The title of this post might strike some readers as being odd, given that I hold a number of contrarian views—most notably the claim that the Fed caused the 2008 recession with a tight money policy.When I say don’t be a contrarian, I mean don’t be someone whose entire identity is contrarianism. Don’t be a person who notices, “The elites say X, therefore I need to search out evidence that ‘not X’ is true.” Guess what, it is almost always possible to find at least some evidence that not X is true; that doesn’t make it wise to hold the view that not X is true.Instead, I’d suggest that the best way to respond to the claim that X is true is to look for all sorts of evidence about X, both supportive and opposed. In most cases, you will discover that the elites are correct; X really is true.  The moon landing was not faked.  Oswald did kill JFK.So by all means you should be willing to hold contrarian views. But don’t be a contrarian. Don’t adopt contrarianism as an identity in the way that a person might be a Cubs fan or a Yankee fan, rooting for their team. This post was motivated by an Axios article that contained this tweet: Imagine a pundit starts their career by making a bold contrarian claim, and achieves a certain degree of fame.  Perhaps their initial bold claim actually turns out to be true.  Over time, the pundit may begin to see him or herself as a contrarian, and feel pressure from their audience to supply increasingly contrarian takes.  It’s at that point when the key mistake gets made, when a person moves from being someone that holds a particular contrarian view to someone whose stock and trade is contrarianism. And this does not happen in a vacuum.  Other pundits may be pursuing the same general career path.  In the competition for readers, pundits are pressured to supply more and more edgy takes, to stand out from the crowd.  This competition can only end in one place, dipping one’s toes into the most taboo political opinions of all.  Just as all political debates eventually make the Nazi comparison, descents into contrarianism eventually soft peddle Nazi crimes.  (Or, if the contrarian pundit is on the left, they end up excusing communist crimes.) (0 COMMENTS)

  I posted last month on my Substack, “I Blog to Differ,”  the first part of my interview with financial planner Drew Benson, a former student of mine in the Masters Macro class I taught at San Jose State University in early 2009. I posted on the last 35 minutes today on Substack and have decided, for the first time, to post the same thing here. Here’s the last 35 minutes Some highlights. 3:50: Lockdowns led to a less-robust civil society. 5:35: Connection between lockdowns and George Floyd riots. 6:25: How our daughter adjusted to the San Francisco lockdown and our fear of getting caught going to see her. 8:10: Judge Steve Williams dying in the hospital alone. 8:48: Why Bryan Caplan would be proud of Drew Benson. 10:10: The huge cost of lockdowns to people in poor countries. 11:40: The worldwide decline in extreme poverty and its brief reversal during lockdown. 14:30: Risk from COVID by age. 15:00: I referred to Heritage Foundation; I meant Hillsdale College. 15:40: Multiple co-morbidities. 17:30: Fed behavior, 2008-09 and 2020-21. 19:00: Fed mistake—paying interest on reserves. 19:50: Bernanke broke his promise made at Friedman’s 80th birthday party. 21:25: Who predicted low inflation in 2009 and high inflation in 2021? Jeff Hummel. 22:15: Taking Jeff Hummel’s Masters in Monetary Theory class. Getting the highest grade. 24:10: Commodity money. 24:30: How Hummel’s class helped me write the Wall Street Journal article in which I criticized Diamond/Dybvig model. 25:59: Has WSJ ever dialed me back? 27:10: Having my WSJ article count equal my age. 29:10: Inflation: True and False. 30:00: What Alan Greenspan did in 1987 in response to a greater than 22% fall in Dow-Jones in one day. (The biggest fall in our history.) 31:30: The 1951 Treasury/Fed Accord is dead.   (0 COMMENTS)

The title of this post is a reference to an excellent book edited by Dan Klein and Fred Foldvary, The Half-Life of Policy Rationales: How New Technology Affects Old Policy Issues. The book looks at how many of the arguments given to justify state intervention – such as public goods arguments – are not intrinsic realities. They can quite often be down to little more than technological limitations. As new technology develops, the issues associated with public goods or common-pool resources can be eliminated, and the justification for state intervention eliminated along with it.  One example of this I recently experienced relates to asymmetric information. When there is asymmetric information in a market, one party has more information relevant to a transaction than another party. This can lead to suboptimal outcomes. Probably the most famous statement of this issue is the famous paper by George Akerlof, The Market for Lemons. To quickly recap, this paper considers the used car market. There is asymmetric information between prospective buyers and sellers of used vehicles. If I’m selling my used car, I know more about the condition of that car that you, the prospective buyer. You might naturally suspect my car is a lemon – that is, a car with significant issues. The risk that I might be trying to sell you a lemon will tend to make you push for a lower price. This, in turn, can lead to an adverse selection problem. When buyers of used cars want to push prices down to offset the risk of lemons, prospective sellers who have the highest quality used cars will pull their cars from the market. This in turn makes the used car market more concentrated with lemons, which further pushes down the price people are willing to offer, leading those with the highest quality cars remaining to pull out of the market as well, and so on. Enough iterations of this process, and the used car market will consist of nothing but overpriced junk. Or so the argument goes.  There is also an asymmetric problem with insurance markets. I know more about my life, health, and habits than insurance companies do. Of course, they can attempt to use broad statistical regularities to account for this. For example, auto insurance companies know that teenage boys are riskier to insure than middle aged women, and will tend to charge higher rates for the former than the latter. But this doesn’t fully offset the issue – auto insurance policies are issued on an individual basis. Maybe I am a reckless driver, and the fact that I haven’t been in any accidents lately is down to sheer luck on my part. This is something I can know about myself, but the auto insurance company doesn’t know – there’s asymmetric information here. But, like most things in life, it turns out there’s an app for that.  I get my auto insurance through my bank, USAA. And I discovered a few months back that there’s an app called USAA SafePilot that you can use to impact your auto insurance rates. If you download the app and sign up for the program, the auto insurance company can gain additional information about your driving habits. So USAA can get a sense of how I drive, how often I stomp on the brakes, whether I’m unlocking and using my phone while driving, and so on. And, as a result of reducing the information asymmetry between myself and USAA, my auto insurance rates were reduced by 18%. Not bad at all. In fact, simply knowing that I have this app downloaded on my phone itself nudges me to act differently when I drive. The other day I was on my way home in the morning from the gym and stopped at a red light, when I saw that there was a particularly striking sunrise in progress. I was tempted to take my phone out and snap a picture of it – but then I realized that if I did, the app would ding me for unlocking and using my phone while driving, so I kept my phone away.  The more general lesson is that the market itself has a tendency to find ways to address market imperfections. There is asymmetric information between myself and a life insurance company – but that can be accounted for with a requirement that approval for a given life insurance policy requires undergoing a medical exam for the insurance company to review. The prospect of a market for lemons creates an opportunity for companies like Carfax to emerge to help reduce information asymmetries about used cars. And the advent of new technologies like smartphones can reduce the information asymmetries in the auto insurance market in ways that were unavailable not all that long ago.  As Arnold Kling would say – markets fail, use markets. Where you see a market failure, some entrepreneur out there sees a market opportunity. The more competition and innovation there is being put to use to take advantage of those opportunities, the better. And as the pace of technological innovation increases, the half-life of market imperfections correspondingly decreases.  (0 COMMENTS)

Note to the readers: This article contains many spoilers for both The Mummy (1999) and The Mummy Returns (2001).   This year marks the 25th anniversary of the cinematic masterpiece starring Rachel Weisz, Brendan Fraser, and Oded Fehr The Mummy (1999). With books of gold and trowels of steel, the battle between the mummy of a high priest and the clumsy Egyptologist librarian stole the hearts of an entire generation. This action-packed adventure movie also inspired a book series, multiple roller coaster rides, and ONE impressive sequel (we leave the proof of which it is to the reader).  However, when you think of this 1999 cinematic classic, you could also think about the economic themes guiding the behavior and decisions of the major characters. Revisiting Hamunaptra provides us with an opportunity to think about how the economic way of thinking can help us solve problems – or at least help us avoid the curse of the Hom-Dai. This movie has nuances and themes for both the introductory student of economics and for the Medjai-like educators who ensure that economic knowledge is not used to bring about the end of the world.  Classic Questions in Economics Especially for an introductory student of economics, The Mummy and The Mummy Returns present clear examples of subjective value, rational choice behavior, trade-offs, and cost-benefit analysis. One of the core principles in economics is that value is subjective to the individual. Rick demonstrates that value is subjective when he notes in the first film that “These men are a desert people; they value water, not gold.” We see Rick, Evelyn (Evy), and Jonathan use market exchange to solve their sudden supply shortage in The Mummy, although Jonathan gripes about the cost of the camels (but – he still pays for the camels). Market exchange also does not require currency, and instead may be supported by any exchange of goods and services between two or more parties where items with perceived value may be exchanged for the gain of the participants. In The Mummy Returns, we instead see Rick using barter exchange with Izzy to secure passage across the desert on Izzy’s airship. The golden scepter that Rick grabbed from Jonathan, catches Izzy’s attentions with Rick’s appeals for help get him nowhere. The market price for the gold scepter would likely be much higher if sold to a jeweler or collector, but Rick has an inelastic demand – they need to leave immediately, and have few substitutes for travel. If there were a complete market with security in all states of nature, the amount exchanged for the scepter would certainly be more than the cost of one round-trip dirigible flight, but with incomplete markets, the gains from trade are not fully realized.   Most characters in both films also exhibit rational choice behavior, even if their behavior appears outwardly humorous or ridiculous. For example, Rick’s old buddy Beni understands cost-benefit analysis, at least in the short-term. When his team is about to trigger a curse by removing the sacred jars from a sealed box, he flees the scene rather than remain where a potential curse could reach him. Later, the lost lives (and organs) of the Americans who removed the jars reveal that Beni made the optimal decision. Beni similarly exhibits rational choice behavior in working for Imhotep, as the cost of losing his life far outweighs any benefit he would receive from refusing to partner with the undead. Beni also exhibits the consequences of a high time preference, however, as his focus on wealth in the present at the risk of his own life leads to his death. You might even say that his economic analysis has…bugs. Calculating between the short-term gains of wealth extraction and the long-run gains of a long life are not the only example of trade-offs in this film. Trade-offs are everywhere, such as when Evelyn tells Rick to leave her with Imhotep in The Mummy, as he still needed to return her to Hamunaptra, trading Rick’s life for her perceived safety. Evelyn is also engaging in game theory against Imhotep and Beni, as she is treating her kidnapping as a multi-period game, rather than a single-period game with a different solution. Similarly, in The Mummy Returns, Medjai Ardeth has to choose between helping to save his friends’ son Alex and warning the Medjai of the imminent rise of another immortal monster. A core principle of economics is that often, on the edge of the possibility frontier, the choice of one outcome does ensure you will lose another. For example, to awaken the Scorpion King, Hafez loses the skin and muscle on his arm in order to place the bracelet into the statue. Hafez may have been able to avoid this fate if he had been as well versed in hieroglyphics and hieratics on the relic bracelet as the Bembridge scholars or Evelyn. The set of information – be it perfect, imperfect, or asymmetric – matters for the choice matrix and whether we achieve efficient outcomes. Lastly, the films also provide good opportunities for discussion of the broken window fallacy and sunk costs. When Imhotep destroys Cairo in his quest to complete the curse, some might argue that at least Cairo could rebuild. However, as Frederic Bastiat wrote in What Is Seen and What Is Not Seen, “There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.” Instead of having to rebuild, Cairo could have instead invested its resources elsewhere, such as human capital investment or innovation. Similarly, when Ahm Shere sinks back into the desert, we might lament the loss of such an oasis. However, what is lost is lost – and the opportunity cost of going after either the wealth of Hamunaptra or Ahm Shere comes with high economic costs. But that’s not all! In our next post, we’ll turn to more economic concepts, such as labor markets, comparative advantage, and externalities. Darwyyn Deyo is an Associate Professor of Economics at San José State University. Alicia Plemmons is an Assistant Professor and Director of the Center for Free Enterprise at West Virginia University. (0 COMMENTS)

Among the many things about which philosophers disagree, one of the debates I find interesting is the debate between actualists and possibilists. Roughly, possibilists believe you should engage in the best possible action you could, whereas actualists think you should do the best thing you will actually do given your imperfections, even if it’s technically possible for you to do better. To try to see the disagreement play out, consider this scenario. I’m engaged in a tennis match with Bob, and Bob handily beats me. I’m a hothead with a terrible temper, and I really want to smack Bob over the head with my tennis racquet, but of course that would be bad to do. Let’s say there are three possible ways things can go. In the best scenario, I approach the net, shake hands with Bob and congratulate him on a good game like a good sport. A less than ideal scenario is that I storm off the tennis court in a huff. And the worst case scenario is that I go over to Bob and whack him over the head with my tennis racquet. Let’s say that I know myself and my temper well enough to be sure that if I go near Bob right now, I will give in to my anger and whack him over the head. It’s metaphysically possible for me to not do this, but in practice this is what I will in fact do. Should I approach the net? The possibilist would say that since the best thing I could possibly do would be to walk up to the net and shake hands like a good sport, I should approach the net. The actualist says that, given the facts of my personality and weakness, the best thing I will actually do is walk off the court in a huff, so I should not approach the net. This debate often plays out in discussions of utilitarian and consequentialist ethics. Suppose a philosopher named Seter Pinger concludes that if you don’t take the highest paying  job you can find, work as many hours as you can before you collapse, and donate every penny beyond what you need to provide yourself with the barest of subsistence, then you’re morally no better than a serial killer. And let’s suppose that given certain plausible features of human psychology, if you demand people live up to this standard, they’ll end up feeling overwhelmed and just not donate to charity at all. However, if you instead argue people live up to a more moderate standard, like taking the Giving What We Can pledge and donating 10% of their  income to effective charities, the actual result of this will be more money given and more lives saved. If Pinger is a possibilist, he will push people to work like madmen and live like monks. If Pinger is an actualist, he will push people to take the aforementioned pledge. Though he doesn’t use this terminology, Scott Alexander would seem to describe himself as an actualist in this post. He accepts that much of what goes on in the meat industry is morally unacceptable. He also says he “tried being vegetarian for a long time” but that he found it “really hard” and that he “kept giving up” on it. But then, rather than being vegetarian, he decided to follow what he called “a more lax rule,” namely, “I can’t eat any animal besides fish at home, but I can have meat (other than chicken) at restaurants. I’ve mostly been able to keep that rule, and now I’m eating a lot less meat than I did before.” A possibilist would say Alexander should give up meat altogether, whereas an actualist would say Alexander should stick to his more lax rule. In a very actualist vein, Alexander says “if I am right that this is the strictest rule I can keep, then I’m not sure who it benefits to remind me that I am scum. Deny me the right to feel okay when I do my half-hearted attempt at virtue, and I will just make no attempt at virtue, and this will be worse for me and worse for animals.” This divide strikes me as being very similar to a difference in how people consider what the government should do – there is a possibilist and actualist divide here too. For example, I once wrote about how Bernie Sanders claimed that if the government levied a $100 billion tax on Bill Gates, the government “could end homelessness and provide safe drinking water to everyone in this country” and Gates “would still be a multibillionaire.” Sanders is talking very much like a possibilist here – he claims that since the best results the government could possibly achieve with $100 billion would be very good, the government in fact should take that $100 billion. My criticism of his claim, on the other hand, was to take something more like the actualist line. After all, I said, “if Sanders is right about the cost of ending homelessness, the federal government could completely end all homelessness in America with just 1.7% of what the federal government already spends in a single year.” Yet I notice that homelessness has not been eliminated. It’s worth noting that Sanders didn’t claim that the federal government could end homelessness and provide clean drinking water to everyone at a cost of $100 billion per year. He claimed that both issues could be completely solved both issues with a one time cost of $100 billion. So, by Sanders’ lights, the government could possibly have already ended homelessness scores of times over with its vast resources, but has not actually done so for various reasons. Yet at the same time, he thinks the government taking another $100 billion in taxes should be evaluated, not on the basis of what real-world experience shows the government will actually do, but on what he thinks is the best thing the government might possibly do, according to his ideal standard. In another post, Scott Alexander evaluates the prospect of taxing billionaires to try to produce good results, where he also takes something very much like the actualist perspective: Two of the billionaires whose philanthropy I most respect, Dustin Moskovitz and Cari Tuna, have done a lot of work on criminal justice reform. The organizations they fund determined that many innocent people are languishing in jail for months because they don’t have enough money to pay bail; others are pleading guilty to crimes they didn’t commit because they have to get out of jail in time to get to work or care for their children, even if it gives them a criminal record. They funded a short-term effort to help these people afford bail, and a long-term effort to reform the bail system. One of the charities they donate to, The Bronx Freedom Fund, found that 92% of suspects without bail assistance will plead guilty and get a criminal record. But if given enough bail assistance to make it to trial, over half would have all charges dropped. This is exactly the kind of fighting-mass-incarceration and stopping-the-cycle-of-poverty work everyone says we need, and it works really well. I have donated to this charity myself, but obviously I can only give a tiny fraction of what Moskovitz and Tuna manage. If Moskovitz and Tuna’s money instead flowed to the government, would it accomplish the same goal in some kind of more democratic, more publicly-guided way? No. It would go to locking these people up, paying for more prosecutors to trick them into pleading guilty, more prison guards to abuse and harass them. The government already spends $100 billion – seven times Tuna and Moskovitz’s combined fortunes – on maintaining the carceral state each year. This utterly dwarfs any trickle of money it spends on undoing the harms of the carceral state, even supposing such a trickle exists. Kicking Tuna and Moskovitz out of the picture isn’t going to cause bail reform to happen in some civically-responsible manner. It’s just going to ensure that all the money goes to making the problem worse – instead of the current situation where the overwhelming majority of money goes to making the problem worse but a tiny amount also going to making it better. It seems to me that there is likely a strong overlap with how much one finds the actualist line of thought persuasive, and their proclivity to view public policy decisions through the lens of concepts like public choice economics, or to evaluate economic regulation with the theory of regulatory capture as opposed to the public-interest theory of regulation. Just like James Buchanan described public choice as evaluating politics without romance, actualist philosophers think behavior should be guided by a similarly unromantic view of human nature. (0 COMMENTS)

The rise of populist politicians is a worldwide phenomenon. An interesting article by the bureau chief of the Wall Street Journal in Germany analyzes the phenomenon in light of last weekend’s electoral advance of two populist parties, one at the extreme right, the other at the extreme left, in two German states (Bertrand Benoit, “Europe’s Populist Surge Isn’t Only About Immigration, It Is About Fading Trust,” Wall Street Journal, August 2, 2024). The portrait Benoit and his sources draw is roughly the following. Some crisis happens, which the government is unable to solve because of the checks and balances of liberal democracy. This fuels popular discontent and mistrust of government. As a result, the voters turn to populist politicians. This analysis raises many questions. Why are today’s democratic governments less able to find solutions than before? How can voters mistrust government while they elect populist rulers who promise more government? Populism is and has always been interventionist. And how can voters believe that populist governments will be able to solve all the problems, given for example (as Benoit mentions) the level of public debt—a problem that was caused by governments intent to solve all problems? I suggest there is a better explanation, inspired by the work of economist and political philosopher Anthony de Jasay. The growing discontent with the state comes from its inherent incapacity to simultaneously satisfy non-identical individuals. Otherwise, its growing powers over more than a century would have done it already. What happens is that democratic governments and their politicians vie to respond to the demands of a majority of voters and thus buy their support (as well as the support of vocal special interests). This generates discontent among those who finance the buying or are handicapped by the government’s new interventions. Think about individuals who find themselves on the wrong side of official discrimination. These angry voters stake their own claims to government largesse, calling it “social justice.” A new vague of discontent is generated that the government will try to defuse to the detriment of other citizens. The more interventionist the state is, the more people will complain. Like the Red Queen and Alice in Lewis Carroll’s Through the Looking-Glass, the state must run faster just to stay in place and even more to move forward. We should not discard the valid complaints of ordinary people against the bullying they have been subject to by the political establishment over the last several decades, from licensure laws to galloping criminalization and coercive discrimination. Remember the legal apartheid initiated against smokers, who were mostly from the low classes, and the private venues that wanted to welcome them–bars, fast food joints, or even outdoor places. (I would add and change a few things in my Econlib article of a quarter of a century ago on “The Economics of Smoking,” but my private-property argument against the so-called “externalities” of smoking was correct.) The major cause of discontent lies in the pretensions and power of interventionist democratic governments. But it is an error to believe that a populist government can stop the discontent cascade. Populism is nothing but totalitarian democracy with a human face: that of a strongman. It generates further dirigisme, polarization, and discontent. How will the Red Queen race end? Not well, de Jasay believes (see the last chapter of his seminal book The State—the interpretation that follows differs only slightly from de Jasay’s). Being continuously asked to give and not to take away, to intervene and not to harm, state rulers will use up all their discretionary power just to remain in command. They have to promise more to outbid their political competitors. The state will thus need more and more economic power. It will fuse political and economic power into “state capitalism.” It will stealthily nationalize the economy, through regulation and cronyism rather than via the Marxist route. Eventually, it will have no choice but to abolish electoral competition and the other checks and balances in order to effectively pursue the happiness of the people–and the power of the rulers. The state will have gained unlimited power. In this brave new world, the former citizens will in effect have become property of the state like slaves belonged to their masters on the plantations of yesteryear. The state will have become the Plantation State. We don’t have to be as pessimistic as de Jasay to understand that, all over the world, such is the path our democratic leviathans are following. ****************************** Sometimes, one must render to Caesar what is Caesar’s and to DALL-E’s what is DALL-E’s. The featured image of this post was produced by DALL-E after only one prompt: “Create an image showing the Red Queen and Alice (in Lewis Carroll’s *Through the Looking-Glass*) running faster and faster just to stay in place.” The Red Queen and Alice, by Lewis Carroll and DALL-E (0 COMMENTS)

Here are three possible answers to this question:1. No, they are not income and should not be taxed.2. Yes, they are income and should be taxed.3. Yes, they are income, but they should not be taxed. We should tax consumption, not income.I favor the third view. People often say that you haven’t really earned income on an appreciating asset until the asset is sold.  I understand their intuition, but I think they are conflating two issues, income and consumption. Consider two investors that have identical big gains on Nvidia stock.  One holds onto the stock, and the other sells the stock and then buys it all back just one minute later at roughly the same price.  One guy has no income tax liability while the other faces a huge capital gains tax bill.  But their underlying financial situations are essentially identical. I suspect that the intuitive belief that income is only real when the asset has been sold is based on the perception that until it is sold there is a risk that the price goes back down.  But if you sell an asset and put the money into a different investment, that new investment also might go back down. Even cash is slightly risky due to inflation.  The only way of being 100% sure that you’ve realized your gain is by spending the profits on consumption. To an economist, the person that holds the Nvidia stock has earned income every bit as much as the person who sells it and puts the funds into an alternative asset.  Both hold portfolios that have appreciated.  Both hold portfolios that might go back down. And yet I understand why people are reflexively hostile to the idea of paying taxes on assets that haven’t yet been sold.  The real problem is that basic tax theory suggests that taxes should apply to consumption, not income.   Under a consumption tax, it makes no difference whether you hold the asset or sell it and buy an alternative investment.  There’s no tax until the funds are spent on consumption.  This reduces lock in effect of capital gains taxes.   Of course the real world is very complex, and it’s possible to argue for the taxation of capital as a second best policy.  In my view the real problem is not which capital gains to tax, rather it is the entire concept of income.  It is very difficult to define income in a way that is both logical and useful for real world tax systems.  You either give up on logic and consistency, or you impose a true income tax system (including unrealized gains) that many people will think makes no sense. (0 COMMENTS)

I was checking a reference in a book for something I’m writing. The book is Michael Hirsh, Capital Offense: How America’s Wise Men Turned America’s Future Over to Wall Street, 2010. There are various passages about Milton Friedman, and the author had interviewed Milton years earlier. This is one passage I found striking: For most of those years of the Cold War, he remained the leader of a maverick insurgency, isolated and condemned even on the Chicago campus as the 1960s counterculture grew. There were times when no one would eat with him in the faculty dining room. At the campus bookstore Friedman’s works were on a bottom shelf, far out of view of the Marx and Lenin posters on the walls. When he gave talks at other colleges, he would sometimes go in through the kitchen, the better to avoid protesters. Even to some who admired him, he was something of an oddity. “I had to see for myself what that black magician from the Middle West was like,” one Harvard graduate announced to him upon arriving in Chicago. It was a lonely time. Chicago graduate students couldn’t even get placed, except at lesser schools. “We were on the outs, the East Coast and West Coast basically had no use for them,” said Gary Becker. “Columbia was the exception; they were broadminded about it. But Harvard, MIT, Stanford, Berkeley, Yale, they were hostile to all these types of ideas. We were considered extremists.” (italics added) The long years in the ideological wilderness took their toll. Friedman never forgot the snubs. “You have no idea of the climate of opinion in 1945 to 1960 or 1970,” he later told author Alan Ebenstein. This reminds me of a story about a September 1968 meeting with two friends who had visited Milton and Rose in August. I wrote about the meeting in my book The Joy of Freedom: An Economist’s Odyssey, but didn’t tell this story. These two friends, Michael Prime and my mentor to be, Clancy Smith, along with two others, drove to Capitaf, Milton and Rose’s summer home in Vermont. Milton and Rose welcomed them warmly. The four young people started playing what I call “Ain’t it awful,” talking about current government policies and how bad they were getting. But I still remember Milton’s answer that my two friends reported: “You should have been around in the late 1940s. Totalitarian thinking was dominant in academia.” By the way, I do think there was a problem with dates in the quote from the book. I don’t doubt that Milton said it, but my impression is that Milton was way less isolated in 1970 than in 1960.     (0 COMMENTS)

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

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