Economics

Equilibrium

Being a late 70’s trained Keynesian I really enjoy the way Dierdre McCloskey starts her sentence:

“In equilibrium”–a phrase with resonance in bourgeois economics similar to “God Willing” in Abrahamic religions–…………..

It always brings a smile.  You can find this on page 456 of The Bourgeois Virtues (2006 The University of Chicago Press) where she discusses consumerism. Even though the text has been out since 2006, I’m just getting to it.

Economics and Unpleasant Truths

I enjoyed this snippet from an essay by Arnold Kling of GMU here:

As economists, we remind people of some unpleasant truths. Such unpleasant truths are deserving of respect, even if not all economists are.

One unpleasant truth is that resources are finite. As individuals, we would each like unlimited access to medical services without having to pay for them. But economists will point out that this is not possible, and instead hard choices must be made. It would be easier to make health policy if resources were not finite, and people are understandably resentful when the consequences of finite resources are spelled out.

Another unpleasant truth is that the “intention heuristic” does not work on a large scale. The “intention heuristic” is to judge the morality of a policy by its intentions, without regard to its consequences. Instead, an economist will point out that a higher minimum wage might harm low-skilled workers, even though the intention is the opposite. It would be a lot easier to assess policy if the “intention heuristic” were reliable, and people are understandably resentful when the problems with that heuristic are exposed.

When research is widely read, there are likely to be enough reviewers with different points of view to ensure that flawed analysis is subject to criticism.

The theory that economists were corrupted by special interests is an example of the “intention heuristic.” It suggests that economics failed to prevent the financial crisis because of bad intentions on the part of economists. With better intentions we would reach a wiser consensus.

Another Gold Standard Rebuttal

Gary Gibson surprises us all (not!) that in gold, the price of gas is falling.

My comment:

Somehow we forget the problems the world economies experienced trying to grow with the value of money tied to a scarce natural resource. I have read from gold supporters that there must have been a conspiracy to defraud the world as the major global economies of the world went off the gold standard. That is not the case.

Tying money’s value to gold is a notion that does not support free market mechanics. It depends on fixed exchange rates which are untenable in a growing world economy.

If you like gold, buy it! It is a great hedge against inflation it seems. So is land. Buy it too! Buy silver! Just leave the money alone. The world’s move towards free-floating exchange rates were part of the global free-market economic progress. Money is to facilitate commerce first, let the market decide what it is worth, we do not need to legislate its value.

Free-Market Money

I read John Tamny’s letter to the editor of Cato Unbound yesterday. Even though I enjoy reading letters and essays about free-market publications from intelligent people this one hit me wrong. I have an Economics degree (BA) from UCSD but I skipped post-graduate academia in favor of the business world. While working my first job, I went on to earn a Certified Public Accountant designation to learn the “language of business”. While I am not qualified to debate many in academia,  I do believe I can shed some light on why a return to a commodity standard for money is ill-advised.

John Tamny, who has excellent credentials, wrote this letter to the editor of Cato Unbound explaining why he felt a return to the gold standard would be optimum. Mr. Tamny makes some excellent points about money, many of which I agree with. He quoted some world-class economists (including Mr. Keynes) about the need for a stable measuring rod to be used in the exchange of goods.

Mr. Tamny’s argument is that money, if not backed by a stable commodity such as gold (the most stable commodity ever according to him), will never be an optimal measuring rod of value. I would argue that there can be only one optimal determinant of the value of money and that is the market.

Money needs no proxy to help the market determine its value. Money’s value is what the market settles on based on its supply and the general confidence in the government issuing it. The US dollar is not backed by a stable commodity for the very reason that unless the supply of that commodity can expand ad infinitum and the government can acquire it ad infinitum, as money can and must, it will eventually drag on the economy.

Gold is a finite commodity and the potential size of the world’s economy is not. If I would like to sell my cows to a butcher, I could accept just about anything of value in exchange although the most efficient would be money. Money is the chit that goes on the left side of the ledger in place of my cows. Do I really care if it is backed by gold? It makes no difference to me because in a market economy with a stable central government I know that when I need feed for my cows I can take the chits I got from the butcher and use them at the feed store.

If we tie the chits to gold, what happens when the need for money increases (because commerce is growing along with population etc) beyond the supply of gold? We then have to devalue the currency relative to our cache of gold. Government intervention to devalue money will, most likely, be problematic. It raises too many questions.

By example, suppose today we have dollars backed by 1/1000th of an ounce of gold. In several years, we will need more money to conduct more commerce (because GDP growth depends on money growth), and so we either buy it or we devalue the dollar dropping its worth  to 1/2000th of an ounce of gold for example. Regardless of how much gold we can buy today, we will eventually have to devalue. Taken to the extreme our money, after many devaluations,  will effectively not be backed by any commodity because it will be backed by 1/200,000,000th or some other tiny fraction of an ounce of gold which, for all purposes, is not far from zero. In addition, we endured numerous shocks along the way as our government intervened (without the help of the market and global economy) to devalue the dollar thereby allowing us to increase the supply of money to accommodate more commerce.

What is surprising is that many free market proponents such as the Cato Institute, Mises.org, and many of the Austrians (including Ron Paul), do not have faith in these markets they adore to set an optimal currency value; a value on currency backed by the full faith and credit of the participants in the economy. They lack faith in currency supported by the robustness of the free market whose supply is assured by a stable government.

These “free-market” advocates see a number of problems with “unbacked” currency stemming from the evils of government and including imminent inflation. Apparently they believe folks will wake up one day and say “Damn I thought I had gold in my pocket and it’s only really paper” and perhaps they believe the butcher will suddenly say, “since this is only paper and I thought it was gold or I think it should be gold, I want $100 for this pound of beef instead of my usual $10”.  This thought process and behavior seems inconsistent with a market understanding and free market ideology.

I say, if you’re free-market, believe in the market. The gold standard is ancient history. It is like training wheels on a bike; we don’t need them. Let’s do business and let the market stabilize the value of a dollar while we grow the economy through that very same market.

In Defense of Al Sharpton

Don Boudreaux writes to Al Sharpton:

Rev. Al Sharpton
National Action Network

Dear Rev. Sharpton:

Your organization, the National Action Network, e-mailed me to boast about your complaint to Walgreen’s CEO regarding his company’s alleged ‘underserving’ of minorities.

I like your tactic! But it prompts me to ask: Why are you ‘underserving’ minorities in need of low-priced pharmaceutical products?

What have you done to attract private capital to finance retail outlets? How have you helped to organize supply chains that get pharmaceuticals from factories to consumers at costs that make the on-going retail distribution of these products profitable at prices that also are affordable to low-income consumers? Where’s the evidence of your entrepreneurial creativity – and the evidence of you risking your own money and of you spending untold hours of your own time – to help bring pharmaceuticals to low-income neighborhoods? Why do you not devote more of your ample energies to struggle with details of the likes of inventory management, optimal liability-insurance coverage, and OSHA work-place-safety regulations so that you can create a retail pharmaceutical chain that earns sufficient profit to enable it to stay afloat while it simultaneously achieves all of what you somehow divine such a retail chain ‘should’ achieve?

Walgreen’s investors and employees actually and already contribute infinitely more energy and resources than you do to the process of making pharmaceutical products readily available to the masses. So surely if it’s appropriate – as you clearly believe it to be – to fling accusations at anyone who arguably exerts insufficient effort to improve the retail distribution of pharmaceutical products, you deserve far more criticism than does Walgreen’s and its CEO.

Sincerely,
Donald J. Boudreaux

Here’s my comment (you have to go down to about the 100th comment):

John Donnelly    December 14, 2011 at 7:17 pm

Ok, I’ll be your huckleberry. I know that most of the commenters are your fanboys (and girls) so I will take the Sharpton side.

Professor Boudreaux is like a father in his disciplining of the complainer with the old argument, “if you aren’t part of the solution, you are part of the problem” or “what? are your legs broken”. His argument is likened to telling an art critic to “grab a brush”!

Unfortunately Professor Boudreaux is not helpful in this case simply because the good Reverend is not in the business of distributing pharmaceuticals and he needn’t be. Nor does Rev Sharpton need to be an economist to express his opinion about Walgreens and their distribution and pricing policies from his social utility point of view.

Chucklehead has it right, Sharpton is just doing his job, complaining on behalf of those he deems to need his help and who don’t enjoy his level of influence. Rev. Sharpton’s attempt to sway a large corporation to do (hopefully mutually beneficial) business to help his community is a very rational thing to do given his unique assets and abilities.

I can go on about the good Reverend’s assets and how he leverages them but that is another debate.

This should generate some interesting comments!

Isn’t an Open Immigration Policy consistent with Free Trade?

I was just reading an interesting post by Dr. Mark Thoma about illegal immigration and unemployment where he discusses Daniel Indviglio’s article. This right after reviewing some of Dr. Don Boudreaux’s comments on trade with China which lead me to wonder….

By closing our borders to open immigration we are in fact not allowing free trade. Is there a difference between a Chinese product (say a circuit board) used in the production of a good or service here (say a cash register) and an hour’s labor from a Mexican immigrant? They both seem to be factors of production.

One could argue that the illegal immigrant would take up jobs intended for Americans. The same can be said for the circuit board.

Politically I wonder if Republicans want to stifle free trade as much as they want to stifle immigration.

I am aware that immigration is a hot topic and I am firmly for open borders unlike many Americans. I believe, and someday hope to write a persuasive essay on the subject; that opening the borders would cause short-term stress but will establish in the long-term, peace and prosperity and equilibrium across borders for all.

In fact, I believe that the laws of supply and demand works for citizens as well as other goods. If we were to open the borders with Mexico we might have a huge influx of Mexicans seeking a better life. In the short run we would endure significant adjustments to the U.S. labor marketplace. However, in the long run Mexico will either endure a shortage of citizens (workers, entrepreneurs) or Mexican markets will find a way to entice them (or immigrants from another country) back to Mexico. Mexicans and others will move into an improved standard of living here and eventually back in Mexico as both country’s labor markets come around to an open border equilibrium.

My question is, are we being hypocritical to advocate free trade without free immigration?

Freeman editor critique of Elizabeth Warren cheeky and short on logic

Bloggers get lazy in their writing sometimes—writing for affect rather than trying to get at the truth. That’s just the way things are, but when a blogger insults my intelligence I feel the need to respond….

You can find the post here. You can read the comment I posted on the blog but I had to apologize to Mr. Richman for attributing a statement to him that was Robert Murphy’s in his blog post Elizabeth Warren’s Blank Check. I would have deleted and reposted the comment but it didn’t appear to be an option. I correct that attribution in the following:

Mr. Sheldon Richman’s irrelevant notions, stipulations and yes, non sequiturs.

His subtitle: “You can’t get to higher taxes from here”. Richman doesn’t know where here is.

First of all Elizabeth Warren was addressing Eric Cantor’s assertion that raising taxes on the rich would amount to class warfare. She rejects Cantor’s assertion because his premise is false; that there is no other reason than class animosity (hatred, envy etc.) that would explain why the duly elected representatives of the citizens of the USA might alter the tax code to increase taxes on “the rich”.

In her rebuttal to Cantor’s assertion (during a short informal campaign talk in a private home), she explains that Cantor is ignoring a “social contract”.  Warren may be referring to an unwritten agreement that citizens of a republic share when building said republic through the collection of taxes to provide various public goods, education and institutions in attempts to create a fertile ground for fruitful enterprise and a flourishing society.

Mr. Richman says that Warren’s premise is that man is a social animal. Not so, that is an axiom, a given, a proposition Warren assumes is true to argue her premise that there exists a “social contract”. The conclusion she reaches is that there is no class warfare here, but rather there exists a “social contract” (a republic building agreement) where the rich may need to pay some amount more in taxes. She is arguing there needs to be more progressivity in our tax structure if you will.

After enduring the Bastiat cut and paste, Mr. Richman states that her argument is “nothing startling” and a “mundane observation in the service of a bad cause”. This appears to be a non sequitur if in fact we are talking about Warren’s rebuttal to Cantor’s assertions of class warfare. I don’t see what is mundane about this observation and the popularity of the video tells me others are don’t see it either.

Mr. Richman wants us to stipulate to an irrelevancy by his own admission, i.e. “that’s not what Warren means”. We happily stipulate that folks get rich through “political means”. This is clearly not relevant to Warren’s rebuttal of Cantor’s assertion. Mr. Richman then says that “she says nothing about corporate-state privilege or the long years of intervention that amount to the “subsidy of history”. Well, she also says nothing about price of tea in China. It was short talk in a private home, she probably didn’t want to get into the “Subsidy of History” nor, to be fair, the price of tea in China.

It gets worse from here. The rest of the post says that repealing state-granted privileges is a good way to do away with services such as roads, education and police because of the evils of Regulatory Capture. I don’t see the relevance here either.

Towards the end Mr. Richman denies the existence of the “contract” which gave me hope that he might attack Warren’s premise with new insights and logic. However he simply apologizes for not trusting unwritten open-ended so-called “contracts” while ignoring the possibility that there must be something, some meeting of the minds that allows us to live together in communities.

Then we get the cry of the John Galt supporters; “Moreover, why aren’t honest production and exchange of valuable goods counted as payment forward?” The answer to this is that “exchanges of valuable goods” implies compensation as being received for the goods. Payment for goods now and credit again going forward might be hard to do.  “Honest production and exchange of valuable goods” gives us businesspeople money as revenue and profit. It is not too much of a stretch to ask that we pay our taxes with money as well.

Finally Richman says that it doesn’t follow that the rich should pay more in taxes because they used services that they have always used. Of course it doesn’t follow because the argument is about balancing the budget to which Richman says finally; cut spending.

I’ve noticed that people who follow the Austrian school of economics are sometimes guilty of fanboyism—quoting Bastiat and Hayek etc regardless of the context or argument. My aim was to point out how poorly the man wrote about a wonderful argument put forth by Elizabeth Warren. I did not say I concurred with her but rather I felt it necessary to comment on the poor analysis and logic of Mr. Richman’s post. Warren’s premise is the “social contract” and I will be either coming forward with arguments supporting the social contract as a basis for a more progressive tax structure or not.

I never intended on commenting on the post on freemanonline.org but I was researching for a post I am preparing to comment on George Will’s goofy Washington Post Op-Ed about the very same Elizabeth Warren argument. George Will’s piece is lacking logic and foundation and I will comment about it right here soon.