Cafe Hayek

Peace and Free Trade

Don Boudreaux

Here's a letter that I recently sent to the Wall Street Journal:

Mark Helprin correctly points out that as the Chinese grow more prosperous their military will grow more mighty ("The Challenge From China," May 13).  He advises that Uncle Sam dramatically increase the size of his own arsenal.

Regardless of this suggestion's merits or demerits, the more vital course is for Uncle Sam to immediately eliminate all trade and investment restrictions with China, and for politicians to stop threatening further restrictions.  Such moves would speed the integration of China's economy with our own.  Being economically integrated means being economically reliant on each other - a happy recipe for prosperity and peace.

Want evidence?  See the important work of economists Solomon Polachek and Carlos Seiglie. Their empirical research leads them to conclude that "international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world."*  Want more evidence?  Ask yourself how likely are even a well-armed Canada or Japan to have any interest in shooting their countless customers and suppliers throughout the U.S.? The answer, of course, is no more likely than we are to want to shoot our customers and suppliers throughout those countries

Donald J. Boudreaux

Broder Unwittingly Helps to Expose the Beast

Don Boudreaux

I sent this letter a few days ago to the Washington Post.  I truly don't get the faith that so many people have in politicians and in politics.

The Post's dean of political analysts, David Broder, today unwittingly reveals two malignancies of politics ("The Price of Delay," May 11). First, politicians are cowards.  Broder notes that dozens of Democratic Senators "desperately" want their party's primary race finally to end, but still refuse publicly to endorse Barack Obama.  Broder quotes Majority Whip Dick Durbin for an explanation: "They want to avoid hard votes."

Second, successful politicians must behave duplicitously.  Here's Broder: "Since McCain effectively cinched his nomination in February and mostly fell out of the news, he has accomplished a lot. He has targeted potential constituencies with appearances and messages tailored for them, knowing that other voters probably are not paying attention."  Broder casually adds that "Obama needs to do similar work."

This isn't leadership; it's cowardly con-artistry.

Sincerely,
Donald J. Boudreaux

"If Only People Had Half a Clue as to Why this is Happening!"

Don Boudreaux

My and Karol's dear friend Betsy Albaugh -- founder and owner of Betsy Fisher, the wonderful womens'-clothing store near Dupont Circle -- sent this site to me yesterday.  In her e-mail, Betsy said "If only people had half a clue as to why this is happening...."  Indeed.  The market -- humans' "propensity to truck and barter," property rights, reason, a worldwide division of labor and trade -- is why so many of us can sit in our living rooms, press a few buttons, and, by spending only a tiny fraction of our incomes, acquire marvelous goods from around the world.

Adam Smith on the China tragedy

Russell Roberts

Here is Adam Smith on the human capacity for selfishness and for something that goes beyond selfishness:

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befal himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own. To prevent, therefore, this paltry misfortune to himself, would a man of humanity be willing to sacrifice the lives of a hundred millions of his brethren, provided he had never seen them? Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it. But what makes this difference? When our passive feelings are almost always so sordid and so selfish, how comes it that our active principles should often be so generous and so noble? When we are always so much more deeply affected by whatever concerns ourselves, than by whatever concerns other men; what is it which prompts the generous, upon all occasions, and the mean upon many, to sacrifice their own interests to the greater interests of others? It is not the soft power of humanity, it is not that feeble spark of benevolence which Nature has lighted up in the human heart, that is thus capable of counteracting the strongest impulses of self-love. It is a stronger power, a more forcible motive, which exerts itself upon such occasions. It is reason, principle, conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct. It is he who, whenever we are about to act so as to affect the happiness of others, calls to us, with a voice capable of astonishing the most presumptuous of our passions, that we are but one of the multitude, in no respect better than any other in it; and that when we prefer ourselves so shamefully and so blindly to others, we become the proper objects of resentment, abhorrence, and execration. It is from him only that we learn the real littleness of ourselves, and of whatever relates to ourselves, and the natural misrepresentations of self-love can be corrected only by the eye of this impartial spectator. It is he who shows us the propriety of generosity and the deformity of injustice; the propriety of resigning the greatest interests of our own, for the yet greater interests of others, and the deformity of doing the smallest injury to another, in order to obtain the greatest benefit to ourselves. It is not the love of our neighbour, it is not the love of mankind, which upon many occasions prompts us to the practice of those divine virtues. It is a stronger love, a more powerful affection, which generally takes place upon such occasions; the love of what is honourable and noble, of the grandeur, and dignity, and superiority of our own characters.

Yes, we are selfish. Yes, many of us slept well last night in the aftermath of the death of thousands in China. But our selfishness does not tell the whole story. Yes, we are self-centered. But there is more to the human enterprise or at least we like to think so.

Continue reading "Adam Smith on the China tragedy"

Free?

Russell Roberts

The latest EconTalk is Chris Anderson, editor of Wired Magazine talking about the tendency for stuff that isn't free to be free. That is, products and services are increasingly being offered below marginal cost and at a zero price, either to allow revenue from other sources such as advertising or to sell other items at a profit or for other reasons. Chris is working on a book on the topic and is interested in feedback. So have a listen and join the comment thread over at EconTalk.

Perspective

Don Boudreaux

My latest essay in the Pittsburgh Tribune-Review is (are you sitting down?) on the benefits of free trade.  Here are some passages:

We've all seen a drawing that looks like two very different things depending upon how the viewer looks at it. In one case, for instance, what at first appears to be the craggy face of an old woman suddenly looks like a beautiful woman standing in a sexy pose. If you look for the old woman in the drawing, you see the old woman. If you instead look for the gorgeous babe, you see the gorgeous babe.

Same picture. Same objective reality. Two wholly different sightings.

And so it is in economics. The very same set of facts -- the very same objective reality -- often tells two (or more) very different stories depending upon the attitude and knowledge that the observer has when examining these facts. More imports from abroad and the losses of specific domestic jobs that they typically entail are seen by some as a sign of trouble for the domestic economy. Others see these same facts as a boon -- as the opportunity to get valuable goods and services at lower costs and as releasing scarce domestic labor to produce outputs that would otherwise be too costly to obtain.

.....

When trade is free, even craggy and slothful economies can be transformed into lively and fertile ones. That's my perspective.

Peace and Free Trade

Don Boudreaux

Here's a letter that I sent today to the Wall Street Journal:

Mark Helprin correctly points out that as the Chinese grow more prosperous their military will grow more mighty ("The Challenge From China," May 13).  He advises that Uncle Sam dramatically increase the size of his own arsenal.

Regardless of this suggestion's merits or demerits, the more vital course is for Uncle Sam to immediately eliminate all trade and investment restrictions with China, and for politicians to stop threatening further restrictions.  Such moves would speed the integration of China's economy with our own.  Being economically integrated means being economically reliant on each other - a happy recipe for prosperity and peace.

Want evidence?  See the important work of economists Solomon Polachek and Carlos Seiglie.  Their empirical research leads them to conclude that "international cooperation in reducing barriers to both trade and capital flows can promote a more peaceful world."*  Want more evidence?  Ask yourself how likely are even a well-armed Canada or Japan to have any interest in shooting their countless customers and suppliers throughout the U.S.?  The answer, of course, is no more likely than we are to want to shoot our customers and suppliers throughout those countries.

Sincerely,
Donald J. Boudreaux

A Great Arrrgggument

Don Boudreaux

One of my and Russ's impressive young colleagues, Pete Leeson, has his research discussed in today's edition of the Boston Globe.  (HT Pete Boettke)

Leeson makes clear that pirates on the high-seas evolved their own social order, one that makes good sense from the perspective of positive economics.  Here's a slice from the article:

The pirates who roamed the seas in the late 17th and early 18th centuries developed a floating civilization that, in terms of political philosophy, was well ahead of its time. The notion of checks and balances, in which each branch of government limits the other's power, emerged in England in the Glorious Revolution of 1688. But by the 1670s, and likely before, pirates were developing democratic charters, establishing balance of power on their ships, and developing a nascent form of worker's compensation: A lost limb entitled one to payment from the booty, more or less depending on whether it was a right arm, a left arm, or a leg.

The idea of enlightened piracy is strange swill to swallow for those steeped in a pop culture version of the pirate - chaos on the high seas, drinking and pillaging, damsels forced onto the plank. Sure, there's something about the independence of piracy that still speaks to people today. (Even the founders of International Talk Like a Pirate Day acknowledge that there is, in people who love to say "Aargh," a yearning for a certain kind of freedom.) But it turns out that pirate life was more than just greedy rebellion. It offers insights into the nature of democracy and the reasons it might emerge - as a natural state of being, or a rational response to a much less pleasant way of life.

To Leeson, pirate democracy was an institution born of necessity. In one successful cruise, a pirate could take home what a merchant sailor earned in 50 years. Yet a business enterprise made up of the violent and lawless was clearly problematic: piracy required common action and mutual trust. And pirates couldn't rely on a government to set the rules. Some think that "without government, where would we be?" Leeson says. "But what pirates really show is, no, it's just common sense. You have an incentive to try to create rules to make society get along. And that's just as important to pirates as it is to anybody else."

So just as Buchanan, Tullock, and Mancur Olson were pioneers in using economics to help us to better understand the behaviors and institutions of stationary bandits, Pete Leeson is using economics to help us to better understand the behaviors and institutions of floating bandits

Stamping Our Feet

Don Boudreaux

Tomorrow, the price of a first-class postage stamp in the U.S. rises from 41 cents to 42 cents.  This price hike by a legally protected monopolist (the United States Postal Service) prompts me to reprint the following letter that my friend (and former colleague at GMU) George Selgin and I published in the April 4, 1994 edition of the New York Times:

To the Editor:

It has been suggested that, because the nominal price of first-class postage is about where it was in the late 18th century, Americans who complain about the proposal to increase postal rates are merely whining wimps who are lacking in historical perspective.

However, the real price of transportation (a key input in postal service) has plummeted over the last 200 years. In 1799 it took 53 days for an Army courier to travel from Detroit to Pittsburgh.

Today the same trip can conveniently be made in minutes. Likewise, the productive efficiency of the United States is vastly greater now than it was even a few decades ago.

Given the plunge in transportation costs, joined with other technological improvements and a large increase in the scale of postal activity, the price of postage should have fallen dramatically.

Americans do not oppose postal-rate increases because of their ignorance of history. 

Rather, opposition to these increases grows from the correct perception that a legally protected monopolist such as the United States Postal Service can keep prices higher, and service inferior, to what these would be under competition.

Regardless of how today's postal rates compare with rates in the past, opening the delivery of first-class mail to competition would lower rates still further while improving service.

DONALD J. BOUDREAUX, G. A. SELGIN
Clemson, S.C.,
March 24, 1994

The writers are, respectively, an associate professor of legal studies at Clemson University and an assistant professor of economics at the University of Georgia, Athens.

Peru, Trade, and Growth

Don Boudreaux

The Wall Street Journal's Mary Anastasia O'Grady is always worth reading -- and this recent essay that she penned is no exception to this rule.  It's entitled "Peru Takes the Other Path."  Here's a selection:

Yet price stability on its own would have left the country [Peru] well below its potential. Far more impressive is the restructuring of the economy, which has led both to growth and to a more equal distribution of opportunity. While a boom in commodity prices has certainly fueled development of late, Peru is also sprouting entrepreneurs in a variety of nontraditional industries. And these innovators are making their way onto the global stage.

The key reform that has made all this possible is the opening of the economy, which until 1990 had very high tariffs designed to protect local industries.

Peruvian journalist Jaime Althaus documents the effects of the opening in his 2007 book (Spanish only) titled "The Capitalist Revolution in Peru." Far from "deindustrializing" the country, Mr. Althaus argues, trade liberalization has strengthened Peruvian manufacturing. Under high tariffs, the industrial sector served mainly as an auto and electronics assembler, using inputs from abroad. But when protection ended, local manufacturing began to discover its comparative advantages.

There were plenty. High growth rates – averaging 11% a year from 1990-2002 – have occurred in sectors that make china, porcelain, knitted fabrics, plastic products and basic chemicals, to mention a few.

The story of the "cluster" of small metallurgical companies that has emerged in Lima is especially compelling. In recent years, these entrepreneurs have been competitive in bidding for work that was previously dominated by important international firms. They have also become exporting powerhouses.

Workers and Employers

Don Boudreaux

Let's reflect on an implicit presumption -- indeed, I'm sure, a presumption held unawares -- that undergirds many familiar discussions of workers' relationships with employers.

This common presumption is that employers generally are philanthropic benefactors of their employees.

Consider that many pundits, politicians, and ordinary folks believe that workers are expendable - that one of the surest and least-painful ways for firms to cut their costs and improve their bottom lines is to fire workers.  This belief make sense only if workers contribute little to firms' profits.  Put differently, this belief make sense only if, in employing workers, firms don't expect much in return.

In short, this belief makes sense only if most workers are overpaid.

A worker who is not overpaid is a worker whose compensation reflects pretty accurately that worker's contributions to his employer's revenues.  So if a firm fires workers who are not overpaid, that firm suffers a loss of revenue at least equal to the compensation that that firm would have to pay those workers in order to keep them in its employ.  Such properly paid workers are not expendable; firing them is not key to improving the firm's bottom line.

Of course, if workers are underpaid, the above holds true with special ummpphhh.  An underpaid worker is one who contributes more to his employer's revenues than that employer pays to keep that worker on the job.  So firing underpaid workers is an especially bad deal for their employers.

So in this view – what we might call the “Progressive” view - workers are seen as contributing little to their employers (which is why employers can so blithely fire workers).  At the same time, employers are seen as contributing enormously and philanthropically to their workers.  “Enormously” because the presumption is that the typical worker’s next-best employment option would pay him or her much less than he or she makes in the current job, and “philanthropically” because the presumption is that the worker is paid more than he or she is worth to the employer.

Strange economics.

Happy 109th, Fritz!

Don Boudreaux

F.A. Hayek was born on this day in 1899.  To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:

Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.

Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.

Caplan on the Gas-Tax Holiday

Don Boudreaux

Think the proposed gas-tax holiday is a wacky idea?  My GMU colleague -- and EconLog's -- Bryan Caplan gives you good reason to think again.

Rational Depending on Context

Don Boudreaux

Bryan Caplan's book The Myth of the Rational Voter : rationally, I'm a big fan.

In Defense of Usury

Don Boudreaux

Especially in light of the renewed efforts to regulate the terms that credit-card issuers are allowed to offer to borrowers, Jeremy Bentham's short little classic Defence of Usury is well worth reading.  Below is a germane passage.  Writing of a potential borrower whose circumstances put him in desperate need of money, Bentham says

A man is in one of these situations, suppose, in which it would be for his advantage to borrow. But his circumstances are such, that it would not be worth any body's while to lend him, at the highest rate which it is proposed the law should allow; in short, he cannot get it at that rate. If he thought he could get it at that rate, most surely he would not give a higher: he may be trusted for that: for by the supposition he has nothing defective in his understanding. But the fact is, he cannot get it at that lower rate. At a higher rate, however, he could get it: and at that rate, though higher, it would be worth his while to get it: so he judges, who has nothing to hinder him from judging right; who has every motive and every means for forming a right judgment; who has every motive and every means for informing himself of the circumstances, upon which rectitude of judgment, in the case in question, depends. The legislator, who knows nothing, nor can know any thing, of any one of all these circumstances, who knows nothing at all about the matter, comes and says to him—"It signifies nothing; you shall not have the money: for it would be doing you a mischief to let you borrow it upon such terms."—And this out of prudence and loving-kindness!—There may be worse cruelty: but can there be greater folly?

The folly of those who persist, as is supposed, without reason, in not taking advice, has been much expatiated upon. But the folly of those who persist, without reason, in forcing their advice upon others, has been but little dwelt upon, though it is, perhaps, the more frequent, and the more flagrant of the two. It is not often that one man is a better judge for another, than that other is for himself, even in cases where the adviser will take the trouble to make himself master of as many of the materials for judging, as are within the reach of the person to be advised. But the legislator is not, can not be, in the possession of any one of these materials.—What private, can be equal to such public folly?

Nye on wine (and war and taxes)

Russell Roberts

The latest EconTalk is John Nye talking about his book, War, Wine, and Taxes. John has many interesting insights into the political economy of trade, the history of trade policy, and why Ricardo's canonical example of comparative advantage is particularly weird.

The Coming Recession?

Don Boudreaux

Along with persons far more insightful than me, I offer a few thoughts on the current economic downturn in the new issue of Reason.

Fair Advice

Don Boudreaux

I've never been invited to deliver a commencement address.  And I probably should never be so invited, for I already know the title I would choose: "Don't Change the World."  I would explain that it's okay -- indeed, admirable -- to change the world marginally, incrementally, by engaging in voluntary actions.  But all the "change the world" talk that high-school and college graduates get presumes that change, any change, is desirable -- as if the world is such a decrepit place that nothing about is worth preserving (except, of course, "the environment").  And all this "change the world" talk also tends to presume that doing things politically is the best way to effect worthwhile change.  (Update: Reader Bob Ewing kindly suggests that I add a link to this article of mine that develops this point further.)

Anyway, I digress.....  for the reason I post today is to recommend that you read P.J. O'Rourke's commencement-address-like ruminations.  (HT to Tom Hazlett)  Here's one of my favorite passages:

Life sends the message, "I'd better not be poor. I'd better get rich. I'd better make more money than other people." Meanwhile, politics sends us the message, "Some people make more money than others. Some are rich while others are poor. We'd better close that 'income disparity gap.' It's not fair!"

Well, I am here to advocate for unfairness. I've got a 10-year-old at home. She's always saying, "That's not fair." When she says this, I say, "Honey, you're cute. That's not fair. Your family is pretty well off. That's not fair. You were born in America. That's not fair. Darling, you had better pray to God that things don't start getting fair for you." What we need is more income, even if it means a bigger income disparity gap.

On Smuggling and Law

Don Boudreaux

My colleague Walter Williams offers great good sense here.

When legislation is harmful -- such as when it attempts to restrict the carrying out of peaceful exchange among consenting adults -- it is widely disrespected.  One of the many unfortunate consequences of harmful legislation is that the disrespect it engenders risks becoming disrespect for law.  Legislation is not at all synonymous with law.

Seeing Past the Chicken Littles

Don Boudreaux

Denver Post columnist David Harsanyi is superb.