including about the bargaining power of the two individuals. The numbers were chosen because they would work in this example. Other numbers might not suggest a possibility for trade. For instance, trade only works here because Bella and Brutto are different.  However, this exercise gives a powerful reason for why accountants and musicians specialize in their different trades, and why we diverse individuals in society are so willing to trade one thing for another: because it makes us richer.  Furthermore, individuals can change their comparative advantages by investing in physical or human capital. That’s the very reason many students are in college to begin with: to develop talent towards a new career path and enhance their future earnings and satisfaction. This is an appropriate first lesson in economics, not how to go about doing your taxes.   Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University. (0 COMMENTS)