The Good News and Real News about Inflation and Earnings

GOOD NEWS

The CPI isn’t signalling a recession.

Household income, adjusted for inflation, continues to rise to new heights.

BUT . . .

Inflation is in the eye (or wallet) of the beholder. It is arbitrarily estimated by sampling the prices of defined “baskets” of products and services. Your “basket” probably differs greatly from the official ones used by the Bureau of Labor Statistics.

Almost no household is a typical one.

REAL NEWS

Aggregate statistics are almost meaningless. There is no such thing as social welfare. Only you can decide if you’re better off than you were yesterday.


Related posts:
Microeconomics and Macroeconomics
Unorthodox Economics: 2. Pitfalls (especially the third entry about social welfare)
Unorthodox Economics: 5. Economic Progress, Microeconomics, and Microeconomics

The Wages of Simplistic Economics

If this Wikipedia article accurately reflects what passes for microeconomics these days, the field hasn’t advanced since I took my first micro course almost 60 years ago. And my first micro course was based on Alfred Marshall’s Principles of Economics, first published in 1890.

What’s wrong with micro as it’s taught today, and as it has been taught for the better part of 126 years? It’s not the principles themselves, which are eminently sensible and empirically valid: Supply curves slope upward, demand curves slope downward, competition yields lower prices, etc. What’s wrong is the heavy reliance on two-dimensional graphical representations of the key variables and their interactions; for example, how utility functions (which are gross abstractions) generate demand curves, and how cost functions generate supply curves.

The cautionary words of Marshall and his many successors about the transitory nature of such variables is no match for the vivid, and static, images imprinted in the memories of the millions of students who took introductory microeconomics as undergraduates. Most of them took no additional courses in micro, and probably just an introductory course in macroeconomics — equally misleading.

Micro, as it is taught now, seems to purvey the same fallacy as it did when Marshall’s text was au courant. The fallacy, which is embedded in the easy-to-understand-and remember graphs of supply and demand under various competitive conditions, is the apparent rigidity of those conditions. Professional economists (or some of them, at least) understand that economic conditions are fluid, especially in the absence of government regulation. But the typical student will remember the graph that depicts the dire results of a monopolistic market and take it as a writ for government intervention; for example:

Power that controls the economy should be in the hands of elected representatives of the people, not in the hands of an industrial oligarchy.

William O. Douglas
(dissent in U.S. v. Columbia Steel Co.)

Quite the opposite is true, as I argue at length in this post. Douglas, unfortunately, served on the Supreme Court from 1939 to 1975. He majored in English and economics, and presumably had more than one course in economics. But he was an undergraduate in the waning days of the anti-business, pro-regulation Progressive Era. So he probably never got past the simplistic idea of “monopoly bad, trust-busting good.”

If only the Supreme Court (and government generally) had been blessed with men like Maxwell Anderson, who wrote this:

When a gov­ernment takes over a people’s eco­nomic life, it becomes absolute, and when it has become absolute, it destroys the arts, the minds, the liberties, and the meaning of the people it governs. It is not an ac­cident that Germany, the first paternalistic state of modern Eu­rope, was seized by an uncontrol­lable dictator who brought on the second world war; not an accident that Russia, adopting a centrally administered economy for human­itarian reasons, has arrived at a tyranny bloodier and more abso­lute than that of the Czars. And if England does not turn back soon, she will go this same way. Men who are fed by their govern­ment will soon be driven down to the status of slaves or cattle.

The Guaranteed Life” (preface to
Knickerbocker Holiday, 1938, revised 1950)

And it’s happening here, too.

Line-Drawing and Liberty

The controversy about the ground-zero mosque illustrates an important aspect of liberty, namely, that its preservation requires line-drawing. There are times when government intervention in private matters is required to preserve liberty, in its fullest sense: life and the pursuit of happiness.

A libertarian purist would disagree. He would say that property rights are property rights, period. The owners of the land on which the mosque is to be situated have the right to decide what to build on their land. Further, if that right is compromised by government intervention, then it is possible for government to dictate how anyone may use his land.

Ignoring that fact that government already dictates how land may be used — through zoning laws, building codes, environmental restrictions, and other forms of regulation — I concede readily that the purist is correct, in principle. We know from long experience that as politicians and bureaucrats acquire the power to intervene in private transactions, they will apply that power in arbitrary and capricious ways.

Does that mean government should never intervene in private transactions? Imagine the following situation: A convicted car thief, having served his sentence, buys a defunct auto-repair shop with backing from some unsavory friends. If the police get word of this setup, what should happen?

1. Nothing, because the shop hasn’t begun to operate, and so there is no evidence that it will be used for criminal activity.

2. Keep watch on the shop, on the reasonable suspicion that the convicted felon and his unsavory associates are setting up a front for a stolen-car operation.

3. Find a legal pretext for closing down the shop.

What are the likely consequences of the three options?

1. The ex-convict will set up a stolen-car operation, and many cars will be stolen, causing great inconvenience to the owners of the stolen cars and higher insurance premiums for the owners of all cars in the area. Justice may prevail, but much harm has been done.

2. The stolen-car operation will be detected quickly, and shut down quickly, thus preventing most of the harm that would arise under option 1. Further, prison terms for the ex-convict and his unsavory associates will prevent them from doing further harm — for a while at least.

3. Allowing the police to shut down the shop without evidence of wrong-doing will encourage the police to persecute legitimate businesses and innocent individuals who happen to incur their disapproval.

If you are a libertarian purist (or a reflexive, anti-police “liberal”), you will prefer option 1; you are a one-day-at-a-time rationalist who adopts a pose of studied agnosticism. If you are a reflexive, law-and-order “conservative” you will prefer option 3. Option 2 is reserved for those who are willing to acknowledge the ex-convict’s history and its implications for his future behavior, but who want to preserve the bulwark of due process against the power of the state.

The question of where to draw the line around the authority of the state should not be decided by simplistic rules. Libertarian purists want to draw the line in the wrong place because their focus in on narrow issues — such as privacy and property rights — and not on the broader issue of liberty.