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:


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.