Pete Boettke Points Out Economists’ Common Belief In Unicorns

boettkeI fancy myself a collector of good stories and Pete Boettke told a great one at the recent celebration of the 40th anniversary of F.A. Hayek’s Nobel Prize.

Unfortunately, I think it’s gotten a little buried (along with Vernon Smith’s excellent lecture) on social media and in the blogosphere, due to articles, posts and comments, replying to a certain exchange at the same event, with which a certain circle will already be familiar (see here, here, here, etc.).

So I wanted to pull this story out and give it its due as a short, impactful, illustration of not only important economic principles but of how these principles are sometimes applied in the too often echo-chamber of research/policy economics. I think here he drives directly to the heart of some presumptions that underlie those that think regulatory failure should just be met with shiny, fancy, NEW regulations.

Pete Boettke, responding to whether new/more/better housing regulations would stop a future housing bubble, started with this story:

Many years ago I was actually at a conference with Pete Leeson, and Ann Krueger said, ‘Look, look, we all love the market. What we need is reasonable regulation that’s not capturable by interests.’

And I raised my hand and I said, ‘What if that’s a null set*?’

And then Andre Shleifer… he chuckled and said, ‘Why are you so unreasonable?’ But the question never got answered.

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Twittering About Minimum Wage

@yipeedog I guess since higher wages hurt the economy, you wouldn’t mind giving up most of your paycheck.”

This lovely note was on my Twitter feed this morning in reply to this article – A Higher Minimum Wage Harms the Economy http://t.co/If1KpAX5Me. I repost it here because it is absolutely representative of the devolution and conclusion of every recent discussion I have had regarding minimum wage laws (and the prospect of a Federal increase in the same).

Each of these exchanges follow a fairly similar track.

I note that jobs are created when an activity can generate value in excess of the cost of performing the activity. Seems pretty straight forward, an employer will hire if the employee produces net positive revenue after all expenses (wages, benefits, taxes, computer, desk, pens, etc.) are factored in. Thus, if you raise the cost of one of the expense elements you decrease the net revenue (the “marginal value”). It also seems totally reasonable to then conclude that SOME increases will cause the net calculation to turn negative on SOME jobs. Net negative revenue being unsustainable in the real world, employers will have to respond by adjusting their employment structure. Continue reading

Why Voluntary Exchange Trumps “Sweatshop” Criticism

 If sweatshops make poor countries better off, then we should allow them because even when benefits are radically disparate, any mutually beneficial exchange, voluntarily arrived at, is by definition non-exploitative and leads to a trend of increasing standards of living.

The power of voluntary exchange is that it naturally leads to two reinforcing effects.

First, it is most likely to capture maximum knowledge of the rational best interest of those parties involved in the exchange.  Even if someone outside the exchange feels they have pertinent knowledge unavailable to one of the participants, the trade off would not be to get in between the two parties and take from one or both the final decision, it would be to provide the information to the party lacking it.  In this way you are guaranteeing that those most likely to have the most knowledge (those with direct loss or gain at stake) are those also making the final trade decisions.

In the case of a sweatshop that is the employer and employee.

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The Legend of Classroom Socialism

A wonderfully illustrative story passed along to me through the internets. Enjoy!

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When asked at his retirement party, an economics professor at a small college said he had never failed a single student before but had, once, failed an entire class.

The class in question had insisted that socialism could work. That no one would be poor and no one would be rich, a great equalizer.

The professor then said ok, we will have an experiment in this class on socialism. All grades would be averaged and everyone would receive the same grade so no one would fail and no one would receive an A.

After the first test the grades were averaged and everyone got a B. The students who studied hard were upset and the students who studied little were happy. But, as the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too; so they studied little …

The second test average was a D!

No one was happy.

When the 3rd test rolled around the average was an F.

The scores never increased as bickering, blame, name calling all resulted in hard feelings and no one would study for anyone else.

To their great surprise, every student failed and the professor told them that socialism would ultimately fail because when the reward is great, the effort to succeed is great, but when government takes all the reward away, no one will try or want to succeed.

The professor concluded the class with this:

These are possibly the 5 most important sentences you will ever hear in college…

1) You can never legislate the poor into prosperity by legislating the wealthy out of prosperity.

2) What one receives without working for, another must work for without receiving.

3) The government cannot give to anyone, something it has not already taken from someone else.

4) You cannot multiply wealth, simply by dividing it.

5) When half the people get the idea that they do not have to work because the other half is going to take care of them… and when the other half get the idea that it does no good to work because somebody else is going to get what they worked for… that is the beginning of the end of any nation.

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Scones, Happiness and School Choice

Recently, I’ve been struggling with blueberry scones.

I know scones aren’t everybody’s thing. As breakfast breads go many prefer the light flakiness of a croissant, or that creamy, sugar of a donut. In a pinch, there’s that old standby toast and a little butter… maybe some jelly too.

A scone however, is not everyone’s “cup of tea”.

First, it is a dense bread. It is not a light little snack, it can top even the heavy, boiled dough of many bagels for sheer wheat per square inch.

Second, it is a risky food. A scone can go dangerously wrong. A scone walks a fine line between wonderfully chewy and inedible, chalky nightmare.

This all leads to a consistent conclusion for those of us who consider ourselves fans of un-yeasted quick bread: When you find a scone you like, stick to it.

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Do Entrepreneurs Intentionally Harm Us?

Sitting in Micro and just had to turn on my “Shut Up” Mode while my teacher recites that we wouldn’t be able to enter a restaurant without the FDA because we would all almost certainly end up with food poisoning. That we wouldn’t possibly trust a restaurant without FDA and other regulatory certification.

First off, the FDA didn’t exist until 1930 and there have always been trusted and widely patronized eateries in this country.

Second, and FAR more importantly, for all of my friends who are restaurateurs or other restaurant professionals, does it offend you as it does me, that someone would say that a regulatory agency is what keeps you serving safe food? That your personal moral and monetary interests wouldn’t keep you from making people sick?

Is it true that it happens? Sure! Both by mistake and negligence. It happens TODAY, with all our regulation.

But I just had a professor say we couldn’t, as a GENERAL RULE, trust restaurants without a bureaucrat holding them accountable.

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Do Econ Professors Believe What They Teach?

Would this make sense? A math teacher spends a whole class proving that 2 + 2 = 4, but then turns around at the end of class and says, “But of course… it also equals 5 sometimes…”

Why do we hear Econ professors stand in front of classes and, after showing clearly and mathematically that…

… the minimum wage creates unemployment, “But of course… Fairness may justify some level of social

wage.”

… government imposed unions raise wages above the sustainable level and wield monopoly power, “But of course… workers would be exploited with them.”

… there’s no historic evidence of sustained monopolies, “But of course… Natural monopolies are still a real thing, and thus should be government authorized and then regulated.”

… rising prices incentivize business owners to stay open during disasters, most effectively ration the use of goods in times of potential shortages and signal to outside entrepreneurs to bring more goods and services into areas where hardship means they are needed the most, “But of course… laws against ‘price gouging’ are still just the right thing to do in these circumstances.”

Please feel free to add your own examples of Economists explaining how 2 + 2 = 5… 🙂

Does this make you laugh?

“What continues to amaze me is this: Japan’s current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do – even though it can be justified only by exotic stories about multiple equilibria, the sort of thing you would imagine only a professor could believe. Meanwhile further steps on monetary policy – the sort of thing you would advocate if you believed in a more conventional, boring model, one in which the problem is simply a question of the savings-investment balance – are rejected as dangerously radical and unbecoming of a dignified economy.”

Author?Maybe Ben Bernanke?

How about Treasury Secretaries Timothy Geithner or Hank Paulson?

No, no and no.

Drum roll please…

Paul Krugman! 09/21/1999

I know it’s nerdy but COME ON! That’s hilarious! Oh how times change, we knew that Nobel Prize winning mind was in there somewhere, would love to hear more of it 🙂

Anti-trust humor is always the funniest…

A little legal joke by Prof. Ivan Pongracic of Hillsdale College:

Three businessmen found themselves together in prison.The first man said, “I was convicted of price gouging because I was charging more than my competitors.”

The second man said, “Well I was charging less than my competitors and was convicted of predatory pricing.”The third man, eyes wide, said, “I was charging the SAME as my competitors and the government threw us all in jail because we’d formed a CARTEL!”

Arbitrariness… A wonderful basis for law in a just society.

Will someone please let me know when “The Long Term” gets here?

 

First published on the Wake Up Tucson Blog:

As we start debating the re-authorization of our state’s 1 cent sales tax I would like to pause for a moment and take a slightly closer look at what has been, and will undoubtably be again, one of the oft heard sentiments in these discussions.

You almost certainly have heard some version of it, but Paul Krugman (writing in his recent release A Manifesto For Economic Sense) provides a good example: “There must of course be a medium-term plan for reducing the government deficit. But if this is too front-loaded it can easily be self-defeating by aborting the recovery.”

So more or less, “Yes, we absolutely, positively know we need to get back to (INSERT NORMAL HERE) but certainly not right now.”

Dr. Krugman is certainly and simply an easy target but is an excellent example of those who, over many years, have maintained an incessant drum beat for “emergency measures”. Whether it is stimulatory fiscal and monetary policy, private company bailouts, vast military spending, expanded police powers, environmental regulatory interventions, increased taxes or other“temporary”, “one-time” reactions to current difficulties, there always seems to happen to be another “emergency” on the horizon which will serve to extend the definition of “temporary” and turn “one-time” into repetitive.

My primary issue are the pundits and government officers who prefer to define us in an almost constant state of “crisis” or for whom at least the pendulum seems only to swing in one direction.

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