Category Archives: Economics

Economics Humor

Posted on December 18, 2015 | Comments Off on Economics Humor

fed rate hike of 2015

Click the image to enlarge.

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Posted in Economics, General Foolishness, Monetary Theory

Douglass North, 1920-2015

Posted on November 27, 2015 | Comments Off on Douglass North, 1920-2015

Many great economists live long lives. James Buchanan, Milton Friedman, F.A. Hayek, Ludwig von Mises, and Gordon Tullock all lived into their nineties. Ronald Coase died a centenarian. Sadly, Douglass North has joined that august club at age 95. Keynes’ prediction about the long run once again proves correct.

North’s ideas and influence will live even longer than he did; consider that his successful rebuttal to Keynes. North won the 1993 economics Nobel for his work as an economic historian, and for showing the importance of institutions in economic development. He also played a large role in inspiring the New Institutional Economics (NIE) movement, which has its own scholarly society.

What are institutions? North and the many economists he influenced use the word in a particular way. For example, the Competitive Enterprise Institute is an institution (it’s even in our name), but not in the Douglass North sense. For North, institutions are more like the rules of the game. In baseball, three strikes and you’re out is a baseball institution—again, in a very different sense than how the Yankees or Cubs are baseball institutions. How would a pitcher’s behavior change if the rule was four strikes per out, or two? How would a hitter behave differently if foul balls were automatic outs? That’s what Doug North’s research approach was about, except on a much larger historical scale.

One of North’s most famous papers is “The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges, and the Champagne Fairs.” It is set in 12th century France, and coauthored with Paul Milgrom and Barry Weingast, themselves distinguished economists. France had no functional national court system in the 12th century, and a dearth of professional judges and lawyers. Even so, informal markets, called Champagne fairs, opened up and spontaneously evolved their own institutions. Even without help from up on high, people found ways to make things work.

These spontaneous Champagne fair institutions ranged from how stalls were allocated to norms for bargaining and haggling, all the way up to the creation of private courts for resolving disputes. It’s a real-life illustration of Hayek-style spontaneous order. North adds the insight that the institutions that evolved in the Champagne fairs guided peoples’ behavior in certain directions. Different institutions would have guided behavior differently.

Over time, successful institutions displaced unsuccessful institutions, in an ongoing social evolutionary process. This insight continues to influence scholars in many disciplines, not just in economics.

Another famous paper about England’s 17th century Glorious Revolution, also coauthored with Barry Weingast, makes the case that checks on royal power made modern life possible. In the short run, a weaker king made people’s property rights more secure. No longer could the king just take what he wanted. Now he had to deal with a strong Parliament. Successfully removing James II, the last of the Stuarts, and replacing him with the more amiable William and Mary made Parliament a credible counterweight to royal ambition.

This new institution, which we now call separation of powers (note that John Locke’s Treatises came out at precisely this time), made modern commerce and the Industrial Revolution possible. There is obviously much more to the story of modernity, but North told an important part of the tale.

North also laid out his institutional approach in a number of books. To his credit, they are all short. One of them particularly influenced me as a student: Understanding the Process of Economic Change. Here, North goes a level deeper than the Champagne fair or Glorious Revolution articles.

Yes, institutions matter. Societies with secure property rights, the rule of law, and so on tend to be wealthier than societies that don’t. But where do those institutions come from? How do they emerge? How do institutions evolve over time? The general theme is that the institutions that best fit a given society’s circumstances emerge organically, from the bottom up. They can’t be planned and imposed from the top down. They just kind of happen, as unsatisfying as that is to say. They also change over time. What works in one time and place may not work in another, so institutions must be allowed to evolve over time. Legislation and social conventions that worked for railroads or horses might not work for self-driving cars. It is a brilliant performance.

One final point to make: economics is about human cooperation and voluntary exchange. It is quite literally a social science. Douglass North understood that point as well as anyone. Fred Smith and I have recently spent a good deal of time encouraging economists to move beyond the Homo economicus blackboard caricature and study Homo sapiens as well. Douglass North needed no such reminder. Nor do his numerous students who work every day to carry on his impressive intellectual legacy. As long as North’s career was, his influence will last far longer.

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Posted in Economics, Great Thinkers

Much to Be Thankful For

Posted on November 25, 2015 | Comments Off on Much to Be Thankful For

Thanksgiving is tomorrow, and all of us have much to be thankful for. Over at Inside Sources, I have a Julian Simon-inspired take on the holiday:

This Thursday is an opportunity to give thanks for a wonderful fact: In all of human history, there has never been a better time to be alive than right now. This might seem an odd thing to say at the moment. War, terrorism, poverty, political repression and hunger still plague many countries. The most recent wounds, inflicted in Paris, Syria, and elsewhere, are still fresh.

But life is improving in unprecedented ways.

Over the last century or so, the typical American’s income has grown sixfold. Life expectancy increased 30 years during the 20th century, from 47 years in 1900 to 77 in 2000. Infant mortality went down by more than 90 percent over that period, from roughly one in 10 to less than one in 100. Just think of all the broken hearts avoided. Nutrition and health care improved so rapidly that the typical American in 1950 was three inches taller than in 1900. Today’s Americans are taller still.

Read the whole thing here.

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Posted in Economics, Publications

What Does the World Think of Capitalism?

Posted on November 24, 2015 | Comments Off on What Does the World Think of Capitalism?

My colleague Richard Morrison has a column up the Foundation for Economic Education that is well worth reading, even though it cites Fred Smith’s and my recent paper. The question he raises–why are markets unpopular?–is a good one.

Richard gives some good answers. I have plenty of my own thoughts on the matter, influenced by thinkers such as Michael Shermer, Matt Ridley, and James Buchanan. I hope to elaborate on them in the near future.

Read his whole column here.

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Posted in Economics

Virtuous Capitalism in Theory and Practice

Posted on November 17, 2015 | Comments Off on Virtuous Capitalism in Theory and Practice

Government is responsible for billions and billions of dollars of corruption and corporate welfare. Considering the potential returns on investment compared to honest entrepreneurship, it is a minor miracle the vice-to-virtue ratio in the economy isn’t even worse than it already is. Why is that? CEI founder Fred Smith and I wrote a recent paper, “Virtuous Capitalism,” which explores several possible answers to the question.

If you don’t have time to read the whole thing, Fred summarizes it in his most recent Forbes column, to which I contributed:

Capitalism has a bad reputation. Many people see it as corrupt, uncaring, and in bed with politicians. And popular wisdom isn’t always wrong. For example, take the Export-Import Bank’s pending renewal. How dare large, healthy businesses such as Boeing and General Electric receive billions of dollars-worth of special privileges?

Has Big Business thought through the political and social costs of such self-aggrandizement? Is sacrificing long-term moral standing for short-term dollars really wise?

Read the whole column here. The paper is here.

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Posted in Economics, Public Choice, Publications

Virtuous Capitalism vs. Rent-Seeking

Posted on October 29, 2015 | Comments Off on Virtuous Capitalism vs. Rent-Seeking

Over at the Institute for Energy Research’s Master Resource blog, I have a guest post summarizing Fred Smith’s and my recent paper, “Virtuous Capitalism.” The post is here, and the paper is here.

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Posted in Economics, Public Choice, Publications

Ex-Im Revival Passes the House

Posted on October 28, 2015 | Comments Off on Ex-Im Revival Passes the House

The House has passed Rep. Stephen Fincher’s Ex-Im revival bill, by the margin of 313-118. Senate Majority Leader Mitch McConnell has publicly said the Senate will not act on the bill, so last night’s vote was more of a public statement than anything else. While the statement might be unpleasant, the public now has a much better idea of which Congressmen are pro-business, as opposed to pro-market—an important distinction. So at the very least, voters now have a better idea of who to hold accountable, and who they might support in primary elections.

With no stand-alone vote, Ex-Im reauthorization will instead be folded into an upcoming must-pass transportation bill. A Senate vote on that could happen as soon as next week.

Both parties share blame for Ex-Im’s possible revival. Nearly all Democrats voted in favor of reviving Ex-Im—a curious reversal of decades-long opposition. Rep. Alan Grayson (D-Fla.) is the only one to stay consistent. Progressives have been Ex-Im’s traditional opponents, not just on corporate welfare grounds, but on human rights grounds—Ex-Im subsidizes many governments with checkered human rights records, and helps to keep them in power. See for example, this Mother Jones article from 1981, this one from 1992, and another from as recently as 2011, which is based on environmental grounds.

The GOP’s small pro-market wing began actively opposing Ex-Im in 2012, so Mother Jones therefore changed its stance around that time; see here and here. See also a thoughtful piece at Salon on this curious role reversal.

So Democrats deserve criticism for abandoning principle, seemingly for no reason other than to take the opposite stance from Republicans. “If you say X, therefore I saynot X” is hardly a sign of intellectual rigor, but such is the nature of partisan politics.

But the goal here isn’t to pile shame on just one party. Both parties deserve it. The traditional pro-business Rockefeller Republican mindset—recall the famous slogan “what’s good for GM is good for America,” as well as a certain bailout from a few years ago—is the party’s traditional stance, and one for which it is often rightly criticized. Republicans are a major reason why Ex-Im was able to survive for more than 80 years, and Republicans are why it is on the brink of revival.

By the time Ex-Im’s 2012 reauthorization came up, a small GOP minority rejected pro-business thinking in favor of pro-market thinking. Rather than making sure to help GM or Boeing or some other specific business, their priority is to maintain an open competitive process under which any entrepreneur with a good idea and a good product can succeed.

These free-marketers raised a bit of a stink about Ex-Im, catching a sleepy Washington by surprise. Then the alarm went off, leading to a pitched intra-party fight that has been raging ever since, with major Ex-Im beneficiaries and traditional pro-business groups adding to the decibel level.

This culminated in the most recent Ex-Im vote. As mentioned above, Democrats deserve criticism for abandoning long-held principles on corporate welfare, international human rights, and clean government (Ex-Im is a well-known hotbed of corruption), seemingly for no reason other than to oppose the other party.

Republicans deserve criticism for their long-standing milquetoast pro-business mindset. Their pro-market minority deserves praise on the Ex-Im issue, but pro-market thinking sadly remains a minority stance in both parties. Hopefully Boeing’saggressive lobbying push doesn’t have too much to do with it.

In fact, corporate welfare issues like the Export-Import Bank provide a wonderful opportunity for progressives and free-market-oriented conservatives to work together. So why aren’t they?

In politics, the minority party’s job is to deny the majority party any possible political victories, even when they agree. At least that’s my theory for Democrats’ sudden, and nearly uniform Ex-Im reversal.

But if members of both parties could put principle ahead of politics, then progressives and the GOP’s free-market wing, and hopefully some others, could very likely cobble together a majority on several issues on which they agree. They can change the country for the better, even as they continue to disagree on other issues. Ex-Im andOPIC could serve as starter issues. There are many more.

I conclude with a small public service: a list of all 127 Republicans who made a public statement by voting in favor of reauthorizing the Export-Import Bank:

Aderholt
Amodei
Barletta
Barton
Benishek
Bost
Boustany
Brady (TX)
Bridenstine
Brooks (AL)
Brooks (IN)
Buchanan
Bucshon
Byrne
Calvert
Carter (GA)
Cole
Collins (NY)
Comstock
Cook
Costello (PA)
Cramer
Crenshaw
Curbelo (FL)
Davis, Rodney
Denham
Dent
Diaz-Balart
Dold
Donovan
Ellmers (NC)
Fincher
Fitzpatrick
Fortenberry
Frelinghuysen
Gibbs
Gibson
Granger
Graves (LA)
Graves (MO)
Griffith
Grothman
Guinta
Hanna
Hardy
Harper
Hartzler
Herrera
Beutler
Hultgren
Hunter
Hurd (TX)
Issa
Jenkins (WV)
Johnson (OH)
Jolly
Joyce
Katko
Kelly (MS)
Kelly (PA)
King (NY)
Kinzinger (IL)
Kline
Knight
LaHood
LoBiondo
Long
Lucas
Luetkemeyer
MacArthur
Marino
McMorris Rodgers
McSally
Meehan
Mica
Miller (MI)
Moolenaar
Mullin
Murphy (PA)
Newhouse
Nunes
Palazzo
Paulsen
Pearce
Pitts
Poe (TX)
Poliquin
Reed
Reichert
Renacci
Ribble
Rice (SC)
Rigell
Roby
Rogers (AL)
Rogers (KY)
Rooney (FL)
Ros-Lehtinen
Russell
Salmon
Sanford
Sessions
Shimkus
Shuster
Simpson
Smith (MO)
Smith (NJ)
Stefanik
tivers
Thompson (PA)
Thornberry
Tiberi
Trott
Turner
Upton
Valadao
Wagner
Walden
Walorski
Walters, Mimi
Weber (TX)
Wilson (SC)
Womack
Woodall
Yoder
Young (AK)
Zeldin
Zinke

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Posted in Economics, Export-Import Bank, Trade

Signs of Life for Ex-Im?

Posted on October 27, 2015 | Comments Off on Signs of Life for Ex-Im?

Last night the House of Representatives voted on a rare discharge petition, under which a controversial bill can skip the usual committee process and go straight to a floor vote. In this case, the discharged bill is Rep. Stephen Fincher’s Export-Import Bank revival bill. It passed, 246-177, with 62 Republicans joining nearly all Democrats. It was the first successful discharge petition since the McCain-Feingold campaign finance regulation bill. For more on discharge petitions, see my earlier post.

So what happens now? On Tuesday, the House will hold further procedural votes on the Ex-Im bill, which will almost certainly pass. Then it’s off to the Senate, which is unlikely to act on the bill.

So crisis averted? Not quite. Because Senate Majority Leader Mitch McConnell is unlikely to allow a vote on the Fincher bill, reauthorization will instead likely be folded into a must-pass transportation bill. So while Fincher’s discharge petition will likely amount to nothing, it does give Ex-Im beneficiaries a backup plan if they have trouble getting Ex-Im reauthorization into the transportation bill.

For more on why Ex-Im is bad policy, bad politics, and bad economics, see my paper.

Finally, for all the sky-is-falling hyperbole coming from Ex-Im beneficiaries, regular readers will remember that Boeing alone receives nearly half of Ex-Im’s business. Despite Ex-Im’s closure, they recently announced that their earnings were up 25 percent in the third quarter. More than 98 percent of U.S. exports happen without Ex-Im assistance. As with many other companies, Boeing will be just fine without Ex-Im and corruption it enables.

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Posted in Export-Import Bank, Trade

Ethics and Rent-Seeking

Posted on October 24, 2015 | Comments Off on Ethics and Rent-Seeking

Nice writeup of Fred Smith’s and my recent paper at Business Ethics Highlights.

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Posted in Economics, Media Appearances, Public Choice

Virtuous Capitalism, or, Why So Little Rent-Seeking?

Posted on October 20, 2015 | Comments Off on Virtuous Capitalism, or, Why So Little Rent-Seeking?

The venerable Fred Smith and I have a new paper out today. Click here to read it. In the paper, we try to solve the Tullock Paradox, named for the late, great economist Gordon Tullock (my remembrance of him is here).

What is the Tullock Paradox? It involves rent-seeking, or seeking special favors from the government. Bailouts, subsidies, and regulations that prevent competition are all examples of rent-seeking. To provide some context, lobbying is roughly a $3.5 billion industry, and the federal government doles out more than $100 billion in corporate welfare—meaning rent-seeking is potentially a 30-fold investment. Not 30 percent, 30-fold. Meanwhile, the Dow Jones averages an 8 percent return. With such outlandish returns on investment, the Tullock Paradox is: why so little rent-seeking?

Tullock had his answers, rooted in economic reasoning, which we summarize in the paper. But while Tullock’s theories are valid, they’re missing something: ethics, virtue, and a full picture of humanity. Most economists stick to analyzing a Homo economicus character who is unfailingly rational and utility-maximizing. This is a useful and interesting species to study, but Fred’s and my goal is to encourage economists to study Homo sapiens as well. We are capable of pride and shame, we want to love and be loved, we aren’t always 100 percent consistent, and we make mistakes all the time.

One reason there is so little rent-seeking is that most (but not all!) businessmen and entrepreneurs have a sense of virtue and honor that prevents them from seeking special favors. It is much more satisfying to make an honest living than a dishonest one. This sort of thing is difficult to quantify, but it is real, and economists should allow virtue to exist in their models.

Moreover, economists’ single-minded focus on sin means they’re only doing half their job. They should also praise and encourage virtuous behavior when they see it. Praise where due, not just criticism where due. Just as rent-seekers deserve opprobrium, honest entrepreneurs deserve to be admired and emulated. Maybe if virtuous capitalists had higher social standing, there would be more of them.

Over the next week or two, we’ll be putting up a series of short posts explaining Tullock’s “Big Four” theories for why there is so much less rent-seeking than one would expect. Besides providing a rent-seeking primer for those who don’t have time to read our entire paper, we’ll also delve into our larger project of encouraging economists to study Homo sapiens as well as Homo economicus, and to acknowledge virtue as well as sin.

Read our paper here.

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Posted in Economics, Public Choice, Publications