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Economics Can Draw The Line Beyond Which Politics Can Not Reach. We Must Cultivate Economic Literacy To Maintain The Boundary.

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The realm of politics is to coordinate solutions beyond what decentralized individual actors and organizations can themselves achieve. This is done through the power of the state (coercion). Thus, the scope and use of politics as a means is strictly limited to where it is the better solution for society and its constituents.

This means that the boundary of the proper use of politics and the state is identified by what can (and will) be coordinated through decentralized means. In other words, the boundary of politics is composed by our understanding of the mechanisms behind spontaneous orders and their emergence.

Chief among these is the price mechanism and economic calculation.

In other words, the “other side” of politics, which suggests where and to what extent the powers of the state should and can be used, is economics and, more broadly, economic literacy.

Economic theory explains how markets, the nondirected and unplanned coordination of decentralized efforts, work. Where markets work, and where the market order does not pose a problem that is unsolvable by market actors themselves, there is no reason for politics—other than as prescribed by the minority normative position that coercion is somehow preferred over voluntarism.

There are, of course, issues involved with defining the exact boundary of the proper realm of politics, and which issues are actual problems.

There is also a problem of “insiders” in the political system having more or less unlimited interest in expanding their sphere of influence (if not power). But the underlying problem, especially in democracies, is widespread economic illiteracy: if we do not (or will not) understand how markets work and how beneficial orders can arise spontaneously out of the actions of self-interested actors, whether individuals or families or businesses, then we undermine, expand, and will even dissolve the boundary of the proper realm for politics.

In other words, to use Franz Oppenheimer’s old but insightful dichotomy, we invite the political means (coercion), along with the inefficiency and unproductive (if not destructive) incentive structures, to take over the proper space of the economic means (voluntarism).

That’s problematic for all of us, if not for society overall, and poses an ethical problem, since the vast majority does not hold the position that “coercion is preferable to voluntarism.”

This is a problem that can only be solved by learning how markets work, studying sound economics, and gaining economic literacy.

As Ludwig von Mises put it:

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.(Human Action)

The social function of economic science consists precisely in developing sound economic theories and in exploding the fallacies of vicious reasoning. In the pursuit of this task the economist incurs the deadly enmity of all mountebanks and charlatans whose shortcuts to an earthly paradise he debunks. (Economic Freedom and Interventionism)

Formatted from Twitter @PerBylund

Say’s Law – Supply Constitutes Demand – Is The Principle Behind The Entrepreneurial Free Market System. Here’s A 10-point Summary.

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Say’s Law, as explicated by the great liberal political economist Jean-Baptiste Say (1767-1832), is the principle that supply constitutes demand, with the corollary that aggregate supply always equals aggregate demand. There’s no more important principle in political economy to get perfectly right – and assiduously avoid getting wrong – than Say’s Law.

Say’s Law is the most important first principle in economics, with innumerable important corollaries and implications; its logic is irrefutable, its empirics undeniable. Any economist who denies the Law is akin to a physicist who denies the Law of Gravity; an economist opposed to Say’s Law isn’t really an economist, any more than a gravity denier is a true physicist.

Among the many important implications of Say’s Law is that prosperity and economic expansions are supply-side phenomena, a consequence of entrepreneurs, the profit motive, saving, investment and capital accumulation. Put negatively, “consumers” per se don’t drive economies (least of all, today’s largest consumer: government). Recessions, economic stagnation, unemployment, and crises occur not because of “over-production” (or “under-consumption”) but because public policies undermine property rights, manipulate prices, prevent markets from clearing, impede trade, and punitively tax profits, income, and capital.

Tragically, Say’s Law has been denied by John Maynard Keynes (1883-1946) and the Keynesians who dominated economics for at least four decades after World War II (and to some extent still influence economics and policymaking today). In his 1936 text, Keynes falsely attributed the Great Depression and mass unemployment to a prior period of “over-production” (in the 1920s). “Say’s Law,” he wrote, the principle “that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment.” (emphasis added) It was a preposterous claim.

In fact, Say’s Law reveals that while certain markets (say, the labor market) may be in disequilibrium, it’s not possible that all markets in aggregate can be so – and if, as with unemployed labor, supply exceeds demand, it’s due to policy barriers like minimum wage mandates, regulations and taxes on would-be employers and employees alike.

Although Keynesian economics dominated academia and policymaking from 1945 to 1980, beginning in the mid-1970s it was increasingly discredited as illogical in theory and harmful in practice; its macroeconomics was inherently contradictory, it had no foundation in microeconomics and it was harmful, precisely to the extent practiced, to economies in Britain, America, and India. Keynesian premises and policies ensured that the 1970s were marked by “stagflation – the worst of both worlds. Thankfully, this dire period was followed by New Classical Macroeconomics, “rational expectations” insights, and supply-side policy cures, all of which affirmed and built on the truth of Say’s Law and its corollaries. The world thereafter was made better by Saysian economics displacing (at least partly) Keynesian economics.

But Keynesian economics persists today, partly because it satisfies unwarranted suspicions that capitalism is inherently unstable or unsustainable, and partly because it rationalizes government policy intervention and activism. Many economists and policymakers, observing the financial-economic debacle of 2008-09, blithely assumed that Keynesian theory explained it while Keynesian policy could cure it.

Nothing was further from the truth. That debacle was caused not by capitalism (or “deregulation”) but by its contravention – by government subsidies, guarantees, and regulations in housing, banking, and mortgages – and it was worsened and prolonged to the extent Keynesian policies were adopted (e.g., massive new public spending and money issuance, plus a deliberate policy of near-zero interest rates).

The latest issue of the Review of Keynesian Economics is devoted entirely to a dozen Keynesian economists insisting strenuously that Keynesian economics is alive and well. No counterviews are entertained, but it seems the acolytes doth protest too much. Why the defensiveness? Because most Keynesian principles are false – always were, always will be. Yet today’s defensive acolytes can take comfort in the fact that Keynesian premises, no matter how wrong, will always retain a sympathetic hearing to the extent people are suspicious of capitalism, while Keynesian policies, no matter how wrong, will always win ardent support from policymakers to the extent they seek to rationalize interventionism and activism.

Say’s Law and Saysian economics go hand in hand with a political-economic-philosophical appreciation for capitalism – for rationality, the pursuit of self-interest, entrepreneurialism, profit-making, private property rights, the rule of law, and constitutionalism. Say’s Law was largely unquestioned (but also not fully grasped) in the century or so before Keynes tried to slay it in the 1930s; before then, Malthus, Rodbertus, and Marx were its most prominent deniers. We should be grateful that in recent years many scholars have kept Say’s political economy, his treatise, and his Law alive, well, and pertinent to contemporary debates – especially Steven Kates, James Ahiakpor, Alain Beraud, Richard Ebeling, Evelyn Forget, Steve Hanke, Steven Horwitz, Gilles Jacoud, Petur Jonsson, Guy Numa, Munir Quddus, Rashid Salim, Evert Schoorl, and Mark Skousen.

Given Say’s Law’s crucial importance to sound political economy and public policy, I offer the following concise account of it, together with its primary principles and propositions:

  •  Say’s Law holds that supply constitutes demand (not “supply creates its own demand”), with the crucial corollary that aggregate supply always equals aggregate demand. There can never be a deficiency (or excess) of aggregate demand relative to aggregate supply; the two phenomena are the same thing (or “two sides of the same coin”) viewed from different sides.
  • It’s misleading to define Say’s Law as “supply creates its own demand” (or, so goes a typical ridicule, that supplying bikinis will create a demand for bikinis, even in Alaska). In truth, newly created bikinis entail a demand for things other thanbikinis. There can be a “glut” (surplus) of goods (or money) in some markets (microeconomic), but no “general glut” in all markets (macroeconomic), and to deny this is to commit the fallacy of composition (“what’s true of the parts is true of the whole”).
  • Production is the creation of wealth (utility) and spending is the exchange of wealth while questions about who earns wealth (and how much – and why) pertain to the distribution of wealth; the consumption of wealth is not equivalent to demand but to the destruction of wealth (utility), the opposite of creating it (production). Demand is not equivalent to consumption; it’s a desire to purchase plus purchasing power (and the latter comes only from the creation of supply, or from the income one is paid for doing so). One cannot demand unless one first supplies(produces) something of value for offer to others in exchange for their goods. Markets are made by producers, not by consumers qua consumers (because consumption is the destruction of wealth, or utility).
  • Of course, we produce wealth, ultimately, to consume it, or save-invest it, but this doesn’t mean consumption “causes” production (destruction is the opposite of creation). Obviously, some wealth is consumed in the process of creating wealth (see “cost of goods sold” in profit-loss statements), but no (net) wealth is truly created unless there’s valued-added (sales exceeding costs = profit). Profit isn’t a “deduction” from (labor) income but net production.
  • Sound economics focuses on the production, exchange and distribution of wealth, not on its consumption; there is a “primacy of production” – because supply is a necessary precondition for prosperity, wealth creation, and demand. Given the importance and primacy of production in an advancing, progressing civilization, we must be concerned above all with the freedom, rights, incentives, and rewards of creative inventors, engineers, and entrepreneurs.
  • Says’ Law is as true in an advanced, monetary economy as it is in a barter economy, and as true in the short term as it is over the long term; in this way Say’s Law doesn’t differ from the law of gravity. These two aspects of Say’s Law are often misunderstood even by adherents.
  • When we produce things in exchange for money or income, we demand money (and income), for purposes of spending or saving; but saving is not a “leakage” from “the spending stream” (it is saved wealth and invested, which means: spending on capital goods instead of spending on consumer goods). If money is hoarded, no drop in total demand occurs; money itself is a type of good, and if hoarded, is itself demanded (intensely so).  A “scarcity” of money by itself doesn’t impede output growth; it merely entails a declining price level; but this should be welcomed as “a declining cost of living” (which implies a rising standard of living). Money hoarding isn’t a normal part of a free economy but occurs when public policy is confiscatory and/or risk-promoting; to the extent a higher, intense demand for money (hoarding) accompanies economic stagnation it’s due to bad policy, not to relatively less total demand.
  • Economic recessions reflect not insufficient nominal demand (an alleged “money shortage”) but less real supply due to counter-productive public policies (taxing, regulating, etc.) which seize or divert wealth and impede-punish its creation; government spending doesn’t cure recessions by promoting consumption but only delays recovery; public spending is financed by taxes, borrowing, or money-printing, none of which is, per se, pro-production; no magical “public spending multiplier” arises from some increased “marginal propensity to consume.”
  • Keynes’s claim that Say’s Law is “equivalent to the proposition that there is no obstacle to full employment [of labor]” is patently false; many (non-macro) factors impede full employment, including above-market wage rates (whether imposed by coercive unions or public policies) and the punitive taxation and/or regulations inflicted on would-be employers and employees.
  • Some Keynesians have acknowledged the importance of a debate about foundations and first principles, conceding that if Say’s Law is true, Keynesian economics necessarily cannot also be true(since the latter says a differential can arise between aggregate demand and aggregate supply and that government policy can do something to close the differential). By the logic and reality of the matter, Say’s Law in fact is true and valid, so Keynesian economics is not.

The great French liberal Frederic Bastiat (1801-1850) popularized much of Say’s political economy and in his Economic Harmonies(1848) wrote of Say and Say’s Law as follows:

It is fortunate for society that men of genius like Say have patiently and tirelessly applied themselves to observing, classifying, and setting down methodically all the facts that constitute this excellent science [of political economy]. Henceforth the human mind can move forward from this firm base toward new horizons. . . You too might be able to take this same torch from the hands of your predecessors and turn its light upon some of the dark recesses of the social sciences, and particularly upon those that have recently been plunged into darkness by the dissemination of mad doctrines.

It’s worth reiterating that there’s no more important principle in political economy to get right – and avoid getting wrong – than Say’s Law. As Bastiat knew, the Law is akin to a torch illuminating and facilitating the spread of knowledge, based on reason and reality. It also helps us avoid a deleterious dissent into the darkness of “mad doctrines.”

AIER Senior Fellow Richard M. Salsman is president of InterMarket Forecasting, Inc. and a visiting assistant professor of political economy at Duke University.

The Stories We Tell Each Other Are A Far Better Forecast Of Future Economic Events Than Economists’ Models And Equations.

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Stories matter. It’s a truism for journalists, but not so much for economists. Robert Shiller, the Yale professor and Nobel laureate who predicted the housing crisis and also put behavioral economics on the map, aims to change that in a book dedicated to the thriving field of narrative economics.

While many economists are still busy creating mathematical formulas to decode and contextualise our supposedly “rational” behavior, people’s actions are more often based on human interest stories than hard data. “When we are asleep at night,” he points out, “narratives appear to us in the form of dreams. We do not dream of equations or geometric figures without some human element.”

The idea that human behavior can exert its own influence in the market is something that most traders would buy into (investor George Soros turned it into a theory that he called “reflexivity”). But in Narrative Economics, Shiller goes much broader and deeper, looking at how the stories we tell ourselves about the world drive our behavior — and thus the world itself if enough people buy into them. Economists, he argues, need to study this if they are to have any hope of doing a better job than they have in the past of predicting major events — such as recessions or asset bubbles — and how people react to them.

Consider, for example, the fall in stock prices that began after Austria-Hungary declared war on Serbia on July 28, 1914. New York and the major European exchanges reacted by closing their doors. That only increased panic, contributing to activities such as the shipping of large quantities of gold from the US to Europe, which in turn increased the danger on major transatlantic shipping routes. This itself was driven by a narrative that took hold among jittery Europeans around the Panic of 1907, which many held up as proof that America was unstable and they should get their money out as fast as possible.

Given all this, why did markets not close after Britain declared war on Germany on September 3, 1939? In part because of a widely shared story that the first world war had ultimately proved to be very profitable for investors who had kept their US assets, and thus were able to make money selling supplies to Europeans during the war. One result of this narrative was that the S&P index gained 9.6 per cent after war was declared.

All this seems so fuzzy — how can we sift through any of the millions of narratives floating around at any particular moment, particularly in our world of high-speed data, and find those that have meaning and will go viral? (Like diseases, narratives must spread widely in order to be economically relevant.)

It turns out that there is some connective tissue in terms of what spreads. Novelty often catches on — Shiller explains how the “Happy Birthday” song, which used the same tune as an earlier piece of music, was much more successful because it allows us to place our own name in the lyrics. There are also several timeless narratives that seem to come back again and again, mutating for each new era. Fear and hope around technology are both common, as are moral narratives such as the need for thriftiness, which Shiller believes helped prolong the Great Depression, or stories based on strong emotions such as anger against interest groups that are perceived to be selfish or out of touch — like corrupt unions in the past, or rich people today.

These stories, says Shiller, shape policy. In 1957, for example, a 3.7 per cent rise in inflation from the year before — significant in today’s terms but nothing like the 23.6 per cent rise in 1920 — created a strong crackdown by central bankers in the US and elsewhere, thanks in part to an LA Times editorial that detailed the misdeeds of selfish union bosses. Allan Sproul, the recently retired president of the Fed at that time, lamented that the “Federal Reserve System finds itself in the position of having to validate, however reluctantly, public folly and private greed by supporting increased costs and prices”. One might write a narrative of the past 10 years involving desperate central bankers trying to paper over the misdeeds of selfish and myopic politicians by keeping rates low and unwittingly brewing up a huge asset bubble and higher inequality.

But can we actually quantify the effect of narrative economics? Not easily, says Shiller. He calls for more data — in the form of interviews that question people about the stories they tell each other and themselves, and a database of sermons that capture the most important passion plays of the day. Believing that easy money will soon give way to a market crash is certainly one. If Shiller is right, the more we believe it, the more likely it will be.

Economic Growth GDP

What Is Economic Repression? It’s The Squeeze On Our Individual Incomes Due To Excessive Regulation and Taxation.

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The U.S. economy may be headed for recession in the next year or two and policymakers are fretting about how to combat it even though an obvious answer stares them in the face — economic freedom.Why the worry? For starters, we are overdue for a downturn in historical terms. According to the National Bureau of Economic Research (NBER), the U.S. economy rarely goes more than a decade without backsliding for at least a couple of quarters and it has been growing, though often anemically, since the end of the Great Recession in June 2009.Moreover, uncertainty about election results and policy paths can impede business investment. Maybe the Senate will boot the President and his V.P. from office. Maybe Don John will survive his impeachment trial but lose re-election only to be replaced next January by … a socialist? A moderate? Maybe he will win and claim a mandate to justify yet more destructive economic policies. Nobody knows, so it may be best to hold off building that new headquarters, investing in that new computer network, buying that fleet of trucks, and so forth. Not good!In addition, a few technical warning signs, like the yield curve, have blinked yellow or red, further increasing uncertainty.Finally, panic over the coronavirus, even if overblown, may hurt too.The only consolation in all this is the knowledge that the economy will rebound automatically through standard economic processes. When recession strikes, the prices of equities, capital equipment, labor, and so forth decrease until somebody with cash says, “I’ll buy that!”

But for the last century or so, policymakers in the United States, like much of the world, have not been content to allow the economy to self-correct. They want to fudge around with tax and interest rates, even if that means countenancing absurdities like more rounds of quantitative easing, negative interest rates, or dropping money out of helicopters.

Cutting taxes is always a good idea and Trump’s tax cuts may have kept the U.S. out of recession thus far despite his onerous trade war. But fiscal and monetary policies are political minefields and hence cannot be relied upon.

Instead of cutting taxes or already super-low interest rates, many so-called progressives want to combat recession by increasing “automatic stabilizers,” like unemployment insurance and SNAP, and thus “save” an economy that does not need saving with their preferred social policies. While arguably preferable to another Great Corporate Bailout a la 2009, automatic bailouts to individuals redistribute resources rather than increaseing production.

So why not combat recession by increasing economic freedom (reduce economic repression) instead? After all, income redistribution does not cause economic growth. The world’s richest countries redistribute the most income because they can afford to, not because the redistribution helps their economies, which thrive due to the increases in productivity that occur wherever peace, easy taxes, and a tolerable administration of justice reign.

Economic growth and economic freedom are also highly correlated but not because rich countries can afford to buy more freedom the way they can afford more redistribution. In fact, economic freedom causes economic growth by providing people with incentives to work longer, harder, and, most importantly, smarter.

Best of all, economic freedom can be increased today, before recession strikes, leaving us better off in recession than we would otherwise be without recession.

Policymakers usually talk about rates of economic growth or shrinkage but that is misleading in many ways. What ultimately matters to individual quality of life are income levels, not rates of change. You would rather live in a society with a $50,000 per capita income and 2 percent rate of growth than a society growing at 10 percent per year with a per capita income of $1,000, wouldn’t you? If you hesitated to answer for even a second, consider this: per capita income in the richer economy grew by $1,000 ($50,000*.02), while that in the poorer one increased by only $100 ($1,000*.10). More importantly, though, you would be better off living in the richer society even if per capita incomes were temporarily shrinking there.

A rich society that is not living up to its potential due to economic repression, i.e., restrictions on economic freedom, is a tragedy, even if it is more difficult to commiserate with people in such societies compared to those forced to live (often literally) in impoverished lands. As Bob Lawson and Ben Powell point out in Socialism Sucks, the victims of economic basket cases like Cuba, North Korea, and Venezuela are easy to pity because they have no beer, or it’s warm, or it tastes like an ass’s ass (to be as blunt as the authors are throughout their instructively hilarious tale!).

But it also sucks that even after a decade of economic growth, the per capita income of the United States today is much lower than it would have been if the New Deal, Great Society, and “wars” on this, that, and the other had never occurred. Compared to that counterfactual world where economic freedom remained sky high throughout the twentieth and twenty-first centuries, America today is in a wicked economic slump. We still might not have flying cars, but our per capita income today could easily be north of $100,000 real dollars.

The economic costs of our nation’s many past policy mistakes are sunk, i.e., irrecoverable. The proverbial ship has sailed, and the water has passed under the bridge. But we do not have to continue making the same mistakes day after day forever and a day. Let’s fight the next recession today by ridding ourselves of the collected policy detritus of the past and allow human, financial, and physical capital to flow freely to their most highly valued uses.

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota.

In Economics, What Matters Is The Level Of Production. Everything Else Is Secondary.

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Economics is truly a 3rd grade subject, and it would be more broadly viewed as a 3rd grade subject if people broke it down to the individual. Looked at through the prism of the individual, the easy answer for economic growth is always to remove or reduce the tax, regulatory, monetary and tariff barriers that invariably harm individuals.

No doubt there are groups of people who might benefit from taxes, regulations, currency devaluations and import taxes (tariffs) foisted on others, and no doubt there are countless individuals who thrive economically despite heavy taxes, regulations, devalued money and tariffs, but no individual benefits economically if more of his work is penalized, more of his time at work is spent complying with regulations, if the money earned at work is routinely being devalued by the government issuer, and if the imports he truly desires come with a tax.

Broken down to the individual we also know that our capacity to buy what we want is a consequence of our capacity to produce. Who knows when we figure it out, but it doesn’t take a high school, college or post-grad education to alert people to the direct correlation between production and demand. We buy things after we produce, so if we want to have life’s finer things, we must produce.

That’s why it’s always so comical to read about economists obsessing over “demand.” It seems economists know the 3rd grade subject that is economics the least well, and this is probably true because they sought higher education to learn what is so basic.

Why would anyone of sound mind focus on demand when the latter is always and everywhere what’s expressed after supply? There’s no getting around this truth. Underlying all demand for goods and services is production of goods and services, at which point the path to rising demand is a reduction of the barriers that limit supply. Nothing could be simpler.

What about money? Money is just the agreement about value among producers that facilitates the exchange of products for products. Long before state-minted money, producers sought a way to exchange with other producers, and “money” was created by those producers as a common language of sorts enabling exchange. If everyone agreed a seashell, a cigarette or 1/35th of a gold ounce had a market value, then these forms of money would facilitate exchange of products among producers with disparate wants: I have bread and I desperately want to exchange it for your wine, but you only want the butcher’s meat. Money makes it possible for me to get your wine at which point you’ll take my money and buy the butcher’s meat.

Which brings us to debt. Look around the internet in search of financial and economic commentary. If you do, you’ll invariably find all manner of alarmist commentary about “soaring debt,” “debt bubbles” whatever that could mean, and one seen by yours truly the other day about how “The World Is Drowning In Debt.” Such a view misses the basic truth that with all things financial, underlying them is an exchange of products.

With debt, there’s merely an exchange of existing production for future production. Getting right to the point, the world is drowning in debt because it’s “drowning” in production. People borrow money not to look at it, but because it can be exchanged for real products and services. If debt is soaring, then so by definition is production.

Soaring debt isn’t a flashing red sign of economic carnage as much as it’s the logical result of the exact opposite. When individuals are producing more, there’s logically quite a bit more to borrow.

Crucial here is that borrowing is similarly an exchange of products. In the present the lender has money exchangeable for goods and services, and the lender is willing to pass up accessing those goods and services now in order to get more goods and services in the future; the difference being the cost of borrowing tacked onto the loan (rate of interest) that the lender adds on. Of course the lender doesn’t want to get less in the future, which means the lender seeks a producer seen as a good when it comes to paying the monies borrowed back. Lenders aren’t predators on the weak as financial journalists naively assert, and they aren’t because they once again want to get more goods and services in the future then they’re transferring to the borrower in the here and now. Borrowers are seen as good to pay back their debt precisely because the work they do is seen as worthy of generating the income that will pay the monies borrowed back.

But wait, some will say, governments borrow excessively. Yes they do, and they’re able to do so because their borrowing is backed by the productive people they’re empowered to tax. Governments produce nothing. That’s why it’s so comical when economists claim government borrowing and spending stimulates economic growth. Economists remind us how silly it is to seek a credential in something so 3rd grade. Governments can stimulate nothing. The debt they run up is a consequence of economic growth, not a driver of it. The more that the citizens they tax are producing goods and services exchangeable for goods and services, the more that governments can tax their production. Governments don’t stimulate growth as much as they tax and borrow it, only to mis-allocate it.

Which brings us back to the individual. Individuals produce, and often times those producers delay the consumption of their production with an eye on transferring it to others. This is where debt comes in. It’s a happy result of soaring production, and expected future production that creates willingness on the part of the producer to delay consumption. In short, debt is a consequence of savings, which never harm the individual, and by definition never harm the economy. The alarmists all around us can relax.

 

 

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks.

A Walmart In The Neighborhood Does More For Affordable Food Distribution Than Food Baskets From Charity.

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Among economists’ insights over the last almost 250 years, one of the keenest is that one can do good while doing well. The idea traces to Adam Smith. It means capitalists’/entrepreneurs’ pursuit of profit can have favorable consequences for the community at large—and not just for capitalists and entrepreneurs. It applies equally to landowners and workers pursuing their own interests.

The following are two of Smith’s statements of the “doing good while doing well” proposition. The first is from The Wealth of Nations and the latter from Smith’s 1759 Theory of Moral Sentiments.

“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.”

“Every individual… neither intends to promote the public interest, nor knows how much he is promoting it… he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

One frequently hears about capitalists/entrepreneurs making substantial gifts either before or after their deaths to colleges/universities and other non-profit organizations. Many say it is an opportunity for them to “give back,” which suggests, at least to me, that the wealth making the gifts possible was obtained in less than noble ways. Regardless, the benefits the community at large reaps from these gifts are not what the doing good while doing well proposition is about.

The doing good while doing well proposition does not describe government officials’ actions.

Rather, the proposition refers to the process by which the capitalists/entrepreneurs earn their wealth. It’s not what they do with their accrued wealth. It’s the benefit the community realizes as this wealth is accrued. To paraphrase Smith, people enjoy the benefits of meat, beer, and bread as a result of their respective producers’ efforts to earn a profit. What these producers do with their wealth is a different question.

It should also be noted that the doing good while doing well proposition does not describe government officials’ actions. For these officials, making personal monetary profits from their jobs is illegal. The result when government officials pursue their own interests, given this illegality, is the topic of the public choice economics. The results do not parallel those of Adam Smith.

The coming of Thanksgiving and Christmas each year brings with it churches and benevolent groups organizing distributions of food baskets. I have participated in these efforts, though probably with less enthusiasm than others.

Americans are surrounded 24/7 by a process (Smith’s invisible hand) that is wealth-producing for all, thereby making these charitable acts possible.

Always in the back of my mind was the doing good while doing well proposition. That is, how do the effects of the proposition compare with the distributions by churches and benevolent groups? To repeat a previous cautioning, how does the process by which capitalists/entrepreneurs pursue profit affect the community at large?

My mind went to the case of Wal-Mart. No one would deny that Wal-Mart is a profit-pursuing entity. At the same time, there is credible evidence that Wal-Mart’s presence in a community reduces food prices between 10 and 15 percent. Put on an annual basis, this is equivalent to food shoppers receiving 5.2 to 7.8 weeks of additional food shopping per year. It follows that Wal-Mart spreads far more holiday food cheer than churches and public service groups do.

Food basket distributions presumably trace to noble intentions, while pursuit of profit is widely held to be ignoble. Noble trumps ignoble. That’s why the doing good while doing well proposition has always been a tough sell for economists. For many, good things only happen when people intend to do good things.

None of the above is meant to trivialize church food baskets during the Thanksgiving and Christmas holidays. Nor is it meant to disparage those making end-of-life or after-life contributions to colleges/universities or not-for-profit institutions. These acts of charity have long played a vital role in American life. Moreover, they are voluntary, and I would be the last to put them down.

Instead, my purpose is to point out that Americans are surrounded 24/7 by a process (Smith’s invisible hand) that is wealth-producing for all, thereby making these charitable acts possible.

T. Norman Van Cott, is a professor of economics at Ball State. This article first appeared at FEE.org

Government Intervention To Address So-Called Market Failures is Largely Superstition.

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Sit in any time beyond the first month of a typical ECON 101 class and here’s what you’ll be taught: free markets work well, but only under conditions that seldom prevail in reality – a regrettable fact that requires the state to intervene to correct each of the many market failures.

The apparent science on display seems impressive. Curves are drawn on the whiteboard to portray the difference left by free markets between marginal private cost and marginal social cost, between marginal private benefit and marginal social benefit, and the resulting failure of markets to produce socially optimal quantities of outputs and to attach to these outputs socially optimal prices.

Gazing at the curves – or, if the class is especially mathematical, studying the equations – reveals the remedial action that must be taken if society’s welfare is to be optimized. Shift this curve upward, or that one downward – or in the equations modify this coefficient that way or that coefficient this way – and, voila!, society is engineered to optimality with the aid of Scientific Economics.

It all seems to be so objective and free of any taint of ideology. After all, you can see it right there in the graph, in black and white: the marginal private cost of operating the oil refinery is lower than is the marginal social cost of doing so. Only a libertarian ideologue objects to using government to bring marginal private cost into equality with marginal social cost. This libertarian stubbornly elevates his ideology over the public good, for, as the graphs and equations make clear, bringing marginal private costs into equality with marginal social costs yields net social gains. Such engineering is Kaldor-Hicks-Scitovsky efficient. (It’s impressive to have scientific terms that non-specialists must google.)

It’s a Scientific Fact: Economic Reality is Highly Complex and Often Unobservable

But the reality is that this allegedly scientific case for intervention is not close to being as scientific as it is widely believed to be, especially by economists.

Curves and equations are often very useful tools for helping us to think clearly about reality. But these curves and equations are seldom realities on which researchers can gather actual data. While Jones does incur particular costs by increasing her factory’s output, those costs are not observable to outsiders. Nor are Jones’s costs the same as the costs to Smith who increases his factory’s output by the same amount as does Jones.

Also not observable are the marginal social costs of these factories’ operations. The factory across town might indeed spew pollutants into the air that my neighbors and I breathe. But I challenge anyone to objectively quantify the cost that each of us experiences as a result of a one-percent increase in the factory’s output – then of a two-percent increase – then of a three-percent increase… and then to add these costs together in order to construct a genuinely objective marginal-social-cost schedule.

This challenge cannot be met, although meeting it can be faked. The best that can possibly be done is for a fair-minded researcher to estimate – inevitably using her own subjective evaluations – the costs that I and each of my neighbors individually bear. But how does this researcher know my discount rate – or, rather, know the length of time over which I regard as relevant my exposure to the factory’s emissions? She doesn’t. She can’t possibly know such a thing. And what’s true for her knowledge of my discount rate is true for her knowledge of my evaluation of the precise degree to which the factory’s emissions negatively affect my present well-being.

This researcher – assumed here to stick as closely as possible to the scientific tenets of economics – knows that the preferences, risk tolerances, and discount rates of all individuals affected by the factory’s output differ from each other. Therefore, to scientifically quantify “marginal social costs,” this researcher must get not only such ungettable information about me; she must also get such ungettable information for each of the many individuals who is or who might become affected by the factory’s emissions.

Even ignoring the fact that preferences, risk tolerances, and discount rates can and do change in unpredictable ways, this researcher’s task is undoable.

This impossibility is no small matter. If the researcher overestimates the social costs of the factory’s emissions, she – in league with government officials – imposes her own “social” cost on others. She obliges the factory to reduce output to a level below that which is textbook optimal. The cost to society of this suboptimal level of output might well be as large as, or even larger than, the cost to society of simply leaving the factory free to operate without government attempts to “internalize” on it the social costs of its emissions.

The Scientific Appearance Is a Mirage

At this point, the mainstream economist pushes back. He doesn’t deny (How could he?!) that, as a technical matter, getting precise information on marginal social costs is practically impossible. But he insists that such an ideal standard is inappropriate. “We can estimate the divergence between private and social costs closely enough,” the mainstream economist assures us, “and then have government act on those estimates. It’s better than doing nothing.”

While it’s true that the perfect should never be allowed to obstruct the good, there are at least two looming problems with this mainstream-economics approach – problems that warn against trusting it to serve as a reliable guide to government policy.

First, as explained above, there’s no good reason to think that estimates made of social costs by even well-intentioned and sparklingly brilliant government officials will be close enough to accurate to trust that a government empowered to correct market failures will, on the whole, raise social welfare. The assumption that such officials will typically perform well enough on this front is based on no science; it’s merely an assumption – or, rather, an aspiration.

Second, there’s no good reason to think that government officials in reality face incentives that prompt them to behave as their doppelgängers in textbooks behave. The entire case for using government to correct alleged market failures is built on the belief that self-interested actions of private decision-makers lead them to seek private benefits at the greater expense of the public. But if we assume that people act self-interestedly in their private spheres we must make the same assumption about people’s motivations in public spheres.

Yet despite more than a half-century of warnings from public-choice economists, mainstream economists continue to assume, without much apparent thought, that government officials act in a way that is categorically different from the way these same persons would act were they in the private sector: private persons are assumed to act to promote their own self-interests, while government officials are assumed to act to promote the public interest.

What, however, could be more unscientific than this assumption of dual motivations? It is justified neither by science nor by common sense, but it is crucial to the “scientific” case for government action to correct market failures.

My argument is not that markets are perfect. (They certainly are not.) Nor is my argument that a highly informed and well-meaning deity could not intervene in markets in ways that improve their performance. (Such a splendid creature certainly could.) My argument is that because economists advise government officials rather than deities, the economic case for using government to correct market failures is scientific only in the most superficial sense. Deep down it’s mostly superstition.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University

3 Lessons In Protecting Us From Politicians Via The Most Popular Economics Book Ever Written.

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November 28 marked the 125th anniversary (the quasquicentennial, for Latin aficionados) of one of America’s most prolific public intellectuals — Henry Hazlitt. According to Lew Rockwell, he “was familiar with the work of every important thinker in nearly every field,” and “wrote in every important public forum of his day.” He published roughly ten million words as a journalist, literary critic, philosopher, and economist, including Economics in One Lesson, perhaps the most popular economics book ever written

Given that Economics in One Lesson focused on seeing through the logical problems with political proposals that ignore economic realities, it could also have been titled One Lesson in Protecting us from Politicians. Given the frequency and vastly expanded costs of such proposals from politicians and their allied political predators in America today, remembering its lesson is an appropriate way to honor Hazlitt’s birthday.

Hazlitt’s lesson was that “the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Looking at the Long Run as Well as the Short Run

Policies’ long-run effects are often very different from their short-run effects. Consider rent control. Because rental housing tends to be long-lived, rent control’s erosion of the rental housing stock does not appear very quickly, allowing proponents to allege the effect doesn’t exist, rather than “it doesn’t exist in a major way, yet.” However, the long-term effects of rent control have been likened to widespread bombing in their ability to destroy the housing stock. Similarly, Keynesians’ focus on increasing consumption has reduced saving and investment, depressing the growth of the capital stock and economic growth. As Hazlitt put it, “Today is already the tomorrow which the bad economist yesterday urged us to ignore.”

Looking at all Groups, Not Just Some Groups

Virtually every government expenditure program not wholly financed by the beneficiaries illustrates the need to look at policies’ impacts on all affected groups, not just the ones who receive special treatment. That is because government has no resources of its own, so any largesse must ultimately come from other citizens. So analysis must extend to how and from whom those resources are to be acquired, and the consequences. If resources come from taxes, those effects must be incorporated (including the costs to society from the distortions created in addition to the direct costs of the taxes). If resources come from government borrowing, essentially a government commitment to increased future taxation, the present and future effects must also be considered.

Even the language used to shill for policies often misleads us from Hazlitt’s lesson. For example, “we Americans pay our Social Security taxes and we Americans get the benefits,” is true in a sense. However, it commits the logical sin of using the same word “we” to mean different things. Early generations got trillions more in benefits than they paid, forcing later generations to pay far more than they will get as benefits, but equivocating on what “we” means hides the massive redistribution.

Similarly, programs supported as helping groups like “the poor,” such as minimum wages or housing assistance, which actually impose large costs rather than benefits on a substantial subset of “the poor” (e.g., those who lose their jobs, hours of work, on-the-job training, etc., or who don’t get funding for their housing, but face rental prices raised by subsidies others get), which cannot be squared with helping “the poor” as a group.

Incentives Matter

Hazlitt offers many more illustrations than those provided here, making it a “must read” for anyone who wants to understand policy despite the violations of his lesson involved. However, I think his two-part lesson would benefit from a third part. We must also recognize and accurately evaluate all the margins at which supposed beneficiaries’ incentives are changed, not just one, because policies cannot change just one incentive.

Food stamps (now the Supplemental Nutrition Assistance Program) offer an instructive example. They were intended to increase food consumption of low-income people. However, they actually have very limited effects on food consumption. Almost all recipients get less in SNAP benefits than they would have spent on food, allowing the benefits to be substituted for dollars spent on food, freeing them up to be spent however recipients choose.

Further, since SNAP benefits are reduced as incomes rise, the food stamp program acts as an income tax, reducing incentives for recipients to develop and use their skills to benefit others. Such effects are magnified for individuals in multiple assistance programs, which is very common.

Asset tests have also been applied which kept people from putting together sufficient resources to go to school to learn their way out of poverty or to start a business and earn their way out of poverty.

Ludwig von Mises said of Henry Hazlitt that “in this age of great struggle in favor of freedom and the social system in which men can live as free men, you…are the economic conscience of our country.”

Economics in One Lesson offered important guidance for that struggle. However, during his life, Hazlitt concluded that “So far as the politicians are concerned, the lesson…does not seem to have been learned anywhere.” Now, with far more resources forcibly taken from some for whatever and whoever the government decides, his insights are more important than ever.

20 Questions About The Illogical Beliefs Of Progressives About Economics And Politics.

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  1. Why do so many American Progressives, fearing that rich people abuse state power, aim to reduce the riches of rich people, instead of the state power that Progressives admit is subject to being abused?
  2. Why do so many American Progressives wish to put even larger swathes of our lives under political control given their belief that politics is so very easily corrupted by oligarchs and big-money donors?
  3. Why do so many American Progressives – fearful of corporate power and understandably dismayed by cronyism – support tariffs and export subsidies (such as those dispensed by the U.S. Export-Import Bank)? After all, each tariff and every cent of subsidy is an unearned privilege granted by government to corporations at the expense of consumers, workers, and households – a privilege that creates corporate power and fuels abuse by corporations that would otherwise not arise.
  4. Why do so many American Progressives, with one breath, criticize free-market economists for allegedly failing to take account of the immense importance that we humans attach to community, cultural identity, and other non-monetary values and features of our existence, and yet with the next breath talk as if the only inequality that matters is inequality of monetary incomes or wealth? (That this “Progressives” criticism of free-market economists is baseless is a subject for another day.)
  5. And why do so many American Progressives, given their correct understanding that monetary values are not all that matter, treat differences in monetary incomes and wealth as sure evidence of economic malfunction?
  6. Why do so many American Progressives believe that ordinary Americans are far too incompetent to choose for themselves, each individually, the appropriate levels of safety for their automobiles, workplaces, and pharmaceutical products, but supremely competent to choose which political ‘leaders’ are best for the entire country?
  7. Why do so many American Progressives revile business people who seek greater wealth by succeeding in commerce, yet revere politicians who seek greater power by succeeding in politics?
  8. Why do so many Americans Progressives hurl accusations of “greed” at private citizens who wish only to keep for themselves more of the money that they’ve earned, yet celebrate as selfless and noble politicians who wish to take from private citizens money that these politicians did not earn?
  9. Why do so many American Progressives tout the alleged virtues of locally “sourced” foods and of locally produced goods while incessantly pushing for more and more power over individuals and locales to be exercised in far-away state capitals and in even farther away Washington, DC.?
  10. Why do large numbers of American conservatives believe that U.S. government tax hikes and other interventions into the American economy are ham-fisted and, hence, harmful to the American economy, yet believe that similar interventions by foreign governments into foreign economies are genius surgical operations that inevitably strengthen those foreign economies?
  11. Why do these very same conservatives also believe that the U.S. government somehow becomes capable of intervening successfully into the American economy if such intervention is advertised as being a response to foreign-government interventions into foreign economies?
  12. Why do large numbers of American conservatives oppose taxes but support tariffs? Are these conservatives unaware that the latter is simply one of many different species of taxes?
  13. Why do so many American conservatives boast about the strength of America and the resilience and greatness of her people but insist also that to allow these same American people to freely purchase goods and services supplied by low-productivity (and, thus, low-wage) foreign workers paves a sure path to America’s impoverishment and demise?
  14. Why do so many Americans across most of the ideological space think they are offering sound and operational advice when they tell someone who is unhappy with existing government policies to “change” these policies by going to the polls to vote?
  15. Why do so many Americans across most of the ideological space equate freedom with democracy? Do these Americans not see that oppression by a majority of one’s fellow citizens is oppression no less than is oppression by a minority of one’s fellow citizens?
  16. Why do so many Americans, across most of the ideological space, who have ever waited in a line at the Department of Motor Vehicles to renew a driver’s license or to register a vehicle, or who have suffered long delays in a cavernous passport-control room to reenter the country after traveling abroad, want to turn over to the same institution that is responsible for the inefficiencies regularly on display in those government offices more control over our lives?
  17. Why does not every American who has ever listened to a speech by a successful 21st century politician, or who has ever attended or tuned in to a “debate” among these office-seekers, come away from such an experience filled with terrible fear at the thought of any of these office-seekers exercising even the tiniest bit of say in the lives of ordinary Americans?
  18. Why do so few American conservatives who were rightly appalled by Barack Obama’s performance in the Oval Office – and who rightly fear how that office would be abused by a President Elizabeth Warren or Joe Biden – wish to reduce the power of the presidency?
  19.  And why do so few American Progressives who are rightly appalled by Donald Trump’s performance in the Oval Office – and who rightly fear an additional four years of Trump’s abuse of that office – wish to reduce the power of the presidency?
  20. Why does the goal of restraining the power of government in all areas of life have so little political clout given that confidence in government is at historic lows?

Urban Democrats Are Driving Jobs And Prosperity Out Of American Cities.

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Finance giant JPMorgan is considering moving its headquarters out of New York City and its gleaming skyscraper buildings. While the company is playing coy with these reports, it has already been slowly relocating many of its operations and jobs to lower tax locations in Ohio, Texas, and Delaware. The Lone Star State currently hosts 25,000 of its employees, and Texas will likely surpass the New York portion in coming years.

The resulting move will harm the middle earners of New York far more than that of the wealthy, who can easily move to a better tax climate. Not only is the state tax structure prohibitive, but Alexandria Ocasio Cortez may be responsible for the pink slips at JPMorgan, which anticipated thousands of educated technology workers to come to the area as part of the planned Amazon headquarters in Queens. But after the freshman lawmaker lobbied against the project, the retailer changed plans. Many good jobs and the growth they sustain at JPMorgan will likely follow.

The exodus is part of a trend sweeping traditionally Democratic states over the last several years. Whether it is the state and local tax deduction changes or burdensome regulations, the trend is becoming increasingly clear. General Electric pulled up stakes from Connecticut awhile ago, and Cigna is considering doing the same. A whopping 1,800 businesses left California in 2016 alone, while manufacturing firm Honeywell moved its headquarters from New Jersey to greener pastures in North Carolina.

None of this is news to businesses or to readers of my columns. However, there seems to be no learning curve among the liberal governments of these tax happy locales. So why are we looking to federalize this model? Democratic presidential candidate Elizabeth Warren has proposed this tax model on steroids should she be elected next year. For her, along with many of the politicians in these blue states and cities, the planned taxes and regulations are meant to be targeted mainly at wealthy citizens.

However, the primary losers in this formula are middle class workers. Between the loss of jobs and revenue, these states and cities press even harder on millions of middle income taxpayers to make up the difference. There is a pervasive ripple effect of driving large companies from former business hubs. Not only does each corporation create thousands of jobs, but the business is a critical part of the local economic foundation.

What will happen when JPMorgan leaves Manhattan? The cumulative effects of rents unpaid, restaurants not frequented, and investment in the surrounding area will jeopardize much smaller businesses dependent on corporate employee dollars. JPMorgan will likely be the vanguard of the coming business exodus. It is not just a hypothetical situation, as changes in corporate taxes have had this effect before. Consider the effects of an anchor business leaving a city, just as the financial sector may consider darting New York under the tax plans of Warren or Bernie Sanders.

The loss of an industry harms the middle class far more than corporate stakeholders, as seen in Rochester, New York, when one of the largest employers, Eastman Kodak, hit hard times. Once a center of filmmaking technology, Rochester grew as Eastman Kodak did. At its peak in the early 1980s, the company employed more than 60,000 people in the area. Over the next few decades, it fought a losing battle with digital technology, employment costs, and the New York tax and regulatory scheme. After years of steep decline, the company filed for bankruptcy in 2012.

Today, Rochester is in dire straits. The average household income is only half of the national average and its once burgeoning middle class is now a hollow shell of its former self. Its population has fallen by a full third since 1960. The city ranking as the 16th sharpest population decline between 2010 and 2017, according to census figures, It is also ranked as one of the worst cities to live in the country. The effects of the fall of Eastman Kodak cascaded into other businesses in Rochester. Pensioners dependent on the company face uncertainty. Restaurants, services, and real estate companies all languish as the local economy continues to sputter.

Many of the Democrats running for president, or who are in charge of the blue state economic models, do not see the next Eastman Kodaks. By making it impossible for businesses to operate, they will inevitably harm middle class workers they seek to help. Corporate boards can create golden parachutes for themselves or declare bankruptcy. A shift worker awaiting a corporate pension does not have the same financial luxury.

Politicians love to preach that their proposals will make the economy fairer by targeting the most productive members of their states and cities. However, the encompassing butterfly effect spells bad news for people like you and me. Every time you vote for a proposition or a candidate promising a repeat of bad policy, just remember that it will ultimately be the middle class that will pay the largest share. So much for fair taxes.

Kristin Tate is a writer and an analyst for Young Americans for Liberty. She is an author whose latest book is “How Do I Tax Thee? A Field Guide to the Great American Rip-Off.” 

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