Category Archives: books and book reviews

More Essential Hayek

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Again, the book will be released next week.

Another point Boudreaux makes is that in a specialized economy, our production activities are much narrower than our consumption activities. This makes rent-seeking more prevalent on the production side.

This point is easily missed. For example, Stephen G. Cecchetti and Kermit L. Schoenholtz write about the mortgage interest deduction as if its political strength comes entirely from home owners. (Pointer from Mark Thoma.) In fact, I would argue that it is the NAR, NAHB, and the MBA that make it inviolable.

We know that food stamps are popular with the farm lobby. And perhaps Medicaid does not benefit recipients as much as it does providers of medical services.

Don Boudreaux on The Essential Hayek

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It is a project for Canada’s Fraser Institute. It will launch next week.

Boudreaux starts with a “nobody knows how to” introduction. He uses paper and ink as examples of mundane goods that require many different people and specialized tasks to be produced.

As I start my book on specialization and trade, I find myself doing the same thing. This is in a great tradition. Adam Smith used the woolen coat. Leonard Read used the pencil. My thought was to use a bowl of cereal.

Payroll Taxes in Europe

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In France, the rate is 42 percent; in Germany, it is 39 percent; in Italy, 40 percent; and in Spain, 37 percent.

That is from Diana Furchtgott-Roth and Jared Meyer Disinherited: How Washington Is Betraying America’s Young. I see it as saying “left-wing economics is bad for children and other living things,” but they are trying to position it differently. In any case, they are suggesting that we could be headed for much higher payroll taxes ourselves.

I had not realized that these tax rates are so high. I find it hard to reconcile Germany’s relatively low unemployment rate with this high payroll tax rate.

Pinker, Hobbes, and Baltimore

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I am still re-reading The Blank Slate. In his chapter on violence, he endorses Hobbes. On p. 330, he writes,

Adjudication by an armed authority appears to be the most effective general violence-reduction technique ever invented. . .there can be no debate on the massive effects of having a criminal justice system as opposed to anarchy. The shockingly high homicide rates of pre-state societies, with 10 to 60 percent of the men dying at the hands of other men, provide one kind of evidence. Another is the emergence of a violent culture of honor in just about any corner of the world that is beyond the reach of the law. Many historians argue that people acquiesced to centralized authorities during the Middle Ages and other periods to relieve themselves of the bureden of having to retaliate against those who would harm them and their kin. And the growth of those authorities may explain the hundredfold decline in homicide rates in European societies since the Middle Ages.

See also Mark Weiner, The Rule of the Clan. A few remarks.

1. This chapter challenges the more anarchist-leaning libertarian views. Instead, Pinker argues that it is natural for humans to form coalition, to fear others’ coalitions, and to launch pre-emptive strikes on relatively small pretenses. (Of course, governments do this as well. Pinker would not argue that nation-states are inherently peaceful with one another. Quite the contrary.) Another excerpt, from p. 331:

When law enforcement vanishes, all manner of violence breaks out: looting, settling old scores, ethnic cleansin, and petty warfare among gangs, warlords and mafias.

2. Reading this chapter, I could not help thinking of Baltimore. Another excerpt, also from p. 331:

The generalization that anarchy in the sense of a lack of government leads to anarchy in the sense of violent chaos may seem banal, but it is often overlooked in today’s still-romantic climate. Government in general is anathema to many conservatives, and the police and prison system are anathema to many liberals. Many people on the left, citing uncertainty about the deterrent value of capital punishment compared to life imprisonment, maintain that deterrence is not effective in general. And many oppose more effective policing of inner-city neighborhoods, even though it may be the most effective way for their decent inhabitants to abjure the code of the streets. Certainly we must combat the racial inequities that put too many African American men in prison, but. . .we must also combat the racial inequities that leave too many African Americans exposed to criminals.

He does proceed to point out that drug laws, by creating an underground economy in which participants cannot call in police to contain disputes, help to promote a climate of violence.

Social Science, Dogma, and Steven Pinker

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Why am I re-reading The Blank Slate? First, because on first reading I marked it as one of the all-time great non-fiction books. Second, because I am thinking about possible parallels between the psychology of B.F. Skinner and the economics of Paul Samuelson. Some remarks:

1. Both Skinner and Samuelson dominated their fields around 1960. For those of you who do not know, Skinner’s view was that all behavior is learned, through the process of reward and punishment. We do what is rewarded and avoid what is punished.

2. Both took a very mechanistic view of, respectively, human behavior and the economy. We should not be surprised to see intellectuals in the aftermath of World War II seeing the world in terms of simple machines. What won that war? T-34 tanks. B-17 bombers. LCA’s that carried soldiers to the beaches held by Germans or Japanese. Relatively simple machines, built in enormous numbers, by countries whose economies were under considerable central control. Neither Skinner nor Samuelson would have thought in terms of personal computers or the Internet as metaphors.

3. Psychology eventually escaped the clutches of Skinner’s restricted research paradigm. Economics succumbed to Samuelson’s.

4. Pinker’s goal in the book is to dispel the dogma that human beings are shaped entirely by environmental factors, especially arbitrary social circumstances, and that social scientists have the power to re-shape society to achieve any desired outcome. On p. 19, he writes,

In behaviorism [Skinner’s psychology], an infant’s talents and abilities didn’t matter because there was no such thing as a talent or an ability. . .To a behaviorist, the only legitimate topic for psychology is overt behavior and how it is controlled by the present and past environment.

According to what I see as the central dogma of (progressive) social science, individual characteristics and choices bear little or no responsibility for differences in life outcomes. Instead, people who are successful owe their achievements to being born into power and privilege. People who are unsuccessful owe their deprivation to being born into poverty and discrimination. These outcomes are entirely changeable, through the application of social science.

Of course, this dogma is still prevalent. President Obama and many academics appear to be wedded to it.

5. I am starting to think about doing a work with the tentative title: Specialization and Trade: A Re-Introduction to Economics. The idea will be to shift focus from the issues of scarcity and choice that are now considered absolutely central in economics textbooks. Although these are certainly important, I want to argue that the central social phenomenon is specialization. In some respects, my goal is like Pinker’s. I want to emphasize the weaknesses in the simple, mechanistic views Samuelsonian economics, particularly Keynesianism, and instead offer a way of thinking of the economy that owes more to computational metaphors. Consider these sentences from Pinker (p. 31, p. 39, p. 40):

The mental world can be grounded in the physical world by the concepts of information, computation, and feedback.

The mind is a complex system composed of many interacting parts.

It is now simply misguided to ask whether humans are flexible or programmed, whether behavior is universal or varies across cultures, whether acts are learned or innate, whether we are essentially good or essentially evil. Humans behave flexibly because they are programmed: their minds are packed with combinatorial software that can generate an unlimited set of thoughts and behavior.

After listing a set of physical brain differences that are associated with different mental capacities and behavioral traits, Pinker writes (p. 44-45),

These gross features of the brain are almost certainly not sculpted by information coming in from the senses, which implies that differences in intelligence, scientific genius, sexual orientation, and impulsive violence are not entirely learned. . .There is much we don’t understand about how the brain is laid out in development, but we know that it is not indefinitely malleable by experience.

Similarly, I want to point out that economic outcomes are not indefinitely malleable by fiscal, monetary policy, and policies intended to correct market failures.

Steven Pinker on Money as a Consensual Hallucination

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He writes,

Life in complex societies is built on social realities, the most obvious examples being money and the rule of law. But a social fact depends entirely on the willingness of people to treat it as a fact. It is specific to a community, as we see when people refuse to honor a foreign currency or fail to recognize the sovereignty of a self-proclaimed leader. And it can dissolve with changes in the collective psychology, as when a currency becomes worthless through hyperinflation or a regime collapses because people defy the policy and army en masse.

That is from p. 65 of The Blank Slate, which I am re-reading.

I would quibble that you do not get hyperinflation from a sudden loss of confidence in the currency. You get it when the government spends more than it taxes and loses the ability to borrow, so its only choice is to print money–and then people lose confidence in the currency.

The important social reality is that people are willing to lend to the government at affordable interest rates. That is what has the potential to suddenly change (see Greece) and that is why large deficits create potential instability.

Charles Murray is Revolting

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I have just started his latest book, By the People. You may have heard that he calls for civil disobedience against excessive government. I am wondering how he would handle two objections.

1. How will the other side respond? I could see progressives engaging in civil disobedience, also. In fact, if conservatives were to win in 2016, I expect to see the emergence of a very large, and possibly violent, protest movement. If conservatives/libertarians were to set a precedent of disobeying laws, then I think this would encourage progressives to disobey laws. For example, they might decide that laws protecting property rights are unjust, and proceed to “liberate” the possessions and homes of the one percent.

2. Would civil disobedience not leave most progressive policies untouched? Social Security, Medicare, and the core of regulation surely would remain. At best, the protests would work against the silliest, least significant regulations.

3. Civil disobedience is ultimately a form of voice. Libertarians should be focusing on ways to increase the opportunity for exit.

Jonathan Rauch Hearts John Boehner

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Rauch has a new e-book (free, at least as of the other day, when I downloaded it) called Political Realism. He argues that progressive political reforms have had adverse unintended consequences. In particular, they have made life more difficult for John Boehner.

Rauch relies on a distinction between professional and amateur politicians, a distinction for which he credits James John Q. Wilson. The pros just want to stay in power, and they will compromise on principles in order to keep it. The amateurs are ideologues.

Rauch argues that seemingly well-intentioned reforms have weakened political parties and thereby strengthened the amateurs. The reforms include attempts to require transparency in government, to restrict campaign finance, to curb earmarks, and to give ordinary voters more power to choose candidates via primaries.

The major unintended consequence of these reforms has been polarization and gridlock. Because the professionals are no longer free to manage the political process, government has become ineffective. Rauch argues that we should dial back the reforms that weaken the party pros and instead think in terms of reforms that strengthen them.

If you believe, as Rauch does, that the professionals would govern more effectively if given more slack, then his argument goes through. However, I am not sure that I buy into that assumption.

I can see one issue–entitlement reform–on which a compromise among professionals could have beneficial effects. But the unsustainable system of entitlements was built by those very professionals whom Rauch extols. My cynical take is that the professionals are good at compromising on the use of other people’s money, most especially when the other people are too young to vote or not even yet born.

If you ask me, the single most consequential political act of my lifetime is likely to be President Obama’s decision to throw the Bowles-Simpson recommendations under the bus. That may have destroyed the last chance to prevent a budget train wreck. Yet Rauch believes that Obama is one of the good guys, a professional able to compromise.

Obama’s professionalism, according to Rauch, is illustrated by the way that health care reform involved compromising with various interests. But if Obamacare is your poster child for professional politics, you are not going to convince me to jump on board the Rauch bandwagon.

As you can tell, my feelings about the book are mixed. I think that the main points are insightful. I see those as

1. Professional politicians are better able to compromise if amateur ideologues are less influential.

2. Progressive reforms have worked to empower amateur ideologues.

However, I do not share Rauch’s optimism for what the professionals might accomplish if they had their way.

Uncertainty and the Sources of Profit

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From The Economic Way of Thinking, eleventh edition, by Paul Heyne and others, p. 195:

Profit arises from uncertainty. In the absence of uncertainty, any differences between expected revenue and expected total cost would be competed away and profits would become zero.

That sounds to me like too strong a generalization. Some remarks.

1. It shows the influence of Frank Knight. But would Knight have bought such a strong statement?

2. Economists, including the authors, point out that profits as reported by business include opportunity cost, particularly the opportunity cost of capital. Economic profit is less.

3. Elsewhere, the authors want to insist, reasonably enough, that taxes are paid by individuals, even when those taxes are called corporate income taxes. I would think that consistency would require insisting that profits accrue to individuals, even when they are called corporate profits. But if all profits accrue to individuals, then I do not see how we can separate economic rent from opportunity cost. Maybe Bill Gates made a lot of money from Microsoft because he happens to have a very high opportunity cost. OK, that sounds absurd, but still, he has a higher opportunity cost than someone with less drive and ability starting a software business.

4. Talking about the profits earned by shareholders is tricky. In the portfolio theory of modern finance, there should be no excess return from taking diversifiable risk. Unless I know something that everyone else doesn’t, I will earn on average a lower return by buying shares in a particular stock than by buying shares in the market portfolio. (I think this point tends to cut against point 3 above.)

5. How do patents fit into the story? Firms obtain patents in order to protect profits. Are patents simply government-chartered monopolies, leading to artificial rents? Or are patents a return on investment in research and development? In the latter case, perhaps one would say that if the outcome of research and development were certain, then profits from those activities would become zero.

6. It seems to me that there are other sources of market power that are defensible. I am not talking about defensible in a moral sense, but defensible in the sense that they will not be competed away. For example, there is reputation. If my insurance company has a reputation for being sound, then potential competitors will find it difficult to persuade my customers to switch. Another example is network effects. Wal-Mart has a lot of customers because it has cheap prices. Because it has a lot of customers, it is in a strong bargaining position with suppliers, so it can keep its prices cheap. But if a lot of companies try to create network effects, and some succeed and some fail, is this another case of profit emerging out of uncertainty?

Going back to the quoted paragraph, I think that it is either false or uninteresting. If we do not stretch our definition of uncertainty, then it is false. Alternatively, suppose that we make it true by arguing that profit from investment in intellectual property, reputation, network effects, and so on is only due to the uncertainty involved in such investment. A forced tautology of that sort is not interesting.

Co-ordinated Specialization

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I have been thinking about the problem of teaching emergent economics. A commenter suggested The Economic Way of Thinking, so I got the eleventh edition. Paul Heyne started the franchise, and this edition, from 2006, adds as co-authors Peter Boettke and David Prychitko. It is quite good. It is certainly an improvement over the Samuelson tradition in which the market is a machine, technocrats are its repairmen, and economists write the repair manual.

The authors write (p. 16-17)

The economic way of thinking was developed by social theorists largely to explain how order and cooperation emerge from the apparently uncoordinated interactions of individuals pursuing their own interests in substantial ignorance of the interests of those with whom they are cooperating. Economics is a theory of choice and its unintended consequences.

The fundamental assumption of the economic way of thinking is that all social phenomena emerge from the actions and interactions of individuals who are choosing in response to expected benefits and costs to themselves.

I prefer something more Smithian and less Misesian. I would be inclined to start with something like this:

The most striking economic feature of modern society is that we can consume the products and services requiring millions of tasks while performing only a few tasks ourselves. Obviously, this requires some form of coordinated specialization. How can this coordination take place? Consider three possible extremes.

1. Decentralized decisions, but with no prices and profits. People just spontaneously decide on their own what would be most useful to society.

2. Centralized decisions, made by an expert planning bureau.

3. Decentralized decisions, guided by prices and profits, and regulated by competition.

The problem with (1) is that you will get imbalances. Suppose that getting milk to urban consumers requires both dairy farmers and truck drivers. If too many people would rather be truck drivers than dairy farmers, then there won’t be enough milk to transport. If too many people would rather be dairy farmers, then the milk will spoil on the farms. More generally, the jobs that no one wants to do will tend to go undone. Computer programmers will all work on video game hacks, not on inventory control systems. Basically, (1) only works when there are very few tasks to be divided among a small number of people who all get along.

Top-down planning is widely used in the economy. I think of corporations and non-profit organizations as operating this way. But as planning organizations increase in their scope of activities, prolems arise. When central planners draw up their plans, they do not know true costs. Part of the reason for their lack of knowledge is that all costs are opportunity costs, and opportunity cost has a subjective component. Moreover, central planners are not well positioned to gauge alternatives to the status quo. How can a remote planner know whether a factory will be managed more efficiently by Jane than by John?

In a complex economy, these knowledge problems are better solved by competition under a price system with profit incentives.

Returning to Heyne-Boettke-Pryhitko, I would prefer not to put as much emphasis on the methodological dogma that people choose in response to expected benefits and costs. Instead, I prefer to emphasize the question of how a society can operate with each individual performing a few tasks while consuming the products of vast multitude of tasks.

I am not saying that one can do away with the dogma. Offhand, I do not see how to get to “all costs are opportunity costs” without invoking it at some point. But I want to be up-front that the dogma has philosophical consequences.