Cafe Hayek

A Dent in Our Pessimism

My friend Fred Dent, of Dent Asset Management, is optimistic about the future.  His case is strong, and his presentation is fascinating.  Here's the short version.  Here's the longer one.  If you have time to watch the longer one, I recommend it highly.

On Milton Friedman

Here's a short interview with the Wall Street Journal's Steve Moore on Milton Friedman's ideas and how they apply to today's economy.

The State of Manufacturing in the United States

This is a pretty darn good report from Harold Sirkin at Business Week.  A key paragraph:

As Stephen Manning of the Associated Press acknowledged in a rare "just the facts" story in mid-February, the U.S. "by far remains the world's leading manufacturer," producing goods valued at a record $1.6 trillion in 2007 — nearly double the $811 billion produced a decade earlier. Indeed, the AP writer noted, "For every $1 of value produced in China's factories [in 2007], America generated $2.50." Not bad for a country that doesn't produce anything anymore.

The facts contradict those who insist that freer trade condemns high-wage countries, such as the United States, to suffer net losses of highly productive enterprises.  (More such facts on manufacturing in the U.S. can be found here.)

(HT Walter Peterson)

Gary Talks With Mary

The Wall Street Journal's indispensable Mary Anastasia O'Grady has a conversation with Gary Becker.  Here are the concluding paragraphs:

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Still, there remain many good reasons to continue the struggle against the current trend, Mr. Becker says. "When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world."

A Much-Better (but Unfortunately Overlooked) Distinction Between Microeconomics and Macroeconomics

Daniel Kuehn's comments on this post prompt me to reprise this post from September 2005:

Rich States, Poor States

Here's an important report from the American Legislative Exchange Council on the relationship -- at the individual U.S. state level -- between economic freedom and economic prosperity.

Arnold's view of macro

Go here. His conclusion:

We badly want macroeconometrics to work.  If it did, we could resolve bitter theoretical disputes with evidence.  We could achieve better forecasting and control of the economy.  Unfortunately, the world is not set up to enable macroeconometrics to work.  Instead, all macroeconometric models are basically simulation models that use data for calibration purposes.  People judge these models based on their priors for how the economy works.  Imposing priors related to rational expectations does not change the fact that macroeconometrics provides no empirical information to anyone except those who happen to share all of the priors of the model-builder.

How Bad Is this Economic Downturn?

I wonder why so many self-described citizens of the "reality-based community" -- generally, the "progressive" left -- remain so stubbornly blind to the reality of the current downturn, as explained today by Alan Reynolds.  Here's a sample paragraph:

With one exception - the steep 45 percent drop in the S&P 500 stock index since October 2007 - few other indicators of economic distress could support this being the worst postwar recession. Thanks to low inflation, for example, real disposable income rose every month during the fourth quarter - at an annual rate above 6 percent.

"I, Pencil" Turns 50

This month marks the 50th anniversary of the original publication of one of the most insightful economics essays ever penned -- "I, Pencil."  It wasn't written by a professional economist; it was written by Leonard E. Read, founder and long-time president of the Foundation for Economic Education.

Although Read was no professional economist, his understanding of the way market economies work, and his ability to explain that logic in clear and compelling terms, far surpasses that of all but a tiny handful of PhD-sporting economists.

Markets to Americans Are Like Water to a Fish

In my latest column in the Pittsburgh Tribune-Review, I argue that government grows not because markets fail, but because markets succeed so well yet so silently,  Here's a paragraph:

In modern America, the market's bounty is assumed always to be there, as if it emerges naturally from the soil, available for us to "redistribute" as we wish.

Happy Thanksgiving, everyone.

Lose the Teleological Mindset

This post is profound.

(HT Bob Higgs)

Were Recent Economic Policies Really Designed by Milton Friedman?

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

V. Nagarajan suggests that the financial turmoil on Wall Street combines with the fact that most winners of the Nobel Prize in Economic Science are Americans to reveal that economics is a discipline unworthy of Nobelity (Letters, September 30).

While some laureates are indeed undeserving of such high distinction, Mr. Nagarajan's presumption that Uncle Sam's economic policies are fashioned after the advice of distinguished economists is unwarranted. One of America's greatest economists is my colleague James Buchanan, winner of the 1986 Nobel Prize.  Jim's life work shows that government officials seek office, not truth - and that success at their venal endeavor too often requires not merely ignoring sound economics but positively fleeing from it as if it were a fast-expanding cloud of anthrax spores.

Sincerely,
Donald J. Boudreaux

Hopeless

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

You introduce several letters on Amity Shlaes's interpretation of the New Deal with this headline: "New Deal Brought Hope, but Not End of Depression" (Sept. 24).

Some "hope."  The New Deal - as convincingly argued by Ms. Shlaes, by professional economic historians such as Robert Higgs, and by most of your letter-writers - deepened and prolonged the Depression.  Any "hope" that ordinary Americans found in the New Deal was as justified as the hope that the Trojans found in the apparent retreat of the Greek army and its gift of a large wooden horse.

Sincerely,
Donald J. Boudreaux

More On 'Industrial Policy'

Heres' a letter that I sent yesterday to the Washington Times:

On top of Uncle Sam's unprecedentedly large bailout plan comes calls from top business executives for "comprehensive industrial policy" ("Ford, Dow execs to discuss national summit in '09," September 22).

Let's keep our heads. Despite the turmoil, Americans today remain incredibly wealthy. This fact is evidence that capitalism works very well even though it is never textbook perfect. Calling for a fundamental restructuring of an economy that produces such widespread prosperity is, at best, an irresponsible overreaction.

More likely, though, this call for industrial policy is a ploy by business executives to escape competition. By trying to plan the economic future, any such policy necessarily tramples innovation and consumer sovereignty. Anything at odds with the policy - such as an unforeseen new product, a creative new technique of production, or simply a change in consumers' tastes - must be squelched, for otherwise the policy falls apart. Many existing firms (especially large ones such as GM and Dow Chemical, who have the resources to influence government) will benefit from industrial policy - but only because such policy inverts the economy from one in which producers exist to satisfy consumers to one in which consumers (and taxpayers) exist to satisfy producers.

Such a policy will make most of us much, much poorer.

Sincerely,
Donald J. Boudreaux

The Perils of 'Industrial Policy'

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I do my best to explain why "industrial policy" -- now being called for by some prominent business executives -- is a very, very, very, very, very bad idea.  I conclude my column with these paragraphs:

Uncle Sam, though, has sufficient power to keep its industrial policy "working" for quite some time.

But by "working," I mean working only on its own narrow terms. It would work to protect established producers by successfully freezing the economy, making static that which was once dynamic -- making stagnate that which was once constantly refreshed with new ideas and new opportunities and killing that which was once alive.

An industrial policy seriously pursued by Washington will make Americans (and, indeed, people all across the globe) significantly poorer. Prosperity is not, and cannot be, created or maintained by policies built on the premise that producers must be served by consumers.

Prosperity means the widespread satisfaction of consumer desires. Firms that satisfy those desires should be celebrated and left free to do their thing. But the moment they stop meeting consumers' desires, for whatever reason, these firms must also be left free to perish.

That's the only "industrial policy" we need.

Infrastructure

It has become a mantra in America - including a mantra of some regular patrons of the Cafe - that the infrastructure of these United States is in desperate need of rebuilding or repair.

What's the evidence for this claim?  (Please don't mention the collapsed bridge in Minnesota or the failed levees in New Orleans.  Anecdotes are not powerful evidence.)

My question is not rhetorical.  Perhaps the infrastructure does need much attention.  But to answer my question sensibly requires some baseline.  To what do we compare today's infrastructure?  To its size and quality of five, ten, or twenty-five years ago (reckoned, perhaps, on a per-capita basis)?  To that of some other country, or average 'infrastructure intensity' of other countries?  (And if so, which other countries?)

Perhaps the appropriate comparison is not to any historical or other-country fact, but to some plausible hypothetical standard.  If so, which one?

And what is infrastructure?  Just roads, bridges, and seaports and airports?  Does it include hospitals, courthouses, and schools?  Sports stadiums?   Are cell-phone towers part of the infrastructure?  What about wi-fi availability?  How about the condition of 18-wheel trucks registered in America?  The number and quality of ATMs?  The quantity and quality of accounting software?  The availability of overnight delivery services?

I'm sincere: my question is not rhetorical.  America's infrastructure today might well be lacking.  But to establish this conclusion requires some plausible comparison: compared to what?

One thing that I am quite sure of is the fact that, without looking carefully at hard data -- and having a plausible standard to which to compare the actual size and state of America's infrastructure -- it is impossible to determine whether or not America's infrastructure really is in bad shape.

Now my priors tell me that an empirical investigation might well show that America's infrastructure is lacking when compared to an appropriate standard.  After all, the agency chiefly responsible for building and maintaining roads, bridges, sewerage systems, and seaports and airports is government.  We've lots of evidence and theory to show that government lacks appropriate incentives to do even its core jobs well.

But I have seen no specific evidence on the condition of America's infrastructure -- evidence with a meaningful benchmark for comparison -- to justify the conclusion that America's infrastructure is in especially bad shape today.

Again, I readily admit that such evidence might exist; but if it does exist, I'm unaware of it.

Let's Hope this Trend Continues

Here's a letter that I sent back in June of this year to the New York Times:

Bob Herbert asserts that the United States economy "has trouble producing enough jobs to keep the middle class intact" ("Out of Sight," June 10). While there are always cyclical ups and downs, Mr. Herbert's statement - if meant as an indictment of the economy's long-term performance - is contradicted by the facts. Not only is the unemployment rate still at a reasonable level, the Census Bureau reports that real median household income (reckoned in 2006 dollars) was $48,201 in 2006, up from $36,847 in 1967 - an increase of 31 percent.  And this  growth has been pretty steady over these 40 years.

Moreover, this figure underestimates the middle-class's increasing prosperity, for it ignores the shrinking size of households. In 1967, the average household contained 3.14 persons; in 2006 it contained 2.57 persons. This fact means that the real income for each member of the average household grew from $11,735 in 1967 to $18,755 in 2006 - an increase of 60 percent.

Sincerely,
Donald J. Boudreaux

(For figures on U.S. household size, see Brad Schiller, "The Inequality Myth," Wall Street Journal, March 10, 2008, p. A15.)

On the Current Financial Turmoil

At Forbes.com, Russ and I each weigh in on today's financial turmoil.  Russ's superb contribution is here; mine is here.

Only time will tell if my optimism is justified.  Adam Smith was correct that there's "a great deal of ruin in a nation" -- meaning that a relatively free society can withstand much abuse.  Whether or not ours can weather the added abuse about to be heaped on it by the hordes of political opportunists scurrying like fanged roaches in Washington remains to be seen.

Constitution Day

Today is Constitution Day in the United States.  On this date in 1787, 39 delegates to the constitutional convention in Philadelphia signed the document that was soon to be ratified by the states as the U.S. Constitution.  (It replaced, of course, the Articles of Confederation.)

It's impossible, I suspect, to find anyone who regards the Constitution as perfect, either in what it says and doesn't say, or in the ways it's been interpreted and applied through the years.  But this much I am confident of: the 1787 Constitution succeeded in the framers' goal of creating a huge free-trade zone.  For all of the courts' (and the Court's) questionable interpretations of this document, and for all of its abuse at the hands of Congresses and Presidents, efforts by state and local governments to protect producers from competition outside of their jurisdictions have largely failed.  Sure there are exceptions.  But the fact that Floridians can buy oranges from California, Californians can buy wine from Washington state, residents of Washington state can buy apples from North Carolina, North Carolinians can buy seafood from Louisiana, and on and on, is a happy testament to the success of the Constitution's commerce clause in creating a huge duty-free (and now transcontinental) market that encouraged the division of labor to deepen and, hence, promoted incredible, widespread prosperity.

The Economy Ain't In Bad Shape

In today's edition of the Washington Post, Donald Luskin does his best to calm people's fears about the state of today's economy.  He's got lots of solid facts on his side.

An Hypothesis

I agree with Russ and many of the commenters who point out how silly it is to judge the relative economic merits of the Democrats and the GOP by measuring what happened economically when the White House was occupied by Democrats and comparing to what happened when Republicans had the run of the place.

Pondering this issue raises a question in my mind: has anyone studied the economic consequences of partisan bickering?  That is, I propose the following empirical study: use as the dependent variable some composite measure of economic performance, and use as the independent variable of interest some measure of partisan bickering.

A reasonable hypothesis is that economic performance improves -- perhaps with a lag -- as partisan bickering (or, more specifically, real and honest-to-goodness gridlock) increases.

Surely such a study has been done.

The Music of the Market

I shamelessly free-ride, in this letter to the New York Times, on an insight about jazz that I learned from Russ:

Jeffrey Lewis nicely recounts the experiment of a band using extreme improvisational methods to write music - no one or two identifiable composers, but participation by all band members ("Communist Songwriting (Sort Of)," August 19).  Mr. Lewis describes the goal: "The songs should never be the recognizable product of one or two minds, but an ineffable, dreamlike synthesis of three or more participants in which the final result was sometimes quite mind-boggling."

Contrary to Mr. Lewis's claim, though, this method of composition has far more in common with the free market than it does with communism.  Communism turned each individual into, at best, a robot with a tightly scripted role in a gigantic central plan.  The communist ideal was planned 'progress'; nothing was to be left to unreliable individual initiative.  Everything was directed, in mind- and soul-numbing detail, from the top.

But in free markets - there the results are truly and marvelously mind-boggling.  Consider the mundane pencil and ask: whose idea was it?  Who planned its production from the raw-material stages (felling trees for the wood, drilling oil for the paint, mining bauxite for the ferrule and graphite for the ‘lead’) through to pencils' delivery to hundreds of thousands of retailers?  The answer is no one.  Pencils - and cars and MP3 players and aspirin and romantic B&Bs and you name it - are each the creative, mind-boggling result, not of any one or two 'composers,' but of the efforts of millions of individuals each doing his or her thing in the feedback-rich environment of markets.

Play on!

Sincerely,
Donald J. Boudreaux

My colleague Tom Hazlett, after reading my letter, e-mailed this nice observation to me:

"... or have folks missed that the corporation provides its 'music' through cooperation in a shared ownership 'commons,' often blasted by critics of capitalism as so smoothly blended to be anti-individualistic? "

Big Industry in Manufacturing Myths

Here's a letter that I sent today to the Washington Post:

Harold Meyerson insists yet again that America has lost its manufacturing, alleging also that investors are abandoning the U.S in favor of "nations with far cheaper workforces" ("Obama's Factory Factor," August 21).  Mr. Meyerson predictably singles out China as one such nation.

Facts utterly contradict Mr. Meyerson's fantasies.  First, U.S. manufacturing revenues (adjusted for inflation) reached their all-time high in 2006. 2006 was also a peak year for inflation-adjusted manufacturing profits in the U.S. and for inflation-adjusted U.S. manufacturing exports.  And the U.S. accounts for the largest share of the globe's manufacturing output; Americans today produce 2.5 times more manufactured goods than do the Chinese. [See here.]

Second, in 2007 the flow of per capita foreign direct investment into the U.S. was up 13 percent from 2006, to $675. In China, it was up 14 percent - to $55.  [I derived these these figures from here, here, and here; I got population figures from the CIA World Factbook .]

Harold Meyerson is a perfect example of the Beatles' "Nowhere Man":
"He's as blind as he can be / Just sees what he wants to see."

Sincerely,
Donald J. Boudreaux

I also posted this letter in the Comments section that accompanies Meyerson's articles.  It's extraordinarily disheartening to read most of the other comments.

I, 'I, Pencil'

Leonard Read's 1958 essay "I, Pencil" is unmatched among all publications in economics in its success at conveying an immense amount of profound wisdom in a style so accessible and charming.  (By the way, near the beginning of The Price of Everything Russ does a superb job of explaining how an economics professor might introduce this wisdom to students.)

My friend Roger Meiners recently created this PowerPoint presentation to accompany his lecture on "I, Pencil."  When Roger sent this presentation to me, he commented that his effort was much easier than Leonard Read's effort of 50 years ago.  "I just used Google to get many of the details and the pictures."

Think about it.  Millions of persons unknown to Roger contributed their skills, knowledge, time, and effort to make it possible for him, in just a few minutes (and at zero marginal pecuniary cost!), to create a PowerPoint presentation that will enable him to deliver a great lecture to his students.  How many people helped to build the computer he worked on?  To construct the cameras that captured the images?  To engineer the PowerPoint software?  To create and maintain search engines on the web?

The answer to each of these questions, and to each of many other similar questions that could be asked about this single, today-very-ordinary task of creating a PowerPoint presentation, is "countless."  In some cases hundreds of thousands of people; in some cases hundreds of millions -- perhaps billions -- of people.

No one knows how to make a PowerPoint presentation.  No one could possibly know all that there is to know about making a PowerPoint presentation.  The creation of such presentations requires the cooperation of uncountably large numbers of people from around the globe.  And yet, like the quotidian pencil, PowerPoint presentations are made and consumed everyday, and at minuscule cost.

That is the power of markets.

The Next Generation

My eleven-year-old son, Thomas -- fencer and Treky -- has started his own blog (which I will contribute to frequently).  The name of this new blog is The Next Generation (HT Karol Boudreaux).  I especially like Thomas's new post about iPods, the Beatles, and markets.

Liberalized Capital Accounts and Wages

What is the effect of liberalizing a country's capital account (that is, making it less costly for assets to flow into and out of the country)?  In this recent paper published by the NBER, Peter Blair Henry and Diego Sasson report their empirical findings on this topic; here's the abstract:

For three years after the typical developing country opens its stock market to inflows of foreign capital, the average annual growth rate of the real wage in the manufacturing sector increases by a factor of seven. No such increase occurs in a control group of developing countries. The temporary increase in the growth rate of the real wage permanently drives up the level of average annual compensation for each worker in the sample by 752 US dollars -- an increase equal to more than a quarter of their annual pre-liberalization salary. The increase in the growth rate of labor productivity in the aftermath of liberalization exceeds the increase in the growth rate of the real wage so that the increase in workers' incomes actually coincides with a rise in manufacturing sector profitability.

This effect is unsurprising.  Liberalized capital markets makes capital more abundant, and more abundant capital means higher worker productivity -- which, of course, results in higher real wages.

(HT Bob Higgs)

The Course of Human Labor in Markets

Russ's new book, of course, is now out; a copy already graces a bookshelf in my home.  But for those of you who haven't yet read Russ's first book -- The Choice -- I urge you to do so ASAP.  It offers the best explanation of trade, and case against protectionism, penned since Bastiat last wrote more than 150 years ago.

A major theme of The Choice is that free trade -- or, more generally, producing any good or service with fewer and fewer resources (including human resources) -- releases resources (again and especially, including human resources) to produce other goods and services that would not otherwise be possible to produce.

And when human resources are released from many of the tasks that demanded it over the years (agriculture, manufacturing), human beings are able to find other occupations that generally are more fulfilling.  Although the span of time over which this emancipating process takes place is long enough to avoid detection and appreciation by those whose observation is only casual, stepping back and looking at our society today in comparison with that of 200 or even 50 years ago makes clear that this process of emancipating human labor from tedium is real and is responsible for much (I would say most) of what is fine and wonderful about our world today.

This comic-book account of robots replacing human labor makes the point.  (HT Ronald Hayden, who found this nice story at ColbyCosh.com)

Frankly Confused

Thomas Frank has a new book (The Wrecking Crew), reviewed in yesterday's New York Times Book Review.  Its thesis is peculiar, especially in light of Frank's oft-repeated claim that, since the mid-1990s, free-market idolaters have deviously managed to reduce the power of government over markets.

In his new book, Frank complains that during this time of alleged free-market ascendancy, the lobbying industry in Washington has blossomed and is inflicting great harm on Americans.

I agree that the lobbying industry on the Potomac swamp continues to grow and that its consequences are generally pernicious.  But how in the world can lobbying continue to grow if - as Frank incessantly asserts - markets are increasingly freer?  Freer markets mean less powerful governments.  And governments whose powers are shrinking have fewer rather than more favors to sell to lobbyists.

If Frank's claim that the role of markets has increased -- implying that the power of government over markets has diminished -- then lobbying would be not the boom industry he complains of, but, rather, a dying industry.

Smith, Hayek, and Will on Society's Complexity

George Will's column in today's Washington Post is especially good (save for his slipping into the mistake of apparently assuming that America competes economically with other nations).

Especially noteworthy is this wonderful -- and wonderfully Smithian and Hayekian -- line:

Modernity means the multiplication of dependencies on things utterly mysterious to those who are dependent -- things such as semiconductors, which control the functioning of almost everything from cellphones to computers to cars.

I would add only that our dependence is not only on things utterly mysterious to each of us, but also on millions of strangers -- as Adam Smith noted in Book I, Chapter 2 of The Wealth of Nations:

But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens. Even a beggar does not depend upon it entirely.

Also relevant here is the final paragraph of Hayeks' 1945 essay "Individualism: True and False":

What [true] individualism teaches us is that society is greater than the individual only in so far as it is free. In so far as it is controlled or directed, it is limited to the powers of the individual minds which control or direct it. If the presumption of the modern mind, which will not respect anything that is not consciously controlled by individual reason, does not learn in time where to stop, we may, as Edmund Burke warned us, "be well assured that everything about us will dwindle by degrees, until at length our concerns are shrunk to the dimensions of our minds."

Situational Ethics

Reading this morning these opening words in a report at Yahoo Sports -- "Wimbledon came under fire from animal activists on Tuesday for using marksmen to shoot down dive-bombing pigeons" -- reminds me yet again that our society is extraordinarily wealthy.  That ordinary people are sufficiently and securely fed, clothed, shod, and sheltered to enable some of them to devote substantial stores of their emotional energies to the care of pigeons is a sure sign of deep and widespread prosperity.

On Savings

One of our age's truly great communicators of economics (as well as a first-rate economic scholar) is Steven Landsburg ("the Armchair Economist").  Steve's review, in today's Wall Street Journal, of Ronald Wilcox's Whatever Happened to Thrift? is a gem.  Here's a slice:

The tax code alone is reason to believe that Americans don't save enough. Mr. Wilcox offers a menu of other reasons, not all of them convincing. He repeats the canard, popularized by Robert Frank of Cornell University, that "keeping up with the Joneses" is a force for excessive consumption. One could argue equally well that it is a force for excessive saving. If I am trying to outshine the neighbors' Mercedes, I might well decide to be extra frugal until I can afford a Rolls Royce.

Mr. Wilcox makes another fundamental error when he points to high foreign savings as a cause of excessive U.S. consumption. When foreigners save, U.S. interest rates drop. This makes it smart for Americans to consume more. "More" is not always the same as "excessive."

I add only a point that I'm certain that Steve agrees with, namely, the freer are trade and international capital flows, the less meaningful it is to speak of national rates of savings.  As a worker I care whether or not my employer is modernizing his operations to increase my productivity; I don't care (or shouldn't care) whether the savings used to finance such investments come from Dallas or from Dubai.  As a consumer, I care that savings is available to finance innovations and the production of attractive goods and services; I don't care (or shouldn't care)  -- as long as trade is free -- if any particular such investment takes place over here or over there, or about the nationalities of the persons who supply the savings to finance this and other investments.

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

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.

Perspective

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.

Happy 109th, Fritz!

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.

Fair Advice

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.

Seeing Past the Chicken Littles

Denver Post columnist David Harsanyi is superb.

Manufacturing and Employment

From Robert Samuelson's column in today's Washington Post:

From 1998 to 2007, total non-farm payroll employment [in the U.S.] rose 12 million, and unemployment averaged only 4.9 percent -- despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

Krugman's Peculiar Sense of History

Paul Krugman makes a claim in his column (appearing in today's New York Times) that is both wrong and misleading.

The column features his familiar theme that ordinary Americans are suffering terribly as a result of the decrepit shape of America's current, GOP-ransacked economy.  Krugman's offending statement is the one in bold:

Our [that is, ordinary Americans'] bleakness partly reflects the fact that most Americans are doing considerably worse than the usual economic measures let on. The official unemployment rate may be relatively low — but the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high. [emphasis added]

Sounds ominous.  But what does this figure mean?  The closest statistic that I can identify to "percentage of prime-working-age Americans without jobs" is to start with (one minus) the labor-force-participation rate of Americans aged 25-54.  Then adjust that figure for the unemployment rate of Americans in that age group.

For example, if 90 percent of Americans between the ages of 25-54 are participating in the labor force (that is, either have or are seeking employment), then ten percent of Americans in this age-group are without jobs by choice (some, for example, are stay-at-home parents).  These ten percent of Americans without jobs are not "unemployed," for they are not in the labor force.

Then, to determine the actual number of prime-working-age Americans who are "without jobs," we must add to this 10 percent of Americans, in this age group, who are without jobs because they aren't in the labor force whatever percentage of the remaining 90 percent of Americans aged 25-54 are unemployed.  BUT because there's no reason to suppose that unemployment is hitting workers in this age group today significantly any harder or less hard (relative to workers in other age groups) than in the past -- and because, by Krugman's own admission, today's unemployment rate of 5.1 percent isn't especially high -- we can ignore this unemployment rate for my purposes.

So what am I getting at?  This: Krugman's statement that "the percentage of prime-working-age Americans without jobs, which isn’t the same thing, is historically high" is, as I said above, both wrong and misleading.

Look at Figure 1B on this page from the San Francisco Fed.  (HT Russ.)  It does not show the labor-force-participation rate for all Americans aged 25-54; rather, it breaks down the participation rate for Americans in this age group by sex.

Look at the labor-force-participation rate of men (aged 25-54).  That rate is indeed lower than in the past.  For the full time period reported in this Figure, that rate is indeed at an all-time low.  It peaked in 1953, and has been declining ever since.

Now look at the labor-force-participation rate of women (aged 24-54).  Not surprisingly, it has surged in recent decades, although leveling off a bit since around 1990 and even declining a tiny bit since around 2000.

It's highly unlikely that, given that today prime-working-age women participate in the labor force at rates vastly higher than was true even in, say, 1975, that the percentage of all Americans aged 25-54 who are "without jobs" is today lower than it was thirty or even twenty years ago.

Whatever is the percentage of prime-working-age Americans who are today "without jobs," it surely isn't -- contrary to Krugman's hysterical claim -- "historically high."

One possibility is that Krugman saw these, or similar, data and confused "men aged 25-54" for "all workers aged 25-54."  If so, then he's correct that the percentage of men in this age group "without jobs" is "historically high" (where "history" here is confined by the data that go back no farther than the late 1940s).  But today's "historically high" figure is part of a trend that began during the first year of the presidency of Dwight Eisenhower.  At that time, George W. Bush was seven years old.

(Note also that, although the labor-force participation rate of prime-working-age men has been declining for a half century, the trend is slight.  Even today's "historically" low figure is pretty darn high.)

So, to summarize.  Krugman is simply wrong to assert that the percentage of Americans of prime-working-age without jobs is "historically high" -- and misleading to suggest that, whatever this percentage might be today, that it is evidence of some major economy malady.  A rise in the percentage of prime-working-age persons "without jobs" might just as well reflect greater middle-class prosperity -- resulting in more years of schooling or early retirement -- as it reflects economic hardship (such as workers so discouraged by their futile job searches that they just call such searches to a halt).

BTW, this post from Megan McArdle on labor-force-participation is worth reading.

The Market, Not Nature, Is Bountiful

Robert Kennedy, Jr., recently wrote this letter to the editor of the New York Times expressing his opposition to building hydroelectric dams in Chile.  I sent my own letter in response to Mr. Kennedy's missive:

Robert Kennedy, Jr., might be correct that electricity is best provided in Chile by means other than hydroelectric dams (Letters, April 8). His presumption, however, about the source of prosperity casts doubt on the quality of his argument.

Mr. Kennedy opposes dams because he wants to protect "nature's bounty."  But nature is not bountiful. If it were, human history would be one of prosperity and long, healthy lives rather than one of oppressive poverty and short, miserable lives.  Nature is miserly.  The bounty that Mr. Kennedy presumes comes from nature is, in fact, the relatively recent product of human creativity and industry unleashed by free markets - and now threatened by the mindless worship of nature.

Sincerely,
Donald J. Boudreaux

The Monster That Is Mercantilism

The Washington Times recently published this letter by William Hawkins.  It's proof that the monster that is mercantilism remains alive, kicking, and screaming.

Today's edition of the Washington Times published a letter that I sent in response.  Here it is:

Not only does William Hawkins misunderstand the principle of comparative advantage, but he incorrectly suggests that it is the lone pillar supporting the case for free trade ("Economic theory ignores reality," Letters, Monday).

Adam Smith didn't know about comparative advantage when he wrote "The Wealth of Nations," but his case for free trade remains powerful. Smith explained that free trade expands the size of markets, making possible capital investments and greater specialization of workers.

These investments, along with the improved skills that highly specialized workers learn, increase output and wages. Confining economic activity to the nation keeps the market artificially small and, thereby, reduces opportunities for output-expanding investment and specialization.

Smith also explained a danger that Mr. Hawkins who wants government to pick economic "champions" overlooks: "The statesman who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it."

DONALD J. BOUDREAUX

The Challenge is to Create, Not Jobs, but Wealth

Today I sent this letter to the Washington Times:

Like economic alchemists, Senators Clinton and Obama peddle plans to spend billions of taxpayer dollars on various government projects that will create millions of jobs ("Obama's economic plan," February 20).

Creating jobs - creating demand for workers - is no challenge.  Vandals and arsonists do so routinely.  What is a challenge is to create opportunities for workers to earn good incomes while producing real value for others, where value is confidently measured by the amounts that buyers voluntarily pay for what is produced.  As far as I know, Sens. Clinton and Obama (and, for that matter, McCain) have never created a business whose success relied upon producing outputs efficiently and then selling these outputs at prices attractive to consumers.

So why suppose that any of their "plans" to create innovative industries and jobs are anything more than the cheap-to-dream-up fantasies of self-important politicians accustomed to spending other people's money?

Sincerely,
Donald J. Boudreaux

A Tribute to Julian Simon

Were he still alive, Julian Simon would have turned 76 yesterday.  Unfortunately, he died in 1998 just four days shy of his 66th birthday.  Here's a tribute that I wrote to Julian, published in today's edition of the Pittsburgh Tribune Review.  And here are some core paragraphs:

Simon's most important contribution was to crystallize and explain an insight that even the best economists before him only glimpsed -- namely, that human beings in free societies are "the ultimate resource." Nothing -- not oil, not land, not gold, not microchips, nothing -- is as valuable to the material well-being of people as is human creativity and effort.

Indeed, there are no resources without human creativity to figure out how to use them and human effort actually to do so. Recognizing the truth of this insight renders silly the familiar term "natural resources."

No resources are "natural."

Take petroleum. What makes it a "resource"? It's certainly not a resource naturally. If it were, American Indians would long ago have put it to good use. But they didn't. I suspect that for Pennsylvania's native population in, say, the year 1300, the dark, thick, smelly stuff that bubbled up in watering holes was regarded as a nuisance.

Petroleum didn't become a resource until human beings creatively figured out how to use it to satisfy some human desires and other human beings figured out how to extract it cost-effectively from the ground.

Or take land. For at least 80 percent of Homo sapiens' time on earth, land was merely something to trod and hunt upon. Land had no special value as a resource until about 10,000 years ago when someone figured out how to cultivate soil and to plant, tend and harvest crops. Only then did land achieve the kind of status and value that we associate with a resource.

The same, of course, is true for magnesium, iron ore, bauxite, feldspar, trees, New York harbor -- you name the "natural resource" and you'll realize that it is a resource only because human beings creatively determined how to use it productively.

An important implication of this realization that humans are "the ultimate resource" is that high and growing population -- in societies with sufficient freedom to allow individuals to experiment and create -- is desirable. If human creativity and effort are not only resources, but also the ultimate resource, surely it's foolish to lament large and growing supplies of it.

Telling Stories

Which of these stories is right?

The Giants will win the Super Bowl. They have the momentum on their side. They have a great pass rush. They will be more relaxed than the Patriots because they don't have the pressure of the perfect season. They'll be able to control the ball with Brandon Jacobs. Manning hasn't thrown an interception in the playoffs.

Or is it this one:

The Patriots are the better team. They have Super Bowl experience. They have the better coach. Their quarterback is better.They will shut down the Giants running game and force Manning to make mistakes.

So which one is better? Neither, of course. They're just stories. But on Monday, one narrative will look convincing and the other will look foolish. But of course there was no way to really know ex ante which story was better. Ex post it will seem obvious. But even ex post, judging the stories or the storyteller is just so much finger-snapping. It's just one data point. Don't be fooled by randomness.

Can a camel understand football?

From the Asbury Park Press:

Forget what the sports analysts are saying. Super Bowl XLII will end in victory for the New York Giants, according to Princess, "Popcorn Park Zoo's famous prognosticating camel," the zoo announced Monday.

Princess had an 11-6 won-loss record for games picked during the season. And "her playoff standings were phenomenal, selecting eight out of 10 winning teams. Last week she accurately predicted the Patriots for the championships, but not the Giants," the zoo press release states.

Each week, Popcorn Park's general manager, John Bergmann, has had the names of two teams playing that weekend written on his hands. Then he offered Princess her favorite snack — graham crackers — in both hands. Whichever hand she nibbled from, that was regarded as her choice in the game.

"I can't explain it, but her predictions, more often than not, are right on the money," Bergmann said. "I'm hoping she's right this time, because I'm a Giants fan."

I think most people understand that the success of Princess is not due to her understanding of football, or her "gut feeling" or her intuition. It's just random. But on Monday morning, some human football "experts" will seem smart and some less so, simply because of one data point, the result of Sunday's game.

 

Which story is better:

The economy is in crisis. The subprime mortgage mess has taken down the housing market and thrown the banking industry into turmoil. The crdeit crunch that is inevitable will soon knock out other industries as well.  The anemic December job numbers (18,000 net jobs created) show are just the beginning of the problem. A recession is imminent or we may already be in one. We have to do something.

Or is it this one:

Yes, housing and banking are struggling. But the rest of the economy is healthy. The December job numbers were atypical. Unemployment claims are down. We don't need a stimulus package.

Who is right? Tomorrow, February 1, the January job numbers will be released. There are hints that they will be very strong. Some people's stories will look wise and others less so, at least for a while. If the numbers are strong, the worriers will find some other data point to wave around.

But I suspect the experts are like Princess, the pigskin prognosticating camel. We are fooled by randomness. We don't really understand the macroeconomy. Certainly not enough to micromanage it.

Stimulie, II

Here is federal tax revenue collected from the income tax on individuals from 2000-2006, reported by the CBO (Tab #3), measured in billions of dollars:

2000    1,004.5
2001    994.3
2002    858.3
2003    793.7
2004    809.0
2005    927.2
2006    1,043.9

Bottom line: revenue in 2006 was still below 2000 in real terms. I'm not sure when the Bush tax cuts first started. The first cuts were passed in 2001 but there was a rebate akin to what's being discussed now--a lump sum retroactive cut, if I remember correctly. Not sure when that happened and when it affected the revenue numbers. But even between 2001 and 2006, real revenue is down.

Here are the numbers for all sources of federal revenue, same CBO report, again, billions of dollars:

2000 2,025.5
2001 1,991.4
2002 1,853.4
2003 1,782.5
2004 1,880.3
2005 2,153.9
2006 2,407.3

That's about a 19% increase from 2000-2006. The GDP price deflator increased about 16% over that time period. So total revenue was roughly flat with a smaller percentage coming from the individual income tax.

I post these numbers in response to a friend (who will be spared identification here) who said the key to keeping the economy on track is to keep the Bush tax cuts in place. He gave two reasons—the tax cuts spurred economic activity that increased tax revenue. And the tax cuts put more money in our hands and less in the government's hands. And because we spend money more wisely than the government, this is a good thing.

But the revenue effect was negative. As to who was spending the money, read on.

There were some good things about the Bush tax cuts—particularly the (temporary) elimination of the estate tax which I view as immoral and possibly discouraging of productivity and creativity. The threat of even higher deficits that they may have created may have kept government spending from being even higher.

But the across-the-board reduction in marginal rates was an illusion. It wasn't really a reduction in taxes. It lowered revenue at the same time that spending was going through the roof. Here are federal outlays in nominal terms, measured in billions, from the same CBO report:

2000 1,789.2
2001 1,863.2
2002 2,011.2
2003 2,160.1
2004 2,293.0
2005 2,472.2
2006 2,655.4

That's a 48.4% increase. between 2000 and 2006.  Again, the GDP price deflator rose about 16% during that time. That's a massive increase in real government spending during a time when tax revenues were essentially flat. To be fair to Bush, you can't blame him for the spending level in 2001. But between 2001 and 2006, it's still a real increase of over 30%. Bush didn't veto a single bill until July of 2006 and that was a stem cell research bill.

So what kind of a tax cut did Bush provide? George Bush (along with Congress) has raised our taxes. Government has gotten bigger. Here is the ratio of federal outlays relative to GDP, the federal government's share of the pie:

1988 21.2
1989 21.2
1990 21.8
1991 22.3
1992 22.1
1993 21.4
1994 21.0
1995 20.7
1996 20.3
1997 19.6
1998 19.2
1999 18.6
2000 18.4
2001 18.5
2002 19.4
2003 20.0
2004 19.9
2005 20.2
2006 20.3

Government's share of the pie has grown dramatically under Bush II. You can argue it was worthwhile. You can argue that he had no choice. (I think you'd be wrong on both counts, but never mind.) But you can't argue that Bush has cut our taxes. Our taxes are higher and they've been shifted into the future via debt.

Notice also that government's share fell during the Clinton years. Yes, I know that's partly because of the Republican Congress. Partly. But it reinforces my view that partisanship is overrated.

George Bush likes to say that he gave us back "our" money because we could spend it more wisely. While I agree with the premise, it was an illusion. There weren't any tax cuts in 2001, 2002 and 2003 that supposedly stimulated the economy or that let us spend the money more wisely than the government. The government spent more of our money, not less.

Spend or save

There's a debate in the comments to this post about whether recipients of tax rebates spend or save them. There's no right answer. It's an empirical question. I was just giving the intuition for why people might save rather than spend a windfall gain, given that most people just presume it will increase spending. I will try and give some more empirical evidence down the the road. Meanwhile, you might find this survey result about the rebates of 2001 of interest:

A poll by the Gallup organization recently asked around 1,000 adults how they would spend their rebate checks. Seventeen percent said they would spend the money,       while 47 percent said they'd use the cash to pay off bills. Thirty-two percent plan to save or invest it.

It's only a survey. But I thought you'd find it interesting.

Stimulie, I

After my commentary on NPR, I spent a lot of time last week talking to bright non-economists about the various proposals to stimulate the economy by giving people money. Most of them presumed that of course giving people money will improve the economy. I realized that most people have trouble with what might be called "macro intuition." So I thought I would start a series of brief observations on why giving people money is unlikely to cause the economy to grow.

Let us begin with the most basic question. If you received a windfall, that is, an unexpected increase in your income, what would you do with it? The right answer is that it depends. If it is a one-time increase, you would respond differently than you would if it were a permanent increase. A one-time increase is more likely to be saved compared to a permanent increase. With a one-time increase, you might use it to pay off current debt. Or you might add it to your savings. Or you might spend some of it and save the rest. Or you might spend all of it.

Would the answer depend on where the money comes from? It would seem to be irrelevant, but it's not. If you are the only person receiving the money, say from an unexpected inheritance, you might respond differently than you would if you knew that everyone was getting a tax reduction.

Let's consider two different situations.

1. Your rich uncle dies who hated you. But he left you money anyway—$1600. What do you do with the money?

2. The government announces a $1600 rebate for all families, financed by borrowing. What do you do with the money?

With the inheritance, you feel a little richer. You might splurge on a fancy weekend in New York. Or you might save all of it. Or something in between. But with the rebate, you are less likely to spend it. Why? Because your taxes (or someone's taxes) are going to go up in the future and that will discourage the feeling that you're wealthier. It's not just a feeling. We as a society aren't any wealthier. To see the importance of this effect, imagine that the government announces that there will be no taxes collected this year. Concerned about a recession, the government is collecting no taxes in order to encourage consumer spending.

Consider a family that because of the magnitude of this tax cut, finds they have an extra $16,000 available rather than a mere $1600. Imagine the husband calling his wife. "Honey, great news. The government isn't going to collect any taxes this year. We have an extra $16,000 to spend. Now we can finally (choose one: take that cruise, replace the minivan, renovate the bathroom)."

The wife replies "Well, if the government isn't going to cut spending (and they're not, because that would offset the stimulus of the tax cut, wouldn't it?), then it's going to have to borrow all the money to cover its spending for this year. The bonds the government sells are going to have to be repaid. We're going to have higher taxes next year and the year after. I think we better put that $16,000 aside to pay for those taxes."

Who wins that argument?

The wife, don't you think. So if a $16,000 tax rebate isn't going to stimulate spending, why would a $1600 rebate? Because people won't realize that they're going to have higher taxes in the future?

And as will see in future posts, even if it is different, it still isn't clear that it will stimulate the economy.

Stimulus

Here is my commentary from NPR's All Things Considered on why a stimulus package is unlikely to stimulate. The link will take you to my newly designed site where I am archiving all my essays and related material.

Future Jobs

The following letter of mine is published in today's edition of the New York Times:

To the Editor:

Bob Herbert quotes the observation by Andrew L. Stern, president of the Service Employees International Union, that Americans today “cannot see where the jobs of the future are that will allow their kids to have a better life than they had.” Mr. Stern adds, “And they’re not wrong.”

But when could Americans of any generation foresee future jobs? Did the blacksmith in 1890 foresee jobs in the auto industry? Did the corner grocer in 1940 foresee his son prospering as a regional manager for Wal-Mart?

Did the telegram-deliverer in 1950 foresee his child designing software for cellphones? Did the local pharmacist in 1960 foresee his daughter’s job as a biomedical engineer?

Our inability today to see the details of the future is no more worrisome than was the same inability of our grandparents. 

Donald J. Boudreaux
Fairfax, Va., Dec. 22, 2007
The writer is chairman of the economics department, George Mason University.

Does It Matter that Other People Save? Yes. Does the Nationality of these Savers Matter? No

Arnold Kling insightfully points out that among the distinguishing features of economics as it is taught and researched here at George Mason University is that we resist the temptation to treat abstract collectives as acting, relevant beings.  The typical GMU economist doesn’t believe that just because a group of people are conventionally called by a certain name – “Americans,” or “Ukrainians,” or “Taiwanese” – that such a designation carries much economic relevance.

Nowhere is the need to “lose the we” more important than in discussions and analyses of international trade – and in particular in discussions and analyses of the so-called “trade deficit.”

Nearly every American is part of the economy that can, without risking too much misunderstanding, be called the American economy -- or, alternatively, the global economy.  But also part of this economy are foreigners who sell their goods and services to Americans – so too are foreigners who buy American-made goods and services – so too are foreigners who invest in dollar-denominated assets.

It’s easy to confuse Americans getting poorer with the American economy getting worse.  The latter does not necessarily follow from the former.

Suppose that 100 percent of Americans are irresponsible spendthrifts – something like the teenager who, upon receiving his first paycheck, spends it all on beer and rock concerts.  Clearly, unless this teenager changes his habits, prosperity beyond the norm will not come his way.  But if American institutions – work habits, trustworthiness, laws, structure of government, and so on – remain attractive to investors, then capital will continue to be invested in America.  New jobs will become available, jobs offering higher and higher pay.  New products and services will be produced, and their qualities will generally rise and prices generally fall over time – becoming more and more affordable even to spendthrift Americans.

Of course, in this scenario all investments will come from non-Americans – from foreigners who, being more prudent and patient than Americans, save and invest part of their current earnings in the economy of which Americans are part.  This economy thrives even if (in this unrealistically extreme example) no American enjoys the fruits that come from owning assets deployed in a vibrant economy.

Americans thrive more than they would thrive if foreigners didn’t invest in America (or if foreigners invested less in America).

Here’s good news for all of us who live in the United States: as long as lots of people are willing to invest in the U.S. economy, we will enjoy benefits over time even if each of us Americans is a spendthrift.  It should make no difference to me or to you if those people who do invest in the United States have passports issued by Uncle Sam or have passports issued by some other government.  If you are a spendthrift, you will not, of course, benefit from this thriving economy as much as you would if you became one of the savers and investors.  But whatever is your own personal rate of saving and success at investing, your material prosperity will be higher the greater is the willingness of other people – including foreigners – to invest in the American economy.

Put differently, if you become the only American willing to save and invest, and if foreigners (for whatever reason) stop investing in the American economy, you will likely be much worse off over time than you would be if you continue your spendthrift ways and foreigners continue their saving and investing-in-America ways.

Marvelous Arrangement

One fact of arithmetic that ceaselessly impresses me is that the number of different ways to arrange, in a single dimension, a mere 20 items is much larger than is the number of seconds in ten billion years.  (I first encountered this fact in something written by Paul Romer, and was reminded of it by something written by Virginia Postrel.)  This simple yet startling arithmetical ditty contains important lessons about economics -- some of which I explore in my latest column for the Pittsburgh Tribune-Review.

My conclusion is this:

Private property ensures that resource arrangements will not be random. Each resource owner chooses a course of action only if it promises rewards to the owner that exceed the rewards promised by all other available courses of action.

For each consumer, this means spending money on those items that best satisfy his individual tastes. For each producer, this means finding those uses that promise the highest profit. Because profit in free markets comes from satisfying as many consumers as possible, each producer is forever on the lookout for better ways to use his resources to satisfy consumers.

Because private property gives to each resource owner (including people who own just their own labor) both the power to reject unattractive offers and incentives to use his resources in ways that generally do much to help others, the result is a system of peaceful, productive, mutual accommodation.

F.A. Hayek called this result a "marvel." It's a breathtakingly complex and productive arrangement of countless resources. This arrangement emerges and evolves over time as the result of billions of individual, daily, small decisions made by persons seeking to better employ their resources and labor in ways that other people find helpful.

Although unplanned, this order is governed by a strict logic -- that of mutual accommodation -- a logic contained only in the institution of private property.