John Nye on revisionist economic history and having too many hobbies

From Conversations with Tyler comes this audio in which Tyler Cowen interviews economic historian Professor John Nye.

Is John Nye the finest polymath in the George Mason economics department?

Raised in the Philippines and taught to be a well-rounded Catholic gentleman, John Nye learned the importance of a rigorous education from a young age. Indeed, according to Tyler he may very well be the best educated among his colleagues, having studied physics and literature as an undergraduate before earning a master’s and PhD in economics. And his education continues, as he’s now hard at work mastering his fourth language.

On this episode of Conversations with Tyler, Nye explains why it took longer for the French to urbanize than the British, the origins of the myth of free-trade Britain, why Vertigo is one of the greatest movies of all time, why John Stuart Mill is overrated, raising kids in a bilingual household, and much more.

Revised version: Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the firm. In particular it briefly considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the firm should, in many ways, be more properly called the proto-neoclassical theory of the firm

Being neoclassical before i... by on Scribd

Scott Lincicome: in defense of free trade

From Conversations with Bill Kristol comes this interview with Scott Lincicome on a defense of free trade.

Scott Lincicome is a leading international trade attorney, adjunct scholar at the Cato Institute, and senior visiting lecturer at Duke University. In this Conversation, Lincicome explains the system of free trade agreements and alliances that the U.S. has built over many decades and how the system contributes to peace and prosperity for America. Lincicome also shares his perspective on the renegotiation of NAFTA, the decision not to participate in the Trans-Pacific Partnership (TPP), and other trade agreements. Finally, Kristol and Lincicome consider where Republicans and Democrats stand on trade today—and where the parties are likely to go in the future.

Don Boudreaux on free trade, protectionism, and the China shock

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Don Boudreaux on Free Trade, Protectionism, and the China Shock.

Don Boudreaux is a professor of economics at George Mason University as well as the co-director of the Program on the American Economy and Globalization at the Mercatus Center. He joins the show today to talk about the future of trade and globalization. David and Don also discuss the history of protectionism in the US, President Trump’s trade policies, and why the China Shock thesis may signal bad economics.

Broken market or Broken policy? The unintended Consequences of restrictive planning

Is the title of an article by Paul Cheshire in the National Institute Economic Review, Volume 245, No. 1, August 2018.

The abstract reads:

This paper summarises the evidence from recent research relating to the British Planning system’s impact on the supply of development. Planning serves important economic and social purposes but it is essential to distinguish between restricting development relative to demand in particular places to provide public goods and mitigate market failure in other ways, including ensuring the future ability of cities to expand and maintain a supply of public goods and infrastructure; and an absolute restriction on supply, raising prices of housing and other urban development generally. Evidence is presented that there are at least four separate mechanisms, inbuilt into the British system, which result in a systematic undersupply of land and space for both residential and commercial purposes and that these have had important effects on both our housing market and the wider economy and on welfare more widely defined.

The article's conclusion reads,

The evidence shows, then, that our planning system is restrictive in terms of the overall supply of land and housing space in the aggregate. It is not just locally restrictive in order to preserve land of significant environmental quality which in its unbuilt state generates amenity or has recreational value. Such purely local restrictions are likely to have positive welfare effects although the costs they impose also need to be taken into account. Overall restrictiveness of supply relative to demand, in the absence of such environmental gains, does not increase welfare but does increase the price of housing relative to incomes, so reduces welfare, and has, as we have seen, unintended adverse consequences; for example on the length of commuting.

Our planning system imposes this overall restrictiveness by means of at least four separate mechanisms. Its decision making is systemically restrictive because results of applications and conditions imposed for ‘affordable’ housing are unpredictable, so development risk is increased; it imposes quantitative restrictions on the supply of space (where it is most valued) by its imposition of Green Belts and height controls; its mechanism for deciding how much land to allocate for housing ignores the most important determinant of demand, so systematically undersupplies land; and there is substantial variation in local restrictiveness measuredby the proportion of applications refused.

Since all have the effect of reducing the supply of housing and other development relative to demand this drives up prices in real terms. Not only has this made housing increasingly unaffordable but it has had very regressive distributional effects, especially redistributing assets to older home owners. There are other unintended effectsof more restrictive planning. A more restrictive pattern of local decisions on housing proposals causes a substantial increase over time in the proportion of local homes that are empty. Not only that but greater local restrictivenesssignificantly increases the average length of commutes for those working locally. There is also evidence consistent with Green Belts increasing commuting distances as workers leap frog out to buy less expensive housing space. This increases the spatial extent of cities even if it reduces the footprint of urbanisation.

The extent of the price distortions induced by restrictions on the supply of land and housing mean that there is a misallocation of resources. Even in the US, where overall restrictiveness has historically been considerably less than in Britain, it has been estimated (Hseih and Moretti, 2017) that GDP would have been some 13.5 per cent higher had not restrictions on building slowed the flowof labour to the highest productivity locations over the period 1964 and 2009. No similar estimates have been done for other countries. Cheshire et al. (2015), however, did estimate that the loss of total factor productivity in the supermarket sector in England, as a result of forcing them to locate on particular sites in ‘town centres’, was 32 per cent just between 1996 and 2008. Cheshire and Hilber (2008) estimated that the restriction on the supply of office space in British cities reached the equivalent of a tax on construction costs of 800 per cent in London’s West End and even in less prosperous cities, such as Birmingham, averaged 250 per cent: there is certainly evidence that the economic effects of planning which is generically restrictive, can be large.

To sum up, there seem to be many reasons for concluding that our policies determining housing supply are broken but no obvious reason to conclude that the housing crisis results from a ‘broken housing market’.

So the answer to the question in the title seems to be broken policy. This raises the interesting and important question of, if you did a similar study for New Zealand would you get similar results? I'm very afraid you would. But just how broken are New Zealand's housing policies? And how costly are these blunders?

Housing and the economy

Two minutes on the topic of "Housing and the Economy" from Jagjit Chadha, Director of the National Institute of Economic and Social Research in the UK. The sorts of issues he talks about apply in New Zealand as well as in the UK.

Being neoclassical before it was cool to be neoclassical: the case of the theory of the firm

This essay looks at the contribution made by pre-1870 writers to what would later become the neoclassical theory of the firm. In particular it briefly considers the work of Dionysius Lardner, Johann von Thunen, John Stuart Mill, Charles Ellet, Jr. and Antoine Augustin Cournot. The neoclassical theory of the firm should, in many ways, be more properly called the proto-neoclassical theory of the firm

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JS Mill and the firm

Another, possible, proto-neoclassical, who wrote on the economics of the firm, if not strictly on the theory of the firm, was John Stuart Mill. While Mill is most often thought of as a classical economist, Ekelund and Hebert (2002: 198) argue he can be considered as a proto-neoclassical economist.

According to Schumpeter (1954: 556), Mill introduced the concept of the entrepreneur to the English speaking economics literature. The influence of J. B. Say helped Mill go beyond just analysing the role of the owner of the factors of production and begin focusing on the role of the entrepreneur and on the internal organization of the firm (Zouboulakis 2015: ???).

For Mill, the number of collective organisations, including firms - both investor controlled and co-operatives, would increase as wealth increases,

"[a]s wealth increases and business capacity improves, we may look forward to a great extension of establishments, both for industrial and other purposes, formed by the collective contributions of large numbers ; establishments like those called by the technical name of joint-stock companies, or the associations less formally constituted, which are so numerous in England, to raise funds for public or philanthropic objects, or, lastly, those associations of workpeople either for production, or to buy goods for their common consumption, which are now specially known by the name of co-operative societies" (Mill 1848: 699).

Mill gave the first discussion of joint production and of the importance of the scale of production. With regard to joint production, George Stigler writes,

"Mill clearly formulated the problem of joint production, i.e., production of two or more products in fixed proportions. He gave the complete and correct solution: the sum of the prices of the products must equal their joint cost, and the price of each product is determined by the equality in equilibrium of quantity supplied and quantity demanded" (Stigler 1955: 297).

As to the significance of the scale of production Stigler adds that,

"Mill's chapter (Bk. I, c. IX), " Of production on a large, and production on small, scale", is the first systematic discussion of the economies of scale of the firm to be found in a general economic treatise. It would take us afield to analyse this chapter in detail, but we may point out that Mill was the first economist to notice that one can deduce information on the costs of firms of different sizes from their varying fortunes through time" (Stigler 1955: 298).

Zouboulakis (2015: ???) writes that "[a]mong the advantages of production on a large scale, he [Mill] mentions the more advanced division of labour, the less than proportionate increase of "the expenses of a business”, the greater possibility of investment to "expensive machinery" and ``the saving in the labour of the capitalists themselves" (1848, 132-6)".

Mill also scrutinised the advantages and disadvantages of the joint stock company. "On the one hand, only such a company can afford the amount of capital necessary to build important projects such as a railway, and to guarantee the continuity of such costly and risky business operations such as banking and insurance. On the other hand, he recognizes that "joint stock or associated management" has some disadvantages over ``individual management"" (Zouboulakis 2015: ???). Mill, like Smith, saw the potential for, what today we would call, principal-agent problems in the relationship between the owners and the managers of joint stock companies. The interests of the managers may not be aligned with the interests of the owners. When discussing methods to the alleviate such problems Mill makes the observation that

"[i]n the case of the managers of joint stock companies, and of the superintending and controlling officers in many private establishments, it is a common enough practice to connect their pecuniary interest with the interest of their employers, by giving them part of their remuneration in the form of a percentage on the profits. The personal interest thus given to hired servants is not comparable in intensity to that of the owner of the capital ; but it is sufficient to be a very material stimulus to zeal and carefulness, and, when added to the advantage of superior intelligence, often raises the quality of the service much above that which the generality of masters are capable of rendering to themselves" (Mill 1848: 141).

Interestingly, such observations give Mill more of a proto-modern feel than a proto-neoclassical feel. But, again, like Smith, Mill did not develop his insights into a full-blown theory of the firm.

Refs.:

• Mill, J.S. (1848). Principles of Political Economy with some of their Applications to Social Philosophy, 7 th edition 1873, re-edited by William J. Ashley 1909, New York: A. Kelley reprint, 1973.
• Schumpeter, J.A. (1954). History of Economic Analysis, London: Allen & Unwin.
• Zouboulakis, Michel S. (2015). 'Elements of a Theory of the Firm in Adam Smith and John Stuart Mill'. In George C. Bitros and Nicholas C. Kyriazis (eds.), Essays in Contemporary Economics: A Festschrift in Memory of A. D. Karayiannis (pp. 45-52), Heidelberg: Springer Cham.

Johnann von Thunen and the (proto)neoclassical theory of the firm

Johnann Theunen has been described as a proto-neoclassical. One reason for this is the, before his time, contribution he made to the theory of the firm. While Dionysius Lardner analysed the firm's output market, Thunen looked at the firm's input markets. He argued that the firm should use inputs up to the point where the value of the marginal product of the input equals the price of that input. His treatment of the issue has become known as the marginal productivity theory of distribution. To illustrate Thunen's argument we will look at the simplest possible model.

We will assume a central marketplace which is surrounded by agricultural land, all of which is of equal fertility. There will be one good, which we call wheat. The landowners hire a single input to production, labour. L units of labour produces W(L) units of wheat. The price of wheat in the marketplace is p while the costs of transporting the wheat to the market is $t per mile per ton. Thus the earnings generated from wheat grown m miles away from the marketplace is p-t.m per ton. Total revenue from the wheat will be W(L).(p-t.m). Assume that the landowner pays workers a wage of w resulting in a total wage bill of w.L. This means that the landowner's profit from producing wheat m miles from the marketplace will be W(L).(p-t. m)-w.L.

Further, assume that the landowner selects L to maximise profits. This results in a problem we can represent mathematically as

max_L W(L).(p-t.m)-w.L

Maximising this objective function with respect to L gives the first order condition,

(dW(L*)/dL).(p-t.m)-w=0

this implies

(dW(L*)/dL).(p-t.m)=w

where dW(L*)/dL is the marginal product of labour and (dW(L*)/dL).(p-t.m) is the value of the marginal product of labour. Equation \ref{thunen} tells the firm it wants to select the level of labour such that the value of the marginal product of labour equals the marginal cost of labour, the wage rate.

Put more generally, a profit maximising firm will choose the level of an input so that the value of the marginal product of the input equals the price of that input. Therefore, from the point of view of a firm, the theory indicates how many units of a factor it should demand.

Blaug (1985: 17-8) sums up Thunen's analysis by saying,

[h]is analysis culminates in the perfectly modern statement that net revenue is maximized when each factor is employed to the point at which its marginal value product (Wert des Mehrertrags) is equalized to its marginal factor cost (Mehranfwand). Although the discussion proceeds in verbal terms, illustrated by numerical examples, Thunen correctly points out that the marginal product of a factor is a partial differential coefficient of a multivariable production function. Moreover, apart from clearly recognizing the distinction between fixed and variable factors, and between the average and the marginal returns of a factor, he took great care to define the inputs of capital, labor, and land in strictly homogeneous units, observing that this condition was rarely obtained in practice--this too was literally more than sixty years ahead of his time.

Refs.:

• Blaug, Mark (1985). 'The Economics of Johann Von Thunen', Research in the History of Economic Thought and Methodology, 3: 1-25.
• Thunen, Johann H. (1826; 1850; 1863). Der isolierte Staat in Beziehung auf Landwirtschaft und Nationalokonomie. Pt. I: Untersuchungen uber den Einfluss, den die Getreidepreise, der Reichtum des Bodens und die Abgaben auf den Ackerbau ausuben. Hamburg: Perthes; Pt. II: Der naturgemasse Arbeitslohn und dessen Verhaltniss zum Zinfuss und zur Landrente. Rostock: Leopold; Pt. III: Grundsatze zur Bestimmung der Bodenrente, der vorteilhaftesten Umtriebszeit und des Werts der Holzbestande von verschiedenem Alter fur Kieferwaldungen. Rostock: Leopold. English translation, The Isolated State, Volume 1. Carla Wartenberg, trans. Oxford: Pergamon Press, 1966; Volume 2 in The Frontier Wage. B. W. Dempsey, trans. Chicago: Loyola University Press, 1960.

Latest Blogwatch column

My Blogwatch column from the latest issue (Issue 61, April 2018) of the NZAE magazine Asymmetric Information.

Sam Hammond on co-determination, corporate governance, and the accountable capitalism act

From David Beckworth’s podcast series, Macro Musings comes this audio of an interview with Sam Hammond on Co-Determination, Corporate Governance, and the Accountable Capitalism Act.

Sam Hammond is a policy analyst and covers topics in poverty and welfare for the Niskanen Center. Sam is a previous guest on Macro Musings, and he joins the show today to talk about his new article in National Review which addresses Senator Elizabeth Warren’s new proposal, the Accountable Capitalism Act, and its potentially negative effects. David and Sam also discuss the problematic stereotypes surrounding ‘corporate bigness’, the positive and negative features of co-determination, and why we need universal safety nets.

Dionysius Lardner and the theory of the firm

The classical economists did not leave us much in terms of a theory of the firm. But one person who did make a contribution during the later classical era, albeit a contribution largely forgotten now, was Dionysius Lardner. Lardner is part of a group of pre-1870 writers that Ekelund and Hebert (2002) has referred to as "Proto-Neoclassicals". They summarise Lardner's contribution made in his 1850 book Railway Economy as he "[a]nalyzed railroad pricing structures; developed simple and discriminating monopoly analysis; analyzed monopoly firm in terms of total cost and total revenue, both mathematically and graphically (with an implicit demand curve)" (Ekelund and Hebert 2002: Table 1, p. 199).

One important contribution Lardner did make was to foreshadow aspects of the neoclassical theory of the firm. Lardner modelled a profit maximising firm and analysed its choice of price (and thus implicitly quantity) using revenue and cost curves, and implicitly a demand curve. He effectively showed that a profit maximum would occur when "marginal revenue" equals "marginal cost".

To understand Lardner's reasoning consider Figure 1

Figure 1

Source: Lardner (1850: 288).

In this Figure, the solid bell-shaped curve is what we would refer to today as a total revenue curve, but where the curve is graphed in revenue/output-price space rather than the standard revenue/quantity space, that is, the horizontal axis measures the price of output. At low prices revenue is also low, but as demand is inelastic revenue increases as price increases. It reaches a maximum, point P in Figure 1, and then as demand becomes more elastic, revenue falls as price continues to increase. While Lardner did not argue explicitly in terms of decreases elasticity, he did come close,

"[n]ow, if a less value still be assigned to the tariff, such as Om", the receipts will be augmented, because the influence of the increased number of objects booked, and the increased distances to which they are carried, owing to the diminution of the tariff, will have a greater effect in increasing the gross receipts than the reduction of the tariff has in diminishing them. By thus gradually diminishing the tariff, the traffic will increase both in quantity and distance, and the gross receipts will be placed under the operation of two contrary causes, one tending to increase, and the other to diminish them. So long as the influence of the former predominates, the gross receipts will increase ; but when the effect of the reduction of the tariff counterpoises exactly the effect of the increase of traffic in quantity and distance, then the increase of the gross receipts will cease. After that, the influence of the reduction of the tariff in diminishing the receipts will predominate over the influence of the increased traffic in augmenting them, and the consequence will be their diminution" (Lardner: 287-8).

The negatively sloped dashed line, Yy, is the total cost curve, again where the curve is graphed in cost/output-price space rather than cost/quantity space. This explains why the curve is negatively sloped. As the price of output increases the quantity demanded falls, i.e., implicitly Lardner is using a demand curve here, and as quantity falls the variable costs of production fall. Fixed costs, the vertical distance Xy, still needed to be paid. Lardner's cost curve shows total costs, fixed plus variable, declining due to the reduction in variable costs.

Lardner notes that the profit maximising point is to be found somewhere between P and s' in Figure 1, at a point where the vertical height of the revenue and cost curves decrease at the same rate. Fortunately, he then clarifies this by stating,

"[t]his may be geometrically expressed by stating it to be the point at which the two curves become parallel to each other" (Lardner 1850: 292).

This observation would be expressed today by saying that "marginal revenue" equals "marginal cost". Note however that for Lardner both "marginal revenue" and "marginal cost" would be defined in terms of the derivative with respect to output-price rather than quantity.

Lardner's explanation also shows that the profit maximising price is greater than the revenue maximising price, point P, that is, the profit maximising quantity is less than the revenue maximising quantity.

Lardner also hints at the advantages of price discrimination, insofar as he sees an advantage to having a lower tariff [price per mile per ton] on longer distances [think, larger quantities of "railway services"]. For example he writes,

"[i]t is clear, therefore, that every reduction which can be made on the tariff affecting the larger class of distances, will have the effect of increasing the area over which the producer can carry on a profitable business, and will proportionally increase the available traffic of the railway. For lesser distances, the reduction of the tariff will only have the effect of augmenting the quantity of the articles transmitted, and this can only be effected in the proportion in which the reduction of the tariff can effect a diminution of price in the market.

A due consideration of these circumstances will easily demonstrate the advantage which must result to the railways from such a graduated tariff as would favour transport to greater distances, [ \dots ]" (Lardner 1850: 299)

and he also said,

"[i]t follows, therefore, that for traffic generally, but more especially for every description of merchandise and of live stock, a tariff graduated upon the principle of diminishing as the distance transported increases, must be the source of largely augmented profits, [ \dots ]" (Lardner 1850: 301)

All this explains why Mark Blaug can write that Railway Economy is "a book containing the first exposition in English of what approximates to the modern [neoclassical] theory of the firm" (Blaug 1997: 293).

Refs.

• Blaug, Mark (1997). Economic theory in retrospect, 5th ed., Cambridge: Cambridge University Press.
• Ekelund, Robert B. Jr. and Robert F. Hebert (2002). 'Retrospectives: The Origins of Neoclassical Microeconomics', Journal of Economic Perspectives, 16(3) Summer: 197-215.
• Lardner, Dionysius (1850). Railway Economy; A Treatise on the New Art of Transport, its Management, Prospects, and Relations, Commerical, Financial, and Social, with an Exposition of the Practical Results of the Railways in Operation in the United Kingdom, on the Continent, and in America, London: Taylor, Walton, and Maberly.

The development of agriculture

From the History of the World podcast comes these two podcasts on the development and spread of farming.

F. A. Hayek: Economics, Political Economy and Social Philosophy

From the Cato Institute comes this audio of an interview of Peter J. Boettke by Caleb O. Brown about Boettke's new book on F. A. Hayek.

The project of F. A. Hayek had its historical context, and it’s worth exploring. Peter J. Boettke is author of F.A. Hayek: Economics, Political Economy and Social Philosophy.

Series of Unsurprising Results in Economics (SURE)

If you, or your students, are looking for somewhere to publish your unsurprising results think about the new journal Series of Unsurprising Results in Economics (SURE).

SURE is an e-journal of high-quality research with “unsurprising”/confirmatory results and as such aims to mitigate the publication bias towards provocative and statistically significant findings.

Aim and Scope

The Series of Unsurprising Results in Economics (SURE) is an e-journal of high-quality research with “unsurprising” findings.

We publish scientifically important and carefully-executed studies with statistically insignificant or otherwise unsurprising results. Studies from all fields of Economics will be considered. SURE is an open-access journal and there are no submission charges.

SURE benefits readers by:

• Mitigating the publication bias and thus complementing other journals in an effort to provide a complete account of the state of affairs;
• Serving as a repository of potential (and tentative) “dead ends” in Economics research.

SURE benefits writers by:

• Providing an outlet for interesting, high-quality, but “risky” (in terms of uncertain results) research projects;
• Decreasing incentives to data-mine, change theories and hypotheses ex post or exclusively focus on provocative topics.

The editor is Dr Andrea K. Menclova, Department of Economics and Finance, University of Canterbury

To learn more, please visit: http://surejournal.org

The employment effects of minimum wages

There is a new NBER working paper out on The Econometrics and Economics of the Employment Effects of Minimum Wages: Getting from Known Unknowns to Known Knowns by David Neumark.

The abstract reads:

I discuss the econometrics and the economics of past research on the effects of minimum wages on employment in the United States. My intent is to try to identify key questions raised in the recent literature, and some from the earlier literature, that I think hold the most promise for understanding the conflicting evidence and arriving at a more definitive answer about the employment effects of minimum wages. My secondary goal is to discuss how we can narrow the range of uncertainty about the likely effects of the large minimum wage increases becoming more prevalent in the United States. I discuss some insights from both theory and past evidence that may be informative about the effects of high minimum wages, although one might argue that we first need to do more to settle the question of the effects of past, smaller increases on which we have more evidence (hence my first goal). But I also try to emphasize what research can be done now and in the near future to provide useful evidence to policymakers on the results of the coming high minimum wage experiment, whether in the United States or in other countries.

Discriminating firms suffer

A new working paper looks at the effects of the forced removal of Jewish managers affected the performance of firms in Nazi Germany. The is "Discrimination, Managers, and Firm Performance: Evidence from “Aryanizations” in Nazi Germany" and is by Kilian Huber (University of Chicago), Volker Lindenthal (University of Freiburg) and Fabian Waldinger (London School of Economics).

The paper shows, what you may expect, in that firms which discriminated against Jewish managers, suffered significant loses in performance.

We study whether antisemitic discrimination in Nazi Germany had economic effects. Specifically, we investigate how the forced removal of Jewish managers affected large German firms. We collect new data from historical sources on the characteristics of senior managers, stock prices, dividends, and returns on assets for firms listed on the Berlin Stock Exchange. After the removal of the Jewish managers, the senior managers at affected firms had fewer university degrees, less experience, and fewer connections to other firms. The loss of Jewish managers significantly and persistently reduced the stock prices of affected firms for at least 10 years after the Nazis came to power. We find particularly strong reductions for firms where the removal of the Jewish managers led to large decreases in managerial connections to other frms and in the number of university-educated managers. Dividend payments and returns on assets also declined. A back-of-the-envelope calculation suggests that the aggregate market valuation of firms listed in Berlin fell by 1.78 percent of German GNP. These findings imply that discrimination can lead to significant economic losses and that individual managers can be key to the success of firms.

So a non-discriminating firm (assuming there were some) would have a competitive advantage.

Pierre Lemieux on Peter Navarro's conversion

In the latest issue of Regulation, Pierre Lemieux writes on Peter Navarro's Conversion.

Navarro is an economist and director of the Office of Trade and Manufacturing Policy (OTMP), a White House agency created by President Trump. He is one of the rare economists to occupy a high-level advisory role in the White House. A Harvard University Ph.D., he is a stiff protectionist, which is rare among economists

Rare is something of an understatement!

Lemieux writes that

Navarro makes five distinct arguments against open trade with China and other countries. They can be summarized as follows:

• The impossible-competition argument: We cannot compete against a dirigiste and even totalitarian country like China. Trying to do so generates negative externalities.
• The fairness argument: “Unfair” trade is not free trade and is destroying the American economy.
• The trade deficit argument: The U.S. trade deficit is a serious problem that reduces gross domestic product and indicates unfair trade.
• The retaliation argument: Retaliatory protectionist measures are justified against protectionist countries; such retaliators are the real free-traders.
• The national security argument: Protectionism is required for reasons of national security.

Lemieux then examines each of these arguments and show what is wrong with them.

Lemieux concludes by saying,

Writing for Foreign Policy in March 2017, journalist Melissa Chan depicts Navarro as motivated by his love of media attention and his longing for political fame. He ran for public office several times, always unsuccessfully, and “morphed from registered Republican, to Independent, to Democrat, and back to Republican.” According to Chan, he is derided by well-regarded China analysts. Disregarding psychological and political speculations, one thing is sure: his arguments are not based on economic analysis.

To summarize my arguments, economics strongly suggests that the best trade policy is not to have one, to leave citizens alone to import or export as they wish. That’s true whether the country’s trading partners are free-traders or dirigistes like China. Free enterprise and economic freedom are not only efficient, they are what fairness is or should be about. There is no reason to be concerned with the trade deficit, except to the extent that it is caused by federal profligacy, in which case the solution is to solve the root cause of the problem. Retaliation only compounds other countries’ protectionism. National security is an easy protectionist excuse. Building a war economy in peace time is not acceptable in a free society.

The maintenance of economic freedom at home—which includes the freedom to import what one wants if one finds the terms agreeable—is the only individualist, coherent, and realistic policy. The young Peter Navarro seemed to understand that. Sadly, today’s Navarro does not.

Trump's trade policies have done the almost impossible, they have united economists across the entire political spectrum Unfortunately for Trump, they are united against him and the policies that Navarro has been advocating.

Things are not going well in Venezuela

Joshua Curzon at the Adam Smith Institute blog writes,

Hyperinflation in Venezuela has reached astonishing levels, making life extraordinarily difficult for ordinary people and causing immense economic damage. Inflation is currently running at some 200,000 per cent and is projected by the IMF to reach 1 million percent by the end of the year.

and he adds,

Using the salary of a full college professor as a benchmark, in the 1980s it took around 15 minutes of earnings to pay for one kilo of beef. In July 2017, this professor needed to work for 18 hours to pay for the same quantity. In mid-2018 he must work longer still, in the unlikely event beef can be found.

Prices are increasing at an ever faster rate. A large coffee with milk cost at least Bs.S.80 (Bs. 8,000,000) in Caracas on the 11th of September 2018, 78% more than the price of week before, and double what it cost 15 days ago and 220% more than five weeks ago.

As in all hyperinflations, the problems is that the government is printing too much money. Way too much!!

Venezuela’s monetary base – the amount of money printed by the government – increased by an extraordinary 30% in one week alone at the end of August. The move by the regime to remove 5 zeros from the currency and place greater emphasis on its Petro cryptocurrency (since revealed by a Reuters investigation to be largely imaginary) seems to have been a smokescreen for even greater money-printing.

In fact, it seems that physically printing money is beyond the means of the regime. As Venezuela’s banknotes are printed abroad, they have to be imported at significant cost to the government, which has led to severe shortages of physical cash. Since 2014, the number of active ATMS has plummeted to around 9,000, while card readers have multiplied.

But why print this amount of money, given you know what will happen?

The regime is printing money because it has little other means of staying afloat. It has largely destroyed the private sector through nationalisation and price control. Oil output is at its lowest level in more than 50 years and foreign reserves are at the same level as 1974 and plummeting downwards.

Hyperinflation is just another sign, if you needed one, that the regime's economic policies are just not working. You have to wonder just how long this can go on. Hopefully not too long.

Peter Boettke talks about Hayek

Professor Peter Boettke has been talking to a number of people about his new book, F. A. Hayek: Economics, Political Economy and Social Philosophy.

The Economic Rockstar


The Economics Detective


The Remnant with Jonah Goldberg