Category Archives: Economics

No Due Date Book Club Notes: James Buchanan, Week 2

I recently joined Liberty Fund’s No Due Date economics book club, where over the next year, participants will read one book per month selected by GMU economics professor Peter Boettke. Pete will also lead group discussions and provide other resources. January’s selection is the first volume of James Buchanan’s collected works, The Logical Foundations of Constitutional Liberty, which collects many of his better-known papers from throughout his career. Buchanan was one of the cofounders of public choice theory, and won the 1986 economics Nobel.

This post, the second of three, collects my notes from those readings. I’m posting them here mostly for my benefit, so I can easily find them during the discussions, and can refer back to them later if I cite them in the future. Readers new to Buchanan or curious about the major themes of his work might benefit from skimming these notes, though I highly recommend reading the primary source. I may or may not do this for future months’ readings, depending on how useful it is.

Note that I copied and pasted these notes unedited from a Word document I kept open while reading. These notes do not always distinguish between as-is descriptions of Buchanan’s arguments, and my opinions and original thoughts about them. Reader beware.


“Individual Choice in Voting and the Market” (Journal of Political Economy, 1954), pp. 75-88.

-Buchanan builds a model of individuals making decisions. They just happen to be voting decisions. For simplification, it’s a direct democracy model without representatives.

-In markets, consumers get what they want. This is not guaranteed in voting markets. There is uncertainty. This affects voter behavior.

-People might vote to signal values, knowing it might not cost them personally. Hence the people who vote for Prohibition, then visit their bootlegger.

-Mises: people bear less personal responsibility for their voting choices than their market choices. So their political choices are more corruptible than their market choices.

-p. 81: “Choice implies that alternatives are mutually conflicting; otherwise, all would be chosen, which is equivalent to saying that none would be chosen.”

-Market choices are unbundled, and less mutually exclusive than political choices, which are take-it-or-leave-it bundles. P. 82: “As a result of this difference, individual choice in the market can be more articulate than in the voting booth.”

-Market decisions are among actual alternatives; political decisions are among potential choices. If the voter loses, they don’t get their preferred choice. Even if they do, there is no guarantee the political process will operationalize it. (he doesn’t seem to make this last point, but would likely agree with it.)

-Market “voters” can be overruled in the sense that, say, their favorite store ot product will go out of business if they don’t get enough “co-voters.”

-All of these differences would remain true under complete economic equality. Objections that “one dollar, one vote” in the marketplace is unfair is not an objection to the points Buchanan is actually making.

-Market choices are not more rational than political choices. The individuals making them are the same. Their differences are in incentives and institutions, not in rationality.

-Section VII, on when to use ballot box instead of the market, is a bit muddled. Institution-level changes gain their legitimacy through the ballot box. Political choices should be made when private choices harm the goals of a majority, or when they are obviously inferior—and it is worth the tradeoffs in choice and liberty to use political means. I would add in something about transaction costs.

-A language problem: current language does not differentiate between market freedom and market power. This semantic point leads to a lot of avoidable confusion.

“Social Choice, Democracy, and Free Markets” (Southern Economics Journal, 1954), pp. 89-102.

-Reaction to Kenneth Arrow’s Possibility Theorem’s philosophical implications. His major argument is that cyclical majorities, which are a product of the intransitive democratic preferences that Arrow’s theorem predicts, provide a bulwark against the tyranny of the majority, and allow for ongoing policy experimentation, rather than setting the initial, “rational” result in stone.

-This highlight’s Buchanan’s subjectivism. He isn’t terribly concerned with this or that policy. He is concerned with the larger system-level processes. Normatively, he seeks to avoid tyranny and stasis, and that’s about it.

-This rests in turn on the core Buchanan theme of methodological individualism. Societies don’t reason or have preferences, individuals do.

-Arrow misuses the word “process,” which has caused confusion in both Arrow and his debaters.

-Buchanan argues that Arrow’s theorem applies to how a welfare function is derived—but not the decision-making process that reacts to that function.

-That doesn’t matter for voting behavior, but it does for market behavior, according to Buchanan. Arrow’s theorem is useful for analyzing voting, but not for markets.

-Methodological individualism: the concept of “social rationality” is incoherent. Societies do not reason, individuals do.

-Interesting side point from Buchanan: utilitarians are individualists, and are therefore philosophically inconsistent whenever they leave the individual and speak of social utility. I add that interpersonal utility comparisons are also impossible.

-Because individuals are rational and the concept of rationality does not apply to societies, we can observe intransitive “preferences” and cyclical majorities in democracies. Also, these inconsistencies can be useful as a check on power and on tyrannies of the majority.

-Cyclical majorities also allow for ongoing experimentation with new policies. The status quo is never set in stone.

-Buchanan invokes near-unanimity as a benchmark of true collective choice, prefiguring The Calculus of Consent, which would appear eight years later.

-Market decisions to tend to obey the transitive property, since they are made solely at the individual level. They are not public choices. Buchanan does allow that this is true only to the extent that an individual’s preferences are, in fact, transitive. Anyone who has spent time with a small child knows that real-life human preferences are not always transitive.

“The Pure Theory of Government Finance: A Suggested Approach” (Journal of Political Economy, 1949), pp. 119-132.

-Buchanan contrasts individualist and collectivist (organismic) approaches to costs and benefits of taxes and spending.

-It was standard practice at the time to count only the costs of government, and not the benefits. Buchanan argues that both matter, and benefits should be counted as well. Later in his career, he would have taken this in a more explicitly public choice direction—the implications for concentrated benefits and diffused costs are obvious. Here, he hints at it, but doesn’t go very far in that direction of analysis.

-One problem with the collectivist/organismic approach is that it thinks in aggregates, rather than in terms of separate individuals. Since interpersonal utility comparisons are impossible, so are accurate societal cost-benefit calculations.

-A price theory point Buchanan does not make: the technical difficulties of separating individual costs is “expensive” in terms of effort and complexity for economists. This is why they choose the “cheaper” option of thinking in aggregates. While rational from a price theory standpoint, this leads to unrealistic analysis.

-Buchanan argues that the aggregate cost of the state should equal its aggregate benefits, in which seems a fairly straightforward Marshallian calculation at the margin. He is agnostic about how those costs and benefits are distributed. That’s for the political process to decide.

-This article clearly reflects his recent study of Italian political economists. He quotes several.

-One of them raises a good point: if political benefits were to be equally spread out, a capita tax would be fair. Since that is not what most people want the state to do, that is why government costs are not equally distributed, nor its benefits.

-The “fiscal residuum” is the difference between a government’s costs and benefits. These will vary from person to person. The goal is for it to equal zero for society as a whole (Buchanan ignores transaction costs and political waste here, but for this simple model’s purposes, that is fine). A progressive tax and benefit system would have a negative residuum for rich individuals, and a positive residuum for poor individuals.

-(Not Buchanan’s point) In practice, democracies often have positive residuums for the middle class, which has the largest number of voters, and negative residuums for the rich and poor. This is for public choice reasons—politicians know want to maximize votes more than they want to maximize any distributional fairness norms they may have.

“Positive Economics, Welfare Economics, and Political Economy” (Journal of Law and Economics, 1959), pp. 191-209.

-Economic theory was developed by utilitarians, and the discipline has been taken over by positivists. Even Milton Friedman is a positivist. This is where Paretian welfare economics comes from. Most economists are not content to describe what is; part of their job is advising policymakers on what should be. Buchanan doesn’t like this.

-Clever insight about Pareto optimality: it avoids the cardinal no-no of interpersonal utility comparisons. Individuals make their own decisions about what makes them better off and worse off, so no interpersonal comparisons are needed. Kaldor and Hicks took Pareto’s approach and developed the new welfare economics.

-A newer development in welfare economics, headlined by Paul Samuelson and others, rejects Kaldor and Hicks. Samuelson, et al rely on a “social welfare function,” and thus commit the non-no of interpersonal utility comparisons.

-Welfare economists, especially of the Samuelsonian variety, assume omniscience of the observer or policymaker. Buchanan says this is unrealistic, and should not guide policymaking. It gives too much power to policymakers to make decisions on others’ behalf.

-Revealed preferences as fatal to the omniscience assumption: We don’t know other people’s preferences until they reveal them through their actions.

-An economist should not decide upon changes, because he has no way to know society’s preferences; the very concept is incoherent. Instead, an economist should present a menu of changes, upon which individuals can decide on, either individually or through the political process.

-This is another example of Buchanan’s subjectivity. His ideological priors are liberal in the sense that he cares about individual consent. But he’s neutral about which policies individuals consent to.

-A rough analogy to Buchanan’s job description for economists is as medical diagnosticians. The patient has a problem, the economist uses their tools to diagnose it and prescribe possible remedies. But ultimately the patient chooses what action to take—though in this case through political consensus, not individual choice.

-Compensation for externalities, such as pollution: Buchanan sees payment for externalities not as an ethical concern for policymakers, but as necessary for an an honest prices system, so individuals can make their own accurate decisions about Pareto-optimal changes. His subjectivity shows up again.

-A political economist’s job is to suggest possible gains from trade, not to impose them against people’s wills—the economist doesn’t know people’s preference functions, and could make non-Pareto-optimal mistakes.

-Good question on p. 203: “Unless the relevant choices are to be made by some entity other than individuals themselves, why is there any need to construct a “social” value scale?”

-Buchanan exposes the vulnerabilities of his own argument—this is the mark of a good scholar. His argument depends on people being reasonable; this is not always true. His argument depends on a contract theory of the state; many people object to this. And no large group of people will be unaminous in decisionmaking, which is the ideal. Some “relative unanimity” benchmark short of that will have to do in real-world political systems, such as a majority vote, a 2/3 majority, or whatever rule people decide on. Buchanan is agnostic on which relative unanimity rule is best.

-If a policy doesn’t gain unanimous consent, is it Pareto optimal? Tough question. Real-world societies will nearly always have to settle for something short of that ideal.

-Which also makes a society progressively more vulnerable to tyrannies of the majority, the closer the adoption rule moves to a 50-percent-plus-one majority.

-A bit of game theory: economists must think at least one move ahead. Don’t recommend what people want right now, recommend what people will want after a proposal goes through the political process.

No Due Date Book Club Notes: James Buchanan, Week 1

I recently joined Liberty Fund’s No Due Date economics book club, where over the next year, participants will read one book per month selected by GMU economics professor Peter Boettke. Pete will also lead group discussions and provide other resources. January’s selection is the first volume of James Buchanan’s collected works, The Logical Foundations of Constitutional Liberty, which collects many of his better-known papers from throughout his career. Buchanan was one of the cofounders of public choice theory, and won the 1986 economics Nobel.

This post, and the following two, collect my notes from those readings. I’m posting them here mostly for my benefit, so I can easily find them during the discussions, and can refer back to them later if I cite them in the future. Readers new to Buchanan or curious about the major themes of his work might benefit from skimming these notes, though I highly recommend reading the primary source. I may or may not do this for future months’ readings, depending on how useful it is.

Note that I copied and pasted these notes unedited from a Word document I kept open while reading. These notes do not always distinguish between as-is descriptions of Buchanan’s arguments, and my opinions and original thoughts about them. Reader beware.

January – James Buchanan, The Logical Foundations of Constitutional Liberty: Collected Works, Vol. 1


“What Should Economists Do?” (Southern Economics Journal, 1964), pp. 28-42.

-They should seek understanding of Smith’s propensity to truck, barter, and exchange.

-They should do catallactics, not oikonomia

-Methodological individualism. Societies don’t have ends in mind, individuals do.

-Lionel Robbins and Max U. as adversaries.

-Don’t posit things as problems; that implies a solution—and a solver, usually the economist or some politician. The real world is far more complicated than that.

-Subtle point, but important: A Max U. robot doesn’t really make choices among alternatives. It follows a pre-determined program.

-“Symbiotics” is Buchanan’s preferred term for economics, even over catallactics. It captures the inherently social nature of what economists study. It is a social science. There is no economics or symbiotics in studying Robinson Crusoe until Friday joins him.

-Another subtle point from Frank Knight: in perfect competition, there is no competition, and no trade as we understand the terms.

-Equilibrium through the perfect competition lens is harmful to understanding. When equilibrium does happen it’s an emergent process. Both of those words matter. Nobody designs it, and the process never ends. Something can always change.

-Markets are institutions and processes, not Max U.s achieving societal goals.

-Politics is also exchange. Economists should study it that way.

-Market exchanges are between equals; political exchanges are between superiors and subordinates.

-Public choice, properly done, is not normative. He expects pushback on this point.

“Politics without Romance” (Lecture, Institute for Advanced Studies, Vienna, Austria, 1979), pp. 45-59.

-Don’t fall for the Nirvana approach. Compare realistic alternatives when looking at institutional arrangements.

-Public choice is supposed to be positive, not normative. First figure out what is, which does not vary from person to person, before proceeding to the should part, which does vary from person to person.

-Pre-constitutional political exchange precedes market exchange.

-Political exchange affects the whole public; hence the name “public choice.” Market exchange affects only the individuals involved (ignoring externalities, which Buchanan does not mention).

-Tension: where does legitimacy come from? Buchanan says it comes from contracts, not rights. But contracts themselves depend on consent. A tension in his thought?

-A “productive state” can emerge to provide public goods by solving transaction cost problems, at least to some extent.

-Cyclical majorities tend to happen in democracies under certain rules. Arrow was on to something, though he tended to ignore institutions.

-Duncan Black and the median voter theorem also have explanatory power in how political exchange works.

-Most people are multi-issue voters, which makes modeling all but impossible, and can result in cyclical majorities.

-Good analogy: people vote on the temperature they want. Then we see if the heating and cooing system is capable of delivering it.

-In a representative democracy, representatives’ incentives are not the same as their voters’ incentives.

-Marginalism does not exist in political goods. They are all-or-nothing bundles. Marginalism does exist in market goods. Consumers can choose a little more or less of each product as they choose.

-Public choice is for something, not just against the romantic view of politics. It is for enabling human cooperation, and avoiding the Hobbesian trap. It sees institutional design as the method that can accomplish this as best people are able.

“Keynesian Follies” (Book chapter contributed to a Nobel conference volume, The Legacy of Keynes, 1987), pp. 164-178.

-Keynes was an artist, not a scientist. His goal was to change the perception og his economist peers. This was one reason he changed his mind so often.

-The depth of Keynesian follies are from Keynes’ followers more than the man himself.

-Keynes was aware of the importance of institutions; less so his followers. Keynes built a model to get people to think that monetary policy mattered less than fiscal policy. The trouble began when this was taken as scientific, rather than a goading to move scholarship in a certain direction.

-Keynes was responsible for people to concentrate on employment as a policy objective, and therefore neglect monetary and market institutions.

-Thought: Is Buchanan getting the arrow of causality wrong? And I have my doubts that people were ever as institution-minded as Buchanan seems to argue.

-Buchanan argues for a full employment impossibility theorem, taught by Henry Simons and C.O. Hardy. Closed market economies have three possible characteristics, of which only two are simultaneously possible at a time: 1) full employment, 2) stable money, and 3) noncompetitive labor markets.

-Keynes’ theory was of its time, but didn’t work in the 1940s and later. Possible implication (would Buchanan go there?) Institutions, if not timeless, are at least more long-term oriented.

-Monetary policy has much stronger effects than fiscal policy. Why then, Buchanan asks, are most Keynesians (asidE from Lerner) focused instead on fiscal policy? One possibility is an ideological preference for a larger public sector.

-Keynesians should have known that fiscal fine-tuning (surplus during booms, deficits during busts) is impossible for public choice reasons. Politicians don’t work that way.

-Keynes the artist of 1936 intended to persuade people to take extraordinary policy actions during extraordinary times, when the normal political rules didn’t necessarily apply. The Keynes of a more stable era would likely have given different advice, but his disciples didn’t seem to realize that.

-Buchanan closes by asking if many Keynesian follies could have been avoided by widespread use of a commodity standard. My answer is maybe, but would the tradeoffs have been worth it?

Retro Book Reviews: A Capitalism for the People: Recapturing the Lost Genius of American Prosperity by Luigi Zingales (Basic Books, 2012)

University of Chicago economist Luigi Zingales’s book A Capitalism for the People: Recapturing the Lost Genius of American Prosperity, which celebrates its 10th anniversary this year, attempts to frame free-market policies in terms that appeal to populists, who generally oppose free markets.

I first read A Capitalism for the People not long after it came out. At the time I wrote:

I am wary of populism in all its forms, from Ancient Roman populares to William Jennings Bryan, right on up through John Edwards and John McCain. But if Zingales’s approach succeeds at making thorough illiberals a little more liberal at the margin, he will have done a valuable public service.

Zingales’s timing was prescient. As the historian Stephen Davies and my colleague Iain Murray have argued, much of the world has gone through a fundamental political realignment over the past decade. Since Zingales’s book was published, a worldwide populist wave put in office politicians such as Brazil’s Jair Bolsonaro, Hungary’s Viktor Orban, and America’s Donald Trump.

Did Zingales come up with a viable strategy for making such illiberal populists more liberal at the margin? That is a difficult question, but the answer is probably no. That isn’t Zingales’s fault—it’s because liberalism and populism are fundamentally incompatible. Populism is about conflict, while market liberalism is about cooperation. It is impossible to meaningfully combine them.

Populism is tricky to define because it lacks a common set of policies or principles, the way conservatives, progressives, and liberals do. Conservatives will reliably support policies that increase social order, such as law enforcement, national defense, and faith-based initiatives. Progressives will reliably support policies intended to reduce inequality, such as social spending programs, minimum wages, and progressive taxation. Liberals will reliably support policies that increase openness, tolerance, and dynamism, such as free markets, free trade, and deregulation.

Populists have been known to support almost any combination of any of these issues, even when they contradict one another. Populists can come from the right, the left, or nearly any combination of the two.

So what do populists rally around, if they lack defining principles or policies? Populism is about the conflict between us and them. It pits regular people against elites, whether in media, academia, or business. It pits one’s fellow countrymen against foreigners, or one’s coreligionists against outside faiths, or one race against another. It pits Republicans against Democrats.

Populism is more of a mindset, or more accurately, an emotionset. Populism comes more from the amygdala rather than the cerebral cortex, which is why it will always be with us to some degree.

A strong sense of in-groups and out-groups gave a survival advantage in hunter-gatherer times, as members of small nomadic bands helped each other out. Their hostility to outsiders improved their defenses. Thinking of people as “Other” also reduced moral qualms about taking food and mates from outsiders, giving another survival advantage in harsh conditions.

We moderns live in different circumstances, but genetically we are still the same people. Populism—and its cousins such as nationalism, socialism, racism, and identity politics—are all different applications of our hunter-gatherer instincts to modern conditions.

Who the outsiders are differs by circumstance; that there are outsiders is the common populist theme. That is why populists can have no coherent policies or philosophies, yet still have something important in common—us against them. The liberal project of preventing the Hobbesian war of each against all is about keeping that universal tendency in check.

So that is what liberals are up against—roughly 95 percent of human history, and millions of years of evolution before that.

Zingales’s contribution is a bit of judo—using the populists’ own tactics against them. If you can frame a policy in an us-against-them way, some populists might warm up to it.

Many populists favor trade protectionism as a way to shelter domestic industries from what they perceive as “unfair” foreign competition. But there are other ways to frame the same issue. If the “them,” rather than foreigners, turns out to be politically connected industries that profit by hurting “us,” the consumers, by lobbying for price-raising tariffs, then some populists could be convinced to oppose trade protectionism and other forms of cronyism. The political strategy is neutral on the policy; it’s about the framing.

But this lack of philosophical mooring leaves Zingales’s argument vulnerable. For example, he argues that globalization increases inequality, which is a classic populist grievance—thinking in terms of ratios, rather than how people are actually doing. As to that more important question, people around the world are doing better than in any other era of history—poverty rates, life expectancy, disease, violence, air and water pollution, and other measures of well-being are nearly all getting better, in both rich and poor countries. Zingales seems to think in terms of conflict, as a populist would, instead of in terms of cooperation. Yet, the beneficial results of the latter are what show up in the data.

Zingales argues on page 38 that “the most powerful argument in favor of antitrust law is one that is rarely made: antitrust law reduces the political power of firms.” That is not the case; regulatory capture is rampant in antitrust. Large companies often welcome antitrust enforcement and other regulation if it puts up barriers to entry against smaller competitors. For instance, Facebook can afford to spend millions of dollars complying with new content moderation regulations as part of an antitrust settlement; the small startup that could someday overtake Facebook cannot. Antitrust doesn’t fight cronyism, it provides more opportunities for it.

For Zingales, the problem is that while his populist framing of antitrust law is spot-on, it is just as easy to give identical framing to the opposite side of the issue. How do you decide which side is better on the merits?

Zingales makes a similar slip on page 51 when he argues that “One beneficial side effect of the Glass-Steagall Act, as with most of the other banking regulations, was to fragment the banking sector and reduce the financial industry’s political power.” In reality, Glass-Steagall made the banking sector more vulnerable by forcing banks to put their eggs in fewer baskets. It also reduced competition among banks, which could compete in either commercial banking or investment banking, but not both.

When various companies in an industry create non-compete agreements like Glass-Steagall did, it often results in an antitrust case. Yet in the case of Glass-Steagall, Congress passed a law forbidding competition.

While that ban went away in 1999, benefiting consumers, banking regulations as a whole have continued to grow. Rules aimed at boosting home ownership for political reasons required banks to take on more risks. When the resulting bubble blew up, unleashing the 2008 financial crisis, Congress passed the Dodd-Frank financial law in response, which exacerbated the “too big to fail” problem it was intended to solve. Yet, it was the repeal of Glass-Steagall that got much of the blame, including from Zingales.

Again, it is easy to make populist arguments both for and against bank bailouts. Bailout supporters can say that bailouts are necessary to protect households’ savings against big banks’ irresponsible behavior. Bailout opponents can argue that bailouts are another example of cronyism. They create moral hazard and make banks even more dependent on their political connections.

In the end, it still comes down to merits and principles. With a little creativity, almost any issue can be framed in populist terms. That means liberals still need to be careful about choosing which issues to frame in an us-vs.-them way for populist audiences.

Zingales is more careful about this in his concluding chapter, which draws out the distinction between being pro-business and pro-market, and comes out strong against cronyism. He writes on page 255:

What would also help minimize cronyism is not a plethora of new government regulations (they are the first to be captured) but a village of potential whistleblowers.

His book would have been better had he applied his advice consistently.

In the decade since A Capitalism for the People was published, Zingales has drawn some company in framing market-liberal policies in populist terms. Last month, George Mason University economist Bryan Caplan, who is openly pro-liberal and anti-populist, compiled two lists of populist deregulation proposals, ranging from ending airport security theater to deregulating shower heads. Arnold Kling, another market-liberal economist, writes regularly about populism and its framing in his Substack blog. CEI founder Fred Smith has a longstanding interest in what he calls value-based communication, of which appealing to populists is a part.

Will Zingales’s framing strategy help to improve policy in the current populist moment? Maybe a little bit at the margin, but it won’t help with substantive change, because the root problem is populism itself. It is at the cultural level, and can’t be fixed by liberalizing a regulation here and there. It takes active engagement, using insights from Zingales, and from Fred Smith, Caplan, Kling, Aaraon Wildavsky, and other thinkers. It takes civility and listening.

Fittingly, it takes cooperation, rather than conflict, to convince people that cooperation is better than conflict for achieving prosperity and security. It is possible to somewhat defuse today’s polarized politics, but it is a long-run process that takes ongoing effort and keeping calm.

By listening, engaging, and appealing to populists on their own terms, liberals can help convince people that an open society is a better place to live than a closed one, that principles are more important than parties or political personalities, and that long-term governing institutions are more important than winning this year’s election. The values of July 4 must prevail over those of January 6.

In the News: Christmas Trees

I was quoted today in a Washington Times story about Christmas trees:

It’s been a tough year on a lot of fronts, from the pandemic to inflation, but holiday traditions are made of strong stuff,” said Ryan Young, a senior fellow at the libertarian Competitive Enterprise Institute. “It also helps that artificial trees last for many years, so most of the homes that go that route are unaffected by supply network problems at least in the tree department.”

Best Books of 2021: Ryan Bourne, Economics in One Virus (Cato Institute, 2021) and Caleb Fuller, There Is No Free Lunch (Freiling, 2021)

Economists are an unpopular bunch. One reason for this is that much of their job is putting parameters on people’s utopias. Spending more money on one issue people care about means spending less on other issues that someone else cares about. Neither politicians nor the public have kind words for those who remind them that tradeoffs exist. Economists, regardless of political persuasion, also tend to have different views than the general public on issues such as trade, immigration, minimum wages, and rent controls. Getting shouted down by people who have not studied the issue at hand is a feeling many economists know all too well.

This dismal reputation is undeserved for two reasons. One, the economic way of thinking is useful. It can shine light on how grocery stores work, why politicians behave the way they do, and even on feeding behavior in birds. Two, it is fun. Basic economic principles are at work, right now, almost everywhere in the real world. Looking for them, and seeing them in action, is a discovery process that provides constant “A-ha!” moments. Two of this year’s best economics books explore both of those themes in ways that anyone can understand.

Economics in One Virus: An Introduction to Economic Reasoning through COVID-19, by Cato Institute scholar Ryan Bourne, shows how applying basic economic concepts can make dealing with the pandemic easier and less contentious. Grove City College economics professor Caleb Fuller’s No Free Lunch: Six Economic Lies You’ve Been Taught And Probably Believeshows that economic reasoning is not only useful, it can be fun. Both books give clear and enjoyable explanations of basic concepts in the economist’s toolkit, in different ways.

Bourne’s Economics in One Virus is the more thorough of the two books, about 270 pages of text to Fuller’s 110. As the title implies, it focuses on current events, while Fuller’s book is more evergreen. First a bit on Bourne’s book, then we will turn to Fuller’s.

Each of the 16 chapters in Economics in One Virus focuses on a different economics concept. He gives layman-friendly explanations of tradeoffs, risk analysis, trade and specialization, and more. His application of marginal thinking to COVID-19 lockdowns and other policies is especially enlightening. It shows that politicians are not as impactful as they think they are, and gives good reason for people to be more civil to their political opponents. Bourne shows why it is perfectly reasonable to support vaccines and mask wearing, while also opposing mandates.

When COVID first hit, people started adapting right away by staying home and socially distancing. They didn’t wait for governors and presidents to tell them what to do. When some states started passing mandates and other rules a few weeks later, they had little effect at the margin. Most people were doing the right thing anyway, so lockdowns and masks mandates had little additional effect. That’s what thinking at the margin is.

People who weren’t listening to their families, friends, and colleagues probably didn’t suddenly change their mind because of something some politician said. If anything, lockdown orders and mask mandates likely caused a backlash, with some people to digging in harder against safety measures. A virus with no political views of its own became a heated political issue for no good reason, which likely resulted in more funerals than necessary.

The lessons from Bourne’s application of marginal thinking are that most people are smarter than politicians think, and that mandates and other measures have smaller effects than most people on either side of the political spectrum thinks. They are bad policy, not just on libertarian grounds, but because their effects are small, especially compared to the amount of social tension they cause. I tried but failed to articulate this point early in the pandemic, and was delighted to see Bourne do it right. That discussion alone is worth the price of admission.

Bourne’s other highlight is Chapter 13’s introduction to public choice theory, which is underserved in most popular economics books. Public choice theory, in a nutshell, says that politicians will always behave in a self-interested manner; design your political systems accordingly.

Too many people have an idealized view of politics, where things would improve if we can just pass the right bill or elect the right people this time. Government doesn’t work that way. Policies are made by the government we have, not the government we would like to have. Any well-meaning reform will have to make it past the desks of people like Mitch McConnell and Nancy Pelosi. It will be watered down, compromised, and loaded with unrelated political favors. Reformers who do not take this into account will fail.

The solution is to focus on larger political processes, not just this or that bill or regulation. We know that politicians will always have an incentive to get reelected and to grow their budgets and powers. But we also know that different rules will give different results. A well-designed political system channels politicians’ incentives in a better direction—or at least a less harmful one.

A political system that disperses political power will be freer than one that concentrates it in a king or a president. A system that makes it difficult to pass hasty “flash policy” during a crisis will be more resilient than one that lets it through. That is why we have a Senate, as well as a House of Representatives. That said, America’s recent experience with the PATRIOT Act, Dodd-Frank financial regulations, and now trillions of dollars of COVID spending bills shows that we need to improve our rules in that area. Harmful crisis legislation has happened three times already this century. Absent reform, it will happen again when the next crisis hits.

With the possible exception of the notion of tradeoffs, public choice theory is probably the most important defense the public has against politicians and populist demagogues. Bourne’s highly readable application of public choice to COVID-era policy making is an important public service.

Fuller’s There Is No Free Lunch is more about the ideas themselves than about applying them to specific issues like the pandemic. At the same time, it is more focused than Economics in One Virus. Where Bourne gives a tour of more than a dozen different concepts, Fuller’s six chapters each cover a different aspect of one idea: opportunity costs. They are each framed as myths—destruction is profit, trade is war, exchange is exploitation, and so on—which he then busts.

Early on, Fuller acknowledges his debt to the 19th century French economist Frederic Bastiat and his 20th century American successor, Henry Hazlitt. Bastiat wrote the famous parable of the broken window, which remains the classic explanation of opportunity costs.

In this story, a young boy accidentally breaks a shop window. The townspeople hail him as an economic hero, because he has created a job for the glass repairman. He will in turn spend his money on a new suit, the clothier will spend that money on something else, and on down the line. This may sound familiar, because many politicians use similar reasoning in promoting their spending bills.

The problem is that the cheering citizens have ignored opportunity costs. They see the repairman’s new suit, but they don’t see that if the window was never broken in the first place, the shop owner could have had both the window and a new suit. Instead, he is down a window, and the economy as a whole has the same amount of new suits, not more of them. The boy caused a net loss.

Hazlitt updated Bastiat for the 20th century with his 1946 book Economics in One Lesson, which applied the broken window fallacy across a range of policy issues. Fuller’s book is a worthy, and needed, update to the Bastiat-Hazlitt tradition. It helps that Fuller is an excellent storyteller. Even veteran economists will find new material here.

As a way to show the opportunity costs of rent controls, Fuller shares a story from the economist Bertrand de Jouvenel about post-World War II Paris. Rent controls made apartments so scarce that people would stalk the elderly day after day and pounce on their rent-controlled apartments as soon as they died. Lower money prices for rent raised non-money prices, such as scarcity. Would-be renters who could have been working and earning money instead would spend their time ghoulishly tracking people waiting for them to die. In that case, human decency was a cost of rent controls.

Speaking of which, rent control also enables discrimination. When lots of people queue up for scarce apartments, landlords can choose tenants based not on price, which is set by regulations, but on their prejudices. They also tend to choose childless couples over couples with children, who will draw on the walls and break things. In New York City, basic maintenance was often neglected, because controlled rents didn’t always cover the cost. Arson rates went up, as some landlords decided to torch their own buildings rather than be legally forced to lose money. Some landlords even fled to the Caribbean and assumed new identities, as documented in Walter Block and Edgar Olsen’s edited book Rent Control: Myths and Realities, which includes several pictures of burned-out buildings. Was the destruction caused by bombs or rent control? The answers are at the end of their book.

Fuller also shares economist Steven Cheung’s story about Hong Kong landlords’ response to a rent control provision allowing for rent increases when tenants turn over. They would sometimes remove windows during monsoon season so rent-controlled tenants would move out rather than tolerate the conditions. The landlords could then charge higher rent to the next tenant.

Occupational licensing has its own opportunity costs. They benefit incumbents, who are enriched by being able to charge higher prices and keep out competitors. And many would-be workers lose career opportunities.

But what about consumers? Here Fuller uses what I call an “invisible coffins” argument. Occupational licensing is associated with measurably more electrocution deaths, blindness, and even poorer dental hygiene.

That is because those licenses can cost thousands of dollars and hundreds of hours of training to obtain. Not only does this restrict supply, but those extra costs are factored into prices; businesses pass on their costs. This raises the cost of basic maintenance services in licensed professions like electrical work and dentistry, so poorer people will sometimes just do without, try to do it themselves, or turn to gray and black markets. That means more avoidable accidents. The effect is large enough to show up in the data, as shown in studies like this one and this one.

I have only one substantive criticism of There Is No Free Lunch. Fuller says on page 69, “here it is, one more time with feeling: Let’s think with our heads, not our hearts.” I argue that it is better to think with our heads and our hearts. Yes, it’s nice that markets are efficient. And it does take thinking with our heads to see why, using the lens of opportunity costs. That’s all necessary, but it isn’t sufficient, and that’s why we need to think with our hearts, too.

The post-1800 Great Enrichment has increased ordinary people’s living standards thirtyfold. This is a historical development on par with the taming of fire or the invention of the wheel, and markets made it possible. Markets enable people to rise out of poverty. They help people live longer, healthier lives.

Markets also encourage virtue, as Virgil Storr and Ginni Choi argue in their book Are Markets Moral? Participating in markets teaches people how to cooperate, how to compete within rules, and how to trust and be trustworthy. They can use their market-generated wealth to give to charities, to support the arts and make their own art, to travel, to spend time with family, and to create opportunities to our children. Our heads show us that markets make all that possible. But we need our hearts to show us why we want those things in the first place.

Bourne’s Economics in One Virus shows how sound economic thinking can make life in the COVID era safer and less divisive, and has ideas for effective damage control against politics. Fuller’s There Is No Free Lunch shows how the simple concept of opportunity costs can help anyone gain insight into how everything, from bounties to retailing, actually works. Anyone who reads either of these books—or, better, both of them—will have both a clearer view of the world and some good ideas about how to make it better.

Senate Shelves Build Back Better Spending Bill, For Now

The Senate will not vote on the Build Back Better (BBB) spending bill this year, though they might take it up again next year. It does not have 50 votes without Sen. Joe Manchin’s (D-WV) support, which appears not to be forthcoming. This is a good thing for two reasons. One is inflation. The other is that Gross Domestic Product (GDP) and unemployment numbers are well on their way to pre-pandemic levels. A stimulus bill was never needed in the first place. There are policies Congress and state governments should pursue, but more deficit spending is not one of them.

Monetary policy has a much bigger effect on inflation than does fiscal policy, such as stimulus bills. Even so, Build Back Better would likely have added between a quarter and a half a percentage point of inflation on top of what we are seeing now. And it might have lasted for a decade or more, depending on how many of its temporary spending programs would have later been made permanent.

Considering that the Federal Reserve has traditionally targeted 2 percent inflation, BBB would have eaten up a big chunk of its usual inflation “budget.” Inflation is currently at 6.8 percent, the highest since 1982. The Federal Reserve today announced it would taper money supply growth. It will slow down a bond purchasing program and end it altogether in March, and will likely enact a series of up to three interest rate increases during 2022.

Since money supply growth is inflation’s biggest component, high inflation will be with us well into 2022, no matter what Congress does. But BBB-caused inflation on top of that would have made a bad problem even worse.

Manchin, and likely other Senate Democrats, may realize this is not a good look going into the midterm elections. President Jimmy Carter made important accomplishments in trucking and airline deregulation, and he appointed Paul Volcker as Federal Reserve chair, who ultimately slowed down the monetary printing press. But in the popular mind, Carter’s legacy is stagflation. If President Biden wants to avoid sharing Carter’s legacy, he should be quietly happy that his signature legislation is now on ice. He should see to it that it stays that way.

Biden should also avoid interfering with the Fed as it works to taper down today’s inflation. Since inflation can spark a temporary boom, politicians have always been tempted to put pressure on the Fed to goose the numbers a little leading into an election. (Lyndon Johnson and Richard Nixon were particularly egregious in this regard, as Peter J. Boettke, Alexander William Salter, and Daniel J. Smith argue in their book Money and the Rule of Law.) But the tradeoff of an inflationary boom now is a bust later.

There is no guarantee that Congress and President Biden will learn the right lesson. When inflation’s temporary stimulus effect wears off, policy makers are tempted to reach for the bottle again, rather than risk a hangover recession and hurt their chances for another term in office. This short-term thinking is what led to the 1970s stagflation. Had the process continued longer than it did, the result could have been Argentina-esque. It is crucial that today, Congress and President Biden respect the Fed’s nominal independence.

Fortunately, inflation is unpopular with the public. And economic fundamentals are in reasonably good shape, which means there is no need for inflationary stimulus. People hunkered down when COVID-19 hit, and are opening up when they feel safe—and when regulations allow them to. We aren’t through it yet, and it’s too early to tell how much effect the omicron variant will have. But the COVID recession had no stock market crash, no financial crisis, no housing bubble, no savings and loan scandal, or any other underlying economic illness. Traditional Keynesian stimulus does not apply to today’s economy. Build Back Better might be the biggest example of a #NeverNeeded policy yet.

The best thing that can be said about Build Back Better is that it was fighting the last battle, not the current one. Less charitably, Build Back Better was essentially a Democratic version of the PATRIOT Act, in which policy makers used a crisis as an excuse to put a bunch of longstanding wish-list items into a bill, and then market it as a must-pass crisis response. Not only would BBB have increased inflation, it would have used up more than $1 trillion dollars of resources that almost certainly have better uses than paying political favors—most of them COVID-unrelated.

GDP is already back to where it would have been had COVID never happened. Today’s ultra-low 4.2 percent unemployment rate looks better than it is, because many people are staying out of workforce, either for safety reasons or because they are content living off of savings for a little while longer. But even accounting for that, employment is in decent shape, and labor force participation is trending back to pre-COVID levels. Job openings are there for the taking—though rapid inflation is making it difficult for employers and employees to figure out fair wage rates.

Congress will instead turn its attention to other issues, such as voting rights. But it turns out there are policies Congress can pursue to fight inflation from the supply side. Money is growing faster than goods and services, causing higher prices. Removing regulatory obstacles to making goods and services will help to bring money and goods back into balance.

President Trump doubled tariffs, and President Biden is pursuing nearly identical trade policies. Scrapping those barriers alone would help unclog supply networks while lowering prices on hundreds of billions of dollars’ worth of goods, from big items like cars and houses to children’s toys and clothing.

There is no good reason for truckers to have a minimum age of 21 during a shortage when there are 18-year-olds perfectly able to do the job well.

U.S. ports operate at roughly half the efficiency of more modern ports like Rotterdam, which is open 24/7 and is heavily automated. While there isn’t much Congress can do about this, the biggest obstacle here are labor union contracts. These need to be modernized to avoid another supply network crisis and keep the U.S. shipping industry up to global standards. However, Congress can repeal the 1920 Jones Act, which attempts to protect the U.S. shipping industry but instead has reduced it to an uncompetitive rump of its former self.

Similar Buy American-style regulations requiring U.S.-flagged ships to dredge U.S. ports are why many ports are badly behind on dredging projects, and are unable to host many modern container ships.

Over a quarter of U.S. jobs now require some sort of occupational license from the government. Sixty years ago, it was 5 percent. Federal, state, and local governments need to get rid of unnecessary licenses that prevent willing people from creating more goods and services. Besides being the right thing to do, it would help to fight inflation.

None of these policies has the attention-grabbing cachet of a trillion-dollar piece of legislation. But unlike the BBB, they would stimulate new economic growth and help get inflation back under control.

On the Radio: Inflation

Today at 5:30 ET, I will appear on the Lars Larson Show to talk about inflation.

I’ll post a link to audio afterwards if it’s available.

In the News: Supply Chains

I can’t access the article due to a paywall, but on December 3 I was quoted in the Washington Times about tariffs and supply chains networks.

Inflation Increases to 6.8 percent, Misery Index Reaches 11

October’s inflation reading was the highest since the recession of 1991. November’s is the highest since the 1982 recession, at an annualized 6.8 percent. The reason inflation is usually highest during recessions is because governments attempt to restart growth through a combination of monetary and fiscal policy. It is troubling that today’s inflation is happening while the economy is growing and unemployment is low.

In fact, the misery index is now in double digits, which rarely happens outside of recessions. The misery index is the inflation rate plus the unemployment rate—economist Arthur Okun came up with it as an easy-to-use statistic for President Lyndon Johnson’s benefit, and it remained a key statistic throughout the stagflationary 1970s. It may be time to dust it off again.

While unemployment is a very low 4.2 percent, when combined with 6.8 percent inflation, the misery index currently stands at 11. For context, its all-time high was 21.9 in June 1980. It was below 5 for a good chunk of the 1950s, and was at 5.3 in April 2015. See a historical chart from the St. Louis Federal Reserve’s FRED database here.

Inflation happens when the money supply grows faster than the supply of goods and services, as I explained earlier. In today’s case, the COVID-19 pandemic shut down large swathes of the economy for an extended period. Even if the money supply had remained stable, the supply of goods and services temporarily went down. The effects are still being felt in today’s supply chain problems.

But economic fundamentals remained healthy. There was no financial crisis or popped housing bubble. People hunkered down for a while, and are in the process of coming back. This is why COVID-era growth has bounced back in close tandem with increased vaccination rates and decreased caseloads. When people feel safe to open back up, they do—and nothing is stopping them except for bad public policy.

Both Congress and President Biden responded to a different type of recession with the same tools. The result is high inflation during a period of growth. The solution is to spend less and get money supply growth back in sync with growth in goods and services. Instead, Congress continues to spend at a record rate, with more likely on the way. The Fed has indicated that it will taper back monetary growth, but not until next year.

Policy makers are unlikely to do the right thing on the money side. But they can help the goods and services side by removing trade barriers, getting rid of unneeded occupational licenses, speeding up years-long permit processes, repealing the shipping cost-raising Jones Act, liberalizing trucking regulations, and other deregulatory measures. These would spark growth while helping to tame inflation—and without adding to the deficit.

Can Regional Trade Agreements Replace the WTO?

Trade policy is in a bad place right now, with two consecutive protectionist administrations in the U.S. and the World Trade Organization (WTO) possibly damaged beyond repair. The Hudson Institute’s Thomas J. Duesterberg recently argued in The Wall Street Journal that one solution would be a pivot to regional trade agreements. While that’s not the worst idea on paper, I sent the following letter to the editor pointing out that it wouldn’t work in practice:

Thomas J. Duesterberg rightfully worries that the World Trade Organization may be damaged beyond repair (“The WTO’s Fast Track to Irrelevance,” op-ed, Nov. 29). A trade organization has enough on its plate without having to deal with trade-unrelated issues such as labor, human rights, and climate. But Duesterberg’s solution of expanded regional trade agreements would likely have the same problems.

Trade-unrelated provisions are part and parcel of trade agreements these days, as the United States-Mexico-Canada Agreement’s 2,000-page length shows. The solution is to confine trade agreements to trade and treat separate issues separately. Until that root problem is addressed, trade policy will remain ugly, whether negotiations happen at the WTO or regionally.

Ryan Young

Senior Fellow, Competitive Enterprise Institute