The most famous passage in Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations is this: It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Just a few sentences prior to it, though, Smith writes: Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that. When an animal wants to obtain something either of a man or of another animal, it has no other means of persuasion but to gain the favour of those whose service it requires. I wonder if Smith understated the ability of animals or, at least, the ability of cats, to engage in exchange. Check out this heart-warming video. I found plausible the idea that the cat thought he was exchanging something that someone else thought to be valuable, a leaf, for something he valued, a piece of fish. HT to my lovely wife, who is always on the lookout for sweet animal stories. (0 COMMENTS)

What is a poem? What is it meant to do? Who is it meant for? Poet Dana Gioia and host Russ Roberts explore these questions and more as they talk about the meaning of poetry. The conversation touches on many personal topics: death, loss, family, and our common humanity. At the beginning of each episode, Roberts mentions EconTalk’s tagline: “Conversations for the Curious”.  This conversation certainly fits the bill, as the two explore what poetry in various forms has meant to them and their families. Dana Gioia’s career as a writer, poet and critic has spanned several genres, including as a librettist for opera and jazz artists. He has done public advocacy work within the arts as the Poet Laureate for the state of California and as chairman of the National Endowment for the Arts. Here’s an excerpt from Gioia on his powers as a poet: You know, when I was a young, ambitious writer at Stanford and Harvard and imagining how I’d make my mark, I had this very English-department notion of what a poem is, and its relationship to the great tradition and the history of ideas. But, nowadays, I think of what a poem is, is this instrument of language that you create, that is one-half a game and one-half a kind of spiritual exploration. But, the highest thing that you can do is to be useful, is to have these words be useful to people in the dilemmas of their actual lives. If you’re lucky, they will find uses for your poem that you don’t even imagine. But, I had a very odd thing where I wrote a poem and I had people talk about it in a totally different context. And I read the poem, and I realized it applied to that context equally. In fact, I rather liked that as much as I liked my own. Because, poems are like children. Once they’re out of the house, they do things that you didn’t imagine and you may not approve of. But, what you’re trying to do is to make them able to lead independent lives. I know that sounds very odd, but once my poems are published, I’m simply one of the readers. I probably may be the best-informed reader, but if they belong anywhere at all, they belong in the language, into the readers of the language. Gioia and Roberts agree on the power that poetry has within ordinary lives, whether for a writer or economist, mother or child, opera lover or pop-song-enthusiast. Do you agree? Their discussion reminded me of scraps of poetry I memorized when I was younger, as a high school or college student, and how they occasionally resurface in my daily life. As an enthusiastic choral singer over the years, many of these poems are songs and have managed to engrave themselves into my brain, almost by accident, but somehow remain, through their words and rhythms, relevant to emotions and thoughts that I have years later. What did you take away from Gioia and Roberts’ discussion? You may want to consider some of the questions below:   1 – Much of Roberts’ and Gioia’s conversation centers around poetry’s power to connect us with past and future generations. Russ quotes from a few line from Septimus in Tom Stoppard’s play Arcadia: We shed as we pick up, like travellers who must carry everything in their arms, and what we let fall will be picked up by those behind. The procession is very long and life is very short. We die on the march. But there is nothing outside the march so nothing can be lost to it. The missing plays of Sophocles will turn up piece by piece, or be written again in another language. Ancient cures for diseases will reveal themselves once more. Mathematical discoveries glimpsed and lost to view will have their time again. You do not suppose, my lady, that if all of Archimedes had been hiding in the great library of Alexandria, we would be at a loss for a corkscrew? Sophocles, as a great tragic playwright, was certainly a kind of poet. Archimedes and ancient doctors, however, belong to what we would characterize as science. What about other human forms of expression and ideas? Do scientific or economic ideas also sometimes serve in this role of poems, connecting human to human?   2 – Gioia describes poetry as something that is “meant to be heard.”  Historically, he points out, poetry has always been connected to song and performance. Perhaps this is true to some extent of any knowledge expressed in human language, it is more than just the visual representation on the page. Can ideas exist independent of discussion? To what extent is poetry a conversation as well as a performance?   3 – In the opening part of the conversation, Gioia reads a poem that he wrote, Meet Me at the Lighthouse. This is dedicated to his cousin, who died at a young age. It begins a discussion about the poem itself, which contains allusions to jazz, Yeats, and classical mythological topics, as well as references to the poet’s memory of his cousin. How do these allusions work together within the unit of the poem to evoke meaning? What do they express about Gioia himself, or his cousin?    4 – Gioia mentions the Latin word for poem is the same as its word for song, carmen. Modern popular music often functions like poetry. Is there a particular poem that has stuck with you throughout life? What was it about that poem that was so meaningful and why do you remember it? If the poem has a musical setting, how does that enhance it? What is it about the music that is necessary to the poem, or is it necessary at all? Does this apply equally to different genres and eras of musical poetry: J.S. Bach, opera, ancient epic poems, Bob Dylan, Taylor Swift (of the Tortured Poets Department), Kendrick Lamar?   Related podcasts  Dana Gioia on Learning, Poetry, and Studying with Miss Bishop, EconTalk Dwayne Betts on Beauty, Prison, and Redaction, EconTalk Cheryl Miller on Hertog and the Humanities, The Great Antidote Zack Weinersmith on Beowulf and Bea Wolf EconTalk   More to explore Shannon Chamberlain on The Freedom of Poets: Thomas Wyatt as a Character in Wolf Hall at the Reading Room and, related, Garth Bond’s The Freedom of Poets 2: Thomas Wyatt and Petrarch Sarah Skwire’s The Opportunity Costs of J. Alfred Prufrock at EconLib Sarah Skwire on Milton’s Poetry and Prose: From the Liberty Fund Rare Book Room at the Online Library of Liberty Confucius’The Shi King, the Old “Poetry Classic” of the Chinese at the Online Library of Liberty The Bard and The Professor: Adam Smith’s Influence on the poet Robert Burns at AdamSmithWorks Adam Smith Also Teaches Good Teaching at AdamSmithWorks The Imitative Arts: Some Fun With Adam Smith’s Artistic Opinions at AdamSmithWorks Ancient Perspectives on the Value of Poetry at the Reading Room The Poet as Intellectual: How the Romantics Took on Thomas Malthus at the Reading Room   Nancy Vander Veer has a BA in Classics from Samford University. She taught high school Latin in the US and held programs and fundraising roles at Paideia. Based in Marburg, Germany, she is currently completing a masters in European Social and Economic History at the Philipps-Universität Marburg. (0 COMMENTS)

Later this month is the 50th anniversary of the South Royalton, Vermont conference on Austrian economics. Liberty Fund asked Richard Ebeling, one of the attendees to write the long essay, and then two people who attended (Mario Rizzo and I) and one person who didn’t (Geoffrey Lea) wrote responses. Here’s an excerpt from my response: Like Richard Ebeling, I was excited to attend the first Austrian Economics conference in South Royalton, Vermont. My motivation was different from Richard’s. I didn’t regard myself as an Austrian economist, but I did find Friedrich Hayek’s work on the socialist calculation debate, and Ludwig von Mises’ work more generally, profoundly insightful and important. I was also a big fan of Hayek’s The Road to Serfdom, the first thing by Hayek that I had read. I had read Hayek and Mises in the late 1960s when I was a young undergraduate mathematics major at the University of Winnipeg. I never took a course in Austrian economics: all of my reading was on my own. In the fall of 1971, when I applied for the Ph.D. program at UCLA, I knew a lot about UCLA’s strong free-market orientation and was looking forward to taking classes from Armen Alchian, Harold Demsetz, and Sam Peltzman, the three UCLA economists whose work I had read. While I knew that none of them was an Austrian economist, I hoped that some of them would be sympathetic. So I took a chance on my application letter, writing, “I would like to be in a graduate program where, if I refer to Mises, people don’t assume that I’m mispronouncing the name of a childhood disease.” It worked, if you judge by the outcome: I was offered full tuition plus a 2-year teaching assistant position paying $440 per month for a 9-month year. That was more than this kid from rural Manitoba had imagined he could get and, more relevant, more than I was offered at my second choice, the University of Chicago. The person who had motivated me to get into economics was Harold Demsetz, whom I had met in January 1970, when he gave 3 talks at the University of Winnipeg. I was hooked on economics. Although I almost always took Demsetz’s advice—he was my dissertation advisor and my mentor—in this case I went against his advice. I told him that I had received an offer to attend the South Royalton conference at someone else’s expense, and the program looked interesting. The three main speakers were Murray Rothbard, Israel Kirzner, and Ludwig Lachmann. I had read, and been impressed with, much of Rothbard’s Man, Economy, and State. Demsetz’s friend and colleague Ben Klein had assigned Israel Kirzner’s Competition and Entrepreneurship in his industrial organization class earlier that year. While I don’t recall Klein saying why he liked the book, I think one reason was that Kirzner rejected the idea that perfect competition had anything to do with perfection. I do remember that Ben liked the idea of dynamic evolving competition that Kirzner, and the Austrians in general, refreshingly brought to the economic discussion. So I was surprised that Demsetz discouraged me from going to the South Royalton event. He told me that, now that my course work was done, I should be digging into my dissertation immediately. But I needed a break after two intense years, and this “busman’s holiday” seemed like what the doctor ordered. I probably batted a thousand on Demsetz’s advice: taking it on every other issue and rejecting it on this one. The conference was well worth it. Here’s a link to Richard Ebeling’s leading essay, Mario Rizzo’s response essay, and finally my responses essay. Geoffrey Lea’s response is yet to come. Don’t miss the part in my essay about Frances Hazlitt’s comment to Milton Friedman. The people in the photo are, from left to right, Harry Watson, Milton Friedman, Jerry O’Driscoll, Jack High, and Richard Ebeling. Personal note: I had a major medical test yesterday. The results were negative; I never like the word “negative” as much as I do when I hear it from doctors. I was sweating the test on Monday and Tuesday morning and having the test Tuesday afternoon. Thus the absence of blog posts Monday and Tuesday. (0 COMMENTS)

Megan McArdle once again joins EconTalk host Russ Roberts to discuss the dangers of the left-leaning bias of Google’s AI to speech and democracy, if such a thing as unbiased information can exist, and how answers without regard for social compliance create nuance and facilitate healthy debate and interaction. McArdle is a columnist for The Washington Post, and is the author of The Upside of Down: Why Failing Well is the Key to Success. Often times when the dangers of AI are discussed, apocalyptic scenarios of human subjugation  or extermination, such as Terminator, I Have No Mouth and I Must Scream, and 2001: A Space Odyssey are thought of. More realistically, some are concerned about the potential of AI to destroy jobs and dilute the meaning of art or make plagiarism easier. AI chatbots and companions are becoming mainstream- for instance, the main topic of this podcast: Google’s Gemini. McArdle’s concern surrounds how the left-wing bias of the companies at the forefront of AI development has bled into their creations, and the tangential impact on American free speech and democracy. McArdle’s initial examples of this are the factual inaccuracies of Gemini in the name of affirming a socially respectable position. The first case discussed involves Gemini’s artistic portrayal of the founding fathers, and other ethnically European historical figures, as nonwhite, which she admits is trivial. However, Gemini’s responses to text queries about gender affirming care were far more notable to McArdle. So, I asked it about gender affirming care, and in short order, Gemini was telling me that mastectomies were partially reversible. When I said, my aunt had a mastectomy for breast cancer is that reversible? It said, no, and I said, well I don’t understand. It seemed to understand that these were the same surgery, but then it delivered a stirring lecture on the importance of affirming and respecting trans people. It had clearly internalized part of our social rules and how we talk about this subject, but not all of them. The errors leaned in one direction, it was not making errors telling people conservative things that aren’t true, and to be clear no activist wants Gemini to tell people that mastectomies are reversible. It was acting like the dumbest possible parody of a progressive activist. McArdle notes that there are reasons for this that don’t involve bias, such as training the chatbot on social media sites such as Reddit, whose moderation leans left. Additionally, the AI doesn’t have the ability to detect certain limits to logical positions, and social rules. But this is an issue for McArdle as well. She sees this as indicative of speech suppression, where only one side of the political spectrum is allowed to be praised, and the other is only allowed to be demonized. Her example of this Gemini’s refusal to giving praise to right-wing figures like Brian Kemp, while doing the opposite for more controversial left-wing figures like Ilhan Omar. The danger in this to McArdle is that AI will teach people not to think in a complex manner and will answer queries analytically to keep the questioner in their ideological bubble. We have these really subtle social rules, and we apply them differently in different situations, we code switch. If I’m with my liberal friends, there are some issues where I’m like, you know what let’s just not have a conversation about that. The AI can’t do that, it’s like a toddler. That can go in one of two directions. The good direction is that Google understands it cannot enforce the subtle social rules of the Harvard faculty lounge, which is effectively what it had done. Google can just say we’re going to be willing to say that Mao is also bad, but we’re just not going to say, Donald Trump who is elected by half of the population is too awful, and you’re only allowed to say awful things about him. That’s a more open equilibrium. It’s a place that allows people to be more confronted with queries and the complexity of the world. Gemini often does a good job with that. I have been dumping on it for an hour, but it actually often does a good job of outlining where the nuance is. My nightmare is that instead, Google teaches Gemini to code switch, to know the person who’s asking the query, what bubble they want to live in, and will give them an answer that will please them. That is a genuinely disturbing future. In response to this, Roberts asks a fantastic question. Since search engines, in order to be useful, are discriminatory or biased by their very definition, what could an unbiased Google, or Gemini possibly mean? This question prompts Roberts to proclaim his pessimism, as the problem is larger than AI chatbots, and is centered around the very ideal of an unbiased search engine. This teaches people to not to decipher truth from varying information, instead people rely on the results they’re given, particularly those which align with their biases. This has a further detrimental trickle-down effect to democracy. To summarize, since search engines are biased by their nature, Roberts’ solution comes from users of search engines behaving more carefully and attentively. This is a conversation about AI, at least nominally, but it’s really a much deeper set of issues related to how we think about our past. History has been taught as great men do great things and let’s learn about what they were. The modern historical trend is partly a reaction against that, and I have no problem with that. The problem I have is the whole idea of unbiased history. What the heck would that possibly be? You can’t create unbiased history; you cannot create an unbiased search engine. Almost by definition if it’s to be useful it’s discriminatory. It’s by definition the result of an algorithm that had to make decisions…the problem for me culturally is that we have this ideal of unbiased search engine. That can’t happen, so we should be teaching people how to read thoughtfully…you start to get people not knowing what the facts are… they assume most things are true if they agree with them. This infantilization of the modern mind is the road to hell, this is going to be difficult for democracy. I don’t think it’s a coincidence that the two candidates we have in the United States are not what most people would call the two most qualified people. It points to something more fundamental. McArdle proposes a similar solution: A proliferation of people focusing less on social appeasement when difficult social questions are being answered, and more on finding nuance. Understanding the complexity within addressing problems like racial inequality is the root to finding solutions. A great new concept I just learned is people who are high decoupling versus low decoupling. High decoupling people abstract all questions from context and low decouplers answers questions in the social context in which they occur. What you need is a high decoupling system instead of one attempting to produce a socially desirable answer. No one is a perfectly high decoupler, but it gives you as much nuance as possible. To contrast Roberts’ pessimism, McArdle gives reason for the best-case scenario. She believes that negatives are sure to come from AI, similarly to how social media led to cancel culture. But human decency will triumph over this challenge. McArdle’s point is one defending liberal society. She views the attempts to fundamentally shift the social order away from enlightenment principles as failures, and the new social order attempting to shift the window of acceptable views seen by Google’s left-wing bias will fail as well. The spirit of human connection and conversation is strong enough to maintain productive discourse. So, I think that the long-term reason to be optimistic: is that these technological challenges are going to create a bunch of bad stuff. I can’t even imagine all of it. You can’t either. If you would ask me in 2012 to predict cancel culture from Twitter, I definitely would not have. But we are also actually fundamentally decent to each other over and over and over again, and we look for ways to be decent to each other…I actually believe that enough people want the things that really matter–which are the people you love, and creating a better world and free inquiry and science and all of those amazing human values…And so, I think at the end of the day, that will probably win if the AI’s don’t turn us into paperclips. Although this was a fascinating conversation, I finished the podcast unconvinced by McArdle that AI bias was a meaningful issue. At multiple points throughout the podcast, she would discuss a response from Gemini that displayed clear left-wing bias, and then go on to state that Google fixed the issue very quickly, even the same day. For example, she mentioned that Gemini does not say mastectomies are partially reversible anymore. The AI that told me that mastectomies were reversible, now doesn’t say that. It’s actually interesting how fast Google is patching these holes. Drawing from this, it seems like Google has a set of values it wants their AI to embody, and they’re just working out the kinks. Furthermore, the leap McArdle takes from this is drastic to say the least, “We are now saying that you can’t have arguments about the most contentious and central issues that society is facing.” Social media bias against right-wing people has been shown to be an unfounded claim and is by far not the biggest threat to free speech. There is a far better argument for social media companies failing to adequately regulate disinformation and false claims about vaccines and the 2020 election or inability to take action against harassment or right-wing extremism coming from their platforms. Similarly, to cancel culture, this is an overblown concern. The better place to focus in the pursuit of preserving free speech and expression does not come from social media companies banning people for hate speech. It comes in state legislatures banning forms of LGBTQ+ expression, such as drag, and Project 2025’s totalitarian and Christian nationalist aims to restrict speech contrary to conservative principles. This is far more important than Gemini refusing to write a love poem for Brian Kemp. Freedom is under attack in America, but it predominately comes from the far right, not Silicon Valley. McArdle’s argument also begs the question of to what extent corporations are responsible to entities other than their shareholders. Are fossil fuel companies obligated to shift their energy production to green sources in order to slow climate change? What about corporations’ responsibility to pay their workers a living wage even if it’s above equilibrium? Are building developers, such as those of the Grenfell Tower, responsible for installing sprinkler systems or building with safer materials, even if it is more expensive? If Silicon Valley is socially responsible to uphold the public square and the spirit of free speech, even if it negatively impacts their shareholders, then this principle of social responsibility should be expanded to all areas of corporate activities.   Related EconTalk Episodes: Megan McArdle on Internet Shaming and Online Mobs Ian Leslie on Being Human in the Age of AI Can Artificial Intelligence be Moral? With Paul Bloom Zvi Mowshowitz on AI and the Dial of Progress Marc Andreesen on Why AI Will Save the World   Related Content: Megan McArdle on Catastrophes and the Pandemic, EconTalk Megan McArdle on the Oedipus Trap, EconTalk Megan McArdle on Belonging, Home, and National Identity, EconTalk Akshaya Kamalnath’s Social Movements, Diversity, and Corporate Short-termism, at Econlib Jonathan Rauch on Cancel Culture and Free Speech, The Great Antidote Podcast Lilla Nora Kiss’ Monitoring Social Media at Law & Liberty   (0 COMMENTS)

I find the debate over the existence of a god intrinsically interesting. Among the many arguments that exist, one argument in favor of a god’s existence I find fairly clever is Alvin Plantinga’s modal ontological argument. I’m not going to get too into the weeds over the finer details of that argument here, but in very simplified and condensed form, it can be described as follows. After offering a definition of “god,” the argument simply starts with the singular premise that the existence of such a being is at least possible. From there, it utilizes modal logic to go through a series of steps to reach the conclusion that the existence of such a being is necessarily true. The argument is logically valid, and everything follows deductively from the fairly modest premise that god’s existence is merely possible. This means that to deny the conclusion of the argument, it becomes incumbent on you to dispute that first and only premise, and offer a positive argument that god’s existence is impossible.  One of the biggest counters to the modal ontological argument is to point out that there is a symmetrical argument that can be constructed to reach the opposite conclusion. That is, you can also start with the fairly modest premise that it’s simply possible that no god exists, and using the same logically valid steps, reach the conclusion that the non-existence of a god is necessarily true. In order to resolve this issue, one would need to propose some kind of symmetry breaker between these two arguments, such that we have some non-arbitrary reason to prefer one over the other. Philosophers and theologians have proposed a number of different symmetry breakers over the years – you can see a compilation and evaluation of them in this recently released paper, if you’re interested. Why am I bringing all this up? Well, recently I posted about how I find libertarianism and classical liberalism to be more focused on reciprocity than other political philosophies. I argued that Thomas Christiano’s argument for the authority of democracy based on the obligation to show proper respect to the judgment of your fellow citizens fails because the obligation he cites (were it to exist, which is far from clear!) is reciprocal in nature. As I put it there: Even assuming that placing one’s judgment above the judgment of others is an impermissible wrong, the situation is still reciprocal. If my fellow citizens say I must do as they have decided because if I don’t, I’m treating my judgment as superior to theirs and treating them wrongly, I can equally say that by trying to compel me to do as they’ve decided, they’re placing their judgment above my own, placing me as an inferior and treating me wrongly. The situation is reciprocal. I also argued that Yoram Hazony’s concerns about free trade undercutting the mutual loyalty among the citizens of a nation fails to get off the ground because of the same issue: After all, what Hazony invokes so often is the idea of mutual loyalty – and the thing about mutual loyalty is that it’s mutual. The obligation goes in both directions. So why would we say I’m failing to show Walter proper loyalty by buying from Carl? Why not say Walter would be failing to show proper loyalty to me, by insisting I buy from him despite the huge additional financial burden it would impose on me? Simply saying “mutual loyalty” does nothing to resolve this Like the modal ontological argument, both of these situations require a symmetry breaker before they can reach the conclusions their proponents seek. And that’s what I think classical liberal and libertarian thought help bring to the table by focusing on the reciprocal nature of these situations. Invoking symmetry isn’t a semantic stopsign, designed to end conversations. It’s an invitation to carry a conversation forward by pointing out that there is a further factor requiring attention.  In the comment section to my previous post, commenter Dylan also brought up the issue of symmetry breakers regarding externalities. Dylan points out that in many cases, people’s moral intuitions about a situation serve as a symmetry breaker. I brought up Ronald Coase’s insight about the reciprocal nature of externalities in my post – and Dylan described how widely held beliefs about particular cases will, for many people, break the symmetrical nature of the situation. As he put it: Take the classic externality of the polluting factory, the idea that I should pay to stop the factory from polluting (or pay to mitigate my exposure) just feels wrong on a fundamental level, even if that solution would win on efficiency grounds. I think this accurately describes how the vast majority of people would react to this situation. To tell someone “Well, why don’t you just pay that factory to install scrubbers if you’re so upset about their smoke and soot falling in your yard” just feels wrong. Most people have a strong reaction along the lines of “They shouldn’t be blowing soot on my house in the first place – why should I have to pay them to make it stop?”  I think that in a lot of cases, moral considerations are a source of symmetry breakers. To use an easy example, my desire that my house not be burned down interferes with Pyro Pete’s desire to burn down houses. Technically, we are imposing on each other in a reciprocal, symmetrical way. But I don’t think it’s a great moral mystery to work out what a symmetry breaker is in this circumstance. Arson is wrong, therefore my imposition on Pyro Pete’s wishes is morally justified in a way that breaks the symmetry.  Sometimes in situations where the moral obligation isn’t clear (or isn’t applicable), other sources of symmetry breakers exist. Sometimes social conventions and norms can serve as symmetry breakers. Or in the court system, one standard that’s sometimes used is the principle of the “least-cost avoider.” In this standard, if two parties are equally imposing on each other (in a way that doesn’t clearly violate some existing law or moral imperative), the responsibility to ameliorate the situation is given to whichever party faces the lowest cost of doing so. If changing the situation is a major imposition on me but only a minor inconvenience for you, then that serves as the symmetry breaker in these cases.  The libertarian and classical liberal focus on reciprocity and symmetry isn’t born of some desire to argue that all laws or interventions are always unjustified on the grounds that every situation is symmetrical. If that was the case, libertarians would be arguing that a law preventing Pyro Pete from burying down my house is unjustified – but I’ve yet to come across a libertarian in favor of arson! But libertarians and classical liberals are correct to point out that the issue of reciprocity and symmetry exist and are important issues deserving examination. Symmetry isn’t an insurmountable obstacle – but ignoring the issue isn’t justified. To the extent that libertarians and classical liberals keep this issue raised, they are doing public discourse a service.  (0 COMMENTS)

The Economist has an article discussing the issue of forward guidance in monetary policy. Here’s an excerpt: To guide expectations credibly, officials must eventually follow through with the changes they indicate. The quandary is deciding what to do when conditions change, as they have since the Powell pivot, with inflationary pressure stronger than expected, which has rendered rate cuts less suitable. Staying the course might no longer be appropriate; changing it risks harming central bankers’ ability to jawbone investors in the future. . . .Ben Bernanke, a former Fed chairman, once warned that such considerations can quickly degenerate into a “hall of mirrors”. If policymakers mimic market expectations, which then shift as a result, endless distortions are possible. Suitably enough, Mr Bernanke’s more recent work reviewing the Bank of England’s approach to forecasting offers a way out, suggests Michael Woodford of Columbia University. One crucial recommendation was that the bank ought to start publishing its projected policy rate under a range of different economic scenarios, rather than just its central forecast. Doing so would help investors understand how policymakers would react to different conditions, allowing them to change course in response to new data without losing face. In my view, making interest rate forecasts conditional on macroeconomic conditions is an improvement over unconditional forward guidance.  Unfortunately, it is difficult to predict how changing macroeconomic conditions might impact future movements in the natural rate of interest. An alternative would be to offer more specific guidance as to the policy goals of the Fed.  For instance, one could imagine a nominal GDP target that calls for 4% annual growth, with make-up policies to correct any short run deviations from this trend line.  This sort of policy regime is called “NGDP level targeting”, because it targets the level of NGDP, not the growth rate. Even more precise guidance could be provided by specifying the exact nature of the make-up policy.  For instance, the Fed could indicate that the make-up would occur at a rate of 1%/year, until back on the trend line.  Thus if a mistake pushed NGDP 1% above the target path, the Fed would aim for 3% growth over the next 12 months.  If a mistake pushed NGDP 2% above target, the Fed would aim for 3% NGDP growth over the next two years.  If NGDP fell 1.5% below target, the Fed would aim for 5% NGDP growth over the next 18 months. One advantage of this sort of policy regime is that it would make it easier to interpret the information in interest rate futures markets.  Today, policymakers don’t know whether an anomalous movement in fed funds futures reflects expectations of what sort of future interest rate would be required to achieve 4% NGDP growth, or a lack of confidence that the Fed is actually trying to achieve 4% NGDP growth.  To make the point more concrete, if the fed funds futures show rates falling to 3.5% over the next year, is that because markets expect a weaker economy, or is it because markets expect an easy money policy that will trigger a stronger economy? I’ve advocated a “guardrails” approach, where the Fed would take unlimited short positions on 5% NGDP growth futures contracts and unlimited long positions on 3% NGDP growth futures contracts.  But even if this market-guided policy regime is politically infeasible, a clearer statement of the Fed’s desired path for NGDP growth would lead to an environment where existing financial markets could provide a rich source of information to policymakers struggling with the question of where to set their interest rate target.  I believe that setting a clear NGDP level target would lead to much less volatility in NGDP growth over time.  Indeed, an NGDP level targeting regime with a clearly specified make-up rule would likely have allowed us to avoid a severe recession in 2008-09, and a severe inflation overshoot in 2021-22. (0 COMMENTS)

The speech that Joe Biden gave at Pointe du Hoc (Normandie, France) in celebration of D-Day echoed a naïve conception of democracy that is now widespread. The general theory goes like this: Democracy is a system where the voter is in power. He is well-informed and votes to express his interest in the public goods that the government proposes to produce. The politicians and the government bureaucrats are selfless public servants who faithfully respond to the electorate’s demands. If I may put a summary in Biden’s mouth: the result is freedom, the rule of law, and a government in the service of “the people”; democracy is good; we come together and do great things at great sacrifice. In reality, to roughly summarize public choice theory, most citizens vote blind because each one’s vote has no impact of the election or referendum result. Many remain apathetic. Politicians and bureaucrats are ordinary self-interested individuals who occupy the public sector to further their own interests. When necessary, they will yield to special-interest groups. The (classical) liberal believes that democracy is a means to individual liberty, not an end, and that the government’s scope and power must be strictly limited to some essential functions in order to restrain its capacity to exploit part of the population. The naïve conception confuses freedom with democracy and views collective choices as superior to individual choices. The collective is greater than the individual, and the latter must sacrifice for the former. Democracy is collectivism with a human face. Biden declared (see “Against D-Day Backdrop, Biden Puts Democracy at Center of Anti-Trump Pitch,” Wall Street Journal, June 7, 2024; and the C-SPAN video of the speech): American democracy asks the hardest of things: to believe that we’re a part of something bigger than ourselves. So democracy begins with each of us … when one person decides there’s something more important than themselves … when they decide that their country matters more than they do. Note in passing how the rhetoric goes from “one person” to the politically correct “they”—ostentatiously to avoid saying “him.”  Intriguingly, Biden later eulogizes “the brave men who scaled these cliffs.” The real function of replacing singular pronouns by their plural is, I believe, to erase the individual. Biden affirms that the American soldiers who took Omaha Beach are asking us to care for others in our country more than ourselves … to be part of something bigger than ourselves … to protect freedom in our time, to defend democracy … to be part of something bigger than ourselves. At least, freedom is mentioned, but it appears to be a mere synonym for democracy, which is the central concept. A free society is very different. Its government leaves every individual free to make the sacrifices he wants without imposing sacrifices on others such as conscripts in times of war. The incipit of Milton Friedman’s Capitalism and Freedom (1962) famously said: In a much quoted passage in his inaugural address, President Kennedy said, “Ask not what your country can do for you—ask what you can do for your country.” …. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that the government is the patron, the citizen the ward. … The organismic, [sic] “what you can do for your country” implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. James Buchanan saw stronger relations between the citizen and a government created and limited by a conceptually unanimous social contract. But he stressed (along with his collaborators Gordon Tullock or Geoffrey Brennan, to mention only those) how the whole system was based on the absolute primacy of individual choices. The citizen is not viewed as a sacrificial lamb. There is no social or collective purposes, only private purposes. Mr. Biden’s concept of democracy is closer to Spartan democracy, which was all about the power of the citizens as a collective, not about individual liberty. In Pointe du Hoc, he preached about countering the natural instinct “to be selfish, to force our world upon others, to seize power and never give up.” But isn’t forcing the world of some upon others exactly what any sort of collectivism means? I suggest there is another way in which Mr. Biden failed his own test. It is pretty obvious that, in the Democratic Party, many presidential candidates other than an 81-year-old apparatchik would have had much more chances to save the Republic from Donald Trump. But Biden is selfish and will not give up power. (0 COMMENTS)

Mike Munger recently wrote about an elementary misunderstanding of economic competition many legislators and regulators seem to harbor – the idea that improving competition means ensuring there are more firms rather than less. This misunderstanding springs from what Munger calls a confusion between the textbook definition of “perfect competition” (which Munger calls an “idiotic concept”) and real competition, as it occurs in the world outside of the classroom blackboard. Munger cites this example: Senator Elizabeth Warren recently argued that the Biden administration, through the FTC, should block the acquisition of Discover by Capital One. Her logic has been “perfect competition,” two small firms are better than one medium-sized firm. Yet one need only take a look at the larger industry, where Visa, Mastercard, and American Express control fully 98 percent of credit-clearing transactions, to realize the folly of that approach. If the Capital One-Discover marriage can be consummated, there will be more competition in the industry, not less. The newly formed entity would have the financial power, and the scale of transactions, to force the credit card industry out of its anachronistic ways. That got me thinking about other cases where “more firms = more competition = better” fails to hold true. Two big examples struck my mind – banking, and mobile operating systems.  Let’s start with the first. Prior to the Great Depression, Canada had a largely unregulated banking system. From that system, what emerged was a relatively small number of very large banks that operated across the country. In the United States, there was a highly regulated banking system that (among other things) heavily skewed towards a “unit banking” system rather than a branch banking system. That is, banks were geographically limited in how far they could expand (operating across state lines was often a no-go) and were thus limited in size. From this system, what emerged was a system of tens of thousands of fairly small banks across the country.  From a “more firms = more competition = better” perspective, it might seem like the United States, with its vast number of banks, would be in a better situation than Canada, which was “dominated” by just a few very large banks. But in practice, the opposite was true. Because banks were so numerous and small, it also meant each individual bank was highly undiversified in the assets it held and was all but chained to local economic conditions. Large, highly diversified banks can better absorb economic shocks than small, undiversified banks. This is part of the reason why in the Great Depression the highly regulated United States banking system had over 10,000 bank failures and the lightly regulated Canadian banking system had none at all.  The second example that came to mind was mobile operating systems. Right now, it’s not at all uncommon to see a certain amount of handwringing over the fact that mobile operating systems is effectively a duopoly between Android and iOS. Wouldn’t it be better if there were more mobile operating systems on the market, because of increased competition? Well, no, not necessarily. If you’re wondering why, then as Munger himself would say, the answer is transaction costs.  Let’s consider a pretty extreme example. Imagine a genie snapped its fingers and tomorrow there was 10,000 different mobile operating systems on the market. Why wouldn’t that be good for competition? Well, one of the annoying features of the real world that’s left out of the introductory blackboard models is transaction costs. If you want to produce and sell an app that simulates a coin flip to help improve the lives of indecisive people, there’s simply no way you’re going program and format that app for 10,000 different OS’s. The transaction costs are simply too high. The same is true for every programmer and app developer out there. The more operating systems are out there on the market, the more complicated and expensive it is to make your application or program available to everyone on the market. Over the last couple of decades, there have been a wider variety of operating systems. Symbian was one. BlackBerry had their own, called (rather unimaginatively) BlackBerryOS. WebOS was another. Windows Mobile had a good run, too. These have all fallen away, leaving Android and iOS locked against each other. Would it be better if all these defunct mobile operating systems were still out there, providing more and better competition? Maybe so in the imaginary world of perfect competition. But in the real world, a world where transaction costs exist, it’s not at all clear that this would be the case. More operating systems means increasing transaction costs associated with producing everything we use those operating systems for – which could very well make the mobile OS market less rather than more productive.  What is the “optimal” number of operating systems? I don’t know. Neither do you. The answer can’t be derived from the blackboard, the armchair, or from tea leaves. But the best chance we have to discover the answer is when markets are free enough for actors to engage in real world market competition.    (0 COMMENTS)

Can a document unify a nation? Yuval Levin of the American Enterprise Institute and author of American Covenant argues that the Constitution unified the United States at the founding of the country and that understanding the Constitution can help bring the country together today. Listen as Levin speaks with EconTalk’s Russ Roberts about how the Constitution not […] The post How the Constitution Can Bring Us Together (with Yuval Levin) appeared first on Econlib.

I often learn more from people whose views partially overlap, than from those with whom I completely agree or completely disagree. Thus I’ve learn a lot from reading Matt Yglesias’s Substack, even though he has a much more favorable view of the Biden administration than I do. In particular, he supports their early effort to pass major bills involving stimulus, and well as subsidies for things like infrastructure, clean energy, and technology.But Yglesias also believes that the Biden administration went off course in 2022: I published a piece on August 25, 2022 advising Biden to press pause on his flirtations with heterodoxy and congressional dealmaking and start listening to boring neoclassical economists. To my mind, that didn’t mean disavowing anything that he’d done in the first 18 months of his presidency. It just meant acknowledging that most of his pre-2021 policy agenda had been cooked up assuming depression-like conditions, and those conditions no longer applied. He’d taken big legislative swings, had some good hits, and now it was time to play defense.But the pivot never really happened. Yglesias is much smarter than most of the policy advisors that Biden relied upon over the past few years.  Many of them don’t really understand neoclassical economics (aka supply side economics), and this led to a series of policy initiatives that made inflation even worse: I would not expect any Democratic administration to weaken Davis-Bacon rules as an anti-inflationary measure, even though doing so would advance a number of Biden’s stated policy objectives. But did Biden need to re-write these rules to be tougher than they were under Obama or Bill Clinton? Similarly, every president likes to tout “Buy American” rules because they sound popular, but Biden’s lawyers genuinely wrote stricter rules than his predecessors. They adopted stricter energy efficiency rules that will drive up prices. They raised tariffs on Canadian lumber. They raised tariffs on solar panels from Southeast Asia. Repealing the Jones Act would be a heavy lift, but Biden made Jones Act rules stricter. A lot of this can be seen as special giveaways to union interests, which is not always ideal but is at least part of a rational political strategy. But beyond that, what I think you see at work in some of the regulatory agencies is a completely sincere, completely non-cynical worldview that promoting high nominal wages is a path to national prosperity. The moves to implement stricter rules on au pairs or create stricter rules for agricultural guest workers don’t have any particularly clear interest group angle. They’re just small moves that drive up the cost of child care and food. To be clear, it is the Fed that determines inflation over the longer run.  But if the Fed sets its policy tools at a position likely to generate 6% NGDP growth, then the enactment of new regulatory measures that raise costs will temporarily shift that nominal spending from output to prices.  Yglesias believes that this policy mistake may ultimately cost Biden the election. The Trump campaign is also advocating policies that could lead to higher costs, such as a 10% tariff on all imports and the expulsion of undocumented workers.  Trump also opposes YIMBY policies to allow the construction of apartments in suburban areas.  But voters tend to focus on the record of the president that is currently in office, not the campaign promises of the challenger.  And Trump benefits from the fact that inflation was relatively low during his tenure. Because I am less Keynesian than Yglesias, I am much more skeptical of Biden’s early policy initiatives.  But I do understand the Keynesian model, and thus I can easily understand why Yglesias has become increasingly frustrated with Biden’s approach to policymaking.  Keynes believed the free market worked reasonably well as long as there was adequate aggregate demand.  By 2022, the economy had recovered from the Covid recession and inflation had become a major problem.  In that sort of world the rules of classical economics apply—industrial policies have real opportunity costs.  It was time to focus on efficiency.  In November, we’ll find out if Biden must pay a price for ignoring the advice of one of the Democrats more insightful pundits. PS.  In my view, the classical rules always apply.  It’s always a good time to focus on efficiency.  Thus I believe the Biden administration went off course long before 2022.  Yglesias pointed me to a Ezra Klein essay from April 2021: Biden has less trust in economists, and so does everyone else. Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics. Multiple economists, both inside and outside the Biden administration, told me that this is an administration in which economists and financiers are simply far less influential than they were in past administrations.  Obama was re-elected against a mainstream Republican.  Biden is trailing in the polls against one of the most unpopular politicians in American history. (0 COMMENTS)