The desire to “make supply chains robust” has been a major talking point for protectionists (and other industrial policy supporters).  This rhetoric has accelerated since the COVID-19 pandemic allegedly showed how fragile globalized supply chains are.  A few years ago, I wrote a post questioning the validity of such claims from a market-failure perspective.  Here, I’ll question the theoretical and empirical foundations of the claim. The argument that protectionism can make supply chains robust is specious.  Prima facie, it makes sense: when supply chains are spread out, they’ll be subject to more political, social, and economic factors in a larger area.  For example, if a firm’s supply chains go through Argentina, China, Germany, and Canada, then political and social upheavals in those areas could affect the supply chain.  If the chain was wholly domestic, then political and social problems in those countries would not necessarily affect the firm.*   However, some consideration shows the fragility of such an argument.  It is common sense, they say, to not put all your eggs in one basket.  Rather, diversification is the way to minimize the risk of catastrophic loss.  If all your eggs are in one basket and that basket should break, then you lose all your eggs.  If your eggs are spread out over many baskets, your risk of loss is much lower if a single basket breaks. The same holds true for supply chains.  If firms rely on a single supplier, then they are highly vulnerable to production shocks (for a technical discussion of this point, see either this paper by Acemoglu et al or this paper by me).  A single shock has a cascading effect throughout the economy, potentially affecting firms far removed from the original shock.  Indeed, the impact of the shock becomes larger when there is less diversification, akin to an avalanche, than when there is more diversification.   In theory, protectionism would make supply chains more fragile than under free trade.  And, empirically, we see this effect play out.  A recent paper out of Japan looking at Asian firms during the COVID-19 pandemic found that firms with greater ties to the global economy had more robust supply chains and better performance than those with weaker ties.  When supply shocks started to hit, globalized firms had more partners to choose from and could subsequently offset the shocks.  Firms with fewer ties to the global market could not so easily offset the shocks and thus performed worse.   In theory, we would expect protectionism to make supply chains more fragile.  Empirically, this is indeed what we see.  If politicians really want to protect supply chains, then getting out of the way and letting firms build their own network of partners will do more good than protectionism.  By increasing the costs to domestic firms of forming such robust supply networks in the global economy, protectionism weakens the very thing it means to strengthen.  Protectionism does not do good; only harm.   *In the case of a globalized world like ours, this last statement is not strictly speaking true.  Many items are traded globally, so anything that affects the global price will affect the firm, regardless of their connection to international trade.  But, in order to steelman the protectionist argument, we will ignore this reality.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

Some years ago, I was in a conversation with my wife reminiscing on my younger years when I was in the Marine Corps. At times, she could be quite taken aback at stories of the various antics Marines got into, particularly with how we treated one another. Casual interaction often involved talking with each other in ways that most people would consider vicious insults, or horseplay that would in most contexts probably be referred to as assault. On one occasion she asked me, “Why were you guys always so awful to each other?” And my immediate response was “For the same reason monkeys poke each other in the eyes.” On the off-chance that this doesn’t clear things up for you, let me elaborate.  I had recently read a book called Games Primates Play: An Undercover Investigation of the Evolution and Economics of Human Relationships. The book looks at social behavior among various primates and illustrates how that behavior is also reflected within human institutions and norms. One form of behavior common among primates is loyalty signaling, and alliance building, by means of the infliction of minor harms.  For example, some monkeys take it in turn to deliberately expose vulnerable parts of themselves to another, and allow that other monkey to prod, poke, or grip these areas. Afterwards, the routine is repeated in the other direction. The effective signal here is, “If I had wanted to, I could have just inflicted a devastating injury on you, but I did not. And I allowed you to be able to inflict a devastating injury on me, but you did not either. Now we know that we can trust each other, because we both just had a perfect chance to cause serious harm but didn’t do so.” The book included, among other illustrations, pictures of monkeys taking it in turn to poke each other in the eyes as part of this routine.  A similar cultural norm was always in effect in the Marines. The unspoken understanding was “You can insult me in the most over-the-top ways imaginable and I will not be upset – indeed, I will laugh along with you. And I can do the same to you, and you’ll laugh along with me too.” In the same way, the norm regarding the rough-and-tumble aspect of Marine culture showed the same signal. As was once put by Max Uriarte, the Terminal Lance himself: The phenomena associated with birthdays in the Marine Corps is second to none. Mention it’s your birthday, someone else’s birthday–even your mother’s birthday–and you will be literally physically assaulted. The birthday in the Marine Corps is a dangerous time, lay low for the day and hope no one remembers tomorrow; lest ye find themselves in a world of angry, blind rage. In a way, this angry hurricane of fist and contusion is the Marines’ way of showing their affection for their fellow companion. I recall my 21st birthday. October 11th, 2007–Iraq. While I assure you my beating was substantial, I remain confident that it was ultimately out of affection. While these antics are taken to further extremes in the Marine Corps than it is among normal (civilized?) people, the same ideas apply. When you get to know someone and they fall into the realm of “casual acquaintance,” the social norm is to be polite, overlook flaws, pretend not to notice potentially embarrassing gaffes, and so forth. But when you move into friendship, things change. Friends tease each other, they make fun of each other, they jokingly highlight embarrassing gaffes rather than pretend not to notice, they play practical jokes, and so on. And often, making a move like this is how one signals to another that the relationship has moved from casual acquaintance into real friendship. I’m sure I’m not the only one who has, at times, felt like such a transition had occurred, and made the first move into “poking friendly fun” at the other person, only to have that person become genuinely upset, making me realize that perhaps they and I hadn’t grown as close as I had thought. (It can’t be just me, right?) And this is also why such behavior is taken to relative extremes in the military. In the Marine Corps, people needed to be able to stick together in extreme, high pressure environments with life-and-death stakes. That kind of cohesion requires that people can’t have walls up against each other – so day to day life greatly depended on regularly demonstrating that all walls were down. So no matter how viciously you insulted me or I insulted you, we would both be laughing about it together over beers at the barracks later that night.  And therein lies the other side of the coin – signaling of this sort doesn’t really send much of a signal if it doesn’t have at least the potential to cost something. Attempting to signal friendship by engaging in behavior that’s indistinguishable from the polite, anodyne behavior among acquaintances sends an invisible signal. Sometimes, signals are misread, and jokes or actions are taken that cause people to become genuinely upset. But if that risk wasn’t there, there would be no signal.  Over the course of my life, I’ve witnessed a number of top-down pushes, both formal and informal, to try to replace these mildly antagonistic forms of friendship signaling in favor of a kinder, gentler society. But if the thesis of Games Primates Play is right, it may not be the case that the kinder, gentler social interaction serves as a real substitute for building social cohesion, because these ideas are deeply embedded in our evolved psychology. If a monkey committee decided that eye-poking was needlessly antagonistic behavior and prevented monkeys from engaging in these behaviors, the end result would not be a greater level of social cohesion among that troop. It would lead to a breakdown of the social order on which the troop relies. And there’s a real possibility that the modern push to move social environments into “kinder, gentler” places where mildly antagonistic behavior is forbidden may backfire. Rather than strengthening social bonds, it may only serve to weaken the fabric that keeps social bonds strong.  (0 COMMENTS)

Many of you know that I have a second blog entitled “TheMoneyIllusion.  Yesterday, I concluded that blog and started a replacement, entitled The Pursuit of Happiness: URL:  scottsumner.substack.com/ Speaking of happiness, here is a question to consider: What are the public policies that you oppose even though you believe that they would make the world a happier place in the long run? I am not interested in unrealistic hypothetical policies involving fanciful creatures such as “utility monsters”; I’m interested in knowing which actual real world policies you oppose despite the fact that you believe those policies would make the world a happier place. Perhaps you’ll find an example of an actual policy that I should also oppose, which will convince me to abandon my utilitarianism. PS.  Please don’t tell me that this is the wrong question.  It’s the question that interests me. PPS.  A Straussian reading of this post is that utilitarianism, properly understood, does not provide clear answers when deciding which public policies are best.  We are like ships navigating in a dense fog.   (The same could be said for Bayesian analysis.) Here’s a picture of Jeremy Bentham:   (0 COMMENTS)

… if we were able to adjust our accounting processes to the realities of taxpayers’ obligations, the government deficit which enters into the savings of business and individuals would be offset by taxpayers’ liabilities, the fiscal (revenue and expenditure) decisions of the government would be neutralized….”1 (Warburton, p. 221) Financial instruments representative of public debt are accounted for today like other securities. However, those other securities are claims on productive investments or have durable goods as collateral, while most of the existing public debt was used to fund current government expenses. Therefore, our accounting of securities’ holdings does not show that capital invested in productive endeavors or purchasing durable goods exists, while capital used to buy public bonds has already been consumed. This article aims to illustrate this situation, concluding with a proposal to perfect how public debt instruments are accounted for to better represent reality. The theoretical framework of the analysis One of the most intractable problems in economics is the definition of capital. The Representational Theory of Capital2 was proposed to help us advance our understanding of how the economy works. It is based on the premise that capital has a dual nature. Capital is the collection of goods, services, and procedures on the “real” side of the economy that entrepreneurs find helpful in producing other things. At the same time, the instruments on the “abstract” side of the economy by which claims on those goods, services, and procedures are represented are also capital. In this sense, financial instruments are just liquid forms of property titles. Such an ontology helps explain many problems other definitions of capital cannot help. One problem is how economic performance can be explained by qualitative differences in the stock of capital that merely quantitative differences cannot explain. It is uncontroversial that the amount of resources you save from one year’s production can be invested so that you can produce relatively more in the following year. Savings invested and destroyed—A practical application Let us assume that economic agents may invest their savings in financial instruments. Could you say that all investments in financial instruments increase the stock of capital of that economy? Quantitatively, yes. What about a qualitative analysis? Some enterprises are not profitable, and some funding finances consumption. Can we say that the money borrowed to pay for consumers’ vacations, the electric bills of public buildings, or the wages of public servants increases our productive capital? Certainly not! However, suppose you have in your portfolio a mutual fund that holds treasury bonds and securities backed by credit card receivables. In that case, that is precisely what you are doing. It may well be the case that the civil laws about the collection of debt and the “full faith and credit of the U.S. government” are all you need to get your money back with interest. Nonetheless, no additional production results from your saved resources. “How we represent financial investments today needs to distinguish between cases in which the resources of the savers are invested in productive endeavors and those used to pay for goods and services consumed by someone else.” How we represent financial investments today needs to distinguish between cases in which the resources of the savers are invested in productive endeavors and those used to pay for goods and services consumed by someone else. In this case, the saver can only hope that whoever took his resources and destroyed them will have other revenue sources from which he can repay that debt. The concept of “savings destroyed” is related to the idea of false rights proposed by the French economist Jacques Rueff. The concept is not identical because if the government can raise the taxation level, reduce its expenses, and honor its obligation without resorting to inflationary financing, the potential for false rights does not materialize. While the concept of “savings destroyed” is applied independently from the capacity of the government to service its debt by extracting a more significant share from the income generated by the existing structure of production. The national debt of the United States as an example Note that we are not considering the total public debt of the United States of more than 33 trillion dollars. The public debt of state and local governments is not considered. Nor are all the unfunded liabilities of the U.S. federal government or any other obligation not represented by U.S. treasuries. Since there is no end to the current annual deficits, they are also not considered. Therefore, future increases in the debt stock are left out of our example. No provision has been made in the federal budget for about thirty years to repay the debt. Therefore, new taxes will be required if expenditures are not reduced to repay the debt. Another consideration is that against the “Golden Rule” of public finance, which states that a government should only borrow to fund investments, not spending; the American government only invests a fraction of what it borrows. The current level of investment in the national budget is about 12.4% of the total budget. Assuming that “investment” generates sufficient revenue to repay the capital invested, we deducted the same percentage from the debt to determine the amount of wealth long consumed in funding the U.S. government’s expenditures. A final consideration is that all the debt held by agencies and departments of the federal government, the debt of the U.S. government with itself, is disregarded—for example, the treasuries held by the Social Security funds. An exception to that rule is the amount of U.S. treasuries held by the Federal Reserve. We understand that the amount of debt monetization is conditional to the demand for money, whose variation may force the government to repay those obligations from tax revenues. Considering all stated above, we assume that the amount of wealth “invested” in U.S. treasuries held by the public and consumed in government spending was equivalent to $21,980 billion at the end of 2023, or $22 trillion for short. Because those resources have not been invested to generate revenue sufficient to repay that portion of the debt, the government can only repay them if it increases the existing taxes or reduces other expenditures. In both cases, inflationary finance is avoided by transferring income from taxpayers in general or some constituencies that had public transfers to them cut by the need to pay the state’s creditors with real rights. The Purpose of this Exercise It is worth remembering that this exercise aims to illustrate that investments in U.S. treasuries are not adequately accounted for if we want our financial statements to reflect what exists in the real world. In estimating a slice of all public sector obligations in the United States, our purpose is to find an amount of government’s liabilities that are part of someone’s assets but cannot be repaid at the current level of taxation. Therefore, a further rubric must be added to the financial statements of some or all in the country to reflect the exact amount of existing “true rights,” that is, the precise amount of claims with identified sources of revenue to repay them. In his Concise Encyclopedia of Economics on “Government Debt and Deficits,” John Seater offers three different classifications of government-issued debt. The first considers who issued the debt. A second considers its maturity. The third considers the source of revenue to repay it. All the federal debt of the United States is considered “General obligation bonds” and not “revenue bonds” since they are repaid from general taxes. This third classification helps us distinguish what is and is not an investment. Furthermore, it offers a possibility for better accounting if issuances of public debt were required to indicate from which funds they would be repaid. Regardless of the merits of implementing such a rule, if public awareness about the United States’ fiscal problems is not increased first, it will likely be a dead letter. Rational Expectations and Ricardian Equivalence Increased awareness about the dire fiscal situation of the United States would only be worth the effort if it were problematic. Rational expectations theory assumes that economic agents already consider the future level of taxation required to pay the debt in making their decisions. That is a kind of “Ricardian equivalence.” As Seater says, “If government debt is equivalent to taxation, then most of the public discussion of the ‘deficit problem’ is misplaced.” However, Seater does not endorse “full” equivalence and states, “Under incomplete equivalence… deficits do have effects….” Our view is also an intermediary hypothesis of “incomplete equivalence,” in which taxpayers can anticipate some, but not all, future taxation associated with present bond finance. In our view, the absence of economic consequences caused by the perceived equivalence of current deficits and future taxation, as assumed by rational expectations theory, does not hold, given two significant problems. First, it does not consider that present savings are used to pay for present consumption instead of current investments. Secondly, it disregards the fact that the universe of all taxpayers does not perfectly overlap with the universe of bondholders. The former qualification implies that the public debt will reduce society’s “natural” level of investments, reducing the prospect for future economic growth. The latter qualification implies that the people earning the income generated by current government borrowing are not necessarily the same as those who should save to pay for the resulting increase in future taxation. We cannot, therefore, aggregate them as if the institutional arrangement of bond finance would produce a set of contrary incentives that would cancel each other. Non-residents of the United States own 34% of the federal debt. Everything else remaining equal, is it reasonable that that capital will remain invested in U.S. bonds if an increase in their taxation becomes likely? Finally, it is not true that the U.S. government has never defaulted. That happened with the decisions of the legal cases of the gold clauses in the early 1930s and later, with the termination of the gold redemption by the United States in breach of the Bretton Woods Treaty. Hence, individuals are somewhat incentivized to consider the implicitly required future taxation in their present evaluations. Historical Context and Legislative Background Starting with the Budget and Accounting Procedures Act of 1950, the federal government uses GAAP accrual accounting, similar to private companies. Since it is at the core of the problems we identify, it is worth pointing out that it assumes that the federal government’s and private companies’ obligations have the same nature, which obviously, they have not. We are calling attention to the fact that the government has the ability to contract obligations beyond its capacity to repay them, which private companies do not possess. Therefore, clarifications that are optional for the financial statements of private corporations to reflect their situation adequately are fundamental to a good representation of the actual state of the fisc. The Road Not Taken In searching for a positive proposal to address the problem of accounting for the destroyed savings, we could not propose anything that would reduce tax revenues, defeating the purpose of restoring fiscal soundness. This realization led us to limit the scope of our proposal merely to increase awareness of the problem, hoping that a well-informed populace would eventually force the hand of elected representatives. If we propose an increase in individuals’ income tax, that could give a good idea of how much we need to increase taxes to compensate for the wealth destroyed. If we propose a new tax, say, a national VAT (Value Added Tax), that could be interpreted as a suggestion that we are not prepared to make. If we adopt the deficit reduction proposed by the Cato Institute of reducing the deficit by about half a trillion per year, 3 it would take 44 years to reconstitute the capital destroyed. Of course, that is better than nothing, but it does not convey the sense of urgency we think the matter requires. An alternative to incentivizing individuals and politicians would be to create some difficulty in issuing more debt. In the end, we rejected that since absent explicit support from the citizenry to restore fiscal balance radically, those initiatives are unlikely to resist the creativity to the profligacy of the federal bureaucracy and elected politicians. No, we decided to focus on accounting for the 22 trillion. Since the savings destroyed are a matter of stock and not of flow, we considered comparing them to households’ net worth. The nominal net worth of all American households in 2023 was $132,218 billion dollars. A reduction of 22/132 or 16.66% must be applied to calculate the actual net worth of American families. We realized, however, that such a calculation has many limitations. First, it does not convey the enormity of the sacrifice necessary to compensate for all savings destroyed since it assumes that such an immense portion of the existing wealth can be liquidated at current relative prices—that is, without forcing a fire sale of less liquid assets, which is obviously untrue. Secondly, and as a necessary consequence of the former, the transference of resources from the taxpayers to the creditors of the public debt should come from the flow of new resources produced, not from the stock of existing wealth, even though pairing one with the other makes an elegant comparison. An additional reason not to develop our proposal around the idea of comparing the national debt in the hands of the public with the net worth of American families is the similitude between the calculations necessary to make such a comparison possible and the calculations required to implement the idea of “Unliquidated Tax Reserve Accounts” or ULTRAs. In “ULTRAs: The Worst Idea You’ve Never Heard Of,”4 Michael Munger comments on the proposal by which unrealized gains will be taxed not in money but by the imposition of a “notional equity interest.” For its proponents, it is a way to introduce a wealth tax. It is preposterous that politicians who have destroyed that proportion of the wealth of American families mentioned above are now suggesting ways to appropriate yet more of that existing wealth. On the one hand, calling attention to the fact that a substantial portion of the wealth nominally in the hands of the public no longer exists could be an antidote to initiatives such as the ULTRAs. On the other hand, it may open the path to its implementation. While it’s important to acknowledge that comparing savings destroyed by the national government with household net worth could be a powerful tool to raise awareness, it’s equally crucial to recognize the associated risks. While part of our proposal, this comparison should be approached cautiously and considered a secondary focus. The Cassandra Proposal With all these considerations in mind, we present our positive proposal. The Federal government should publicly disclose the amount of the savings it “destroyed” as a percentage of taxpayers’ net worth every year. For this calculation, the Federal government’s debt is considered the sum of treasuries in the public’s hands, less what was used for investments, which amounts today to $22 trillion. For this calculation, the Federal government should commission the Bureau of Labor Statistics to create an official definition of the sum of the net worth of American citizens. The IRS should inform annually, along with their income tax return receipts, everyone with income in the United States (even the currently exempt from paying taxes) what that percentage of their net worth it is. It should include a warning like the one given to Social Security beneficiaries that their benefits are conditional. Such warning would say that when required to repay the treasuries, since there is no provision under current levels of taxation and expenditure to repay the debt, the citizens may be taxed on that percentage of their net worth to repay the obligations of the federal government for it to keep its full faith and credit. Still, pairing the existing net worth of households and their proportional share of the savings destroyed by the federal government does not adequately reflect the sacrifice necessary to return those savings to the investors in the national debt. To raise awareness about this problem, establishing a relationship between the $22 trillion in savings destroyed by the national government and household income would be better. In 2021, taxpayers filed 153.6 million tax returns, reported earning more than $14.7 trillion in adjusted gross income (AGI), and paid nearly $2.2 trillion in individual income taxes, according to the Tax Foundation’s summary of tax data. The average maturity of the U.S. national debt is slightly longer than six years (73 months). Despite that, for our calculation, we consider a repayment period of thirty years. That would imply payments of about $1 trillion ($982 billion) per year for the thirty-year repayment period. In summary, the 153.6 million taxpayers who filed tax returns in the most recent years earned a gross income of $14.7 trillion and paid $2.2 trillion, or 14.96% of their income, in income tax. The moment when the U.S. government is asked to honor its obligations to the bondholders, for the federal government to raise the necessary resources, the income tax proceeds should increase by $1 trillion on top of the current $2.2 trillion, an additional taxation of about 45%. In other words, all current taxpayers (including those currently exempt from taxation) would be required to pay $1 trillion, or the equivalent of 6.8% (1/14.7) of their current gross income, on top of all the taxes they currently pay, for thirty years. Therefore, in addition to requiring that taxpayers be informed about the share of their net worth necessary to repay the portion of the national debt in the hands of the public whose resources were not invested but consumed, our proposal is, most importantly, for the taxpayers to be informed for which period and which percentage of their gross income should be allocated for that purpose. Postscript In the aftermath of World War II, Clark Warburton, in commenting about how bond financing of the public deficit was perceived by the Keynesian mainstream at the time as “solving” the problem of a deficient volume of savings, argued that “this solution is an illusion resulting from defective accounting procedure” (p.220). For more on these topics, see “Accounting for Capital and Income,” by Robert P. Murphy. Library of Economics and Liberty, July 7, 2014. “Rational Expectations,” by Thomas J. Sargent. Concise Encyclopedia of Economics. “Government Debt and Future Generations,” by Robert P. Murphy. Library of Economics and Liberty, June 1, 2015. It is worth repeating here a lengthy quote from him: A government deficit entails an obligation on the people of the nation, as taxpayers, to repay at some future time an identical amount to the government—even though the maturity dates and the distribution of this obligation among the various enterprises and individuals of the nation are unstated and unknown. If our accounting procedure were corrected to take account of the obligations of taxpayers, the stupendous volume of “savings” in wartime would disappear. The simple fact is that our accounting procedures, derived from the indefiniteness of taxpayers’ obligations, translates a major part of the cost of war, or of other government activities, into “savings.” This has long been recognized in economic theory but seems to have been forgotten by the advocates of “deficit spending” (p. 221). Let us hope this proposal will remind us of this basic lesson that once again has been forgotten. Footnotes [1] Clark Warburton, Depression, Inflation, and Monetary Policy: Selected Papers (1945-1953). Kessinger Publishing, 2010. [2] Leonidas Zelmanovitz, The Representational Theory of Capital: Property Rights and the Reification of Capital. Lexington Books, 2020. [3] Ryan Bourne, “A Case for Federal Deficit Reduction: Spending Cuts to Avoid a Fiscal Crisis.” Cato Policy Analysis, April 18, 2024. [4] Michael Munger, “ULTRAS: The Worst Idea You’ve Never Heard Of,” American Institute for Economic Research, July 1, 2024. *Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. Thomas Lanzi is a Hillsdale College, Class of 2025, student majoring in Finance and Accounting, as well as a Liberty Fund Research Assistant. For more articles by Leonidas Zelmanovitz, see the Archive. (0 COMMENTS)

Frontispiece, Anna Karenina, by Leo Tolstoy. This article was inspired by a recent Virtual Reading Group on Leo Tolstoy’s Anna Karenina, led by Richard Gunderman. Learn more about our Virtual Reading Groups at the Online Library of Liberty. To what field of study would a thoughtful person look to find more joy in life? For most of human history, during which what we now know as economics did not exist, insights on joy might have been sought in religion, philosophy, literature, or the arts. More recently, however, economists have begun devoting considerable attention to aspects of life such as positive and negative effects, well-being, and life satisfaction. Some economists have even attempted to craft measures of happiness. In a recent McKinsey Global Forward Thinking podcast with Betsey Stevenson and Justin Wolfers, the latter says, “It’s not your grandfather’s economics, it’s not the widget factory. It’s the decision about how many kids to have, it’s what’s going to determine the next election, it’s whether people are going to turn to crime. It’s issues of social policy, the questions of inequality, of racial justice, of healthcare systems, of financial crises, of pandemics.”1 Stevenson, attempting to lay to rest Thomas Carlyle’s description of economics as “the dismal science,”2 responded, “Economics includes making choices that are going to leave you as well-off as possible. That’s a very optimistic view of life. Economics helps you live your best life possible. It gives you the tools to systematically make decisions that will leave you, whoever you are, with whatever values you have, making the best choices you possibly can.” “[D]oes economics offer our best shot at joy?” Are these economists correct? Is economics the most fruitful way to approach the pressing issues of our times? Does it reliably guide both micro-level decision making, such as whether to rent or buy, as well as macro-level decisions, such as how to reduce crime? Does it show us how to live the best possible life? Are human beings best understood as fully optimizing, fully rational creatures whose paths in life can best be described in mathematical terms? Finally, does economics offer our best shot at joy? To understand these questions more deeply, we turn to a very different account found in Leo Tolstoy’s novel, Anna Karenina. Some characteristics of Tolstoy and his novel might recommend him to economists. First, Tolstoy commanded a large fortune. Furthermore, multiple polls of writers and the reading public have singled out Tolstoy as the greatest writer who ever lived, with Anna Karenina frequently emerging at the top of rankings of the best novels. To begin with, I would note that wealth and joy, at least in Tolstoy’s eyes, are not necessarily correlated. The richest of the principal characters in the book is Count Alexi Vronsky, the man who will become the lover of the novel’s title character, Anna Karenina, the wife of a government official. Vronsky is “terribly rich, handsome, and has first-rate connections,” yet despite scoring highly on all parameters of the well-being equation, by the novel’s end, he declares sincerely that, “To me, life is worth nothing.” A casual economically minded reader might suppose that the count has lost his fortune, but this is not the case. He is as rich as ever, with more money than he can count. Yet he has lost something much dearer to him that wealth, namely the woman he loved, who has taken her own life in order to escape her troubles and make him pay. He serves as the novel’s clearest reminder that, while wealth makes many things possible, it does not guarantee some of the things in life that matter most. Another character is constantly beset by financial difficulties. The novel opens with great tumult in the household of Stepan Oblonsky, whose wife has just discovered that he has been having an affair with their French governess. Oblonsky is a perfectly good-natured fellow who lives in the moment. When he is with his family, he is capable of thinking as a husband and father, but when he is out in the world, he thinks of himself as a vigorous young man who should not be deprived of pleasure. As a creature of the moment, Oblonsky is constantly living beyond his means and burying his family deeper and deeper under a mountain of debt. He spends and tips extravagantly at the clubs but cannot provide his wife the funds necessary to buy a winter coat for their eldest child. Yet it is not his failures as a money manager that constitute his principal problem in life. Far more serious is his inability to do anything more than seek what is pleasurable and avoid what is unpleasant. For insight into joy, we must consider another character in Anna Karenina, a woman often regarded as a doormat by contemporary readers, namely Oblonsky’s long-suffering wife, Dolly. When we first meet her, she has just found out about her husband’s affair with the governess and informed him that she cannot go on living in the same house with him. Says her husband to himself, “She will never forgive me. And what is more terrible is that it is all my fault, yet I am not to blame.” Oblonsky does not hold himself responsible for his infidelity because he does not believe in responsibility. He sees his behavior not in terms of fixed moral disposition or character but the “reflexes of the brain.” To him, his wife is merely “a worn-out, aging, no longer beautiful woman who is in no way remarkable; the simple, merely good-natured mother of his family” of five children, and she should have “indulged him, simply out of a sense of fairness.” Oblonsky is not an evil man. He is, on the other hand, a man without a conscience. He is a pleasure seeker and a pain avoider, who, mindful of the “full gravity of the situation, feels sorry for his wife, his children, and himself.” Yet overwhelmed by the unpleasantness, all he can think to do is to exit, “to lose himself in the demands of the day.” He picks up his hat and stops to consider whether he is forgetting something, realizing that he has “forgotten nothing except the one thing he would like to forget—his wife.” Dolly, of course, will be visited by her husband’s sister, Anna, and will choose not to leave him, realizing that she “cannot break herself of the habit of considering him her husband and loving him.” She asks herself the question, “Can we go on living together? Is this possible? After my husband, the father of my children, has taken his own children’s governess as his mistress?” That Dolly proves able to do so is precisely why many contemporary readers despise her. Yet it is Dolly who offers some of the novel’s most profound insights into joy. And she finds this joy not in wealth, or power, or fame, or even pleasure, the things that the men in her husband’s social circle often care most about. To the contrary, she will never acquire worldly power or fame, experience any pleasures other than ones that would strike many as banal, and will only be driven deeper and deeper into penury by her husband’s profligate ways. Yet Dolly finds joy of a kind that her husband will never know. Consider a scene in which she is bathing her children in a river. “She took no greater pleasure in anything than in this bathing with all her children. To run her fingers over all these plump little legs while pulling on their stockings, to gather up in her arms and dip these little naked bodies and hear their delighted and terrified squeals, to see the wide-open eyes of these splashing cherubs of hers was a great pleasure for her.” Later, we gain further insight into what life is like for Dolly, and the true source of her joy in it, even in the midst of the suffering of her children’s illnesses. For whistling during supper, one of her little sons has been sent to his room without desert by the governess. She goes to see him, and there she witnesses a scene “of such joy that tears came to her eyes, and she herself forgave the culprit.” The punished boy was sitting in the drawing room at a corner window; and next to him stood his sister with a plate. Under the pretext of wishing to feed her dolls, she had asked the governess for permission to bring her portion of pie to the nursery and instead brought it to her brother. While continuing to cry at the unfairness of the punishment he had suffered, he ate the pie brought to him and through sobs kept saying, “You eat some, let’s eat together… together.” When they saw their mother, they became frightened, but when they looked at her face, they realized that they were doing a good thing, and they began laughing, and with their mouths full of pie, started wiping their smiling lips and smearing their beaming faces with tears and jam. My goodness! Your new white dress!” said their mother, trying to rescue the dress, but she had tears in her eyes and was smiling a blissful, ecstatic smile. Dolly’s life contains its full share of heartache, perhaps more. Her husband will continue to see other women and deplete his wife’s estate. Her children will continue to behave badly from time to time and break her heart. They will fall ill. And yet, … hard though it was for the mother to bear the dread of illness, the illnesses themselves, and the grief of seeing signs of evil propensities in her children—the children themselves were even now repaying her in small joys for her sufferings. Those joys were so small that they passed unnoticed, like gold in sand, and at bad moments she could see nothing but the pain, nothing but sand; but there were good moments too when she saw nothing but the joy, nothing but gold. We intuitively understand there is no way entirely to forsake the bad and choose only the good. Oblonsky tries to do so but ends up leading a self-centered, superficial, and ultimately empty sort of life. He has no fixed identity, he is not really dedicated to anyone but himself, and as a result, his world is rather cramped and shallow. He thinks that he is going for life’s gusto, but in reality, his lack of responsibility keeps him on the sidelines. Oblonsky despises his wife. Her world seems a small one—the household, her children, domestic cares. She is not setting policy, shifting large sums from one account to another, or making a name for herself. In many ways, someone looking at her life through the lens of economics might say that she will never amount to much, and in fact is amounting to less and less. In economic terms, at least in those that Bentham might recognize, this may well be true. And yet Dolly is all in. Unlike her husband, she lives for something beyond herself, her family and her children. She is totally committed to them, even to the point that she can forgive her husband his betrayals. She cannot love him the way she once did, but the flourishing of their children is so important to her that she is prepared to sacrifice everything for them. In a way her husband and the economists might find nearly impossible to fathom, she lives not for herself but for others. Dolly’s choice is brought into sharp relief when she visits her husband’s sister, Anna. Anna has left her husband and son to live with her rich and dashing lover, Vronsky, who spares no expense in constructing for her a life that he believes will suit her. Their union has even produced a daughter, whom she names Annie. One day, Dolly leaves her children in the care of her sister and travels to Vronsky’s estate to talk with Anna and see firsthand what her life is like. On the journey, Dolly, a betrayed wife, considers how the adulteress Anna has been ostracized by society, and whether she deserves such treatment. They attack Anna. For what? Am I really any better? At least I have a husband I love. Not the way I would like to love him, but I do, but Anna doesn’t love hers. What is she guilty of? She wants to live. God put that in our hearts. More than likely, I would have done the very same thing. Perhaps I should have left my husband and begun a new life. Maybe I would have loved and been loved for real…. Anna did quite right, and I cannot ever reproach her in the least. She is happy, she is making someone else happy, and she is not broken down, as I am, but is probably just as fresh, clever, and open to everything as ever, she thought, and a mischievous grin creased her lips, especially because, while thinking about Anna’s romance, she imagined parallel to it her almost identical romance with an imagined composite man who was in love with her. Like Anna, she confessed everything to her husband. And Oblonsky’s shock and confusion at this news made her smile. Dolly’s moment of truth comes when she sees Anna’s life firsthand. She is beautiful. She is surrounded by luxury, and she is engaged in good works. She and Vronsky have a hospital built to tend the peasants. Anna describes herself as “unforgivably happy” and her life as a dream. Her little daughter is surrounded by the finest toys from all over Europe, and she has the best nurses and maids that money can buy. From the standpoint of a hedonic calculus, Anna seems to have it all. Yet Dolly quickly realizes that something is wrong. “Anna, the wet nurse, the governess, and the child were not accustomed to being together and the mother’s visit was an unusual event.” The last straw comes when Dolly asks Anna how many teeth her daughter has and she gets it wrong, not knowing about the last two teeth. Anna admits, “Sometimes it’s hard for me being in a way superfluous here. It is not the way it was with my first.” Anna has constructed a life for herself in which she is not really a mother. It is not long before Dolly resolves to leave. In fact, she cannot get home to her children soon enough. Anna has the kind of house and family that would look great in a glossy magazine, while Dolly by comparison seems threadbare and worn out, hardly fit for a photo shoot. But Dolly has something Anna cannot purchase at any price: genuine love for her children, the deepest possible dedication to them. As a result, she experiences a joy in being a mother that is utterly unknown to Anna. In one sense, at least, Tolstoy’s perspective on joy may be more authentically economic than the economists’ accounts. In Aristotle’s writings, we find economics contrasted with politics, politics involving the management of a state (polis, city) and economics focusing on the household (oikos, household or family). Oblonsky and Anna care for neither the state nor the family and thus fail at both, while Dolly represents the consummate economist, primarily because she loves her family. For more on these topics, see Richard Gunderman on Greed, Adam Smith, and Tolstoy. EconTalk. Betsey Stevenson and Justin Wolfers on Happiness, Growth, and the Reinhart-Rogoff Controversy. EconTalk. “Tolstoy, Smith, and the Perils of Loneliness,” by Richard Gunderman. AdamSmithWorks, October 20, 2021. Why doesn’t Tolstoy, one of the world’s great geniuses, simply provide us with an equation for joy and a table enumerating the values for each of his characters, including Vronsky, Oblonsky, Dolly, and Anna? Perhaps because he does not believe in it. Could it be that he has concluded that whatever joy is, it is not susceptible to scientific modes of inquiry and cannot be figured out in the way many economists suppose? Instead of calculating joy, he found it necessary to tell a story about it. Footnotes [1] “Forward Thinking on bringing the joy to economics with Betsey Stevenson and Justin Wolfers.” McKinsey Global Institute, June 28, 2023. [2] For more on Carlyle’s infamous label, see “The Secret History of the Dismal Science. Part 1. Economics, Religion, and Race in the 19th century,” by David Levy and Sandra Peart. Econlib, Jan. 2, 2001. *Richard Gunderman is Chancellor’s Professor of Radiology, Pediatrics, Medical Education, Philosophy, Liberal Arts, Philanthropy, and Medical Humanities and Health Studies at Indiana University. He is also John A Campbell Professor of Radiology and in 2019-21 serves as Bicentennial Professor. He received his AB Summa Cum Laude from Wabash College; MD and PhD (Committee on Social Thought) with honors from the University of Chicago; and MPH from Indiana University. For more articles by Richard Gunderman, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Book Review of The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy. Ryan A. Bourne, Ed.1 Price controls have grown increasingly common across large sectors of the economy such as finance and healthcare, especially in the wake of laws like Dodd-Frank and Obamacare. President Biden’s recent cap on credit card late fees, as well as his broader campaign against what he calls “junk fees,” are the latest examples of an anti-market-price attitude sweeping Washington, and price controls are now playing a leading role in the Presidential election. As a result, the new edited volume The War on Prices: How Popular Misconceptions about Inflation, Prices, and Value Create Bad Policy from the Cato Institute comes out just in time to address problems stemming from price controls and inflation. Quoting economist Alex Tabarrok, editor Ryan Bourne wisely notes that, “Prices are a signal wrapped up in an incentive.” By this he means market prices convey information about scarcity as well as the nature of consumer wants. Prices also incentivize companies to produce what people value, and individuals to conserve where resources are in short supply. Biden’s junk fee policies fail to recognize this important coordinating mechanism of prices. Tying the Invisible Hand Whereas it used to be conventional wisdom that binding price ceilings cause shortages and price floors cause gluts, price controls are now suddenly back in vogue. The book’s release coincides with an alarming shift in the regulatory environment. In 2023, for example, Biden’s Office of Management and Budget (OMB) repealed a section of its guidance to federal regulators that discouraged agencies from enacting price controls and similar “economic regulation,” like quotas. OMB’s move will make it easier to impose such policies in the future. While the ill effects of price controls are sometimes readily apparent, as with the gas lines associated with the 1970s and the rationing of everyday consumer goods during World War II, harms can be harder to detect in other contexts, which explains some of their renewed popularity. Michael Cannon points out in his chapter on healthcare markets that government-fixed healthcare prices are often capped too high relative to the market-clearing level, resulting in excessive spending, the cost of which is largely obscured because it is paid for by government. Meanwhile, controls on financial product prices make it harder for marginal communities, like the poor, to access credit. Reduced access to loans for purchasing homes or vehicles, and higher interest rates on credit cards and mortgages, are not nearly so visible as long lines at the pump. Other effects of price controls can be hard to anticipate. Bourne’s chapter on World War II price controls documents how, beyond creating shortages, price caps degraded quality in unexpected ways as companies responded to lower revenues. Likewise, Jeffrey Clemens’s chapter on the minimum wage shows how workplaces often cut fringe benefits before adding workers to the unemployment lines, suggesting the real world is messier and more complicated than Econ 101 theory sometimes implies. Monetary Myths and Misconceptions In addition to covering the problems with price controls, The War on Prices serves as an excellent primer on inflation and its underlying causes. Bryan Cutsinger rightly criticizes the “wage-price spiral” economic fallacy, which posits that workers pushing for higher wages drive businesses to raise prices, which leads workers to demand still-higher wages in a self-perpetuating inflationary cycle. Brian Albrecht points out how “greedflation” similarly confuses cause and effect. Inflation is fundamentally a monetary phenomenon caused by excess money growth. Inflation drives up nominal corporate profits, not the other way around. Author Stan Veuger provides a helpful overview of Modern Monetary Theory (MMT), which is a relatively new economic theory “born” in the blogosphere. MMT’s emphasis on the importance of money parallels the monetarist views of some of the book’s contributors. MMT argues, correctly I would say, that monetary policy can in theory be loosened through Congress spending new money into the economy, and tightened by raising taxes. But in practice, policy will never work this way. The problem with MMT is not so much that the theory is wrong, but that it ignores the political realities that make the use of fiscal policy to control inflation unrealistic. Politicians are usually reluctant to raise taxes for fear of losing the next election. Even if taxes could be raised by exactly the right amount at exactly the right time (a big assumption when Congress can’t pass a budget on time), politicians would need to resist spending the raised revenue to keep inflation in check, and they are unlikely to exhibit any such spending restraint. As far as areas for improvement, some of the book’s contributors pin blame on journalists for the public’s economic ignorance regarding inflation. Pierre Lemieux, for instance, lambastes journalists who discuss inflation as “driven” by the rising prices of different product categories in the Consumer Price Index (CPI). Price indices have well-known limitations, and Lemieux is correct to point out the shortcomings. But a few of Lemieux’s complaints come across as capricious. Journalists are technically correct when they note that the prices of particular goods, like eggs or milk, do “contribute” to an index rising in value. Even if these journalists sometimes use sloppy language that could be misunderstood as implying a cost of living index and inflation are the same thing, it is unclear how influential these news stories are. In spite of the imperfections with indices like the CPI, they remain useful for tracking overall price trends and detailing the way in which inflation affects different parts of the economy at different times. The Limits of Laissez-faire While The War on Prices does a thorough job explaining the virtues of market prices, it did miss the opportunity to discuss some of their downsides. The incentives market prices provide, for example, are often perverse, as when externalities and other market failures are present. In such cases, prices may encourage redirection of production away from efficient uses. A good example is the high salaries of sports stars, which Deirdre McCloskey defends, but there remain reasons to be skeptical of this free market outcome. Even if those salaries are ultimately the result of intense consumer demand for sports entertainment from athletes exhibiting rare physical ability, society would be better served if consumers had other priorities beyond sitting on the couch watching sports and young people invested their time building more productive forms of human capital. McCloskey is correct to note that market prices don’t tell us anything about what one inherently “deserves.” But a lot of market prices reflect a desire on the part of the public to engage in conspicuous consumption. It would be more economically efficient if we lived in a world where scientists and engineers were as highly valued as actors and athletes are in our own culture. Price controls also have certain benefits. Consider that if controls enacted during World War II created additional capacity for military production, why would not similar restrictions in normal times create capacity for other valuable items that usually go underproduced? Sacrifice—in the form of consumers accepting lower quality and quantities of consumer goods, as occurs under some price control policies—has upsides. This is especially true when the sacrifice flows from consumers’ free choices to save and invest more and consume less. The Objective Nature of Subjective Value “Value derives from individual preferences, and is therefore “subjective” in the sense that the value of a painting might vary from person to person…. But the real resources government interventions use up in the form of land, labor, and capital are objective phenomena.” The book’s section on value was also a bit light on details when it came to distinguishing between the determinants of value and economic cost. Value derives from individual preferences, and is therefore “subjective” in the sense that the value of a painting might vary from person to person and depend on mental considerations. But the real resources government interventions use up in the form of land, labor, and capital are objective phenomena. In this sense, economists’ use of the word “subjective” when describing resources’ value can be misleading. Private (individual) and social (total) economic cost are objective concepts falling in the realm of positive economics. Cost can be calculated scientifically, though this does not mean it is always easy to do so. An objective understanding of cost does not negate marginalist or preference-based explanations of price determination. This fact is perfectly consistent with criticisms of the “labor theory of value,” which 19th century economists William Stanley Jevons, Léon Walras and Carl Menger utterly demolished. Yet many economists to this day mistakenly conflate objective cost with subjective accounts of price formation. The chapters on value in The War on Prices thus missed an opportunity to set the record straight in this regard. Whatever the shortcomings, which were minor, The War on Prices remains essential reading for anyone seeking to understand the economics of price controls and inflation. McCloskey’s core recommendation is spot on. Market failures occur because of missing markets. “The socially sensible move then is to create markets where there are none, not abolish them by collectivization or price controls.” The challenge lies in promoting the creation of new markets, while still subjecting them to the ethical constraints and related prerogatives that are inescapable for human flourishing. Ultimately markets must be subordinated to certain inalienable checks, such as rights or the protection of “sacred goods” like happiness or aesthetic beauty. McCloskey acknowledges the need to “choose properly what is for sale and what is not,” respecting the role of sacred values. For more on these topics, see Ryan Bourne on The War on Prices. The Great Antidote Podcast, August 2024. Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics. “Can Price Controls Fight Inflation?” by Rosolino Candela. Library of Economics and Liberty, September 5, 2022. “Cutting Corners and Nickel-and-Diming Customers,” by James Broughel. Library of Economics and Liberty, March 15, 2024. Overall, The War on Prices arms readers with the intellectual ammunition needed to combat misguided inflationary policies and price controls. It falls short of being able to declare total victory for the free market, however, leaving room for further discussion about the limits of guiding markets by the preferences of indulgent consumers, and the ethical considerations that necessarily factor into governing even the most well-functioning and efficient of market forces. Footnotes [1] Ryan A. Bourne (ed.), The War on Prices: How Popular Misconceptions About Inflation, Prices, and Value Create Bad Policy. The Cato Institute, 2024. * James Broughel is a senior affiliated scholar with the Mercatus Center at George Mason University and a senior editor with the Center for Growth and Opportunity at Utah State University. For more articles by James Broughel, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Unlike chimpanzees, which acquire the vast majority of their daily calorie intake from easy-to-find foods such as fruit and leaves, early humans occupied a more complex foraging niche, relying on foods they had to either extract (e.g., buried tubers, or nuts inside shells) or hunt. These more complex foraging techniques take time and skill to learn—and cannot easily be acquired through observation alone. The combination of foraging skills being difficult to learn and necessary for survival in humans may be the point of difference between us and the other great apes, explaining why we are prolific teachers while our ape cousins are not. –Nichola Raihani, The Social Instinct: How Cooperation Shaped the World.1 (p. 92) Humans could not just pick the low-hanging fruit. In order to survive in our more difficult ecological niche, we had to evolve skills that other apes did not possess. In The Social Instinct: How Cooperation Shaped the World, Nichola Raihani dwells on the skill of cooperation. There is a simple conclusion that we can draw from this whirlwind tour of early human evolution: we needed to cooperate to survive. This helps to explain why there is almost no evidence in the fossil record of other apes living alongside humans in the East African Rift Valley. Instead, our great-ape cousins inhabit less seasonal and more plentiful environments where extreme cooperation is not a prerequisite for survival. p. 77 Raihani sees the cooperation of insects as fundamentally different from the cooperation of humans. She makes the case, … for conceiving of highly social insect colonies (for example, ants and termites) as being individuals in their own right—or “superorganisms.” Social insect colonies often exhibit striking similarities with multicellular bodies, like yours and mine. In particular, the design features and behaviors of the constituent insect “parts” can only be understood with reference to the higher level of organization: the colony. p. 25 She would have us think of an ant colony as a single unit, with various types of ants within that unit acting as constituent parts. The parts are designed (by evolution) to work together. They do not consciously choose to work together or negotiate how they work together. Could we also view a human group as a superorganism, like an ant colony? Some evolutionary biologists believe that the answer to these questions is yes. Like the insects we just met, humans also have widespread division of labor and are tremendously cooperative, including in scenarios where help is not directed to kin and we can expect no return favors from the beneficiary. These evolutionary biologists claim that our species’s uniquely cooperative nature only makes sense if we consider ourselves as being cogs in a larger machine. So the argument goes, cooperation can only be understood because of the benefits this yields at the group level, with the implication being that selection also operates at this higher level of biological organization. p. 27 But Raihani does not share this view. For a collection of parts to be welded into a new kind of being, their interests need to be almost completely and permanently aligned. p. 27 Humans only cooperate sometimes. Often, we are in conflict within a group, and groups themselves sometimes cooperate with one another and sometimes compete with one another. Ants are not applying game theory. Humans are. “Humans cooperate strategically. We cooperate when we find it in our individual interest to do so, and sometimes we go against the interests of the overall group or society to which we belong.” The members of an ant colony cooperate automatically. They always act in the interest of the survival of the overall colony. Humans cooperate strategically. We cooperate when we find it in our individual interest to do so, and sometimes we go against the interests of the overall group or society to which we belong. Raihani says that our family structure also differs from that of other apes. For example, humans evolved a cooperative approach to child care. Many primates live in social groups, and humans are no exception. Nevertheless, we are unique among the great apes in that we also live in stable family groups, where mothers receive assistance from others in the production of young. The evolution of our family—fathers, siblings, and grandparents—was the first critical step on our path toward becoming a hypercooperative species. p. 47 Raihani says that we stay in families long enough for older siblings to help raise younger ones. … mothers can expect to receive help from their older children in the business of rearing younger ones. And we are the only ape that does this. For those of us living in modern, industrialized societies, it might come as a surprise to discover that we are cooperative breeders, as we typically have relatively small families, and often stop breeding before the older children can become helpers to younger ones. p. 73 Mothers have always received help in caring for children, although the form that help takes may vary. … for most of our time on Earth, mothers have been embedded in vast social networks and children have been raised by multiple caregivers, including fathers, older siblings, aunts and uncles, and grandparents. Many contemporary human societies still live like this, though these large extended families have (to some extent) been replaced by more formal institutions, like schools and day care, in many industrialized societies. Formal institutions that provide childcare are a logical extension of our cooperative breeding natures. p. 78 Raihani emphasizes that human brains play a unique role in our species’ cooperation. … some of the most important sociocognitive traits that set humans apart from other species—a concern for the welfare of others, the ability to take another person’s perspective and to understand and share their mental states—are traits that are conspicuously lacking among the other cooperatively breeding species on the planet. … Humans are one of the most cooperative species on the planet, a trait we share with other cooperatively breeding species. But our version of sociality is built on different cognitive foundations. p. 126 A key difference relative to other species is that we are aware of the trade-offs involved in choosing to cooperate. Broadly speaking, the kinds of cooperation problems we encounter from day to day can be summarized under one common header: social dilemmas. They are social because our decisions affect other people (even if this is not always obvious). And they are dilemmas because individual and collective interests diverge. p. 129 At the group level, we address these dilemmas by doling out rewards and punishments. We give one another incentives to cooperate. An important reward for pro-social action is a good reputation. People seek good reputations, because a good reputation increases the willingness of others to work with us and to assist us. This represents another distinctly human use of our cognitive skills. … there is scant evidence that any of the other great apes know or care about what others think of them. … For humans, reputation management involves taking the perspective of another person, and also inferring how their beliefs and impressions of us might be altered under various scenarios. p. 159 Raihani sees this as critical to the development of specialization and trade. Without systems to track and monitor the reputations of others, it is unlikely that the intricate systems of mutual trade that characterize all human societies would ever have emerged. p. 160 But our heuristics for tracking reputations can lead us astray. We say we think it is good to raise money for charity or protect the environment, but we rail against companies that try to achieve these aims if they also derive a profit in doing so. Our difficulty in reconciling the fact that something can be both for profit and for good at the same time frequently prompts us to choose outcomes or people or companies that deliver no benefit whatsoever to good causes, rather than those that take a slice of the benefits they generate. p. 181 I think that people systematically assign overly high status to non-profits and overly low status to profit-seeking businesses. This was news to me: The classical view of ancestral (preagricultural) human societies is that they were small-scale, bounded communities, comprising just a few dozen members, with the idea being that “each of our ancestors was, in effect, on a camping trip that lasted a lifetime.” But it turns out that this view is rather outdated. Humans were (much like we still are) likely to have been embedded in vast social networks, with many of their closest friends and family members living far away. Whereas the average male chimpanzee might expect to interact with just twenty other males in his entire lifetime, recent estimates put the average hunter-gatherer’s social universe at about 1,000 individuals. p. 193 Still, I do not believe that ancestral societies had the ability to organize social institutions to govern a group larger than the Dunbar number of about 150 people. Instead, I suspect that what emerged was something like Rule of the Clan.2 Raihani points out that our skills at cooperation also enhanced our ability to cause harm. By working together, the earliest humans were increasingly able to overcome the challenges that nature threw at them: the problems of food scarcity, water shortages, and dangerous predators could all be mitigated via cooperation. But, as a consequence, other humans became our primary threat. We were no longer battling against nature, but against one another. p. 207 cooperation is favored if and when it offers a better way to compete. A corollary of this is that cooperation frequently has victims (in fact, cooperation without victims is the most difficult kind to achieve). p. 236 She says that humans became justifiably frightened of one another. … paranoia might be a feature, rather than a bug, in our psychology. We are emphatically not proposing that the extreme paranoia that accompanies mental disorders like schizophrenia has been favored by evolution…. At lower intensities, however, paranoia is likely to play an important role in helping us to detect and manage social threat. p. 209-210 For more on these topics, see Deborah Gordon on Ants, Humans, the Division of Labor and Emergent Order. EconTalk. “Cooperation Requires Large Brains,” by Arnold Kling. Library of Economics and Liberty, April 3, 2023. Mike Munger on the Division of Labor. EconTalk. One comes away from The Social Instinct with an appreciation for the complexity of human cooperation. As an individual within a group, I may choose to cooperate or defect in various situations. The group must give me the incentive to choose to cooperate. Above the group level, a larger society has to harness group cooperation. A highly cohesive group may behave in ways that corrupt and damage the larger society. Institutions must operate to channel group cooperation constructively. Human cooperation is both impressive and precarious. Footnotes [1] Nichola Raihani, The Social Instinct: How Cooperation Shaped the World. St. Martin’s Press, 2021. [2] See “State Clan and Liberty,” by Arnold Kling. Library of Economics and Liberty, May 6, 2013. *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)

Many boys and men in America are doing worse than girls and women in education while struggling with a culture that struggles to define what masculinity is in the 21st century. Is this a problem? Richard Reeves thinks so which is why he started the American Institute for Boys and Men. Listen as Reeves discusses […] The post The Problems of Boys and Men in Today’s America (with Richard Reeves) appeared first on Econlib.

  Caltrain’s Great New Electric Trains Replace Heavy Polluters by Brad Templeton, Forbes, August 21, 2024. Excerpt: The numbers mean Caltrain was burning about 25 million gallons of diesel annually. But today, Caltrain has around 590,000 boardings/year and an average of 24,600 on weekdays. That means 3.5 gallons of diesel per boarding, on average, which is equivalent to 4 gallons of gasoline. Each round trip thus burned the equivalent 8 gallons of gasoline per person. A 30 miles each way round trip in a car with the average load of 1.5 people, which is less that one gallon per person in a Prius, and 2 gallons per person in a large SUV. Even if each passenger were given a personal Hummer H2 to drive, they would only burn 4.6 gallons for that round trip. If diesel Caltrain were a car, it would be class as one of the heaviest polluters per passenger.   Will Brazil’s Government Shut Down X for 20 Million Brazilians? by David Inserra, Cato at Liberty, August 29, 2024. Excerpt: Brazilian courts have now formally threatened to shut down X (formerly Twitter) in Brazil because X will not silence or provide information on individuals critical of the current government, including individuals living in the United States. And: Also, now there are rumblings that Brazil may be targeting Starlink and SpaceX, which are only partially owned by Elon Musk. If true, this would mean that other unrelated US companies and investors are being hit by Brazil’s judicial authoritarians.   Simon Newcomb on Public Opinions and Economic Insights by Timothy Taylor, Conversable Economist, August 29, 2024. Excerpt: Simon Newcomb (1835-1909) is largely unknown today, but he was a highly prominent economist back in the day: as one example, he was active in the disputes that led to the founding of the American Economic Association back in 1885. In July 1893, he published an essay on “The Problem of Economic Education” for the prominent (both then and now!) Quarterly Journal of Economics. The essay argues that there are basic insights of economics–well-known as of 1893–that are largely unknown or ignored by the general public. What I found thought-provoking was that a number of these insights appear equally unknown to much of the public, as well as to many policymakers, here in the third decade of the 21st century. And from Newcomb: Before such a thing as economic science was known arose the theory of the “balance of trade.” The fundamental doctrine of this theory was that trade was advantageous or disadvantageous to a nation according as the value of its exports exceeded or fell short of the value of its imports. Accordingly, in the nomenclature of the time, an unfavorable balance of trade or state of credit meant one in which the imports were supposed to exceed the exports, and a favorable balance the contrary. An immediate corollary from this view was that trade between two nations could not be advantageous to both, because the values which each exported to the other could not both be greater than those received from the other. … For a century and a half the doctrine entertained and taught by economists is that there can be no trade between two nations which is not advantageous to both; that men do not buy or sell unless what they receive is to them more valuable than what they give in exchange; and that what is true of the individual man is, in this respect, true of the nation. And yet the combined arguments of economists for a hundred years have not sufficed to change the nomenclature or modify the ideas of commercial nations upon the subject. … The terms ” favorable ” and ” unfavorable,” as applied to the supposed balance of trade, still mean what they did before Adam Smith was born. We might well tremble for the political fate of any statesman who should publicly maintain that our exports would, in the long run, substantially balance our imports, no matter what policy we adopted; and that, if this equality could be disturbed, the advantage would be on the side of the nation which imported the greater values.   (0 COMMENTS)

The Wall Street Journal reports that the International Brotherhood of Teamsters has thus far refrained from giving its official support to one or the other of the two main parties and presidential candidates in the forthcoming election (“Some Teamsters Rebel After Boss Praises Trump,” August 24). A Teamsters’ spokeswoman declared: Our endorsement must be earned. The meaning of this sentence is clear: the organization will officially support the candidate or party that promises to give it the most in terms of coercive legal privileges or hard cash for its members. The Brotherhood sells its support in exchange for privileges, and the government sells the privileges in exchange for support. It is political exchange between greedy bullies. What theory of the state can justify that? The cynical view is to think, “Our turn to get privileges will come!” The angelic view of the state consists instead of thinking, “Oh my God, that’s bad, they should (like I do) selflessly pursue the common good.” A basket of other justifications contains many strands claiming that the rules under which we live or have decided to live allow for some limited political exchange; some (James Buchanan, for example) are more defendable than others (say, Jean-Jacques Rousseau). A different, anti-state, approach has been proposed by economist and political philosopher Anthony de Jasay. The Teamsters’ bargaining is seen as a manifestation of the “adversary state” or discriminatory state, which takes sides in favor of some citizens and against others. Among those who live under the discriminatory state, the winners are those who most efficiently bargain to sell their support to the state. In a sense, the Teamsters’ officialdom believes in a dictatorship of the proletariat with a human face, that is, in which the proletariat votes. But this is only a first approximation. In fact, many of its members (cops and airline pilots, for example) are no proletarians at all; the others are not paupers. As its logo shows, the union was more proletarian (assuming for a moment that this term has any meaning on a free market) when its original members in 1903 were drivers of horse-drawn wagons. Their hierography presents them as early defenders of “social justice.” According to historian David Witwer, the Teamsters’ union did admit and recruit Blacks as full members but was not uncontaminated by the racism of the trade unions and of the white workers who often resented the competition of the Blacks (see his “Race Relations in the Early Teamsters Union,” Labor History 43-4 [2002]). Perhaps I should emphasize that in a standard (classical) liberal or libertarian perspective, there is no reason to oppose collective bargaining, provided that every member of the “collective” (the members of the union) is a voluntary member and that the other side, against whom it is negotiating, is not forced by law to “negotiate.” As a matter of terminology, and in parallel to the substantive “collectivism,” I suggest that “collective” should refer to groups that impose their will on recalcitrant members; in that sense, free trade unions might be involved in group bargaining, not collective bargaining. Trade unions would be as useful as any voluntary association, perhaps even more useful in certain circumstances, provided it remains voluntary and does not wield coercive privileges. In general, the way to know that an institution is useful in the economic sense of “efficient” is that it survives with no legal privilege. (0 COMMENTS)