Today’s Quote of the Day…

…comes from page 29 of “Modern Principles of Economics” (4th Edition) by my GMU professors Alex Tabarrok and Tyler Cowen:

The most important tools in economics are supply, demand, and the idea of equilibrium.  Even if you understand little else, you may rightfully claim yourself economically literate if you understand these tools.  Fail to understand these tools and you will understand little else.

Amen to that.

Today’s Quote of the Day…

…is from Chapter 3 of Frederic Bastiat’s final work Economic Harmonies (page 499 of the Mises Institute Edition):

Can we concieve a time when man can no longer form even reasonable desires? Let us not forget that a desire that might be unreasonable in a former state of civilization–at a time when all the human faculties were absorbed in providing for low material wants–ceases to be so when improvement opens to these faculties a more extended field. A desire to travel at the rate of thirty miles per hour would have been unreasonable two centuries ago–it is not so at the present day [or 70mph in Bastiat’s time! -JMM]. To pretend that the wants and desires of man are fixed and stationary quantities, is to mistake the nature of the human soul, to deny facts, and to render civilization inexplicable.

JMM: What we take for granted were once unobtainable wants because we had to focus on growing food. As that food was automated (thus destroying a lot of farmer jobs) and became cheaper and taken for granted, more desires, once unobtainable, became obtainable. Desires like kitchen appliances, faster transportation, recorded music, etc. Then, as more of those desires became taken for granted and cheap (displacing lots of manufacturing jobs), we moved to other desires, like better health, better medicine, more diversions (theatre, movies, sports, TVs, etc).

Shift happens, but it happens because desires are being met, which in turn allows new desires to come about. Human desires are indefinite.

Today’s Quote of the Day…

…is from page 229 Karl Menger’s 1883 book Investigations into the Method of the Social Sciences, specifically Appendix VIII “The ‘Organic’ Origin of Law and the Exact Understanding Thereof” (original emphasis):

However, law can also come into being, and even under the most original conditions, in another way essentially different from the above: by authority. The man in power or intellectually superior can set certain limits to the discretion of the weak men subject to him or of those mentally inferior. The victor can set certain limits for the vanquished. He can impose on them certain rules for their action to which they have to submit, without considering their free conviction: from fear. These rules, however similar they appear on the surface to those of national law, are both by origin and by the guarantees of their realization essentially different from the law which grows out of the convictions of the population and the realization of which was also originally an affair of the nation. Indeed, they can be in direct contrast to national law; they are really statute, not law. But the strong man has an interest in calling them ”’law,” in cloaking them with the sanctity of law, in connecting them with religious  traditions, in elevating them so that they become the objects of religious and ethical education. This is the case until the habit of obedience and the sense of subjection developed by them recognize in them something analogous to law and until this habit and sense scarcely distinguish any longer those rules limiting the discretion of the individual which are produced by the convictions of the nation from those which power prescribes for the weak.

JMM: What Menger means here by “national law” is not some national convention or agreement (in fact, he explicitly rejects the “social contract origin” theory of law), but rather what is more akin to custom and tradition: something that evolved over time to serve a purpose (protect individual interests) and is widely accepted and respected by members of the society.

What Menger does in this paragraph is draw a distinction between “national law” (the subject of the essay thus far) with statutory law.  The primary difference is how these two are established: national law (which is properly called law) is established through human interaction.  Statutory law is established through authority (ie imposed).  The two have superficial similarities only.

This is not to say that statutory law is inherently less desirable that law.  What it is to say is that statutory law can become unhinged from morality, in which case we are faced with the Bastiat Dilemma: “When law and morality are in contradiction to each other, the citizen finds himself in the cruel alternative of either losing his moral sense, or of losing his respect for the law—two evils of equal magnitude, between which it would be difficult to choose.”  To treat statutory law as some “will of the people” or the object of some “divine intelligence” (to use Menger’s term elsewhere in the essay) is to fundamentally misunderstand law.

 

Today’s Quote of the Day…

…is from Armen Alchian’s 1950 address to the Pacific Coast Economic Association, as reprinted on page 635 of the Liberty Fund’s 2006 volume of Alchian’s work: Choice and Cost Under Uncertainty (emphasis added):

The real issue [of the debate about economic methodology and mathematical models] relates to the economic substance – the applicability to real economic problems, or what I call here economic validity – of the mathematical models.  And with regard to this, it is submitted here that the mathematical analysis reveals very clearly the true scope and structure of the analysis, thereby facilitating an evaluation of its economic validity.  One may well argue that the empirical invalidity, or unrealism, of so many mathematically expressed theories and hypotheses is simply a result of their clarity, which reveals quickly the applicability of the system, whereas in literary theorists it is difficult to make such an appraisal so readily.  In any event, the mathematical approach must not be treated as the new delivery truck was treated by the delivery man who became so absorbed in the operating characteristics of the truck that he neglected to deliver the goods.

JMM:  As is characteristic of Alchian, he delivers a lot of economic insight into a small area.  Mathematical models have an important role to serve in economics: they can sharpen our thinking by pointing out logical flaws in the reasoning.  They can help solidify the pattern predictions we make by testing them against real data.  But, as Alchian warns, we should not become so obsessed with the working of our models that we economists forget that our primary duty is to provide insight into economic matters.  If our models do not do that, then they are failing in their job, as are we.

Today’s Quote of the Day…

…is from Page 145 of Adam Smith’s classic 1776 work The Wealth of Nations (Liberty Fund Edition):

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

The first line of this quote is one of the most famous of all of Smith.  But the conversation usually ends there (typically with an erroneous claim that Smith would support antitrust legislation).  The immediately-following sentences provide deep insight into Smith’s classical liberalness as well as the dilemma we all face in the trade-off between liberty and security.

Smith also here has a discussion on incentives.  The law should not render associations between producers (ie trade groups, cartels, etc) necessary.  While Smith is discussing in the context of labor regulations and business regulations here, that discussion can be easily extended into the realm of what we now call Public Choice.  When government can hand out favors, firms will try to capture those favors.  They may even form associations to pool resources to increase the likelihood of capture (eg a Chamber of Commerce).

The foresight of Adam Smith, and his continued applicability to modern economics is astounding.

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.

Today’s Quote of the Day…

…is found in a letter from Frederic Bastiat to Richard Cobden (leader of the Anti-Corn Law League) dated 8 April 1845.  The letter can be found on page 58 of the Liberty Fund’s collection of Bastiat’s correspondence, The Man and the Statesman (emphasis added):

Sir,

Since you have permitted me to write to you, I will reply to your kind letter dates 12th December last.  I have been discussing the printing of the translation [of Cobden’s speeches and pamphlets] I told you about with M. Guillaumin, a bookseller in Paris.

The book is entitled “Cobden and the League, or the Campiagn in England in Favor of Free Trade.”  I have taken the liberty of using your name for the following reasons: I could not entitle this work “The Anti-Corn Law League.”  Apart from the fact that this would have a barborous sound for French ears, it would have brought to mind a limited conception of the project. It would have presented the question as purely English, whereas it is a humanitarian one, the most notably so of all those which have brought campaigning to our century.

By presenting the issue of free trade as a humanitarian issue rather than a sectarian or nationalist issue, he demonstrates the universality of the principles of free trade.  Many opponents of free trade like to argue that free trade is conditional.  They may argue that free trade requires “transnational rule-making institutions.”  Or that trade only is good if one nation (ie the nation of the speaker) benefits.  Or that free trade needs to be “fair” (whatever that means).  But Bastiat makes no such prerequisites.  Bastiat and Cobden both argue that free trade is not an English concern, not a French concern, not an American concern, but a human concern.

The Anti-Corn Law League that Cobden was part of was founded in opposition to the Corn Laws, a series of mercantilist legislation that raised the price of food within Great Britain by restricting imports.  Given this legislation occurred at the same time as the Irish Potato Famine, the Corn Law, by artificially increasing scarcity of food, likely caused many deaths in Ireland from the famine.  The Corn Laws contributed to a humanitarian crisis.  We are seeing similar situations going on in Puerto Rico, where scarcity is increased because of the Jones Act, and Houston and Florida where scarcity is increased because of anti-price-gouging legislation.  Free trade is a humanitarian concern, not a sectarian concern.