In 1776, the British MP Soame Jenyns wrote a work titled A View of the Internal Evidence of the Christian Religion.1 The bulk of the work is an apologetic for Christian orthodoxy against the claims of skeptical deism, but it has a notable political dimension. The political dimension is manifest in Jenyns’ discussion of New Testament ethics, in which he depicted patriotism as a pagan virtue inconsistent with Christianity: A christian is of no country, he is a citizen of the world; and his neighbours and countrymen are the inhabitants of the remotest regions, whenever their distresses demand his friendly assistance: Christianity commands us to love all mankind, Patriotism to oppress all other countries to advance the imaginary prosperity of our own: Christianity enjoins us to imitate the universal benevolence of our Creator, who pours forth his blessings on every nation on earth; Patriotism to copy the mean partiality of an English parish officer, who thinks injustice and cruelty meritorious, whenever they promote the interests of his own inconsiderable village. This claim elicited many responses in Britain in the final decades of the eighteenth century. The matter was taken up in debate clubs, and it provoked the publication of some significant pamphlets and philosophical works. Sampling the responses illuminates an important perspective on the consistency of patriotism with the ethical ideal of moral equality. Two responses to Jenyns came from students of the great Scottish philosopher Francis Hutcheson. Both emphasized epistemic reasons supporting the virtues of patriotism. Drawing on Hutcheson’s insights on the providential design of the moral sentiments, Archibald Maclaine, a minister of the Church of Scotland in The Hague, advanced the prime importance of caring for our particular social attachments in light of our contextual knowledge. We are best equipped to care for our families, our friends, our communities, and our countries because we have unique insights into their character. A particular focus on the good of our familiars need not, however, be inconsistent with a commitment in principle to the good of strangers. Maclaine believed that God, in his providence, has arranged a potential for mutually beneficial human relationships at all levels of social interaction, including at the level of the nation. This last proposition is broadly attested to by social science, at least according to the insights of another student of Hutcheson, Adam Smith. In The Wealth of Nations2 Smith deployed the tools of political economy to demonstrate the mutual entailment of the good of our country with the prosperity of our international neighbors and the good of humankind more broadly. In the 1790 edition of his work The Theory of Moral Sentiments,3 [TMS] Smith brought insights from his political economy to bear explicitly on the issue of patriotism, tapping into the discourse sparked by Jenyns fourteen years earlier. Smith rearticulated arguments from Hutcheson and Maclaine about the virtues of particularity given our epistemic limitations, and he complemented those arguments with comments on the mutually beneficial nature of international trade. Maclaine and Smith understood that many proposals framed as serving the common good of the nation do no such thing. Many ostensibly patriotic proposals are at best misguided and at worst screens for the advancement of factional interest. This fact does not, however, detract from the virtue of true patriotism. It just shows that not all that self-advertises as patriotism is properly patriotic. Patriotic Sentiments In his book Patriotism, Morality, and Peace,4 Stephen Nathanson distinguished four central aspects of patriotic sentiments: “(1) special affection for one’s own country; (2) a sense of personal identification with the country; (3) special concern for the well-being of the country; (4) willingness to sacrifice to promote the country’s good” (pp. 34-35). Such sentiments are natural and widespread in the modern world. Some believe they morally require correction. For Jenyns, our tendency to prioritize the interests of our country ought to give way to a cosmopolitan ethic, which he framed as consistent with the Christian imperative to universal benevolence. We should view ourselves as citizens of a common city of humankind. We should no more prefer the welfare of our own local neighborhood to the welfare of the city of humanity than a man should prefer the good of his hand to the good of his whole person. Thus, the sin of patriotism ultimately reduces to the sin of pride: to prioritize one’s own country is predicated on the mistaken belief that we are in fact of greater moral significance than our neighbors. One prominent counterpoint to the arguments of Jenyns in contemporary philosophy can be found in the writings of Roger Scruton. Scruton saw the duties of patriotism flowing from our unchosen moral obligations to the nation, which is to be distinguished from the state. The nation is the outer bound of the community that has shaped and nurtured us into the people we have become. There are of course idealized and fictitious visions of the nation that are recruited for ideological purposes; but that doesn’t detract from the reality and formative significance of the national community. Loyalty is due to the nation by virtue of the rootedness of self-understanding in the realities of place. Moreover, without patriotic affection for pre-political social community that constitutes the nation, Scruton argues, our political associations will not sufficiently cohere. They will fail to provide us with law, order, and the protection of individual freedom. The responses to Jenyns’ argument against patriotism in the eighteenth century pursued a different but not entirely inconsistent line of argument. Most respondents to Jenyns mainly affirmed the Christian duty to “universal benevolence,” that is, the duty to organize our affairs in a way that actively contributes to the good of humankind at large. But they emphasized the consistency of serving universal benevolence with a devotion to family, community, and country, in keeping with longstanding Christian teachings on particularity. An early expression of those teachings in Christianity can be found in Augustine’s De Doctrina Christiana,5 where he argued that we are to focus special attention on our social connections, notwithstanding the general Christian imperative to love all men equally: “Further, all men are to be loved equally.  But since you cannot do good to all, you are to pay special regard to those who, by the accidents of time, or place, or circumstance, are brought into closer connection with you.” We have limited attention and resources, and we cannot actively serve the good of everyone. To discriminate, then, Augustine argues that we are to choose those with whom we have some personal connection. Our familiars are not morally superior to strangers. But in the sea of humanity, they are our focal points: “since you cannot consult for the good of [all people], you must take the matter as decided for you by a sort of lot, according as each man happens for the time being to be more closely connected with you.” The point about our special obligations to our familiars featured in the early eighteenth century in debates about the compatibility of self-love and neighbor-love. The philosophical terms of that debate were then in turn mapped onto the later intellectual debates about patriotism debates sparked by Jenyns. A prominent figure in the early debates on self-love was Francis Hutcheson. In his 1725 Inquiry into the Original of Our Ideas of Beauty and Virtue,6 Hutcheson emphasized the providential orientation of our sentiments towards the good of our familiars, beginning with our own person. Augmenting a point along the lines of Augustine’s teachings on particularity, Hutcheson focused on our epistemic limits. We can admire the wisdom of God in the orientation of our affections towards our familiar connections because we have so little understanding—and therefore power—to enhance the lives of those at great social distance. The whole of humankind lies far beyond our comprehension and power. We are most empowered to serve the good of our own person, hence the virtuousness of proper self-love; beyond ourselves, we are equipped with the contextual knowledge to effectively serve our families, communities, and, at the outer bound of familiarity and effectiveness, our country. A student of Hutcheson, Archibald Maclaine, drew from Hutcheson’s analysis to respond to Jenyns in 1777. He charged Jenyns with promoting a “fanatical quietism” by equating the love of country with “pride, revenge, and savage feroscity.” The fact that many acts flying under the head of patriotism are covers for nationalistic domination and the subjugation of others does not detract from the virtue of a true patriotism: “we should not imagine that there is no genuine coin, because we meet with a multitude of counterfeits.” True patriotism is warranted for Maclaine because it orients our focus towards the largest social group that we might hope to positively impact. Patriotism, like friendship, for Maclaine is to be understood as a particular expression of the general duty to universal benevolence, a species within the higher genus of love: Universal benevolence is a generous sentiment, a noble affection; but its real exertion is beyond the reach of humanity, and it can only become active and useful by its application to particular objects. A man would certainly make a ridiculous figure, who, under the pretext of being obliged by christianity to exercise only universal benevolence, should neglect his country, and those smaller societies, to which alone the useful effects of his zeal can extend.7 Framing the Christian ethic of moral equality and neighborly love as in conflict with obligations to our local attachments is, for Maclaine, a grave moral error. The duty to love our neighbors finds expression not in abstract planning or high-level political schemes, in the first instance, but in the active care for those within our spheres of influence and attention, of which the country is the focal endpoint. Similar points came forward in Adam Smith’s final edition of The Theory of Moral Sentiments in 1790. In a chapter called “Of Universal Benevolence,” which was new to the final edition of the work, Smith affirmed the ethical ideal of universal benevolence. Like Maclaine, however, he argued that an abstract focus on universal benevolence could distract from our concrete duties, through which the good of our neighbors are in fact served. “To man is allotted a much humbler department” than the care of the universe: “the care of his happiness, of that of his family, his friends, his country.” Rearticulating the insight of Hutcheson, he points to the wisdom manifest in our natural orientation: That wisdom which contrived the system of human affections, as well as that of every other part of nature, seems to have judged that the interest of the great society of mankind would best be promoted by directing the principal attention of each individual to that particular portion of it, which was most within the sphere of both his abilities and understanding. Smith added the claim in his discussion that we do not—and should not—simply love our countries out of consequentialist considerations. We should love our country “for its own sake, and independently of such considerations”; in a similar fashion, we should love our families for their own sake, independently of the considerations of the widespread social usefulness that comes from the attachment of each to his or her family. But we can, nonetheless, appreciate the benefits of virtuous familial love, friendship, and patriotism to humanity at large. Patriotism as Virtue “Do we live in a world in which the gain of one nation comes at the loss of another? Answering the question requires insights from economics.” Justifying patriotism on epistemic grounds along the lines just sketched doesn’t answer a fundamental question: is the good of our country actually consistent with the good of our neighbors? Do we live in a world in which the gain of one nation comes at the loss of another? Answering the question requires insights from economics. In 1781, a cleric named John Prince delivered an address before the English Antigallican Society called “True Christian Patriotism.” In the address he articulated a moderated version of patriotism, in response to Jenyns. Patriotism is virtuous not in the form it was practiced by the pagans: the “passion for national glory… incited the ancient Romans to trample upon the natural rights of mankind, in order to aggrandize themselves.” But patriotism is virtuous and consistent with Christianity so long as the good of one’s country is pursued by “fair, just, and reasonable means.” His address essentially concluded with an admission, however, that pursuing the good of one’s nation by fair, just and reasonable means will often run against the material interests of other nations: You [society members] have devoted yourselves to your country, which includes in it your brethren and companions, and every other beloved relation: to defend and maintain your religion against the wiles and attacks of Popery: You have engaged yourselves to encourage the honest industry of your own countrymen, and to prefer their manufactures and workmanship, in spite of the tyranny of fashion, to Gallic fopperies: You have not enriched foreigners, and starved your own country’s artificers: You have served your country in a way that must render your patriotism and loyalty unsuspected.8 To be patriotic means to care for the good of one’s nation. To care for the good of one’s nation means to care for the wealth of the nation. For Prince, the wealth of the nation is furthered by the privileging of domestic industry, which harms one’s neighbors, but through a complex of policy measures, not through open warfare. Smith had taken such arguments to task in 1776 in The Wealth of Nations. In that work, essentially, he argued that the jealousy of trade—”the malignant jealousy and envy” (WN, 228) with which we view the success of our neighbors—is fundamentally unpatriotic because it is predicated on the backwards notion that the material success of our neighbors means our own poverty. It also can be seen as unpatriotic in a more classical sense: the jealousy of trade, such as Prince expressed in his sermon, is typically a product of special interests. Policies stemming from that jealousy privilege the interests of certain market incumbents over the good of the nation as a whole. Smith’s contemporary Josiah Tucker, whose books Smith owned in his personal library, had made a similar point earlier, arguing that “the Interest of the Trader, and the Interest of the Kingdom, are two very distinct Things.” The “able Statesman, and judicious Patriot” will distinguish between the two and promote the good of the country through the arts of peace and commerce. In 1790, in the context of his discussion of patriotism, Smith alluded to his analysis in The Wealth of Nations and pointed to the relevance of economic analysis in appreciating what patriotism ought to look like in practice. We have limited power outside our spheres of familiarity, but the study of political economy illuminates the large extent to which the pursuit of the good of our country entails the good of our international neighbors, at least in times of peace. Patriotism doesn’t require us to levy protective tariffs on goods and services, to or subsidize failing domestic industries. The commercial success of our allied neighbors ought to be seen as a boon—something the patriot, a person by definition interested in furthering and even sacrificing for the national interest—ought to generally promote, through efforts at commercial liberalization. As he put the point in TMS, France and England may each of them have some reason to dread the increase of the naval and military power of the other; but for either of them to envy the internal happiness and prosperity of the other, the cultivation of its lands, the advancement of its manufactures, the increase of its commerce, the security and number of its ports and harbours, its proficiency in all the liberal arts and sciences, is surely beneath the dignity of two such great nations. These are real improvements of the world we live in. Mankind are benefited, human nature is ennobled by them. In such improvements each nation ought, not only to endeavour itself to excel, but from the love of mankind, to promote, instead of obstructing the excellence of its neighbours. These are all proper objects of national emulation, not of national prejudice or envy. (TMS, 229) For more on these topics, see “A Brief History of the Editions of TMS: Part 2,” by Erik Matson. AdamSmithWorks, Dec. 4, 2020. Yoram Hazony on the Virtue of Nationalism. EconTalk. One way to conceive of patriotism as a matter of proper focus: in a world of billions, we owe allegiance and attention to the good of the place in which we reside, partly because we have such little knowledge, and therefore ability to make a positive difference, beyond our national borders. This doesn’t sufficiently capture the psychology of patriotism, and there are other aspects of patriotism not here considered, chiefly the notion of sacrifice, which situates the good of the nation above the good of the individual. But when coupled with insights from economics, as advanced by Smith, the point about proper focus illuminates the consistency of the love of one’s country with the good of other nations. There are, of course, instances of conflict over borders or certain natural resources in which the good of different national political forces are at odds. But such conflicts don’t reduce the potentiality of a mutually beneficial cooperation of the nations. Smith in particular worked to illustrate that potential. As Jeremy Bentham wrote in 1843, the work of Adam Smith was “a treatise upon universal benevolence” in which “the nations are associates and not rivals in the grand social enterprise.” Footnotes [1] Soame Jenyns, A View of the Internal Evidence of the Christian Religion, Hard Press, 2018. [2] An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. Cannan edition online at Econlib. [3] The Theory of Moral Sentiments, by Adam Smith. Online at Econlib. [4] Stephen Nathanson, Patriotism, Morality, and Peace. Rowman & Littlefield, 1993. [5] De Doctrina Christiana, by St. Augustine. Available in translation online at On Christian Doctrine (Book II). NewAdvent.org. [6] An Inquiry into the Original of Our Ideas of Beauty and Virtue (1726, 2004), by Francis Hutcheson. Online Library of Liberty. [7] Archibald Maclaine, A series of letters addressed to Soame Jenyns, Esq. on occation of his view of the internal evidence of Christianity by Archibald Maclaine. HardPress, 2018. [8] John Prince, True Christian Patriotism. A Sermon Preached Before the Several Associations of the Laudable Order Antigallicans. Gale ECCO, Print Editions. 2018. *Erik W. Matson is a Senior Research Fellow, Mercatus Center at George Mason University and Deputy Director of Adam Smith Program at GMU Department of Economics. For more articles by Erik W. Matson, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

A Book Review of Pricing the Priceless: A History of Environmental Economics, by H. Spencer Banzhaf.1 How do you price scarce and valuable resources that are not traded in a market? Before answering that question, one may need to ask: why do we want to price those resources? In Spencer Banzhaf’s account of the history of environmental economics these are the two most pressing questions that environmental economists have asked. In Pricing the Priceless, Banzhaf starts from a version of the second question. The environment is a resource we want to conserve for future generations so they can also use it. It is our responsibility, therefore, to rationally plan for its continuous use. But the environment is also a resource worth preserving as it is, for its beauty, for our spiritual enjoyment of it, for its own sake, even if, or perhaps especially because, it does not have any use. The idea of conservation, firstly associated with Gifford Pinchot (1865-1945), and the idea of preservation, firstly associated with John Muir (1838-1914), are the intellectual lines around which the debate develops in Banzhaf’s volume. Both approaches share the problem of pricing the priceless. The story that Banzhaf tells us is a story of the development of ideas, a story that is not linear, not obvious (especially ex-ante), and a story of both tensions and synergies between academia, think tanks, and public agencies. Banzhaf notes that the term environmental economics was not used until the 1960s, then become commonly used only in the 1970s, but its problems were older than the name. The development of environmental economics is entangled with the development of the understanding of externalities, both in Pigouvian and in Coaseian terms, of the public finance tradition, with agricultural economics, and with the government and the military in particular. “Cost-benefit analysis works well if one has commensurable costs and benefits. But what if the benefit or cost is the environment itself?” When the government had to develop a policy, it faced the problem of understanding if that policy was worthwhile. But how could we know? Cost-benefit analysis works well if one has commensurable costs and benefits. But what if the benefit or cost is the environment itself? Or nature? Or maybe outdoor recreation? Can we measure how much people are willing to travel to be outdoors? Can we reliably ask them how much they value the outdoors? Or how much they are willing to pay not to have it destroyed? What if we can compensate those who are facing the costs? What if we can only potentially compensate those who are facing the costs? What incentives do people have to tell the truth? Or what if high prices caused by the increased scarcity incentivize the discovery and use of substitutes? The problem of the environment became more pressing during the Cold War. One of the problems was to make sure there would be enough resources to outlast the communist threat. Conservation and “efficient management” became a priority, especially in terms of water resources. It was difficult to try to find a method to estimate the value of the losses to nature generated by a water dam, let alone to human life. The pushback to any attempt to put a monetary value on an individual life, among other seemingly priceless things, incentivized economists to think not just in terms of costs and benefits but also in terms of trade-offs. So rather than just trying to recommend optimization, some preferred to simply identify the trade-offs among incommensurables. This allowed economic experts to offer policy makers an array of options to choose from, leaving the ultimate decision regarding what to do to politics, thus avoiding unpleasant and unpopular recommendations. Part of the problem was that optimization outcomes would not always be consistent with political outcomes, as concentrated interests would win out over the diffused interests of taxpayers and consumers (p. 185). Thus, economists found themselves divided between a belief in consumer sovereignty and a belief in political sovereignty, without any obvious solution. To this reader, the book is thus a wonderful window into the discipline as well as into post-war America. Yes, it is a history of environmental economics, but environmental economics grew within economics, and economics grew within post-war American politics. To me, the message of the book is summarized in the following sentence: Having come into the government to bring their expertise to practical problems, they [economists] had at least partially lost control of their research agenda and were forced by their government agencies to perform such valuations. Thus, bureaucratic necessities became the mother of economic invention” (p. 229). For more on these topics, see “From Prometheus to Arcadia: Liberals, Conservatives, the Environment, and Cultural Cognition,” by Pierre Desrochers. Library of Economics and Liberty, June 6, 2022. Jesse Ausubel on Agriculture, Technology, and the Return of Nature. EconTalk. Terry Anderson on the Environment and Property Rights. EconTalk. The book highlights the intricate and unintended intertwining between an academic discipline and a political reality. There is much, much more in the book, from the history of and reasoning behind cap-and-trade polluting permits to the links with experimental economics. Everything is explained in detail and rigorously documented, as the forty pages of references testify. While perhaps not a book for a general audience, but an economist, or an educated person keenly interested in the environment, should be able to appreciate its rich content and its thorough narrative. Footnotes [1] Pricing the Priceless: A History of Environmental Economics, by H. Spencer Banzhaf. Cambridge University Press. 2024. *Maria Pia Paganelli is a Professor of Economics at Trinity University. She works on Adam Smith, David Hume, 18th century theories of money, as well as the links between the Scottish Enlightenment and behavioral economics. For more articles by Maria Pia Paganelli, see the Archive. As an Amazon Associate, Econlib earns from qualifying purchases. (0 COMMENTS)

Most people don’t have a reasoned theory to understand how the state and politics work. Many believe mythological stories they caught at home or in school. Many think their own country is unquestionably the best in the world, and their intuitions and beliefs flow from that. We must not disparage ordinary people. The poorer the country, the more they need all their energy to survive and raise families. In richer countries, ordinary people are those who, when they were left free, have formed middle classes that launched and maintained the Industrial Revolution. The problem comes when, through the state, which they don’t understand, they want to get benefits and privileges at the expense of others and dictate how others should live (see my “Princess Mathilde and the Immorality of Politics,” Econlib, April 1, 2024). The political leaders they follow, and often yearn to obey blindly, don’t necessarily have a more serious theory of the state except as an instrument of their ambitions and power. Nicolás Maduro, who was just, fraudulently from what we know, reelected president of Venezuela, a country he ran to the ground with his mentor and predecessor Hugo Chávez, seems to have a simple theory of the state, which happens to be very convenient for his own self-interest. The Financial Times reports (“Nicolás Maduro, Venezuela’s Contested President,” August 2, 2024): Ultimately, his fate is likely to be decided by the powerful military and whether it remains loyal. In the meantime, he is focused on burnishing his image. “I’m just Nicolás Maduro, a student, worker, union leader, constituent assembly member, legislator and foreign minister,” he told the news conference. “And I act out of love.” A different passage of this report is the journalist’s matter-of-fact statement that “Maduro drew closer to China and Russia and adopted free-market policies.” If “free-market policies” are policies to respect and protect voluntary interindividual cooperation without coercive direction from political authorities, Maduro did no such thing, because it would threaten his power. What the newspaper means is that Maduro recently allowed the circulation of the dollar to deflect the discontent of those whose political support he needs. In its different manifestations, love is a natural and useful sentiment in private and small-group interactions. But public love from unrestrained political rulers and coercive busybodies is a very dangerous thing. James Buchanan and the contemporary school of constitutional political economy defend a diametrically opposite ideal: institutions constraining political leaders to contribute to the maintenance of a free society based on an ethics of reciprocity among equally free individuals. In their seminal The Calculus of Consent, James Buchanan and Gordon Tullock wrote: Christian idealism, to be effective in leading to a more harmonious social order, must be tempered by an acceptance of the moral imperative of individualism, the rule of equal freedom. The acceptance of the right of the individual to do as he desires so long as his action does not infringe on the freedom of other individuals to do likewise must be a characteristic trait in any “good” society. The precept “Love thy neighbor, but also let him alone when he desires to be let alone” may, in one sense, be said to be the overriding ethical principle for Western liberal society. (0 COMMENTS)

The universe, points out economist Noah Smith, is always trying to kill us, whether through asteroids hurtling through space or our every-few-hours hunger pains. Why, then, should we expect anything but a gravitational pull toward poverty? Listen as Smith explains to EconTalk’s Russ Roberts why he believes that poverty will always be our “elemental foe,” […] The post The Ever-Present Challenge of Escaping Poverty (with Noah Smith) appeared first on Econlib.

  The list this week is quite short. It reflects only slightly less reading. Mainly, it reflects less thinking about what I’m reading because I’m dealing with some personal issues. Top Five US Commercial Partners by Timothy Taylor, Conversable Economist, July 29, 2024. Now to the excerpt: In discussions of US international economic ties, it sometimes feels a bit as if the only other country worth mentioning is China. Daniel Hamilton at the Brookings Institution put together a list of US international economic ties in a short essay “Who is America’s top commercial partner? (Hint: It’s not China.)”(March 21, 2024). Here’s a table from his article: If you’ve managed not to notice the picture, then before clicking on the link or reading below, make a guess about which country is the United States’ #1 trading partner.       Timothy goes on to point out that, measured in goods traded, the top 4 in 2022, in order, were the EU ($904.1 billion), Canada (793.1 billion), Mexico ($779.1 billion), and China (690.3 billion). The numbers are exports added to imports.   What Aspiring Economists Aren’t Being Taught by Steven E. Landsburg, Wall Street Journal, August 2, 2024. Excerpt: Price theory seems to be fading from the economics curriculum. Surveying the course offerings of the top few dozen economics departments, I see a lot more coursework offered in theoretical microeconomics and a lot less in price theory than I did five years ago. I’ve talked to many economists who have noticed the same thing. I’m not sure why this is happening. Maybe it’s driven by students who demand courses in which they can succeed by memorizing the textbook rather than learning how to think. But if economics majors aren’t learning how to think about economics, then who will? This fits nicely with recent discussions about teaching economics on this site. See here and here.   (0 COMMENTS)

Interest rates are important, but not in the way that most people assume. To see why, it might be helpful to start with an analogy. Why does inflation matter?If you ask the average shopper, they’ll tell you that inflation is obviously bad because the public has to pay more for the stuff they buy. But if you pick up any economics textbook, nowhere do they mention this factor as a “cost of inflation”. That’s because when people spend more on goods, other people earn more selling those goods. By themselves, higher prices are a zero sum game.That doesn’t mean high inflation is not a problem—I believe it’s a very serious problem. But it’s not a problem for the reason that most people assume its a problem.The same is true of interest rates. Most people (wrongly) think that low interest rates are good for the economy. Stock traders know better, and indeed stocks fell sharply on Friday, even as longer-term interest rates plunged.  As with inflation, interest rates can be important—but not for the reasons that you might assume. I suspect that most people make the same mistake that shoppers make with inflation, reasoning from personal experience. Thus they might imagine how lower rates might make it easier to buy a house or car. But interest rates are a zero sum game. When one person pays more interest, another person receives more interest.  I suppose you could argue that a change in interest rates might cause some sort of “redistribution”, although it’s hard to say exactly how.  When rates are low, the media complains that big banks benefit and retired folks with savings accounts are hurt.  When rates are high, the media complains that credit card holders suffer and big banks benefit.  But even if falling interest rates were to redistribute money to lower income people, that doesn’t mean it would help the economy.  Low rates also tend to reduce velocity, as people have more incentive to hoard cash.  As always, it depends on why interest rates change.  Consider the following two claims: 1. It’s nonsense to speak of how interest rates affect the economy.  It would be like talking about how a change in oil prices affects the oil market. 2. It makes a lot of sense to speak about how monetary policy affects the economy. If both are true, then obviously interest rates cannot be monetary policy.  So what is monetary policy? 3. Monetary policy is a set of actions taken by central banks that impact the supply and demand for base money, often with the goal of impacting macro aggregates such as prices, employment and/or NGDP. So then what do interest rates have to do with monetary policy? 1. Prior to 2008, the Fed targeted the fed funds rate by instructing its open market desk to buy and sell Treasury securities.  This policy directly impacted the supply of base money, and indirectly affected interest rates. 2.  After 2008, the Fed continued to change the supply of base money (via QE), but also used the tool of interest on bank reserves to impact the demand for base money. 3. The Fed also impacts the demand for base money by affecting the expected growth rate of NGDP.  Faster NGDP growth trends to reduce the real demand for base money. Note:  These three effects do not all work in the same direction! This is the key point that so many people miss, even many economists overlook this problem.  (If you are familiar with the recent debate, the first two mechanisms are emphasized by Keynesians, and the third has implications related to NeoFisherianism.) Because monetary policy affects interest rates in a complex and often contradictory fashion, it’s not possible to look at changing interest rates and make any inferences about the stance of monetary policy.  I suspect that the reason why America has never had a mini-recession (defined as unemployment rising 1% to 2%, and then falling) is because our central bank has often been confused about the relationship between interest rates and monetary policy.  When the economy tipped into a small recession, the Fed initially makes things worse by tightening monetary policy—creating a bigger recession.  They wrongly assume they are not tightening policy because they reduce their target interest rates.  But lower rates are not easier money—especially if the natural rate is falling even faster. Suppose that central banks are gradually becoming aware of this mistake.  Then, if my hypothesis is correct, the US should begin experiencing minirecessions.  These will occur instead of normal recessions because the Fed will no longer be fooled by an obsession with interest rates.  The Fed will begin to focus more on a wide variety of financial market indicators, and also be more willing to adopt a “whatever it takes” approach to stabilizing market expectations of future aggregate demand (NGDP.) It would take many decades of improved performance to be confident that it was not merely luck, so I won’t be around to see if my prediction comes true.  Indeed I don’t even know if the Fed has begun to see past the fallacy that interest rates are monetary policy, a necessary precondition for any improved performance.  It’s also possible that they could reduce the severity of the business cycle through a different policy reform, say the adoption of level targeting. I’d guess that there is a greater than 50% chance that we are entering our first minirecession.  If so, I think it is likely that this period does not get labeled a “recession” by the NBER.  In that case, it would be our first ever soft landing.  And closely related to these points, it would be our first violation of “Sahm’s Rule”. Alternatively, we might have a full-blown recession.  Either way, the next 12 months will likely be far more interesting than the past 12 months.  Here are my (highly unscientific) guesstimates: 1. Boom:  Unemployment peaks at 4.3%  — 5% chance 2. Minirecession: Unemployment peaks between 4.4% and 5.3% — 65% chance 3. Recession: Unemployment rises above 5.4% — 30% chance I’d be interested in what readers expect—feel free to add to the comment section.  As an aside, these are my definitions; the NBER uses different criteria for defining recessions.  I define soft landing as at least three years of continued expansion without triggering high inflation, even after unemployment has fallen near cyclical lows.  We’ve never done that.  That would be a far more impressive national goal than repeating the 1969 moon landing in the 2030s. PS.  This is kind of a cool graph:   (0 COMMENTS)

In my Defining Ideas article last month, “The Draft Is Still a Bad Idea,” I made the case against a traditional draft to obtain military manpower. A related proposal is for a universal draft of young people, male and female, that would give them a choice between military and civilian service. That kind of draft is also a bad idea. Some of the arguments against such a draft are the same as the arguments against a military draft. The distinctive features of a universal draft also bring other issues into play. The bottom line, as I shall show, is that a universal draft is even more objectionable than a limited military draft. A universal draft, like a military draft, would violate young people’s freedom to choose their occupations and would take no account of the losses to these young people. In addition, a universal draft would, by definition, take away the freedom of many more young people than a military draft would. Also, as some officials in the military have recognized, a universal draft could make it more difficult for the military to get its desired amount of high-quality first-term manpower.   These are the opening paragraphs of my latest piece for the Hoover Institution, “Forced National Service: Worse Than The Draft,” Defining Ideas, August 2, 2024. Another excerpt: The suggestion of harsh measures for young people wasn’t unique to William James. In the famous December 1966 conference on the military draft, a conference that attendee Milton Friedman saw as a turning point towards opposition to the draft, noted anthropologist Margaret Mead called for drafting women as well as men. She recognized that there was a special problem with women that didn’t exist for men: women can get pregnant. (It’s too bad that Mead wasn’t around to explain that fact to Supreme Court justice Ketanji Brown Jackson, who, in her confirmation hearing, said that because she was not a biologist, she could not give a definition of a woman. Anthropologist, not biologist, Margaret Mead had no such difficulty.) Read the whole thing.   (1 COMMENTS)

Author’s Note: This post originally appeared on my (now defunct) personal website as a blog post on January 23, 2019.  Since I took down my website, I have had several requests for this post.  Econlib has been kind enough to allow me to repost it here.  I have made minor modifications for grammar and style, but otherwise the post remains identical.  The original version is available through the Wayback Machine here.   In his 1987 Economic Review article detailing the history of optimal tariffs, Thomas Humphrey writes: [The optimal tariff model] assumes unrealistically (1) that foreign countries will not retaliate with tariffs of their own, (2) that elasticities of supply and demand in foreign trade are not so large in the long run as to render the tariff ineffective, (3) that the optimum tariff rate can be precisely identified and skillfully administered, and (4) that politicians can resist pressures to raise tariff rates above the optimum level. All four of these objections of the optimal tariff model are difficult to overcome when addressing the model as a policy procedure.  I have written on some of these other points before (as have many people far smarter than I).  However, I want to focus on point #2 and I’ll try to keep this not wonky. That the optimal tariff model depends on elasticities of supply and demand is not controversial.  Indeed, that is how the calculation of the tariff works.  However, given condition (2) above, we can see the optimal tariff is, at best, a short-run policy.  This follows from the Law of Demand. Most people tend to think of the Law of Demand in its common form: all else held equal, an increase in the price of a good will reduce the quantity demanded of that good.  But there is a second Law of Demand: the longer a price remains relatively high, the more elastic the demand for a good becomes.   Given that the goal of a tariff is to increase the relative price of a good, then as long as the tariff remains in place, the more elastic demand for that good becomes.  Indeed, if the tariff remains in place and, again, everything else held equal, over enough time, the tariff could cause the demand curve for a good to become perfectly elastic.  A perfectly elastic demand curve would indicate no consumer welfare gains from the trade.  The elimination of consumer welfare would then mean that the tariff is a net welfare loss for the country in question.  So, an optimal tariff cannot persist in the long run, only in the short run given the Second Law of Demand.   Some might object by saying: “But wait, Jon, you sly and handsome devil!  That would just mean the optimal tariff would need to be reduced.  There’s no reason to think the tariff would eventually become a net welfare loss.”  Indeed, it may very well be that some benevolent government can milk the tariff for everything it’s worth by constantly adjusting the optimal tariff as the elasticities change.  However, this is where public choice comes into play.  As Gordon Tullock discussed in 1975, government support of firms is very difficult to remove.  Domestic producers have capitalized on the gains the tariff has provided them.  To remove the tariff is not to eat up “extra normal” profit for monopolizing firms, but rather to eat into normal profit for them.  These firms are legitimately harmed, profit-wise, by the removal or alternations of these protections like an optimal tariff.  Any adjustment to an optimal tariff, even if demanded by the economic scenario is likely to be fought tooth-and-nail by affected firms.  The resulting stagnation will likely result in an optimal tariff that is too high!  Any short-run gains from the optimal tariff (assuming all the above conditions are met) would likely be eaten up by this un-optimal tariff that results from the changing elasticity and lack of change in the statutory tariff.   In a general-equilibrium theoretical framework, an optimal tariff makes perfect sense.  But, once time and public choice enters the fray, the reasonableness of an optimal tariff goes out the window.  And, as GMU economist Garett Jones likes to say: in a knockdown fight between general equilibrium and public choice, public choice wins every time.   Jon Murphy is an assistant professor of economics at Nicholls State University. (0 COMMENTS)

The Subcommittee on Antisemitism and Anti-Israel Bias of the Jewish Advisory Committee at Stanford University issued a 128 page report on May 31, 2024.  The 12 members–faculty, staff, graduate and undergraduate students, an alumnus, and two rabbis–deserve high praise for their work. The Subcommittee presented a surprisingly bold recommendation in a section titled Rethinking Diversity, Equity, and Inclusion.  It challenged one of Stanford’s most important objectives underpinning its academic mission:  Diversity, Equity, and Inclusion.   Stanford’s commitment to Diversity began decades ago, more recently morphing into DEI, the acronym for Diversity, Equity, and Inclusion.  DEI programs have focused on, and continue to emphasize, the recruitment of BIPOC  (Black, Indigenous, People Of Color) faculty and staff, and the enrollment of BIPOC undergraduate, graduate, and post-doc students.  DEI programs culminated in IDEAL, Inclusion, Diversity, and Equity in a Learning Environment, which provided new slots to increase BIPOC programs on campus.  The number of DEI faculty and administrators at Stanford increased from 80 in 2021 to 177 in 2024.  The University has established departments, centers, institutes, and degree programs in every racial and ethnic category on campus. In Rethinking Diversity, Equity, and Inclusion, the Subcommittee writes:  In the longer-term, we make a different recommendation.  We believe that this identity-driven approach to belonging and inclusion is anathema to the University’s educational mission, and that it ultimately works to the detriment of the very groups it seeks to aid.  Among other things, these DEI programs tend to propagate oversimplified histories and promulgate ideologies about social justice without subjecting them to the critical inquiry that is a core aspect of a university education.   In other words, the Subcommittee has been charged with how to counter antisemitism and anti-Israel bias within a fundamentally flawed system, and thus has been unwittingly tasked with recommending how to fix the very system that has failed our Jewish and Israel community members, among many others.  In that spirit we offer the radical proposal of moving from DEI programs as presently constituted to a pluralist framework that benefits individuals from all backgrounds…  (pp. 106-07) To summarize, DEI is a fundamentally flawed system, anathema to the University’s educational mission, and has failed the Jewish community on campus. Apart from the writings of several scholars at the Hoover Institution who have criticized DEI, the Subcommittee report is the first serious internal challenge to Stanford’s DEI policy. The Subcommittee’s report  will be filed in the Stanford Archives and largely forgotten.  But it’s a start, however small, in recommending corrective action.   Alvin Rabushka is the David and Joan Traitel Senior Fellow, Emeritus at the Hoover Institution. (0 COMMENTS)

Fed meetings occur every 6 or 7 weeks and the fed funds target is adjusted in quarter point (25 basis point) increments. In the past, I’ve argued that this procedure is inefficient. I don’t favor interest rate targeting. But if the Fed insists on that policy tool, I’ve suggested that the rate be adjusted much more frequently. One idea I’ve discussed would have the fed funds target adjusted daily, to the nearest basis point. Rather than long periods of almost no change interrupted by abrupt changes, the rate would move up and down based on new information, like a market price. I’ve suggested that the rate could be set each day at the median vote of the FOMC.Today’s Financial Times provides a good indication of why I believe this approach makes more sense: US bond yields tumbled following the jobs data as investors flocked to the safety of Treasuries and bet that the Federal Reserve — which held interest rates steady on Wednesday — will be forced to respond to a weakening economy with rapid cuts in borrowing costs.The US 10-year yield sank 0.18 percentage points to 3.79 per cent, the lowest since December. Investors now expect the Fed to lower borrowing costs by a full percentage point by the end of the year, implying it will have to deliver an extra-large half-point cut at one of its three remaining meetings.“The Fed rolled the dice one more time on Wednesday and they’ve been proved wrong,” said Steven Blitz, chief US economist at TS Lombard. Friday’s jobs numbers “don’t spell recession, but the Fed has to act, and a 0.5 percentage point cut in September is now firmly on the table. They could even move sooner, before the meeting,” he added. Instead of “rolling the dice” with an outdated nineteenth century model, where bankers might have arrived in town after a long journey on horseback, how about a 21st century policy regime, where policy adjusts rapidly and smoothly as new information comes in. The Fed likely won’t adopt my proposal.  But I suspect that right now Jay Powell privately wishes it were in place.  It’s an unusually long 7 weeks until the next meeting.  A lot can happen in seven weeks. (0 COMMENTS)