Back in 2019, entrepreneur Nick Hanauer gave a Ted Talk called “The Dirty Secret of Capitalism – And a New Way Forward.” Recently, a quote from the talk (which starts at the 14:53 mark of the linked video) has been making its way around social media.  Hanauer says: “Unlike the laws of physics, the laws of economics are a choice.  Neoliberal economic theory has sold itself to you as unchangeable natural law, but in fact it is social norms based on pseudoscience.  If we want a new economics, all we have to do is choose it.” This statement by Hanauer is confused.  He conflates three very different things: 1) economic laws, 2) economic theory, and 3) social norms.  Theories are distinct from laws.  Different theories can use the same laws to arrive at different outcomes.  For example, both socialist and liberal economic theory accept the validity of the Law of Demand (which he bizarrely calls “equilibrium” at the 4:30 mark), but the theories contain different assumptions.  Economic laws derive from the problem of scarcity, just like many physical laws derive from conditions of the physical world.  We can no more choose to do away with scarcity than we can choose to do away with gravity. Then, he dismisses what he calls “neoliberal economic theory” as “social norms based on pseudoscience.”  But all science is, to some extent, based on social norms.  Science is a process done by humans who exist within larger professional and societal institutional frameworks.  Those, in turn, all have their own societal norms which influence behavior. In the video he is trying to argue that “neoliberal economic theory” is attempting to impose social norms onto a group.  Perhaps, but again, any theory that becomes policy is doing the same thing.  COVID-19 policy, for example, attempted to impose many social norms onto groups including (but not limited do) constant masking, social distancing, and following technocratic advice without question.  So, it’s not clear why he thinks “neoliberal economic theory” is any different.  To the extent that “neoliberal economic theory” is a theory, then it is not attempting to impose social norms onto a group, but rather explain what is; social norms are generally taken as given. There is a lot to criticize in Hanauer’s talk. The talk is very confused and he makes very basic mistakes.  But I want to end with praise.  In one of the few items he gets conceptually correct, Hanauer criticizes modern economic theory’s over-reliance on utility maximization.  Classical liberal economics, from Adam Smith in 1776 through Friedrich Hayek, James Buchanan, Deirdre McCloskey, and my teachers at GMU have been arguing against strict utility maximizing and more “sympathetic” behavioral explanations of human behavior.  One of the virtues of free market economics is that it treats people as people rather than mindless utility maximizers who simply respond predictably and unerringly to incentives.  I agree with Hanauer that economics should refocus along virtuous behavior and social behaviors.  But that means embracing liberal economics and capitalism, not rejecting it.   Jon Murphy received his PhD in economics from George Mason University and is an Instructor at Western Carolina University. (0 COMMENTS)

Communism worked very well for the early Christians (Acts 2: 44–45). The early Christians shared their worldly possessions voluntarily. Communists and socialists take other people’s possessions by force. As Winston Churchill once quipped, “The Socialism of the Christian era was based on the idea that ‘all mine is yours,’ but the Socialism of [today] is based on the idea that ‘all yours is mine.’” In the parable of the good Samaritan, the Samaritan freely chose to use his own time and resources to help the injured man. He did not vote to force other people to do it in his stead. Like progressives, libertarians believe in helping other people. Unlike progressives, we believe that compassion should be voluntary and not coerced.   Karl Marx got his definition of economic justice (‘from each according to his abilities; to each according to his needs’) from the Bible. Socialists say they want an economy based on the rule: “From each according to his ability, to each according to his need.” The incentives under such a system are to demonstrate minimum ability and maximum need. In a free market, people produce according to their ability and are rewarded in proportion to the benefits they provide to other people – as judged by those people. The incentive, therefore, is to produce what others want at prices they are willing and able to pay. Supporters of government control often admit that free markets deliver the goods, but argue that governments distribute them more fairly. They point to people who, because of age or disability, are incapable of producing anything. The government must control the economy, they claim, so that it can redistribute goods to these few. But rewarding need yields more of it, adding those who will not produce to those who cannot. And taxing demonstrated ability yields less ability demonstrated. Need, which socialism claims to address, can therefore only grow under socialism. By contrast, under the free market, need does not pay, production does, so production grows and need declines. The choice between government control and the free market is the choice between government coercively combating growing need amid growing poverty and individuals voluntarily combatting shrinking need amid growing wealth.   Socialism redistributes the wealth, making society more just. Justice means to give to each what is her due – what she has earned. Redistribution gives to some what is due to others – the opposite of justice. As economist Thomas Sowell asked, “What is your ‘fair share’ of what someone else has worked for?   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource. (0 COMMENTS)

Communism worked very well for the early Christians (Acts 2: 44–45). The early Christians shared their worldly possessions voluntarily. Communists and socialists take other people’s possessions by force. As Winston Churchill once quipped, “The Socialism of the Christian era was based on the idea that ‘all mine is yours,’ but the Socialism of [today] is based on the idea that ‘all yours is mine.’” In the parable of the good Samaritan, the Samaritan freely chose to use his own time and resources to help the injured man. He did not vote to force other people to do it in his stead. Like progressives, libertarians believe in helping other people. Unlike progressives, we believe that compassion should be voluntary and not coerced.   Karl Marx got his definition of economic justice (‘from each according to his abilities; to each according to his needs’) from the Bible. Socialists say they want an economy based on the rule: “From each according to his ability, to each according to his need.” The incentives under such a system are to demonstrate minimum ability and maximum need. In a free market, people produce according to their ability and are rewarded in proportion to the benefits they provide to other people – as judged by those people. The incentive, therefore, is to produce what others want at prices they are willing and able to pay. Supporters of government control often admit that free markets deliver the goods, but argue that governments distribute them more fairly. They point to people who, because of age or disability, are incapable of producing anything. The government must control the economy, they claim, so that it can redistribute goods to these few. But rewarding need yields more of it, adding those who will not produce to those who cannot. And taxing demonstrated ability yields less ability demonstrated. Need, which socialism claims to address, can therefore only grow under socialism. By contrast, under the free market, need does not pay, production does, so production grows and need declines. The choice between government control and the free market is the choice between government coercively combating growing need amid growing poverty and individuals voluntarily combatting shrinking need amid growing wealth.   Socialism redistributes the wealth, making society more just. Justice means to give to each what is her due – what she has earned. Redistribution gives to some what is due to others – the opposite of justice. As economist Thomas Sowell asked, “What is your ‘fair share’ of what someone else has worked for?   Richard Fulmer worked as a mechanical engineer and a systems analyst in industry. He is now retired and does free-lance writing. He has published some fifty articles and book reviews in free market magazines and blogs. With Robert L. Bradley Jr., Richard wrote the book, Energy: The Master Resource. (0 COMMENTS)

In a comment on my most recent post, co-blogger Scott Sumner makes a good point: Ricardian equivalence should probably be called “Barro equivalence”, as the economics profession generally names concepts after their modern (re)discoverer. That reminds me of another fun story. Background: Barro’s article rediscovering Ricardian equivalence was in the Journal of Political Economy in 1974. (He didn’t mention Ricardo in his article.) I had my head down that year, starting to work on my Ph.D. dissertation and so I completely missed it. I did know of Barro because we had read some work by Barro and Grossman in my macro classes at UCLA. He and Grossman wrote those pieces when, I think, Barro could arguably be called a Keynesian. In June 1975, I was invited to my first Liberty Fund colloquium. Svetozar Pejovich organized it at Ohio University in Athens, Ohio, and I attended. There were a number of economists there whom I regarded as economic stars. Because of the story I’m about to relate, I won’t give the name of the particular economic star. One Liberty Fund rule is the Chatham House rule, which says that you’re not allowed to report on something someone else said without that person’s consent. Call this person “X.” In a discussion about deficits, X, kind of out of the blue, criticized Bob Barro for that article, saying he was reinventing the wheel. (Bob Barro wasn’t one of the participants.) He then explained to the group pretty well what the article said and seemed to be critical of two things: (1) Barro’s reinventing the wheel and (2) the actual point Barro, and Ricardo, had made. I didn’t get this guy’s point, so I did what I always do in such circumstances: asked a question. “X,” I said, “I’m trying to figure out your criticism: is it that Barro reinvented the wheel or is it that the wheel isn’t round?” I can’t remember getting a clear answer but I think it was basically that the wheel wasn’t all that round. Fast forward to September 1975, when I arrived at the University of Rochester as an assistant professor in the Graduate School of Management (now the Simon School.) The president of the university, Robert Sproul, had a really nice reception and dinner for all the new hires across campus. I found myself sitting at the same table as Bob Barro. He had arrived at the economics department as, if I recall correctly,  an associate professor with tenure. So I told him the story without telling the question I asked. Then, I said, I asked X “is the wheel round?” Barro laughed out loud. We later became close and I’ve always enjoyed his laugh. By the way, here are some fun reminiscences by Barro about his 1974 article. And here is my biography of Ricardo in David R. Henderson, ed., The Concise Encyclopedia of Economics. (0 COMMENTS)

I rarely think of the Internal Revenue Service as a “service:” when it takes my money, I don’t think the agency is serving me. But in this case, it really did perform a service: It reminded us of who its agents are and of the fact that they are willing to use deadly force “if necessary.” Various other commenters have noted that this is not something new. For many years, the IRS has had about 2,000 agents who carry guns and are willing to use deadly force. I knew that. Maybe you knew that. But a lot of people probably didn’t. This is from my latest TaxBytes piece for the Institute for Policy Innovation. It’s titled, “The IRS Shows Its Guns,” IPI, August 17, 2022. Read the whole thing, which is very short. (0 COMMENTS)

We’ve all been super excited waiting for the release of EconTalk host Russ Roberts’ new book, Wild Problems. It’s now out, and both I and Russ hope you all choose to read it! (How else will you catch the chapter on Bill Bellichick?!?!?) This episode is icing on the cake, as Russ brings back Mike Munger- this time to interview him!. (P.S. Many other interviews with Russ are now available. Here’s a link to the one he did recently with Tim Ferriss.) What are wild problems? The big ones. The decisions where data doesn’t matter, where cost-benefit analysis can be misleading. This has been a challenging kind of problem for Roberts to acknowledge, given his early Chicago-school training. (Don’t miss the part at the end when Munger asks him when he stopped being an economist!) Today, Roberts worries that our apparent obsession with “life hacks” may distract us from the important questions that make life worth living. How’s your  quest for a well-lived life coming along? Use the prompts below to help us continue the conversation.     1- Roberts and Munger compare the approach of scholars like Milton Friedman and Gary Becker with that of Frank Knight and James Buchanan. According to Munger, what is the difference between the process of becoming and the process of deciding, and how has this distinction come to  shape the way Roberts thinks about wild problems? (And just for fun- how does this also relate to the decision to become a vampire?)   2- About 10 minutes in, Munger and Roberts discuss the pool problem posed by Daniel Gilbert. Why does Munger insist Gilbert’s conclusion is wrong, and to what extent do you agree? What about Roberts’ implicit borrowed claim about the unexamined life not being worth living… should you teach this to your children? (Think again about the pool… would you rather your children be happy for 23 hours and miserable for one, or the reverse?) Are today’s wild problems harder than they were in the past?   3- What is the Secretary Problem, and how does it relate to the problem of finding a life mate? Related, what’s wrong with the way scholars of decision theory think about making these kinds of decisions? Have you ever tried to apply “rational” decision-making to a wild problem (or vice versa)? If so, we’d like to hear how it went!   4- What does it mean to “privilege your principles?” How might someone cultivate being the sort of person that privileges their principles?   5- Consider the story Russ tells about finding a wallet in San Francisco and the one Mike tells about his recent fender bender in the university parking lot. Why do you think each made the choice they did? How much cost was borne in each story? In other words, how costly does virtue need to be to qualify as virtue?     (0 COMMENTS)

In the comment sections to various posts, I see lots of ideas being conflated. Here I’d like to separate out some distinction policy questions:1. Should the value of the medium of account be stabilized in terms of gold or NGDP? Or should its quantity be fixed?2. Should the monetary system be determined by the government or the private sector?3. Should banking be regulated, or should we allow free banking?In my view, these are three completely unrelated questions. Any of the 12 possible combinations are at least theoretically feasible. I make this point because people will say things that make no sense to me, such as that they oppose NGDP targeting because they favor free banking. Or that they want to abolish the Fed because they favor a gold standard. Huh?Here are some feasible systems:The monetary authority (public or private) might do nothing more than define the US dollar as 1/2000 ounces of gold. Or it might define the dollar as 1/20,000,000,000,000th of NGDP, as measured by an NGDP futures contract. Or it might fix the monetary base at a constant level. None of those options are any more libertarian than the other two. In each case, you either artificially fix the value of the dollar or you artificially fix the quantity of dollars.  Any of those three systems could in principle be done by either the government or the private sector. So that makes six possible combinations.And for each of those six possible combinations, you could either regulate the banking system (our current system), or allow a completely unregulated free banking system, even allowing banks to issue banknotes to be used as currency.FWIW, my own preference is to have NGDP targeting, done by the government, combined with a 100% unregulated free banking system. But even if you don’t agree with me, try to keep the issues separate. The role of the government in monetary policy is one thing. The price or quantity of the medium of account is another thing. And the status of commercial banking regulation is a third thing. (0 COMMENTS)

[Editor’s note: Read Part One and Two of Lynch’s review.] At the beginning of Chapter 9, which finally marks the beginning of Ferguson’s writing on our current pandemic, the author claims that while he obviously cannot write the history of the crisis while it’s unfolding, “the act of thinking historically about an unfolding event is not without its value.”  I hope you will forgive me if I admit to you that the first thought I had upon reading this sentence was, “well Niall, it certainly has value to you!”  The value of this particular book project to the reader is an entirely different matter. So what is the value here?  What can we derive from this attempt to think historically about disasters, plagues, death, and destruction?  It seems to me that there is some value if the reader does not approach this project as a book per se, because it isn’t really a coherent book-length project.  It’s rather a mess.  But within that mess there are some very interesting observations about the limits of politics, the challenges that crises present, and even how we as individuals reacted to the pandemic while it was happening.  If you think about this book as a collection of essays, albeit disconnected, there are some things worth reading and other chapters best avoided. For example, Chapter 9 was probably dated the moment the book was printed, and looks even more so now.  Yes, the United States’ and United Kingdom’s initial responses to the pandemic were haphazard and cost lives; however looking at a still partially locked down and economically suffering China in 2022, one wonders if the Chinese leadership is simply forestalling the inevitable.  Furthermore, writing when he did, Ferguson seems to ignore the public fatigue to draconian measures against a disease that even he acknowledges was deadly for a specific subset of folks (the elderly and those with co-morbidity).  That fatigue eventually set in throughout the world.  Now contrast that rather dated chapter with one that has aged better: Chapter 10.  In it, Ferguson reviews the economic consequences of the pandemic and lockdowns.  He notes that the now widely dismissed and flawed model from the Imperial College London on the possible death rates of the COVID virus also ignored the social, economic, and political realities of human life.  He notes that the excess death rates of the US and Sweden looked remarkably similar at the time, a fact that became clearer and clearer as time passed.  Lockdowns didn’t seem to be helping control deaths, and they certainly made the collateral social and economic damage of the pandemic far worse.  His review of the social unrest during the summer of 2020 is more uneven and now looks ready for a rehash, but his point about the partisan nature of the pandemic and response is dead-on, even if his social overview seems dated. Whatever one thinks of Ferguson’s theories regarding empire and global hegemony, his penultimate chapter addresses how, at the time, he saw ever more clearly that the rising conflict between China and the US was the new Cold War.  I don’t think I need to rub it in, but obviously Russia has messed this up for him.  Pity the political prognosticator.  While China has obviously sided with Russia in its invasion of Ukraine, one can’t look at current silly Chinese COVID policies and slowing economic growth and see the Chinese leadership as the same rising adversary that appeared to have handled the virus better than the US did.  Furthermore, the relatively robust American and European response to helping Ukraine has probably given China more pause in gazing longingly at Taiwan as a future Hong Kong, particularly in light of the way Beijing has chosen to govern the territory.  Any Western leader who doesn’t admit what will happen in Taiwan should China move against it will be hard pressed to explain why.  So here again, Ferguson’s assertions and theories have not aged particularly well. I guess if I had to sum up this review in a sentence it would be this – the first part of this book is much better than the latter parts of it, but the key takeaway is that Ferguson’s book has given us a way to understand how intellectuals and pundits were reacting to the pandemic in real time.  If you want to revisit old discussions and debates from the lockdown period this book will revive old, probably unpleasant memories.  What have we learned for the next great plague or disaster?  This reviewer believes the main lesson from COVID was the need for political skepticism and a healthy dose of faith in individuals and markets creating wealth as a form of broad resilience; it’s not clear to me Ferguson highlights those factors enough.    G. Patrick Lynch is a Senior Fellow at Liberty Fund. (0 COMMENTS)

On Wednesday, Cato Institute economist Ryan Bourne wrote me the following: In the UK right now, there’s a Conservative leadership race. Liz Truss is promising to cancel the tax rises her opponent Rishi Sunak instituted as Chancellor. If she reverses all of them, it would be circa 2% of GDP cancellation of tax rises. Sunak claims this would make inflation much worse. Today in The Times newspaper there was an op-ed citing David Stockman on the 1980s about how Reagan cut taxes and then couldn’t cut spending. The implication was that, despite Truss’s promises to cut spending too, she won’t and the UK will be left with higher deficits pushing up inflation and leading to higher interest rates. I pointed out to the author of the op-ed that inflation fell under Reagan and, in any case, was a monetary phenomenon and he said “ok, but what happened to interest rates?” I checked and to my surprise nominal interest rates fell after the very early 1980s, although still remaining historically high in real terms. Now the economic research on the link between the larger structural deficit and those high real rates seems to give mixed results. Ben Friedman and Krugman say deficits pushed up real rates; Hendershott and Peek that it didn’t have much effect either way. I wondered if you had navigated this debate at all and had any thoughts about who is right? I had, and so I wrote back the following: I DID have strong priors about the connection between deficits and real rates all through the late 1970s and early 1980s. But the experience that you refer to dashed my priors. Not only that, but in the discussion from about 1984 on, lots of people, both academic economists and fairly smart politicians like Dick Cheney, argued that there wasn’t a connection. The politicians weren’t clear about WHY there wasn’t much connection. Some of the economists—I have in mind Paul Evans of the University of Houston in the mid to late 1980s—did give a reason: Ricardian equivalence. I recommend that you track down and read this article from the Journal of Political Economy in 1987: https://www.journals.uchicago.edu/doi/abs/10.1086/261440 And then I added my fun story because it involved my boss at the Council of Economic Advisers, Martin Feldstein. Marty was a deficit hawk who believed that there was a strong connection between deficits and real interest rates. Here’s the story: I was a senior economist with President Reagan’s Council of Economic Advisers from August 1982 to July 1984. I got there a few weeks before Marty Feldstein got there as chairman, the day after Labor Day in 1982. At the first meeting he called, he told us that if we ever saw him doing something wrong or making an incorrect statement we should call him on it. (I tried the next day on a fairly small issue and got some pretty negative feedback, which is what I expected.) Fast forward to the writing of the 1983 Economic Report of the President. It’s crazy time. It starts around early November and goes to late January. CEA hands exaggerate how hard we worked but it is true, nevertheless, that we worked harder than usual. So people are pumped up. It’s our exciting time. There was a junior staff economist named David S. Reitman, an undergrad whom Marty had brought with him from Harvard. Over lunch sometime in late December or early January, I think it was, David said that he wasn’t sure he would “let” Marty say that higher deficits implied higher real interest rates. His point, which was well taken, was that the evidence for this relationship was awfully slim. I silently laughed because I knew that if Marty wanted to say it, he would say it. He did, on p. 86.     (0 COMMENTS)

Comments after my post asking for libertarian monetary ideas mostly focused on the question of what it means to abolish the Fed.1. Some regard the phrase as not being literal, rather a call for the Fed to stop exceeding its mandate when intervening in the economy. According to this view, the Fed could still do something like inflation or NGDP targeting, but would stop doing things like bailouts.2. Some insisted on the Fed doing something even less discretionary, such as rule freezing the monetary base.  The Treasury could handle that.3. Some suggested having the US government replace currency with gold as the medium of account.  Again, no Fed would be required.4. Some suggested just getting government entirely out of money and seeing what the market comes up with. Perhaps something like Bitcoin might win the competition. Here’s what makes money so tough for libertarians.  The US dollar is already deeply embedded in our economy.  All sorts of contracts are denominated in dollars, and many of those contracts commit to dollar transactions decades out in the future.  That means the US government has an obligation to insure some sort of stability or at least predictability to the value of the dollar over time.  Right now they are not doing a great job, but things could be far worse. It’s sort of like holding a tiger by the tail.  You might wish that the US government had never created the fiat dollar, but now that it has it’s hard to let go. That doesn’t mean it’s impossible, but you need to insure there is some sort of asset called “US dollars” for the foreseeable future, if only to prevent a collapse in our financial system. That doesn’t mean that we must have a Fed.  Commenters pointed out that we had US dollars before the Fed was created in 1913.  However, even before 1913 the federal government had a monetary policy.  That policy had two components: 1.  A definition of the dollar as a specified quantity of gold. 2. Substantial government gold holdings, which changed over time.  This influenced the value (purchasing power) of gold. So it wasn’t pure laissez faire. Many people wondered why options #2, #3 and #4 are such a bad idea.  After all, we had a gold standard back in 1900.  Why not return to that system? I’d make two points here: 1. The gold standard was quite not as successful as advertised by its proponents. 2.  Abolishing the Fed would not recreate the historical gold standard.  That system is likely gone forever, much like the Holy Roman Empire. A fixed monetary base, gold, and Bitcoin all share the same problem, which makes them unsuited to be the medium of account.  In each case the quantity of the medium of account is fixed, or at least highly inelastic in the short run, and in each case the value (purchasing power) of the medium of account is likely to be highly volatile. It’s not enough to say the market will choose a money that produces price stability.  The value of Bitcoin has been extremely unstable, and yet the market chose Bitcoin over other cryptorcurrencies that have a much more stable purchasing power.  The market price of gold has also been highly volatile in recent decades, much more volatile than back in the 1800s. If the US adopted the gold standard it would make the value of gold slightly less volatile, but still nowhere near stable enough to serve as medium of account.  The US government isn’t influential enough, by itself, to recreate the sort of stability in the value of gold that we saw in the late 1800s and early 1900s.  That would require a level of international cooperation that is unthinkable today.  It would look more like the gold standard of 1918-33—in other words, a mess. In addition, if the changeover occurred at something close to the current market price of gold, then long run inflation expectations would fall from 2% to roughly zero.  This would lead to a massive transfer of wealth from borrowers to creditors.  In the case of Treasury bonds, we’d need a tax increase to finance the enormous transfer of wealth to T-bond owners.  Try selling that idea to voters! A fixed monetary base has the same problem.  The value of base money would be affected by changes in nominal interest rates and financial stability.  If nominal interest rates fell to zero and/or if there were a financial crisis, the demand for base money would soar, creating severe deflation.  With a fixed base, QE would be impossible during a financial crisis.  In contrast, technological innovation that made the financial system more efficient might reduce the demand for base money, creating inflation. As a practical matter, the amount of base money within the US would decline rapidly over time, as something on the order of $100 billion in currency flows overseas each year, hoarded by people in other countries.  So freezing the total monetary base would be equivalent to rapidly reducing the stock of base money remaining in the US.  That could cause a banking crisis. I think it’s a mistake to start from the premise “we need to get rid of the Fed.”  Perhaps the optimal monetary system would not involve a Federal Reserve.  But the reasoning process should begin with a search for the optimal monetary system.  (And when doing so, don’t assume that other countries will join us in abandoning fiat money.)  The second step is figuring out how to get from here to the optimal system.   Right now we have a tiger by the tail.  It’s not enough to say, “let go of the tiger”, you need a plan as to what to do next. (0 COMMENTS)