Month: December 2009

Columnist, Heal Thyself

David Brooks’s recent column, “The Protocol Society,” is a typical Brooksian muddle, in which he attributes evolutionary changes in economic behavior to the “discoveries” of contemporary economists.

Despite Brooks, there is nothing new under the sun of economic analysis. The practitioners of today who draw on sociology and psychology are simply returning to the roots of economics — the description of human behavior — which can be found in Adam Smith and his successors, well into the 20th century. This “old school” of literary economics didn’t give way to the “new school” of mathematical economics until after WWII, when Paul Samuelson led the profession down the dead-end street of convoluted, abstract theorizing.

The difference between the old-old school and the new-old school is that the moderns rely less on introspection and casual observation and more on data collection, “laboratory” experiments, statistical analysis, and the research findings of sociologists and psychologists. That this is not an unalloyed blessing can be seen in the “accomplishments” of a leading member of the new-old school, one Richard Thaler, whom Brooks omits to mention. Thaler’s specialty, which has been dubbed “behavioral economics,” focuses on the psychology of decision-making and how it leads individuals to make what Thaler believes are sub-optimal and even unwise choices. From there, Thaler and his collaborator, Cass Sunstein, have ventured into normative policy recommendations, which they dub “libertarian” or “soft” paternalism. Needless to say, actual libertarians find much to criticize in Thaler’s normative prescriptions, which carve out a role for government in “nudging” people in directions that “wise men” like Thaler and Sunstein would like to seem them nudged.  For much more about the dangers of “libertarian” paternalism, see these two posts and follow the links therein.

In any event, Brooks writes as if there were a real difference between economic activity in the 19th century and economic activity in the 21st century. As if, for example, there wasn’t a lot of brainpower and organizational skill involved in the “second industrial revolution” of the last third of the 19th century. As if, to take another example, the “protocols” of the modern food court didn’t have their counterparts in the market squares of yore. As if, to take a final example, the manufacture of steel, autos, and other durable goods doesn’t (and didn’t) involve massive capital investments (many of which were made possible by patented processes and machinery), so that the average cost of making each unit declines markedly as the rate of output rises. It is as if the 21st century simply arrived, bright and shining, with no connection to the past.

On the whole, Brooks is onto something, which is that economists are getting back in touch with the realities of human behavior. However, he is guilty of a gross attribution error. He writes as if there were something new in economic behavior because economists are now better able to describe it. The same attribution error is found among teenagers (of every era), who believe that sex didn’t exist until they discovered it.

Trade

Imagine two individuals, A and B, each of whom makes something different. Let’s say that A makes bread and B makes butter. If A wants butter for his bread, he buys some butter from B; if B wants bread to go with his butter, he buys some bread from A. This kind of exchange for mutual benefit, stripped of monetary measures, is the essence of economic activity.

What is special about trade if it happens to take place across international borders? Nothing. If I’m B (in Boston), and I have a choice between bread produced by A (in Alberta) and bread produced by C (in Chicago), I’ll choose A’s bread if I consider it a better value than C’s (e.g., same quality, lower price or higher quality, same price). Do I owe C a living? No. If C can’t compete with A in bread-making, he ought to try his hand at something else, but he shouldn’t use superior force (i.e., government) to force me to buy his product.

If B spends more on A’s bread than A spends on B’s butter, B is running a deficit. Isn’t that awful? No, it isn’t. B, to finance his deficit, can draw on his savings, borrow from A, or sell stock in his butter-making business to A. All of these are voluntary choices; none should be cause for alarm. If B draws on his savings, he’s getting something in return that he values: bread. No problem there. If B borrows from A, A is taking a risk and B is getting bread. No problem there. If A buys stock in B’s butter-making operation, A is taking a risk and B is getting bread. No problem there. (None of these actions is different, in principle, than allocating a portion of one’s savings to a down payment on a house, and financing the balance with a loan — which isn’t much different than selling the lender stock in one’s future earnings prospects.)

In each case, A and B are making informed decisions based on direct knowledge of their wants and the risks involved in satisfying them. The aggregation of such decisions into national accounts (e.g, the trade account) gives the impression that the transactions are collective, that “we” Americans in the aggregate are suffering at the hands of shifty foreigners, and that government ought to “do something” about it. Well, they aren’t collective decisions, the Americans involved aren’t being fleeced, and government efforts to “do something”  (e.g., raise tariffs on imported goods) invite the kind of disaster that followed enactment of the Smoot-Hawley Tariff Act.

What about unemployment that might result from trade? Well, yes, trade can cause transitional unemployment, but that’s true of domestic trade as well as international trade. If the U.S. government, as a matter of long-standing policy, had banned domestic and international trade because it might cause transitional unemployment, we wouldn’t have progressed from buggies to Model Ts to reliable Japanese cars, from parchment and quill pens to PCs, from face-to-face conversation to cell phones, and so on. In growing economies — as more-or-less laissez-faire economies are most of the time — temporary unemployment is soaked up by growth, that is, by the expansion of existing industries and the addition of new ones. It’s Schumpeter’s “creative destruction” at work.

The alternative to “creative destruction” (of which international trade is a necessary part) is the kind of insular, centrally directed economy that prevailed in Soviet Russia, where nominal “full employment” masked the wholesale misuse and real underemployment of land, labor, and capital. The same thing has happened by “democratic” means in most of Europe, and is happening by similarly “democratic” means in the United States. Witness, for example, the Environmental Protection Agency’s recent decree about “greenhouse gas” emissions.

In summary, trade is trade, whether domestic or foreign. When government acts in ways that stifle trade, the result is underemployment of land, labor, and capital. There are but two valid reason to stifle trade. One is to prevent, deter, or punish truly harmful acts. The other is to prevent, deter, or punish the easy acquisition of U.S. military secrets and technology by enemies and potential enemies.

For related posts, see these categories:

Economics – Fundamentals
Economics – Growth & Decline
Political Economy & Civil Society

Good News?

GRAPHIC UPDATED 12/14/09

What’s bad news for Obama is good news for the country. As I have said:

To hope that Obama fails is not to wish ill for the nation; to the contrary, it is to hope that Obama’s policies fail of realization because they are seen (rightly) as inimical to liberty and prosperity.

It is my sincere and fervent hope that the following trends portend good news for the liberty and prosperity of Americans:

Sources: Rasmussen Reports Daily Presidential Tracking Poll and Health Care Reform Poll. Overall net approval ratings represent the difference in the percentage of  respondents strongly approving and strongly disapproving of Obama (negative numbers mean net disapproval). Health care ratings represent the difference in the percentage of respondents strongly supporting and strongly opposing Obama’s health care “plan,” or what they take to be his plan. I use Rasmussen’s polling results because Rasmussen has a good track record with respect to presidential-election polling.