Today’s Quote of the Day…

…comes from page 111-112 Adam Smith’s 1776 masterpiece, An Inquiry into the Nature and Causes of the Wealth of Nations:

But perhaps no country has ever yet arrived at this degree of opulence. China seems to have been long stationary, and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only, cannot transact the same quantity of business which it might do with different lawsand institutions. In a country too, where, though the rich or the owners of large capitals enjoy a good deal of security, the poor or the owners of small capitals enjoy scarce any, but are liable, under the pretence of justice, to be pillaged and plundered at any time by the inferior mandarines, the quantity of stock employed in all the different branches of business transacted within it, can never be equal to what the nature and extent of that business might admit. In every different branch, the oppression of the poor must establish the monopoly of the rich, who, by engrossing the whole trade to themselves, will be able to make very large profits.

JMM:  The nature of the institutions and the legislation that is enforced in a given country has a lot to do with the potential growth of the economy.  Institutions and legislation that protect and expand the scope of markets, in other words, institutions and legislation that allow human cooperation to flourish, will bring opulence.  Conversely, those that reduce the scope of markets will bring stagnation.

An Open Letter to President Trump

26 January 2018

Mr Donald Trump
1600 Penn. Ave. NW
Washington, DC 20500

President Trump:

At the Davos meetings, you declared America “open for business.”  I cannot tell you how happy I am to hear this change of heart, especially since you took steps just a few days ago to close America from business.  In fact, much of your rhetoric, from NAFTA to pulling out of the TPP, were steps to close America to business.  I hope you will keep your word from Davos as backdown your claims to re-negotiate NAFTA and bring the US back into the TPP.  After all, as a businessman you must know that “being open for business” means both buying and selling.


Jon Murphy
George Mason University

Protectionism is Fueling Trade Deficits

The Jones Act, ostentatiously a protectionist piece of legislation, is unintentionally causing the trade deficit to increase.  The US is forced to look overseas for heating since shipping it internally is so expensive because of the Act.

The lesson to take away from this story is that controlling/regulating an economy is no straightforward act.  Passing protectionist legislation is no guarantee to reduce trade deficits, as we can see here.  Actions have unforeseen consequences, and can often result in the opposite of desired outcomes.  Economic activity is complex, and it is not merely a technological problem.

Thoughts on the Authority of Law

Precious little thought of law & economics is spent focusing on where the authority of law and legislation comes from.  Most economists just assume it to be given: Coase with his “bargaining in the shadow of the law” and even Ostrom with her Commons problem-solving.*  This post serves as a method to get some of my thoughts down.  This is hardly complete or refined.  Therefore, any questions, comments, helpful critiques (especially if sources are attached) are welcomed.

However, there are exceptions to my above criticism.  Three of the best examples of economists exploring this problem are James Buchanan in Limits of Liberty, Adam Smith in Lectures on Jurisprudence, and Frederic Bastiat in The Law.  All three tend to get at the root of the problem: the authority of law and legislation rests on its moral foundations.  As Buchanan writes (page 97-98, emphasis added):

Under what conditions are individuals most likely to adhere to the inherited rules of order, most likely to respect and to honor the assignment of individual rights in being?

This question can only be answered through an evaluation of the existing structure, as if it were the outcome of a current contract, or one that is continuously negotiated. Individuals must ask themselves how their own positions compare with those that they might have expected to secure in a renegotiated contractual settlement. If they accept that their defined positions fall within the limits, they are more likely to comply with existing rules, even in the acknowledged absence of any historical participation. 

Bastiat puts it more succinctly (page 111 of the Liberty Fund edition):

When law and morality contradict each other, the citizen has the cruel alternative of either losing his moral sense or losing his respect for the law. These two evils are of equal consequence, and it would be difficult for a person to choose between them.

In other words, people will respect the law and respect legislation to the extent they comply with morality.  When the law and morality are in conflict, then one has to lose respect for either one or the other.  This would suggest to me that the law’s authority comes from its alignment with morals.

We also tend to see the morality language in the way we discuss legislation.  Unfavorable legislation is often described as “unjust.”  The entire system of police (ie policy enforcement) is called the “justice system.”  These words smack of morality.  We expect legislation (ie policy) to comply with moral preconceptions.  When they do not, we are faced with the Bastiatian conundrum.

Where, then, do morals come from?  I contend, as does Adam Smith in Theory of Moral Sentiments, that morality comes from our interaction with one another (see, for example, Part III).  This is implied in the word “moral,” with its origins coming from the Latin word “mos,” or “custom.”  Morality deals with the rules of human interaction, either in a negative sense (mere justice) or a positive sense (ethics) (for a more in-depth discussion on this point, see Dan Klein’s paper on Smithian justice or Smith’s discussion in Part VII of TMS).  Therefore our sense of morality must come from interacting with one another.

If morality develops from our interactions with one another, and law is the set of rules developed to facilitate dealings, this suggests a tight connection between law and morality.  But how tight?  Can morality and law deviate?  I think the answer is “yes.”  Traditions and superstitions develop in law as a way to enforce and perpetuate morals (Dr Peter Leeson does a lot of interesting research in this field, as does Adam Smith in his Essay on Astronomy).  However, traditions and superstitions tend to be difficult to change when they have cultural inertia behind them (which is a good thing).  Even if there may be some scientific reason to change the transition and superstition, ie the law, it may be difficult to do precisely that (I am reminded of the line by Rick Sanchez in Rick and Morty: “Scientifically, traditions are a stupid thing, Morty!”).  The traditions/superstitions will change once the critical threshold of departure in morality from law occurs.

Turning to the question of incentive and punishment, if my above reasoning is correct, it’d explain why some legislation requires little enforcement/punishment but others require lots of punishment.  For example, a traffic ticket.  Many people complain about traffic tickets but still pay the fine.  And while there is always some violation of the limit (people going 70 in a 65), there are few major offenders.  Low fines are able to deter behavior because there is a strong moral presumption against speeding (ever been cut off in traffic?  How does one react?).  Conversely, something like drug prohibition requires heavy fines and penalties probably because there is a strong moral presumption against drug prohibition (especially in the case of marijuana).  When heavy punishment is required to enforce legislation, it may be a sign of a moral presumption against the legislation.**

What does all this mean?  I don’t know.  It may explain why some legislation/regulation is effective and others are not.  It may explain why development aid never accomplishes its goals.  It may explain, or suppliment, why optimal tariffs, taxation, and the like are impossible to calculate.  Lots of things to consider and feedback is appreciated.

*This comment is in no way a slight upon either economist.  I love and respect both Coase and Ostrom very much.  Their contributions to economic thought are extraordinarily valuable and their respective Nobel Prizes were well-deserved.

**Another possible reason is the natural desire for revenge/recompense from the violation.  For example, punishment of a murderer may be strong because of a large natural desire for revenge for the violation of justice.  However, this is a conversation for jurisprudence, which I will have to pick up at a different time.

The Confusion Around Shithole

Predictably, Trump made an undiplomatic description of certain people and countries and, just as predictably, people on the Left have objected to his comments.  And, just as predictably, Trump defenders have appeared with cries of “political correctness.”

However, the problem with Trump’s comments is not the profanity or disparaging of certain countries, as undiplomatic as they may be.  The problem is much older:

Socialism, like the ancient ideas from which it springs, confuses the distinction between government and society.

Given the context of Mr Trump’s comments, that he was questioning the wisdom of having immigrants from “shithole” countries, Mr Trump makes exactly the mistake Bastiat discusses: he confused people for the government.  The countries may, in fact, be shitholes (however one defines that), but the people aren’t necessarily so.  We are not our government; we are individuals.  And, as I have written elsewhere, the institutions under which we live matter a whole lot.

In their rush to criticize Trump, the Left has made similar errors.  They have focused on defences of the targeted nations or of blanket cries of “racism.”  They’ve ignored the individual aspect of immigration (no surprise given the Left’s overt infatuation with socialism).

Similarly, in their rush to defend Trump, many of his supporters miss the context and point of Trump’s comment.  They wonder why Trump can’t call a country a shithole, citing concerns about political correctness.  But they too make the mistake of confusing the government and the society.

In short, Trump, his defenders, and his detractors on the Left all show their socialist leanings, and subsequent fallacious thinking, with this flap over shithole and immigration.

Will Trump Oppose This Deal?

Toyota and Mazda announced today they are investing $1.6 billion in a new auto plant in Alabama.  The construction will bring some 4,000 jobs to the region.

However, since this plant is a foreign entity, the $1.6 billion will be counted toward the trade deficit.  In other words, the trade deficit will expand by $1.6 billion with this project.  This, of course, puts Trump and the mercantilists in his administration in a bind: they claim manufacturing is good and the trade deficit is bad, but here we see a clear case where the trade deficit is creating jobs (as it does anyway).

So, will Mr. Trump bite the bullet and argue this plant construction is “the worst trade deal in history” or will he admit his economic schemes are intellectually inconsistent?  Only time will tell…