How an economist breaks up with his girlfriend.

Its nothing personal, its all about the cost-benefit analysis.

Yes, even Canadians like trade

From the late, great, and Canadian, trade economist Harry Johnson:

Second-best policies are usually recommended by third best economists working for fourth-best politicians ...

A first-best quote.

Beyond efficiency

A talk by Israel M. Kirzner in which he responds to to the ethical critics of the market order.

EconTalk this week

Louis Michael Seidman of Georgetown University talks with EconTalk host Russ Roberts about the United States Constitution. Seidman argues that the we should ignore the Constitution in designing public policy, relying instead on the merits of policy regardless of their constitutionality. Seidman defends his position by citing examples in the past where constitutionality has been ignored and says it would be better to recognize our disdain for the Constitution in a transparent way. In this lively conversation, Roberts pushes back against these ideas, citing the limits of reason and the dangers of using popular sentiment to determine policy.

The case against patents

This is the title of a new paper by Michele Boldrin and David K. Levine which appears in the latest issue (Vol. 27, Issue 1 Winter 2013) of the Journal of Economic Perspectives. Boldrin and Levine argue.

The case against patents can be summarized briefly: there is no empirical evidence that they serve to increase innovation and productivity, unless productivity is identified with the number of patents awarded—which, as evidence shows, has no correlation with measured productivity. Both theory and evidence suggest that while patents can have a partial equilibrium effect of improving incentives to invent, the general equilibrium effect on innovation can be negative. A properly designed patent system might serve to increase innovation at a certain time and place. Unfortunately, the political economy of government-operated patent systems indicates that such systems are susceptible to pressures that cause the ill effects of patents to grow over time. Our preferred policy solution is to abolish patents entirely and to find other legislative instruments, less open to lobbying and rent seeking, to foster innovation when there is clear evidence that laissez-faire undersupplies it. However, if that policy change seems too large to swallow, we discuss in the conclusion a set of partial reforms that could be implemented.

I am however reminded of a comment by Jean Tirole,

Consider the patent system. It has long been recognized that patents are an inefficient method for providing incentives for innovation since they confer monopoly power on their holders. Information being a public good, it would be ex post socially optimal to award a prize to the innovator and to disseminate the innovation at a low fee. Yet the patent system has proved to be an unexpectedly robust institution. That no one has come up with a superior alternative is presumably due to the fact that, first, it is difficult to describe in advance the parameters that determine the social value of an innovation and therefore the prize to be paid to the inventor, and, second, that we do not trust a system in which a judge or arbitrator would determine ex post the social value of the innovation (perhaps because we are worried that the judge might be incompetent or would have low incentives to become informed, or else would collude with the inventor to overstate the value of the innovation or with the government to understate it). A patent system has the definite advantage of not relying on such ex ante or ex post descriptions (although the definition of the breadth of a patent does). (Jean Tirole, "Incomplete Contracts: Where Do We Stand?" Econometrica, Vol. 67, No. 4 (Jul., 1999), pp. 741-781.)

So the real question is can you replace the current system with something that works better? Given how long the patent system has been around that maybe more difficult than its sounds.

Gemmell on state assets sales

In the past I have written on privatisation in general and the partial sales of state owned assets in particular. See also here. Norman Gemmell, has also been writing on asset sales, but in his case its in the New Zealand Herald. He says,

First, what might "selling off the nation's silverware" mean? This phrase seems designed to convey the notion that, like inherited family heirlooms, state assets will be lost to the nation forever if sold to the highest bidder.

So, what heirlooms might the sale of electricity companies involve?

Well, it could be, for example, that the singular pursuit of profit in this industry destroys some of the valuable natural assets that we prize - such as scenic beauty and pollution-free rivers. Sometimes, once damaged, these things are hard to recover and government ownership might better protect against this.

The problem with this argument is that even if we accept the need to protect our natural heritage, why should it be best to give government ministers and their bureaucrat advisers the right to decide the best balance between profit and protection? Politicians are subject to all sorts of covert lobbying over their decision-making, while public servants generally have pretty limited experience either of running commercial organisations or of environmental protection in practice.

Even trade union leaders in the industry would probably do a better job than government ministers. At least those leaders have more day-to-day experience of the relevant issues. But the wider point is that, as most countries' governments now recognise, the burden of proof for state ownership and control of commercial activity should be based on demonstrating why the private sector cannot be trusted. This is quite the opposite of the "family silverware" argument that generally presumes state ownership is optimal until proved otherwise.

So what of the argument that "governments have no right to sell, to the wealthy few, assets that belong to all taxpayers"? This is another myth. Taxpayers don't "own" any of these state assets. The Crown, administered by democratically elected governments, has given itself monopoly power over numerous aspects of our lives - from the legal system under which we must all operate to the "ownership" of large swathes of the New Zealand landmass.

Over generations, however, millions of New Zealanders' (and some foreigners'!) tax payments have helped to fund many commercially and socially profitable activities. These include building up assets such as schools, hospitals and valuable commercial enterprises such as the SOEs. (Most of our taxes of course went to pay for things we've already consumed - such as teachers' and nurses' salaries and welfare payments.)

So if the Government now wants to sell some of those SOE assets for cash it is merely transforming one type of state asset for another - the millions of dollars it will receive. The real issue here is what it then does with the cash. The two main options are: (1) invest them in another type of asset - such as building more schools and hospitals; or (2) spend the cash on things we currently need, such as teachers and social welfare benefits.

The first option is trading one asset for another. The Government essentially gives up an asset that paid it an annual dividend (potentially keeping taxes lower than they otherwise would have been). It replaces it with an asset that it hopes will give an annual social return - better educated children or whatever.

The second option - spending the cash from share sales immediately on public servants, welfare payments or lower taxes - does involve fewer state assets in total. But it represents the kinds of decisions we all (governments included) make every day - namely how much of our income to invest for the future, and how much to spend now.

The point about if the Government wants to sell some assets for cash it is merely transforming one type of state asset for another - the millions of dollars it will receive, in worth keeping in mind. As Gemmell says, what is really important is what the government does with the money.

Economists disagree?

Earlier I noted research that showed that economists agree ..... a lot. Now Justin Wolfers has to go and do the predictable and claim that economists disagree .... a lot.

But perhaps the best comment on the agree/disagree divide comes from Bryan Caplan when he writes,

Who's closer to the truth about economists' ideological divide: Dahl and Gordon, or Wolfers? My answer: it heavily depends on whether or not your sample includes the broader public. Compared to non-economists, economists enjoy an amazing consensus. But if you only compare us to one another, we're a contentious tribe.

Coase and Wang on How China Became Capitalist

The article How China Became Capitalist (pdf) by Ronald Coase and Ning Wang is from the January/February 2013 issue of the Cato Policy Report.

No one foresaw that the “socialist modernization” that the post-Mao Chinese government launched would in 30 years turn into what scholars today have called China’s great economic transformation. How the actions of Chinese peasants, workers, scholars, and policymakers coalesce into this unintended consequence is the story we tried to capture. Today, we don’t need to present any statistical data to convince you the rise of the Chinese economy, even though China still faces enormous challenges ahead. Many Chinese are still poor, far fewer Chinese have access to clean water than to cell phones, and they still face many hurdles in protecting their rights and exercising their freedom. Nonetheless, China has been transformed from the inside out over the past 35 years. This transformation is the story of our time. The struggle of China, in other words, is the struggle of the world.

Read the whole thing. Better still, read the book on which the article is based.

The French gold sink and the great depression

Douglas Irwin of Dartmouth College talks on The French Gold Sink and the Great Depression. The discussants are Charles Calomiris of Columbia University and James Hamilton of University of California, San Diego.

Antidumping protection hurts exports

Hylke Vandenbussche and Jozef Konings argue in an article at VoxEU.org that there is evidence to suggest that old-fashioned protection can have an unexpected negative effect on firms that are part of a global value chain. In an increasingly globalised world, exporters’ success seems to positively depend on the free entry of imports rather than the other way round.

Protection is often viewed as a powerful instrument to help domestic firms to raise their sales at the expense of foreign importers. But this view is now being challenged by recent research showing that the effects of protection really depend on the international orientation of the firms i.e. whether they are exporters or not. Protected firms that are well integrated in global value chains may actually lose sales whenever the imports of inputs are subject to protection. This observation may not come as a surprise, but it is important to realise that trade policy has not kept pace with this aspect of globalisation.

The main reason is that many of the current WTO rules governing trade protection stem from an era where trade models predicted that all domestic firms would benefit from import protection. Traditional theory models assumed that all firms in the protected industry are import-competing and only sell domestically. However, in recent years an increasing number of papers have shown that even within narrowly defined industries, firms can be very different. Some firms only produce for the domestic market, others mainly export or sell both domestically and internationally. Thus, the question that can be raised is whether all domestic firms benefit from import protection given that some of the protected firms may be exporters

What does this tell us about trade policy?

Some trade policy uses protection as an instrument to protect its domestic import-competing sector. If this policy does not take its negative externality on protected firms’ exports into account, it may have negative long-run consequences. Firms today no longer operate within the confines of a singular country or market, and their operations are increasingly international. Two decades ago, when firms mainly sold domestically, import protection laws may have been an effective way to temporarily boost a country’s trade surplus and current account. It is no longer the case today. In an increasingly globalised world, exporters’ success seems to positively depend on the free entry of imports rather than the other way round.

So we have another reason, if we needed one, to be anti-protection.

Things you learn at 2am

In their book The Marketplace of Christianity Ekelund Jr., Robert F. Hebert and Robert D. Tollison note that in 1805:

Spanish Index of Forbidden Books issued under the aegis of the Catholic Church banned hundred of titles, including Adam Smith's The Wealth of Nations and Burke's Reflections on the Revolution in France.

I can't quite see what Adam would have said that would get him banned.

The gains from trade

Chris Dillow at the Stumbling and Mumbling blog misses the point of the gains from trade:

Mario Balotelli's transfer to AC Milan highlights the Marxian critique of capitalism.

How can Man City get £19m for a player who is so obviously flawed? The answer's simple. It's because their great wealth means they did not need to sell him, and so could drive a hard bargain. The party in the strongest bargaining position gets most of the surplus from any trade.

How can Chris possible know the bargaining positions of the parties? How can he know the surplus that each party gets from the bargain. The important point to note here is that this trade was voluntary, both parties will only have agreed to it if they think they will gain from the bargain and the parties themselves are the only ones who know the amount of surplus they think they will get.

Rewards to grad school

Recently we had the Ministry of Education releasing figures on what students can earn after they graduate. Now we have Jason Sorens writing at the Pileus blog saying Don't Go to Grad School:

It’s not just PhD programs that aren’t worth it any more. Law school applications have plummeted. Full-time MBA’s in the United States are of doubtful value at best, especially when opportunity cost is considered. Even medical degrees are now a huge financial risk.

Instead of going to graduate school, students would be better advised to do more with their undergraduate degrees. The value of studying math is difficult to overstate. From engineering to biomedicine to insurance and finance, understanding calculus and advanced statistics opens doors. This is true regardless of whether a BA is useful mostly for human capital development or for signaling (math is hard for most people). I recommend a minor in math to most undergraduates. Alternatively, computer programming and web development can be self-taught — you don’t even need to go to college.

The rewards that the Ministry says are there is not the ones you want to think about. As Sorens notes you need to take into account the opportunity costs of getting a degree to judge whether it is worthwhile, and once you do you may well find it isn't. Also consider life time earnings, not just fives years worth.

Or you could just think of your education as a consumption good rather than an investment good.

The flattening hierarchy: not

Over the past few decades one of the things that management gurus, consultants and the popular business press have argued is that firms are flattening their hierarchies. Flattening typically refers to the elimination of layers in a firm's hierarchy (can't say I've seen much of it in universities) and the broadening of managers' spans of control. The alleged benefits flow primarily from pushing decisions downward to enhance market responsiveness and improve accountability and morale.

The questions this gives rise to are, Has flattening actually occurred? and where it has, Has it delivered on its promise? These questions are examined in a new paper in the Fall 2012 issue of the California Management Review. The paper, The Flattened Firm: Not As Advertised, is by Julie Wulf.. Wulf writes,

[ ... ] I set out to investigate the flattening phenomenon using a variety of methods, including quantitative analysis of large datasets and more qualitative research in the field involving executive interviews and a survey on executive time use [ ...] . Using a large-scale panel dataset of reporting relationships, job descriptions, and compensation structures in a sample of over 300 large U.S. firms over roughly a 15-year period, my co-authors and I began by characterizing the shifting “shape” of each company’s hierarchy. We focused on the top of the pyramid: after all, it is the CEO and other members of senior management who make the resource-allocation decisions that ultimately determine firm strategy and performance. Then, to dig deeper into how decisions are made in flattened firms, we complemented the historical data analysis with exploratory interviews with executives—what CEOs say—and analysis of data on executive time use-what CEOs do.

We discovered that flattening has occurred, but it is not what it is widely assumed to be. In line with the conventional view of flattening, we find that CEOs eliminated layers in the management ranks, broadened their spans of control, and changed pay structures in ways suggesting some decisions were in fact delegated to lower levels. However, using multiple methods of analysis, we find other evidence sharply at odds with the prevailing view of flattening. In fact, flattened firms exhibited more control and decision making at the top. Not only did CEOs centralize more functions, such that a greater number of functional managers reported directly to them (e.g., CFO, CHRO, CIO); firms also paid lower-level division managers less when functional managers joined the top team, suggesting more decisions at the top. Furthermore, CEOs report in interviews that they flattened to “get closer to the businesses” and become more involved, not less, in internal operations and subordinate activities. Finally, our analysis of time use indicates that CEOs of flattened firms allocate more time to internal interactions. Taken together, the evidence suggests that flattening transferred some decision rights from lower-level division managers to functional managers at the top. Flattening is associated with increased CEO involvement with direct reports—the second level of top management—suggesting a more hands-on CEO at the pinnacle of the hierarchy.

EconTalk this week

Peter Boettke of George Mason University talks with EconTalk host Russ Roberts about his book, Living Economics. Boettke argues for embracing the tradition of Smith and Hayek in both teaching and research, arguing that economics took a wrong turn when it began to look more like a branch of applied mathematics. He sees spontaneous order as the central principle for understanding and teaching economics. The conversation also includes a brief homage to James Buchanan who passed away shortly before this interview was recorded.

More agreement among economists

It is often said that economists always disagree, but is this true. If the results of a recent NBER working paper are anything to go by economists seem to be agreeing a lot. The paper is Views among Economists: Professional Consensus or Point-Counterpoint? by Roger Gordon and Gordon B. Dahl. The abstract reads,

To what degree do economists disagree about key economic questions? To provide evidence, we make use of the responses to a series of questions posed to a distinguished panel of economists put together by the Chicago School of Business. Based on our analysis, we find a broad consensus on these many different economic issues, particularly when the past economic literature on the question is large. Any differences are unrelated to observable characteristics of the Panel members, other than men being slightly more likely to express an opinion. These differences are idiosyncratic, with no support for liberal vs. conservative camps.

Interesting that differences are idiosyncratic with no support for a liberal vs. conservative divide. I'm sure non-economists would have thought there would be such a divide.

The questions referred to above can be found here.

One interesting question the panel was asked had to do with China-US Trade:

Question A: Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China.

85% of responses were either "Strongly agree or agree". I think the other 15% were "Did not answer". I can't find anyone who "Disagreed or Strongly disagreed".

On Free Trade:

Question A: Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.

85% "Strongly agree or Agree", 5% "Uncertain", the rest I think are "Did not answer". I can't find anyone who "Disagreed or Strongly disagreed".

Another question was on Ticket Resale:

Laws that limit the resale of tickets for entertainment and sports events make potential audience members for those events worse off on average.

68% "Strongly agree or Agree", only 8% "Strongly disagree or Disagree".

On Buy American:

Federal mandates that government purchases should be “buy American” unless there are exceptional circumstances, such as in the American Recovery and Reinvestment Act of 2009, have a significant positive impact on U.S. manufacturing employment.

49% "Strongly disagree or Disagree". 10% "Agree". 0% "Strongly agree".

On Rent Control:

Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.

81% "Strongly disagree or Disagree". 2% "Agree". 0% "Strongly agree".

Is the financial sector too large?

A question asked by Greg Mankiw over at his blog. He points us to two possible answers.

This first of these is The Growth of Modern Finance by Robin Greenwood and David Scharfstein. Their abstract reads:

The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or “shadow banking”). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking – the main areas of growth in the financial sector – has been socially beneficial.

They conclude,

Our objective in this paper has been to understand the activities that contributed to the growth of finance between 1980 and 2007, and to provide a preliminary assessment of whether and in what ways society benefited from this growth.

Our overall assessment comes in two parts. First, a large part of the growth of finance is in asset management, which has brought many benefits including, most notably, increased diversification and household participation in the stock market. This has likely lowered required rates of return on risky securities, increased valuations, and lowered the cost of capital to corporations. The biggest beneficiaries were likely young firm, which stand to gain the most when discount rates fall. On the other hand, the enormous growth of asset management after 1997 was driven by high fee alternative investments, with little direct evidence of much social benefit, and potentially large distortions in the allocation of talent. On net, society is likely better off because of active asset management but, on the margin, society would be better off if the cost of asset management could be reduced.

Second, changes in the process of credit delivery facilitated the expansion of household credit, mainly in residential mortgage credit. This led to higher fee income to the financial sector. While there may be benefits of expanding access to mortgage credit and lowering its cost, we point out that the U.S. tax code already biases households to overinvest in residential real estate. Moreover, the shadow banking system that facilitated this expansion made the financial system more fragile.

The second is Is Finance Too Big? by John H. Cochrane. He concludes,

Greenwood and Scharfstein’s big picture is illuminating. The size of finance increased, at least through 2007, because fee income for refinancing, issuing, and securitizing mortgages rose; and because people moved assets to professional management; asset values increased, leading to greater fee income to those businesses. Compensation to employees in short supply – managers – increased, though compensation to others – janitors, secretaries – did not. Fee schedules themselves declined a bit.

To an economist, these facts scream “demand shifted out.” Some of the reasons for that demand shift are clearly government policy to promote the housing boom. Some of it is “government failure,” financial engineering to avoid ill-conceived regulations. Some of it – the part related to high valuation multiplied by percentage fees – is temporary. Another part – the part related to the creation of private money-substitutes – was a social waste, has declined in the zero-interest rate era, and does not need to come back. The latter can give us a less fragile financial system, which is arguably an order of magnitude larger social problem than its size.

The persistence of very active management, and very high fees, paid by sophisticated institutional investors, such as nonprofit endowments, sovereign wealth funds, high-wealth individuals, family offices, and many pension funds, remains a puzzle. To some extent, as I have outlined, this pattern may reflect the dynamic and multidimensional character of asset-market risk and risk premiums. To some extent, this puzzle also goes hand in hand with the puzzle why price discovery seems to require so much active trading. It is possible that there are far too few resources devoted to price discovery and market stabilization, i.e. pools of cash held out to pounce when there are fire sales. It is possible that there are too few resources devoted to matching the risk-bearing capacities of sophisticated investors with important outside income or liability streams to the multidimensional time-varying bazaar of risks offered in today’s financial markets.

Surveying our understanding of these issues, it is clearly far too early to make pronouncements such as “There is likely too much high-cost, active asset management,” or “society would be better off if the cost of this management could be reduced,“ with the not-so-subtle implication ( “Could be?” By whom I wonder?) that resources devoted to greater regulation (by no less naïve people with much larger agency problems and institutional constraints) will improve matters.

Reasons for liking a carbon tax

This article from the National Journal argues in favour of a carbon tax:

To paraphrase Ronald Reagan paraphrasing Will Rogers, some people around here never met a tax they didn’t dislike. Others have met just one: a carbon tax.

A number of the nation’s leading conservative economists, who as a rule do not like taxes, are touting some benefits to a federal carbon tax. That group includes Gregory Mankiw, a former Romney adviser and George W. Bush-era chairman of the Council of Economic Advisors; Douglas Holtz-Eakin, Sen. John McCain’s 2008 chief economic adviser; and Art Laffer, progenitor of Reagan’s treasured Laffer Curve.

Such a tax could raise an estimated $1.5 trillion over 10 years and help wean the country from carbon-intensive fuels. And with Congress set for a season of budget fights and a possible effort to overhaul the tax code, the carbon tax is likely to reenter the conversation about getting America’s fiscal house in order.

So, it’s worth understanding why the economics of a carbon tax might make it appealing to some conservative economists, and why many political arguments about taxes don't apply to it.

The reasons that some economists like a carbon are outlined here.

The basic reasoning is,

A carbon tax is a special kind of tax called a Pigovian tax, named after 20th-century British economist Arthur Pigou.

Normally, a competitive market produces just the right amount of a good. If there are not enough people selling glue, its price will rise and people will cash in by selling more glue. If too many people are selling glue, the price will go down, and some people will find it’s not worth their while to sell glue anymore. Either way, the market should settle at the point where the cost of producing more glue is equal to the value people place on that additional glue.

But Pigou realized that if a producer wasn’t paying for the full cost of producing a good, they would produce too much of it anyway and everyone else would foot the bill. Imagine that making glue is expensive because it costs a lot to cart away all the horse carcasses used in its production. There’s not going to be a lot of glue because only people who really like glue will be willing to pay to produce it.

Now imagine that instead of carting away the dead horses, glue factories realize they can dump them in nearby rivers for free. All of a sudden, it becomes a lot cheaper to make glue, so the price goes down. At a price like this, you can’t afford not to buy glue, so people consume more of it, and new glue factories pop up.

It all looks like economic growth, until the dead horses start piling up, and people start getting sick. Then they get a bunch of medical bills and the government has to spend money cleaning up the river. The sticky-fingered glue barons don’t mind much, because they can afford to buy the expensive houses upriver, and when the cost of cleanup gets spread to everyone, the cost to them is a pittance compared to their newfound glue fortunes.

Meanwhile, the tape users are fuming. They’re getting sick from glue they don’t even use, and the horse-dredgings are driving up their tax bill. And because a bunch of the former tape-makers have jumped on the glue bandwagon, there’s now a tape shortage. It’s a mess.

When you account for the costs of sickness and cleanup, each tub of glue costs $20 to produce. But the glue factories don’t pay for this, so they can sell glue at a going rate of $12. Glue that’s only worth $12 is being made at a cost of $20, so $8 is being wasted on each new tub of glue.

In this case, Pigou would prescribe an $8 tax on glue. Now, it costs glue factories $20 to produce glue, and only people willing to pay that much for glue will buy it. Less glue is produced, so fewer dead horses end up in the river, and the revenue raised from the tax can be used deal with the problems caused by the ones that do.

Coase in his famous 1960 article, The Problem of Social Cost, points out some problems with Pigou's approach.

Administrative bloat at universities

This is a topic much discussed at universities ........ by non-administrators. Arnold Kling writes at his askblog blog

In universities, I would argue that the growth in administrators is symptomatic, not an independent cause. The problem is what is known in the software business as scope creep or feature bloat. The more you add features to software, the more complex it becomes, and the harder it becomes to manage. Organizations are the same way.

Universities, like government, add new programs with alacrity, while almost never discarding old programs. Any university today has many more majors, many more activities, and many more technologies in use than was the case 30 years ago.

How do you introduce efficiency and cost saving at universities? Narrow scope and reduce features. Do students choose your school because of the chemistry department? If not, then get rid of it. Better to have three excellent departments than dozens of mediocre ones. Let students take courses on line in the ones that you do not cover.

The basic point is that if you really want to reduce administrative overhead, you have to think in terms of radically reducing scope. The downside of trying to do this is the fight you would get from powerful groups of insiders who have much to loose. Canterbury has tried to get rid of academic programs and has been far from successful at it. Interestingly even when academic staff do go the number of administrators that go seems much less.

Mercantilism and its contemporary relevance

Peter Boettke over at the Coordination Problem argues that,

[Dani] Rodrik claims that "The liberal model has become severely tarnished, owing to the rise in inequality and the plight of the middle class in the West, together with the financial crisis that deregulation spawned." But the reason for this is precisely because for the past 6 decades it hasn't only been the Asian countries that have pursued Mercantlist policies (as Rothbard explained 50 years ago).

So while Rodrik is basically right when he says: "The history of economics is largely a struggle between two opposing schools of thought, liberalism' and 'mercantilism.'" He is off the mark when he states that: "Economic liberalism, with its emphasis on private entrepreneurship and free markets, is today’s dominant doctrine." This is true only in rhetoric, but not in the reality of economic policy practice.

One may have thought that Adam Smith killed off mercantilism more than two hundred years ago, but no. As Boettke notes the struggle between liberalism and mercantilism has be long and if Rodrik is anything to go by has yet to be won. One thing people like Rodrik are good at is to blame recent, and not so recent, economic problems on liberalisation and deregulation despite the fact that there has been little serious attempts at either. As Boettke adds,

Every where we turn in our economic lives we can see the grabbing hand of the state. Throughout the western world we have bloated public budgets, the manipulation of money and credit, obstructionist regulations, and numerous measures to weaken the discipline of profit and loss. In short, we have state controlled market economies.

This look more like a mercantilist world than a economically liberal one.