The Good vs the Bad Economics

The following is a question from the GMU Microeconomics Ph.D. Comprehensive exam I took last night:

A government is considering imposing a price ceiling on a good that has a supply curve with zero elasticity [perfectly inelastic].  The price ceiling would be binding, so the government-imposed price would be lower than the lassez-faire price.  In your two-part answer, explain:

a. What does textbook price theory predict about the implications of a price ceiling?

b. What would a more sophisticated, well-rounded economics, predict about the implications of a price ceiling?  Ignore public choice issues.

I particularly liked this question.  The difference between a good economist and a bad economist is the ability to see beyond just the seen (in this case, the model) and to see the unseen (in this case, the mix of things that affect people and resources beyond the model).  The poor economist (or poor econometrician) looks only at his model and treats it as the Gospel.  People will come up with all kinds of models to justify their various pet projects, whether it be tariffs, minimum wage, or what-have-you, and ignore all the economics around them.

Any good discussion of economic phenomena must involve a discussion beyond just the scope of the model and, as in the worlds of the GMU microeconomic committee above, involve “a more sophisticated, well-rounded economics.”

Sorry Scarcityists: Demand Curves Still Slope Downward

At Cafe Hayek, Don Boudreaux writes a response to the scarcityist argument, as he puts it:

[P]rotectionism is justified if enough consumers or voters are willing to pay higher prices in order to help workers.

Don lists three reasons why the scarcityists’ reasoning is incorrect.  Below is my addition of a fourth reason from the comments section of that post:

I’d add a fourth one, one which shows that this scarcityist’s plan to save jobs though higher prices cannot work:

When the relative prices of protected domestic goods rises, then some sacrifices must be made. Scarcityists assume, incorrectly, that all the goods where quantity demanded falls is from the importers rather than the domestic producers, and thus only foreigners’ jobs are harmed. But this is not so; we only import a fraction of our goods. If the relative prices of domestic protected goods X, Y, and Z rise, and if the scarcityists do not change their purchases of X, Y, and Z, then necessarily other purchases of domestic goods that were not subject to import competition (say, goods A, B, and C) will be cut back. For instance: if one has to spend more on sugar, steel, and toys, one has less to spend on dinner out, movies, and baseball games.

The scarcityist may respond by saying “But wait! I am not on my budget constraint. I don’t spend every penny I have. I can afford to spend more.” I have two responses to this: 1) Good for you, but for many of us, we are not that wealthy, and 2) Then that necessarily means you are saving less. By saving less, there are less loanable funds, which means less money for people to borrow to build homes and businesses, persue education, buy cars, etc. So, you’re taking jobs away from people in construction, business, education, automaking, etc. In short, as long as relative prices rise, quantity demanded of something has to fall. Why? Scarcity is still a thing.

In his 1971 book “Economic Theory,” Gary Becker has a neat little proof of this (see pages 21-23 of the 2007 edition). A more detailed proof and discussion can be found here: http://www.jstor.org/stable/1827018

 

Unintended Consequences of Protectionism: The Jones Act and Highway Congestion

In 1920, the US government passed the Jones Act, an act requiring all sea shipping between US ports be done on ships that were built, crewed, flagged, and owned by Americans.  The act is a clearly protectionist measure designed to protect domestic shipping from foreign competition (although there is also a national defense argument for it).  The idea is that a cheaper foreign shipping company could not undercut US shippers on domestic trade routes.  If I were to ship something via ocean from Miami to Boston, I’d have to do it on US built, crewed, flagged, and owned ships.

The Jones Act, to the extent it is binding, raises the cost of ocean shipping in the US (if this were not the case, say it were already cheaper to ship on US ships than foreign ones, then the Jones Act would not be binding).  When the relative price of something rises, it encourages the use of substitutes.  The main substitutes for domestic shipping are trucking and railroad (and air to a lesser extent).  With the rise of ocean shipping costs from the Jones Act, transporters would turn to trucking and rail.  Furthermore, since trucks take up a lot of room on the highways and freeways, it is likely the marginal increase in trucking from the Jones Act increases congestion on the highways.  In short, the unintentional result of the Jones Act is to increase traffic congestion (and, potentially, traffic accidents as well).

Some interesting thoughts for further research:

  1. Do trucking and rail companies lobby in support of the Jones Act (bootlegger and Baptist)?
  2. Has the Jones Act had a measurable impact on the level of traffic (this is an empirical question that would be extremely hard to answer because of the age of the Act)?

A Quick Break

I am in the middle of my comprehensive exams.  I have one on the 14th and the next on the 21st.  Studying for these will consume all my time.  Please forgive my lack of posting over the next two weeks

Today’s Quote of the Day…

…is from Lecture 6 “Rational Behavior” (page 25-26) of Gary Becker’s excellent book Economic Theory (original emphasis):

One basic query is: What is meant by rational behavior?  Consider first what is not meant.  Certainly not that people are necessarily selfish, “economic men” solely concerned with their own well-being.  This would rule out charity and love for children, spouses, relatives, or anyone else, and a model of rational behavior could not be so grossly inconsistant with actual behavior and still be useful.  A viable definition of rationality must not exclude charity and love; indeed, consistent family behavior probably requires love between family members.

Also, rationality should not imply that each household’s decisions are necessarily independent of those made by others.  Different households are linked utltimately by a common cultural inheritance and background, and they may also be linked in a more proximate way.  If household j increases its consumption of X, household i might be led to change its consumption of X.  Such interdependicies commonly occur, and should be consistent with our model of rational behavior.

The essence of this model of rational behavior is contained in just two assumptions: each consumer has an ordered set of preferences, and he chooses the most preferred position avaliable to him.

 

Blood and Soil, MacLean, and Buchanan

Last week, at the Mises Institution, President Jeff Deist gave a speech on broadening libertarian appeal.  He concluded the talk thus [emphasis added]:

In other words, blood and soil and God and nation still matter to people. Libertarians ignore this at the risk of irrelevance.

Many libertarians objected to the phrase “blood and soil,” because of its historical context and ties to Nazi Germany and fascism (for example, see this piece by Steve Horwitz).  Others claim that the phrase is taken out of context and that it was referring to a Jeffery Tucker piece written earlier that month (personally, I find this explanation a bit problematic, but I won’t go into that here).

Also this summer, libertarians have taken aim at the book Democracy in Chains by Nancy MacLean, a highly erroneous account of the intellectual life of James Buchanan, founder of the Public Choice school of thought.  MacLean’s thesis is straightforward: despite the value-free wording of  Public Choice, James Buchanan and the Koch Brothers are working on a vast conspiracy to overthrow democracy and establish an oligarchy.  Despite lots of footnotes, she provides no hard evidence for her claims (as noted by various reviewers and fact-checkers, the sources cited in the footnotes tend to either be incorrect, incomplete, or downright contradictory).  And yet, she pushes on, undeterred and several on the left jump on board.

At first, I wondered how she could get away with this.  But then, I realized libertarians, and in particular, the methods espoused by Jeff Deist, aren’t doing ourselves any favors.

A quick history lesson is necessary (for a more complete, and probably more accurate than my retelling here, account, see here): back in the 80’s and 90’s, there was a movement within libertarians, lead in particular by Murray Rothbard, Lew Rockwell, and Ron Paul, to recruit as many people to libertarianism as possible, particularly as a conservative-libertarian fusion and oppose the left, which was becoming more socialistic, on cultural grounds.  Of course, this strategy appealed to many people who were of decidedly anti-democratic nature (white supremacists, Neo-Nazis, anti-foreigner, etc).  Whether or not recruiting these specific people was the goal of the policy is irrelevant; it was the consequence.  Many of these groups, which were now broadly calling themselves “libertarians,” were decidedly anti-democratic and decidedly racist and decidedly elitist and all the charges levied by MacLean against Buchanan.

One cannot fault MacLean for not knowing this history (although perhaps were she doing a better job on her book, she would have researched the matter).  I, who have been in the libertarian movement for about a decade, am just learning much of this.  But it does make her accusations, at least prima facie, more understandable.  Buchanan’s work is used in a lot of libertarian economics (although to call him a major influence is a bit much), he got money from the Kochs (who are libertarians), Stormfront and alt-right leader Richard Spenser have called themselves “libertarians,” therefore Buchanan and the Kochs must share similar goals as Spenser and Stormfront and others.

Jeff Deist may think he’s doing libertarians a favor by trying to make libertarianism have a broad appeal.  But, if you cast a wide net, you also risk dragging up rotten fish which can ruin the whole bunch.  This is the wrong strategy for winning people over.  Rather than admit libertarianism is weak, unable to face challenges of the day, and thus must turn to other areas and places (or, abandon our principles in the face of things like “immigration” and “feminism”), we must show that libertarianism and classical liberalism is still relevant.  If we continue to cast a wide net and drag up rotten fish (unintentionally or not), then we will continue to stink.

Immigration and Institutions: A Response to Jonny Anomaly

Writing at Quillette, Dr. Jonny Anomaly (yes, that’s his real name) discusses immigration, institutions, and why some immigration restrictions may be necessary.  It’s an interesting article, although I find his rationale for immigration restrictions rather weak.

Dr. Anomaly writes:

For one thing, the social norms and political institutions that promote prosperity are often quite fragile, as evidenced by recent events in Turkey, and the failure of constitutional democracy to take hold in Iraq after American attempts to replace dictatorship and tribalism with a secular liberal order.

I disagree with his interpretation of the evidence here.  The two examples he provides are where a liberal order was forced upon the area, rather than developed naturally.  Institutions, when imposed, do tend to be fragile.  This is seen in the work of many great developmental economists work (for example, see Doing Bad by Doing Good by Chris Coyne or The Tyranny of Experts by William Easterly).  However, where liberal institutions develop naturally, they tend to be highly robust.  The United States is an excellent example where despite many shocks to the system over the approximately 250 years of our existence, we remain a highly liberal country.  Shocks have included invasion, mass immigration (by both intelligent and less intelligent people), famine, drought, civil war, terrorism, etc.  The US is not ideally liberal, and there have been missteps, but the whole thing hasn’t collapsed the way it would have if institutions were inherently fragile.

He goes on to say:

Many supporters of open borders fail to distinguish between different qualities of immigrants. They assume that if a high level of immigration has benefitted some countries in particular eras, such as the United States, Canada, and Australia in the 19th and 20th centuries, then it is simply the quantity of migrants, rather than the composition of migrants, that caused prosperity in these nations. But this is a fallacious inference that depends on the assumption that all people are just as likely to promote the welfare of a country regardless of their values, skills, or traits.

In his recent book, Garrett Jones argues that a nation’s wealth and welfare depend crucially on the qualities of its citizens, including IQ, conscientiousness, and the ability to delay gratification. These personality traits are heritable, are (according to Jones) positively correlated with prosperity, and (according to criminologists) negatively correlated with crime.

The problem with this argument is that it doesn’t appear, at least prima facie, to be correct.  The mass immigration of the 19th and 20th Centuries was not of high-skilled immigrants.  Rather the opposite, really: they tended to be the dregs of European society.  And yet, America prospered.  Those who attempted to turn America toward Socialist institutions were not uneducated immigrants, but rather highly educated native WASPs.

This is not to discount the importance of intelligence in economic activity; quite the opposite.  But rather, an economy is made up of all kinds of goods: high quality, low quality and everything in between.  A dynamic economy allows all resources to find a niche, including labor.

There’s more I could say on this article, and maybe I will down the line, but I want to finish off with this: the evidence on immigration’s impact on the economy is far from crystal clear.  There are copious amounts of evidence pointing in both directions.  Given this ambiguity, I argue a liberal society demands that freedom is preserved and that the action which would restrict freedom (in this case, restricting freedom of commerce of the citizens of the society) must be shunned until evidence beyond a reasonable doubt is presented.