For the last ten years I have been baffled as I watched the conservative movement devolve into a weird wing of progressivism—especially on economic issues. While once at least paying lip service to limited government, fiscal prudence, and personal responsibility, conservatives now ignore the size of government and fiscal responsibility. They increasingly call for a larger child tax credit, a universal basic income, and paid leave arranged and ensured by the federal government. Many conservatives now also proudly embrace tariffs, hyperactive antitrust, and industrial policy (often justified, of course, as necessary to ‘fight’ China). Conservatives – or at least the more politically active ones – are reverting to their 1920s selves (See Matt Continetti’s book, The Right: The 100 year war for American Conservatism.) I failed to see this reversion occurring, in part because I moved to the United States in 1999 and was until recently fairly ignorant of the history of the conservative movement- and how the last forty years were more an exception than the rule.   I fear that this recent trend is just the beginning. It won’t be long before the conservatives’ platform is a full-on version of big government, big business, and big unions. It’s depressing. It is hard not to wonder if the liberty movement is now failing to follow in the footsteps of Hayek, Friedman, and other great 20th-century champions of freedom. It’s important now to recognize that on most fronts the challenges faced by the first- and second-generation members of the Mont Pelerin Society were, if anything, greater than what we champions of freedom face today. After all, people in 1947 – or even in 1987 – could not, as we can today, point to the actual collapse of the socialist states as evidence of the dangers of collectivism. And yet Hayek and his peers left us a world that was more accepting of free trade and free-market economics, even if these liberal policies were not the default position. Perhaps a more optimistic way to view the current situation is to be inspired by those who fought for a more classical liberal world at a time when things looked particularly grim. Rather than despair, get energized by the challenge. But this raises the question of what is the best way not merely to preserve the flame of freedom but to spread it. What the next steps are, I do not know. I am open to your suggestions. The private sector continues to deliver innovation, growth, and widespread prosperity. But as of today, few people are willing to acknowledge that it is the free-market system that allows these wonderful things to happen, and that while of course imperfect (often because impaired by government interventions), any alternatives would be much worse. How do you fight the battle of ideas when so many people distrust the institutions that host those of us who produce and apply these ideas? I have spent most of my professional life producing work to show that arguments for government interventions are bunk. For instance, in this new paper with Chuck Blahous, he and I take on the new conservative recommendation that Social Security be used to provide paid-leave benefits. We show, again, all the ways that this is a terrible idea. Of course, I believe that work such as this is important, since these are serious propositions introduced in Congress and supported by a fairly large number of conservatives. But is there a better way? In this new paper, Gary Leff and I argue that next time legislators are tempted to bail out airlines ostensibly to ensure that they will be ready when the economy reopens, the public should remember the actual, depressing results of the most recent such bailout. But Congress won’t change its response unless we change the incentives politicians face during the next emergency. How do we do that? After all these years, I still don’t know. Maybe it is more effective to offer a vision of what a libertarian world looks like. This is what Aaron Powell does in this edited volume. I recommend it. I think this approach describes also a lot of the work of former EconLog blogger Bryan Caplan. He inspires by offering a vision of what a world would look like without government subsidies to higher ed, a world with largely open borders, and a world with radically fewer restrictions on home building. The Fraser Institute’s Economic Freedom Index offers such a vision, because it is a concrete way to illustrate what countries with less economic freedom look like compared to those with more freedom. The 2022 Economic Freedom of the World Report was released earlier today; all countries have declined in economic freedom, thanks to over the top pandemic responses, but the U.S. has actually declined even more relative to other countries. The U.S. rating fell by twice the amount of the average reduction worldwide. The U.S. is at its lowest level of economic freedom in four decades. The bottom line is that while I am usually an optimist, I find myself increasingly worried and wondering what we did wrong and what to do next.   Veronique de Rugy is a Senior research fellow at the Mercatus Center and syndicated columnist at Creators. (1 COMMENTS)

  But guess who got to ignore California’s restaurant-closing measure? That’s right: Governor Gavin Newsom. On October 9, 2020, his own Department of Public Health issued a prohibition on gatherings of more than three households. But on November 6, less than four weeks later, Newsom was seen at an expensive restaurant attended by at least twelve people, celebrating the birthday of a lobbyist. Newsom did what politicians often do when caught: he lied. He claimed that the dinner had been outdoors. But photos showed his claim to be false. Then Newsom did what politicians often do when caught in a lie: he apologized. Although I may have missed it, I don’t recall his expression of sympathy for others who might have wanted to celebrate birthday parties indoors with people from multiple families. Newsom and his staff set the rules for all of us and expected us to obey them. But Newsom exempted himself and his friends and apologized only when caught. That is the aristocracy of pull. This is from David R. Henderson, “The Aristocracy of Pull,” Defining Ideas, September 8, 2022. I also get into the higher minimum wage we can now expect for fast-food workers in California: Economists know what happens when governments raise minimum wages. In the simple model that we teach our students, employers lay off workers whose productivity isn’t high enough to match the higher minimum wage and employers also adjust by making production more capital intensive. We often point out that the minimum wage law doesn’t guarantee a job; all it guarantees is that if you get a job, it will pay the minimum wage. But for workers who are relatively unskilled, that’s a big “if.” It’s precisely the requirement that they be paid the minimum wage that makes them less likely to get or keep a job. But some economists also teach a more complex model that more completely fits the reality of the labor market. They point out that the wage is only one part of the compensation package. Other components are employers’ contributions to health insurance and retirement plans, and general working conditions: free food for employees, flexibility so that employees can deal with sick children, etc. When the government sets a high minimum wage, employers can reduce those benefits. Critics of this view might argue that employers of unskilled workers do not give a lot of fringe benefits. But that actually helps make the economists’ case: the higher the minimum wage, then, all other things equal, the skimpier the fringe benefits. And a chance to recount one of my favorite skits: In the 1930s, in a play on Broadway called Ballyhoo of 1932, actors Willie and Eugene Howard did a famous skit. In the skit, a speaker, wanting to persuade his audience of how great communism would be, shouted, “Come the revolution, everyone will eat strawberries and cream.” One member of the audience yelled back, “But I don’t like strawberries and cream!” The speaker responded, “Come the revolution, you’ll eat strawberries and cream—and like it!” I think of that when I think of the fast-food council. This council will make decisions for thousands of employers and hundreds of thousands of employees. It’s true that many employees might like the decisions. But it’s also true that many employees might dislike the council’s narrowing of their options. In a world of heterogenous tastes, many employees might not “like strawberries and cream.” Read the whole thing.   (0 COMMENTS)

“There’s someone in Bangladesh who would almost surely be a better economics professor than I am and is now behind a water buffalo,” he told me. “The market economy gives me and my preferences 200 times the voice and weight of his. If that isn’t the biggest market failure of all, I don’t know what your definition of market failure could possibly be.” This is from Annie Lowrey, “The Economist Who Knows the Miracle is Over,” The Atlantic, September 3, 2022. Don Boudreaux has made the point that it’s hard to claim this as market failure when Bangladesh is a country whose markets are most repressed by government. He points out that in the 2022 edition of the Annual Report on Economic Freedom of the World, about which I’ll have more to say in a day or two, Bangladesh ranks a dismal 139th out of 165 countries that are rated. That’s a major contributor to the water buffalo driver’s poverty. I won’t say more about that because Don said it well. But there’s another point to make. The Bangladesh government is not the only government preventing that water buffalo driver from being an economist: governments in richer countries such as the United States also play a huge role. Whatever you think of restrictions on immigration, they are restrictions; they are heavy regulation of the labor market. If the United States substantially relaxed its restrictions and let, say 5 million Bangladeshis into the country, that water buffalo guy might actually get here and become an economics professor. And Brad might be right: this former water buffalo driver might well do a better job than Brad at teaching what is, and what is not, market failure.   (0 COMMENTS)

Some economic models rely on the assumption that people are entirely selfish. But these models tend to be internally inconsistent, as they often assume an economic regime that could not possibly exist if people had absolutely no regard for the broader society.  At a minimum, a market economy requires at least some willingness of people to refrain from rent seeking in the form of barriers to commerce. People are somewhat selfish.  Most people care a great deal about their own interests, and somewhat less about the interests of strangers that they have never met.  Nonetheless, people often engage in activities (such as voting) that are hard to explain from a narrow self-interest perspective.  People seem to have at least some sense of solidarity with others, which shows up in a willingness to fight for one’s country or to pursue philanthropic causes. A Bloomberg article about a power crisis in California caught my eye: A timely mobile alert may have prevented hundreds of thousands of Californians from being plunged into darkness in the middle of a heat wave Tuesday night. Just before 5:30 p.m. local time, California’s grid operator ordered its highest level of emergency, warning that blackouts were imminent. Then, at 5:48 p.m., the state’s Office of Emergency Services sent out a text alert to people in targeted counties, asking them to conserve power if they could. Within five minutes the grid emergency was all but over. This graph shows the impact: It is possible that some power consumers wrongly assumed that their decision to turn down the AC would have a significant impact on the risk of a blackout.  That decision would be consistent with selfishness. Given California’s vast population, however, any individual power reduction would be a drop in the bucket. I’m certain that at least some California consumers understood that their decision to turn off the AC would have little overall effect on blackout risk, and did so out of solidarity with society as a whole.  How can I be certain?  Because I received this text message, at a time the outside temperature was in the high 90s.  I immediately shut down our central air conditioning.  I suspect that other people had the same thought process. Homo economicus is a reasonable approximation for some purposes.  A more realistic economic model, however, would assume that people care a lot about their own self-interest and put a much lower but still positive weight on the utility of their fellow citizen.  In addition, people have more solidarity with people that live nearby than with those who live far away. Countries with a high level of solidarity, such as Denmark, tend to have more effective governance than countries where most people have a low level of solidarity with strangers, such as Afghanistan.  More specifically, countries with a great deal of solidarity tend to be more market-oriented than countries where people have less solidarity with strangers. Back in 2008, I wrote a paper that touched on these issues, which began as follows: The Great Danes: Cultural Values and Neoliberal Reforms “Virtually every commercial transaction has within itself an element of trust . . . It can be plausibly argued that much of the economic backwardness in the world can be explained by the lack of mutual confidence.” (Kenneth Arrow, Gifts and Exchanges, Philosophy and Public Affairs, 1972, p. 357.) I don’t know whether Arrow is correct, but the following anecdote might help to illustrate the concept that Arrow had in mind. While traveling in Northern Michigan this summer I noticed farm stands by the edge of the road selling cherries. Often, no salesperson was present. One simply placed a five dollar bill in a small metal box, and drove away with a quart of cherries. This system makes one realize the enormous waste of labor resources involved in someone waiting by the roadside for motorists to stop and purchase cherries, and may be one reason why high-trust societies tend to be relatively prosperous. (0 COMMENTS)

It’s said that one man’s trash is another man’s treasure. In the same way, one man’s market imperfection is another man’s market opportunity. Imperfections in markets don’t prevent markets from operating – they are a driving force of the market process. As Hayek once said, in the standard economics model of “perfect competition,” there is no actual competition! A commonly cited market imperfection is “imperfect information.” Lack of information is indeed a problem, but companies and consumers both have incentives to find ways to solve this problem. One way to achieve this is through branding. Suppose you’re on a road trip and need to make a quick stop to eat. You have two options – a local burger joint called Billy’s Burgers, or a McDonalds. You know nothing about the former restaurant – it could be a hidden gem, or it could leave you chained to your toilet for the next three days. You’re just passing through town, so you’re not going to be a repeat customer; this is a one-time transaction. You might not want to take the risk that Billy’s might turn out to be a dud. Meanwhile, with McDonalds, you know exactly what you’re going to get. It’s going to be basically the same as every other McDonalds you’ve ever tried. The same is true for other major chain restaurants. The brand name communicates valuable information to the consumer, alleviating the problem of imperfect information. But times have changed. We don’t need to rely so much on branding to supplement our information. Nowadays, everyone knows about Yelp, Google reviews, and other similar review aggregators. If you were to take that road trip now, you could just pull up the Yelp reviews for Billy’s Burgers. You’d see the results of hundreds, if not thousands, of others who have been through that town. You’d be able to see the full menu, along with pictures posted by both the restaurant and the customers. Suddenly, your ability to choose between McDonalds and Billy’s can be much more informed. In fact, a working paper from the Harvard Business School looked into the effect of Yelp on the restaurant industry. The author, Michael Luca, found that a rating increase of one star on Yelp leads to an increase in revenue between 5% to 9% – but that this impact was limited to independent restaurants. Chain restaurants saw no significant effects from Yelp reviews. This makes intuitive sense – I’ve often consulted Yelp and similar apps when deciding about an independent restaurant or a food truck. It’s never even occurred to me to look at Yelp to find a rating for any given Chipotle or Applebee’s. Why would I? I already know what to expect from those places. And I’ve also found that because of Yelp, I’m far more likely to seek out and eat at independent or specialty restaurants instead of chains, because Yelp has made it so much easier to find the gems among the grit.   What to make of all of this? I think there are three takeaways. Markets are not about reaching and maintaining an equilibrium, free from frictions or imperfections. Markets are an ever-ongoing process, working in response to those frictions and imperfections. The solution used yesterday may not be the same as the solution used today. Where branding was once key to imperfect information, crowdsourcing has now emerged as a valuable tool as well. Tomorrow’s might introduce a new solution which is totally different – the process will continue to evolve, in ways that aren’t always apparent right now. Because the process always evolves, there is no fixed, “correct” answer to how to handle market imperfections over time. This should make us extremely reluctant to use regulation. Once you do, you’ve said a single institution (the state) must create a one-size-fits-all solution for everyone. Once implemented, a political solution will inevitably create some winners and losers, which itself inevitably creates interest groups out of the winners who have reason to maintain this new status quo. If a better solution emerges, markets could smoothly transition to it, as we’ve seen with branding giving way to crowdsourcing. But political structures force you to battle with special interest groups and entrenched interests before you can gain new options. This can leave a suboptimal solution in place long after it stops being useful – if it ever was useful to begin with.   Kevin Corcoran is a Marine Corps veteran and a consultant in healthcare economics and analytics and holds a Bachelor of Science in Economics from George Mason University. (0 COMMENTS)

On August 23, in an interview with Dr. Anthony Fauci, Fox’s Neil Cavuto asked if the school shutdowns had “forever damaged” kids. Fauci answered, “I don’t think it’s forever irreparably damaged anyone.” If only that were true. But a large amount of accumulated evidence contradicts Fauci’s rosy claim. Moreover, not only did the school shutdowns damage millions of children, even worse, those shutdowns will shorten their lives. Keeping schools open would have saved lives. School closings caused losses in learning, which will lead to long-term losses in income, which, in turn, will lead to lost and shortened lives. This is from David R. Henderson and Ryan Sullivan, “Contra Fauci, School Closings Will Shorten Lives,” AIER, September 5, 2022. Co-author Ryan is the father of two young kids whom he loves very much. That motivates him a lot to write these things. And: Other estimates put the shortening of lives caused by the school shutdowns at much higher levels. A paper by Dimitri A. Christakis, Wil Van Cleve, and Frederick J. Zimmerman published in the Journal of the American Medical Association estimated 13.8 million years of life were lost due to the school closures. This number was estimated from a standard analytical model that examined the association between school closures and reduced educational attainment and the association between reduced educational attainment and life expectancy. It was based on data from the CDC, the Social Security Administration, and the U.S. Census Bureau. Dividing 13.8 million years of life lost by a normal life expectancy of 78 years in the U.S. indicates that the school shutdowns were responsible for the equivalent of about 177,000 deaths. Economists often use the term “invisible graveyard” to refer to deaths such as these. The idea is that these deaths are not yet identified, but they will take place in the future. That’s a tragic outcome regardless of whether we see them in the obituaries. Read the whole thing.   (0 COMMENTS)

Tyler Cowen was recently interviewed by Brian Chau. Tyler was somewhat critical of woke excesses in the US, particularly in universities. Chau was much more critical of wokism. The most interesting part of the interview came during a period (of roughly 20 minutes) after the 44-minute mark in the podcast. Tyler suggested that many developing countries could use more wokeness, and cited India as an example. Chau seemed somewhat confused by this claim, and pushed back a bit. My own views are closer to Tyler’s, but I’d like to frame this question in a way that tries to make sense of Chau’s view as well.  I’ll use a simple two-dimensional model of politics.  You can say it’s wildly simplistic, but in my defense I see lots of people using one-dimensional models (e.g., wokism is good, non-wokism is bad, or vice versa.) Think about a model where the extreme right represents political regimes where the powerful oppress the disadvantaged and/or minority groups.  On the extreme left, the powerful oppress the advantaged.  Of course that raises an interesting question—if they are advantaged, how can they be oppressed?  One example might be the Chinese Cultural Revolution, where people that came from upper class families were persecuted.  (Again, I understand that this model only addresses a few aspects of politics, and leaves much out.) From this perspective, the “moderate” position between the extreme left and the extreme right is not really moderate at all; it represents a sort of extreme liberation. People are not oppressed by anyone.  The following pyramid might make it easier to see my point: Let’s say we start from a position on the extreme right, where the powerful people repress weaker groups like women, racial minorities, religious minorities, gays, etc.  Over time, weaker groups are gradually liberated.  At some point this movement gains so much power and prestige that society begins discriminating in favor of the traditionally weaker groups, and begins oppressing the strong (say Protestant, white, heterosexual men.)  Now instead of moving up and to the left from Nazism to liberation, society begins moving down and to the left, toward Maoism.  (BTW, I’m certainly not suggesting that white males in America are strongly oppressed, but this is the sort of issue that right-wingers worry about.) Tyler uses India as an example of a place where more wokism is needed. Indeed by 21st century American standards, much of the world is still on the right side of the pyramid.  (Africa, South Asia, Russia, the Middle East, etc.)  But note that when making this claim, Tyler is implicitly defining wokism along a sort of left-right access.  The woke are the people pushing us to the left, toward (what they perceive as) greater help for the disadvantaged.  In many countries, that means pushing toward greater liberation. In the interview, it’s pretty clear that Chau hadn’t given much thought to woke issues in developing countries.  He clearly saw the phenomenon from a “freedom-oppression” perspective.  He’s implicitly assuming that we are on the left side of the pyramid.  Because the most controversial aspects of wokism in America lead to a reduction in freedom, he found it hard to understand how India could possibly benefit from more wokism.   On the other hand, even many American conservatives would probably agree that India could benefit from a bit more enlightened attitudes on issues like gender, caste and religion.   But perhaps they don’t see that as wokism. To leftists in the US, more wokism means better treatment of the disadvantaged.  To rightists in the US, more wokism means more oppression of non-favored groups.  Cowen and Chau both agreed that recent trends in wokism in US universities are doing more harm than good.  But when you remove wokism from that specific context, and look at it from a global perspective, one’s perspective depends on whether you see wokism as a left-right issue, or along the freedom-oppression axis. Tyler’s point is that in India there’s a lot of oppression of women, Muslims, Christians and lower caste people in general, and in that sense India needs more leftism.  Here I mean leftism in a social sense, not in terms of economic policy.  India’s current (populist right wing) government is making things worse.  And (in my favorite part of the interview), Tyler points out that this is a blind spot for American right-wingers when they look around the world: Maybe completely is too strong a word but look in India there’s plenty of groups I spoke to some people who were involved with them to give women who are raped the chance to bring actual suits against their violators in a way that doesn’t take 20 years or involve extreme humiliation. Make them unacceptable on the marriage market and so on and I don’t doubt the motives of those people are mixed. There’s a lot of hypocrisy and (???) reasoning might apply. It just seems to me those are largely highly beneficial movements and I’m rooting for them to succeed and I view that as a pretty big and essential part of the emancipatory perspective of libertarianism and classical liberalism and I don’t quite get why what you might call the North American right isn’t just fully on board with that as part of a belief in human liberty. Chau responded “I don’t think they aren’t.”  And yet I see the same thing as Tyler when I read many right wing pundits.   All of this has echoes of a period that I recall from my youth.  Broadly speaking, socialism was the major global political movement of the mid-20th century, just as right wing authoritarian nationalism is the major political movement of the 21st century.  In the post-war decades, most American progressives thought the communists went too far, just as today most American conservatives presumably think that people like Putin, Xi, Orban, Modi, Bolsonaro and Erdogan are too authoritarian.  At the same time, while America progressives were not communist, they were not sufficiently anti-communist.  Similarly, I now see American conservatives intrigued by extreme right wing foreign leaders who parrot “anti-woke” rhetoric.  Believe me, the major problem on this planet is not that “me too” has gone too far.  It’s not that gay rights have gone too far. Right wingers used to call progressives “communist.”  A more accurate charge was “soft on communism.”  That was a real thing when I was young.  Today I see right-wingers who are soft on misogynist authoritarian nationalism. PS.  I’m aware that India has lots of affirmative action.  As I said, politics is complicated.  It’s quite possible for some aspects of a society to be on the right side of the pyramid while other aspects of the same society are on the left side.  Nonetheless, India is mostly on the right side. PPS.  Oddly, the American right is much tougher on Xi Jinping than it is on other right-wing authoritarian leaders, even though Xi is most definitely a right-wing authoritarian.  Today’s China is clearly fascist, and the continued use of the term “Chinese Communist Party” is just a fig leaf to cover up that embarrassing fact. (0 COMMENTS)

I used Labor Day to write my biweekly column for the Hoover Institution’s online publication Defining Ideas. Hey, that’s why it’s called Labor Day, right? So we can labor? Here’s my Labor Day post, a day late. Start with this quote from Phil Gramm and John Early, “Income Equality, Not Inequality, Is the Problem,” Wall Street Journal, August 29, 2022. (August 30 print edition.): Real government transfer payments to the bottom 20% of household earners surged by 269% between 1967 and 2017, while middle-income households saw their real earnings after taxes rise by only 154% during the same period. That has largely equalized the income of the bottom 60% of Americans. This government-created equality has caused the labor-force participation rate to collapse among working-age people in low-income households and unleashed a populist realignment that is unraveling the coalition that has dominated American politics since the 1930s. And: Our most significant finding from correcting the census income calculations wasn’t the overstated inequality between top and bottom earners. It was the extraordinary equality of income among the bottom 60% of American households, regardless of employment status. In 2017, among working-age households, the bottom 20% earned only $6,941 on average, and only 36% were employed. But after transfer payments and taxes, those households had an average income of $48,806. The average working-age household in the second quintile earned $31,811 and 85% of them were employed. But after transfers and taxes, they had income of $50,492, a mere 3.5% more than the bottom quintile. The middle quintile earned $66,453 and 92% were employed. But after taxes and transfers, they kept only $61,350—just 26% more than the bottom quintile. I haven’t checked Gramm’s and Early’s numbers but they appear to be well-sourced. The bottom line is that the welfare state in the United States is now so extensive that for people in the bottom 60 percent, work pays off at best marginally. We need to make work pay better. Not by dictating higher wages; we know the problems with that. But by paring down the welfare state. Note: The one thing I wonder about their numbers is how they account for spending on in-kind government welfare programs like Medicaid. Finkelstein, Hendren, and Luttmer found that Medicaid recipients value a dollar of Medicaid spent on them at only 20 to 40 cents. If Gramm and Early valued the Medicaid at $1 of benefit to the recipient for $1 spent on the recipient, they would be overstating the income of the bottom 20 percent. That would mean that the gap in income between the bottom quintile and the next two quintiles would be higher than their numbers show. However, it should be noted that one reason Finkelstein et al found such a low value is that “the uninsured pay only a small fraction of their medical expenditures. Put differently, if there was [sic] no Medicaid, this population would still receive some health care and would pay only a small share of its cost, likely due to the large amount of uncompensated care provided by hospitals.” So we might be back roughly to the dollar for dollar value of Medicaid spending, that I suspect Gramm and Early used, not being as big a problem as I first thought. Without Medicaid, they would still get a fair amount of medical treatment without working and being covered by health insurance. The graph above is from their WSJ article. (0 COMMENTS)

Economics, as it has been taught historically, often departs from a static analysis of society in which economic activities are in perfect equilibrium. It is only after this baseline is given that more realistic assumptions are added for the economics students to be trained in more practical economic models. To the extent that economic theory is a tool to facilitate the understanding of that aspect of reality that is economic activity, it is necessary to expose the students to the fact that real life economic activity is never in equilibrium, and that a static analysis misses the subtleties that a dynamic one may provide, in the same way a photo does not provide as much information as a movie. Different schools of economics have added different features to their respective tool kits that would allow for more realistic understandings about how the economy works, and we do not need to distinguish between the many existing approaches for the purpose of this essay; it is sufficient to know that they exist. Since the moment that social change became (again) accepted as a proper object of economic analysis in the second half of the nineteenth century, a debate about the nature and the causes of those changes ensued. Although with parallels in other fields of social sciences and other applications within economics itself, the discussion about changing economic conditions started as a consequence of the realization that some countries had institutional arrangements better suited to promote, or at the very least, to allow economic growth than other countries. So, if the institutions of society are no longer taken as given, and economists start to use their existing tools to develop new theoretical tools to understand the differences in institutional settings, they soon develop an interest in knowing what causes those changes and whether it would be possible to provoke them to happen or to improve them. Think about North and South America in the 1960s. What were the conditions that allowed or supported economic growth and development in the North that were absent in the South? Once those elements were identified, the next logical step became considering what could be done to make these conditions come about. The idea of how to promote economic growth soon crystallized around two causes: institutions and culture. This essay is not the place for a review of the literature about economic growth. For our purposes here, giving an example of each will suffice—and we will refer to Douglass North’s and Deirdre McCloskey’s works respectively as examples of arguments for institutional and cultural changes as the causes of economic growth and development. Douglass North and Barry Weingast wrote extensively about how the institutional changes centered around the creation of the Bank of England in late-seventeenth-century England created a “credible commitment” that the public debt would be honored in spite of the Crown’s bad credit. With that, a financial revolution1 took place, creating the conditions for industrialization and productivity growth. By the same token, using their framework, William Summerhill analyzed the performance of Brazil’s foreign debt in comparison with other Latin American countries in the nineteenth century and found again that a “credible commitment” to creditors goes a long way in getting funding when you need it and at a lower cost.2 Deirdre McCloskey argues that the “bourgeois virtues”3 instilled in Northern Europe after the Protestant Reformation, which is an argument broader than the argument previously advanced by Max Weber about Protestant Ethics,4 was the main cause of the economic growth and industrialization of Europe before any other civilization. The primary argument of their thinking is clear; it is impossible to do justice to their arguments in the confines of this article. We will also not attempt to square the circle and make their claims compatible. Instead, we will offer an additional element for consideration in order to understand how social changes happen in general, although we will continue to use the case of economic growth for discussion. “If institutional changes are not entrenched in society, they may be reversed easily. If cultural changes are not translated into social institutions, it is difficult to imagine how consistent change will occur.” First, we need a dynamic analysis of the relationship between culture and institutions rather than a static one. We realize that once this process is started, it operates in a spiral—with cultural and institutional factors not only reinforcing one another—but also allowing them to expand their reach. If institutional changes are not entrenched in society, they may be reversed easily. If cultural changes are not translated into social institutions, it is difficult to imagine how consistent change will occur. Second, once either or both are accepted as causes of economic growth, we still need to explain how the process starts. We argue that ideas are the triggering factor. Of course, we are not saying anything entirely new. In regards to economic performance, Douglass North already called attention to the fact that ideological support for market institutions is an important element for economic growth to happen.5 In more general terms, Friedrich Hayek also assumes that ideas are the trigger of social change when he explains how ideas are transmitted in society and result in social changes in “The Intellectuals and Socialism.”6 Another reference is Ludwig von Mises, who in his last major work, Theory and History, advanced the following argument: The genuine history of mankind is the history of ideas. It is ideas that distinguish man from other beings. Ideas engender social institutions, political changes, technological methods of production, and all that is called economic conditions. Let us return to North’s example of the creation of the Bank of England in 1694. As already mentioned, King William III was broke. William Patterson and his associates approached the Crown with a proposal to segregate a special, new stream of tax revenue for the specific purpose of paying what would be owed to them if the conditions for the loan were accepted by the Crown. They were accepted, and a sink fund was created to repay that debt. Disagreements between the government and its debtors surrounded the Bank of England. The Crown agreed that from then on, disagreements would be resolved by the Court of the Exchequer. It is worth mentioning that Parliament, where the merchants were represented, had some say. All these features added to the “credible commitment” that the government, at that time, was serious about repaying that debt. Thus, an idea became a reality via institutional change. The idea was so good that the change endured. With time, it helped to create a culture of financial innovation and intermediation that led to more efficient allocation of resources in the United Kingdom before anywhere else. Notably, the mediator between institutional change and cultural change were the new incentives, framed by the institutional reform. In a story for another day, the renewal of liberalism after World War II bears important parallels to the Bank of England story. The new framework for a liberal market economy in West Germany and other European countries after World War II—keeping mind the new ideas of a multilateral and rules-based international economic order centered around free trade, were major achievements of this path breaking “ordoliberal” renewal in economic policy thinking. Other innovations within the economic analysis of law, public choice theory insights about collective action, “Austrian” insights about entrepreneurship, dynamic efficiency, and the uses of knowledge in society, all lent support to the subsequent international waves of liberalizations and democratizations—from the end of the Soviet Union to the opening up of China. These were the ideas that underpinned the globalization that raised the standard of living for billions, enabling more people than ever before to work their way out of abject poverty. That is a lot to be credited to the ideas as the trigger of institutional and cultural changes. However, economic growth is not the only kind of social change, as this essay has already made clear. Let us not forget that all changes are not for the better. Persistent increases in inequality with its resulting erosion of social cohesion and trust is a real problem in many societies, as is climate change and loss of biological diversity. These are major challenges that require better solutions and where we once again are faced with big choices of great consequence for the future. Postmodernism and Cultural Marxism (of which critical theory and identity politics are a part) are powerful ideas in an age of polarization—ideas that have been provoking immense cultural and institutional change in Western societies in general, and in the United States in particular. Are you troubled by attacks on the principles and values of the American Founding? Certainly they did not start by spontaneous generation. They began with original thinkers proposing them and intellectuals helping them to propagate—on a receptive and fertile ground—until they gained the support of a significant part of the public opinion. To avoid Western societies and their liberal democracies being transformed in the direction of those ideas, new and better ideas need to be proposed and gain acceptance by the public. If past experience can serve as a guide for what is achievable, the future of the essential Western idea and reality may not look that bleak. We find it reasonable to understand the greatest strength of liberalism to be embedded in its proven ability to reinvent itself in response to a changing world. But this renewal will not come from a status quo mindset, it can only come from new and better ideas. Again, Mises understood something essential about ideas in Theory and History that may be worth noting: The genesis of every new idea is an innovation; it adds something new and unheard of before to the course of world affairs. The reason history does not repeat itself is that every historical state is the consummation of the operation of ideas different from those that operated in other historical states. Another reason for measured optimism about the future of liberalism resides in the well-known consequences of a high quality meeting place for ideas: They tend to stimulate and speed up the process of generating new and better ideas through constructive and critical exchange and debate. Just take two obvious examples. It is indeed, as a historical fact, very hard not to appreciate the enormous amount of ideas that came out of the Walter Lippmann colloquium in Paris in 1938 and the Mont Pelerin Society that was created in 1947. These ideas had consequences. Finally, it should be noted that shared experiences play a role in the productivity of networks of ideas. The devastating consequences of the interplay of extreme anti-liberalisms during the interwar period and World War II sharpened the focus and strengthened the sense of urgency among the participants in the Lippmann-colloquium and the meetings of the MPS. For more on these topics, see Economic Growth, by Paul Romer. Concise Encyclopedia of Economics. Theory and History: An Interpretation of Social and Economic Evolution, by Ludwig von Mises. Liberty Fund Edition, Online Library of Liberty. “Ideas Matter,” by Pedro Schwartz. Library of Economics and Liberty, May 5, 2014. We are once again faced with new totalitarian threats to the liberal world order that once created a safe environment for liberal democracies all over the world. At the same time, liberalism faces severe authoritarian and nationalist threats from within the West at a time when substantial social, economic, and environmental challenges loom large. In other words, there is no shortage of reasons for hoping that the “international society of liberal thinkers”—to use Hayek’s words in describing his own idea to establish the Mont Pelerin Society—should once again become a leading source of ideas in the service of human freedom and dignity. Footnotes [1] Douglass North and Barry Weingast, “Constitutions and Commitment: The Evolution of Institutions Governing Public Choice in Seventeenth-Century England,” The Journal of Economic History. March 3, 2009. [2] William Summerhill, “Sovereign Commitment and Financial Underdevelopment in Imperial Brazil.” Working draft prepared for the conference “States and Capital Markets in Comparative Historical Perspective,” 21 October 2006, UCLA Center for Economic History. [3] Deidre McCloskey, “Bourgeois Virtues?” in CATO Policy Report, May/June 2006. Prudentia, May 18, 2006. [4] Max Weber, The Protestant Ethic and the Spirit of Capitalism, 1905. Available online at Marxists.org. [5] Douglass North, “Transaction Costs, Institutions, and Economic Performance.” USAID.gov. PDF file. [6] Friedrich A. Hayek, “The Intellectuals and Socialism.” University of Chicago Law Review. Volume 16, Issue 3, Article 7. *Lars Peder Nordbakken, an economist at the liberal think tank Civita in Norway, holds a degree in civil economics from the Norwegian School of Economics in Bergen. He is a member of the NOUS network and the Chair of the organizing committee of the Mont Pelerin Society general meeting on Liberal Institutions and International Order: Renewing the Infrastructure of Freedom and Liberalism. *Leonidas Zelmanovitz, a Senior Fellow with the Liberty Fund, holds a law degree from the Universidade Federal do Rio Grande do Sul in Brazil and an economics doctorate from the Universidad Rey Juan Carlos in Spain. For more articles by Leonidas Zelmanovitz, see the Archive. (0 COMMENTS)

In recent years, fears of inflation and the possibility of recession have grabbed headlines, particularly as the Federal Reserve has raised interest rates to curb inflation. In a recent article published in The Washington Post, historian Meg Jacobs and economist Isabella Weber suggest an alternative way to fight inflation.1 Rather than fight inflation by raising interest rates and risk the potential of a deep recession, Jacobs and Weber argue that implementing price controls would be a more effective means of curbing inflation. As they argue, although “price controls have a bad reputation politically and a record of mixed success, they worked in one of the most important cases in American history—World War II. And the differences between that case and later failures,” such as Nixon’s implementation of wage and price controls during the 1970s, “reveal how policymakers can wield this tool effectively.” Whether or not price controls “work” to fight inflation, the question has broader implications for our understanding of basic price theory. As I argue below, the only way in which price controls “work” to fight inflation is under the premise that prices provide marching orders to solve a technological problem. However, the real function of prices is to provide guiding signals to solve an economic problem of allocating scarce resources according to their valuation in competing consumer uses. My point is not to argue whether Jacobs and Weber are unaware of this distinction, per se. Rather, it is to illustrate, from their own point of view, the only way in which their argument “works”, namely the claim that price controls can fight inflation. The fundamental nature of a technological problem is the allocation of given resource for a single, given objective. In the context of World War II, the Office of Price Administration and Civilian Supply, which was created in 1941, and succeeded by the Office of Price Administration (OPA) from 1942 to 1946, effectively abolished free market pricing for all goods and services. Although the United States did not officially abolish private property rights during this time, in effect, price controls constituted a restriction on the ability to exchange on mutually agreeable terms, and hence a de facto restriction of private property. In effect, the de facto control of the factors of production (i.e. land, labor, capital and other means of production) through price controls administered by the OPA and other government agencies replaced a free market and militarized the U.S. economy for a single, overriding purpose: to defeat the Axis Powers. In a situation of total war, however, the valuation of factors of production are not derived from competing valuations between consumers for final goods and services. Rather, the goals and plans of individuals (consumers and producers alike) are superseded by a technological problem: the allocation of resources toward destruction of the enemy. As Friedrich A. Hayek elaborates on this point: The problems which the director of all economic activities of a community would have to face would only be similar to those solved by an engineer if the order of importance of the different needs of the community were fixed in such a definite and absolute way that provision for one could always be made irrespective of cost. If it were possible for him first to decide on the best way to produce the necessary supply of, say, food as the most important need, as if it were the only need, and would think about the supply, say of clothing, only if and when some means were left over after the demand for food had been fully satisfied, then there would be no economic problem. For in such a case nothing would be left over except what could not possibly be used for the first purpose, either because it could not be turned into food or because there was no further demand for food. The criterion would simply be whether the possible maximum of foodstuffs had been produced or whether the application of different methods might not lead to a greater output (emphasis added, 1935, p. 5-6). “The lessons that Jacobs and Weber claim to be drawing about the role of WWII price controls are irrelevant to the issue of controlling present-day inflation, since their example of “success” assumes away the role that market prices play in solving an economic problem“…. On the contrary, the lessons that Jacobs and Weber claim to be drawing about the role of WWII price controls are irrelevant to the issue of controlling present-day inflation, since their example of “success” assumes away the role that market prices play in solving an economic problem: allocating scarce resources among multiple, and often conflicting, consumer uses. “The key to price stabilization,” Jacobs and Weber argue, “lies in politics: a strong alliance and a broad-based social commitment are crucial for the effective implementation of selective controls as a way to tamp down inflation.” However euphemistic such government control may sound, it cannot hide the fact that prices are presumed here to function like a set of marching orders decreed from the top down to which individuals passively respond in fulfillment of a single, overriding end. My point here is not to argue that inflation was actually controlled during World War II, as Jacobs and Weber claim. Rather, it is to argue that the only way in which the validity of Jacobs and Weber’s argument can hold is if consumers and producers are presumed to have been dictated prices in a completely passive manner. This implicit assumption not only renders the argument inapplicable for remedying inflation today, but also proves unsound in the case of World War II, since the discussion of the secondary effects of price controls are completely absent. Simon Kuznets, Nobel Laureate in Economics for his work on the measurement of GDP, explained following the conclusion of World War II in his book, National Product in Wartime. He argument then expresses serious doubts relevant to Jacobs and Weber’s claims today, and applies just as much about the prospect of price controls controlling inflation today: Price indexes do not reflect fully qualitative deterioration in commodities and services; the ‘pricing up’ that takes the form of adding superficial and unwanted elements to the good, largely in order to raise it into higher price brackets without violating price regulations; the reduction in discounts or in services formerly granted in connection with durable commodities; pricing on black markets; and the general effects of a narrowing freedom of choice on the part of would-be civilian purchasers (Kuznets 1945, p. 39). What Kuznets is highlighting is the adjustment process that prices generate in a situation where there is relatively more money competing for relatively fewer goods (i.e. inflation). Consumers for final goods will compete against each other by offering higher prices, and in turn, producers of such final goods (i.e. consumers of scarce resources) will compete against each other by offering higher prices in response to such consumer valuations. If prices are not allowed to respond to such competing demands to solve this economic problem because price controls are implemented, then the results outlined by Kuznets above will result. For more on these topics, see Price Controls, by Hugh Rockoff. Concise Encyclopedia of Economics. “The actual case for wage/price controls,” by Scott Sumner. EconLog, January 5, 2022. Don Boudreaux on Monetary Misunderstandings. EconTalk. In summary, to conclude that price controls are an effective means to combat inflation is incorrectly based on an unrealistic and faulty understanding of prices as a set of marching orders to which individuals passively respond. However, prices in the real world are actively generated by competition between consumers for goods and services, and competition between producers for factors of production. The result is that market prices serve as a set of guides, or traffic signals if you will, to coordinate the plans of consumers and producers in a peaceful and productive manner. If prices serve as a “system of telecommunications” as F.A. Hayek taught us (1945, p. 527), then interference into the guiding function of market prices can never eliminate inflation; rather, relative prices will only adjust to account for inflation and circumventions to price controls. References Hayek, F.A. (1935). “The Nature and History of the Problem.” In F.A. Hayek (ed.), Collectivist Economic Planning (pp. 1-40). London: G. Routledge & Sons. Hayek, F.A. (1945). “The Use of Knowledge in Society.” The American Economic Review 35(4): 519-530. Kuznets, Simon. (1945). National Product in Wartime. New York: National Bureau of Economic Research. Footnotes [1] Meg Jacobs and Isabella M. Weber, “The way to fight inflation without rising interest rates and a recession.” The Washington Post, August 9, 2022. *Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. (0 COMMENTS)