Free Market Monday

Tag: Free Market Monday

Hayek on the Price System

It’s hard for me to give a better example for the 300 students than Hayek talking about tin.  This is from the 1945 AER piece, “The Use of Knowledge in Society“:

It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes. Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process.

More ‘Gas’ than You Can Handle

The always-on- the-lookout-for supply & demand examples duo at are shaking their heads at the continuing disconnect between how politicians talk about prices and how the price system actually works. Today’s contribution is gasoline prices.

Here’s a taste:

Increasing taxes on oil companies will not lower gas prices, so Democrats are hoping that voters see it as unfair that oil companies are making so much money and receiving tax breaks (economists don’t have much to say about equity arguments — there is no economic theory to explain differences in your “fairness” and my “fairness”).

And this:

Expanding domestic production of oil and gas will not reduce gas prices significantly

“The proposal would end a series of tax advantages for the five companies and produce about $21 billion over 10 years, Democrats say.”

Let’s do the math. Suppose the five major oil companies are able to take the entire $21 billion in higher taxes over 10 years and pass it along to consumers in the form of higher gas prices. U.S. consumption is about 132 billion gallons per year (source: EIA). Dividing $2.1 billion per year by 132 billion gallons gives a price increase of about $0.16 per gallon. A fairly typical driver (12k miles, 20 mpg) would pay about $96 more each year as a result. You can determine for yourself if this is a price increase that politicians should worry about…

Those back-of-the-envelope calculations can be so refreshing!

The Constitution of Liberty — A Panel Discussion

Speaking of Hayek, late last week the libertarian Cato Institute hosted a blockbuster panel on The Constitution of Liberty, which was just re-released.  The curiosity of the day was the appearance of Hungarian financier, George Soros, certainly no libertarian, but someone who was around when Hayek and Popper were mixing it up.   The panel also contained rock star law professor Richard Epstein, and preeminent historian of economic thought,  Bruce Caldwell.

Good review of the panel here, and the video is here.

Blackout is Another Word for “Shortage”

No doubt you have heard (okay, perhaps I have some doubts) about the blackouts rolling across Texas this past week.  Blackouts occur, of course, because the quantity of power demanded at a point in time exceeds the quantity of power supplied, leaving some folks literally in the dark.   And out in the cold.

So, the key question is why power supply was insufficient.  Michael Gilberson of Texas A&M provides a preliminary analysis of why Texas power producers failed to meet demand.   The first reason is that it was very cold, so the demand for power increased.  The cold also caused the power to decrease (!) as power plants themselves suffered outages due to frozen pipes at large coal-fired plants (didn’t their mothers ever tell them to leave the water dripping?).

Actually, that isn’t really the first reason.  The real reason is likely Texas’ famous electricity isolationism; that is, the state deliberately lacks to infrastructure to export or to import electricity.  Why would they pursue such a policy?  To avoid federal (i.e., inter-state) regulation.

Here’s another explanation along the same line.

That electricity markets tend to be very complicated to understand, but supply and demand fundamentals are not.

Pro-Market v. Pro-Business

George Mason economist, and letter-to-the-editor writer extraordinaire, Don Boudreaux, has an opinion-editorial in the Christian Science Monitor explaining his distinction between public policies that are pro-business and those that are pro-market.

Economists (especially the free-market variety) – concerned always to keep outputs of goods and services as high as possible – typically defend business against counter-productive government interference. We economists do so, however, not because we have special fondness for business. We do so because we understand that government interference in business often results in fewer goods and services for ordinary men and women – as consumers – to enjoy.

In short, an economy’s success is best measured by how well it pleases consumers, not by how well it pleases businesses…

“Competition” sounds good. But businesses don’t like competition; they like protection from competition – along with subsidies, special tax breaks, and other government favors that relieve them from the need to cater energetically to consumer demands. So a pro-business president is prone to curry favor with businesses by shielding them from competition…

The irony is that such policies – which really should be labeled “crony capitalist” – are often labeled “competitiveness” policies. Because these policies increase the profits of some domestic businesses, they are mistakenly believed to make the domestic economy more “competitive” when, in fact, they make it less so.

This seems to me to be an important distinction.  I try to convey to you all that no one hates competition more than business does.  If you set up a profitable business, say, selling hot dogs on a street corner, the absolute last thing you want is a competitor to park her cart next to yours.

And, while we’re on the subject, don’t forget to join us for tea at 4:21 for Econ TeaBA.

Capitalism and Friedman

Yesterday was the 50th anniversary of John F. Kennedy’s inaugural address that exhorted Americans to “Ask not what your country can do for you — ask what you can do for your country.” Although the expression is iconic and emblematic of the selfless nature of public service, not everyone was impressed.  Indeed, free-market champion Milton Friedman opens his libertarian polemic, Capitalism and Freedom, with this:

IN A MUCH QUOTED PASSAGE in his inaugural address, President Kennedy said, “Ask not what your country can do for you — ask what you can do for your country.” It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic, “what you can do for your country” implies that government is the master or the deity, the citizen, the servant or the votary. To the free man, the country is the collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

Well, that’s a take I didn’t hear in my civics classes.

I was reminded of this in a recent discussion of theory of advocacy revolving around Schumpeter and Marx, where Friedman’s name came up.  Schumpeter fleshes out the implications of science and ideology in his brilliant 1948 address to the American Economics Association, “Science and Ideology.”

Another Puzzelah

Here’s another question for you — is Wall Street worthless?  I think I’ve asked this before, but I came across two items this week that take this head on.  On the pro-market side, we have Russ Roberts over at Cafe Hayek wondering why he never noticed the rampant cronyism between Wall Street and Capitol Hill:

I am increasingly pessimistic about the fake nature of Wall Street as part of the capitalist system. It is part of the crony capitalist system. I am ashamed at how long it has taken me to notice this. But once you start paying just a bit of attention, it’s hard not to notice.

He then adds fuel to the fire by wondering whether the Bootleggers and Baptists apply to Wall Street generally.  Don’t know the Bootleggers and Baptists story?  Check it out here.

So while Roberts gnashes his teeth, John Cassidy at The New Yorker spills out 10,000 words on the general worthlessness of Wall Street, concluding that most of what it does is socially worthless.

This shouldn’t come as too much of a surprise to you:  Professor Finkler cites it here and I posted something about it here.  We have also seen John Cassidy in the thick of the economics profession here.

Access to Capital

When I conceived of the “free market Monday” tag, this recent Reuven Brenner article in Forbes is what I had in mind.  Brenner is one of the great champions of the idea that access to capital and fluid capital markets are prime drivers of capitalist economies. In this piece, he talks about the importance of risk capital in revitalizing the North American economic outlook.

I also recommend Brenner’s Force of Finance for anyone looking for a modern day capitalist manifesto.  You can get a good taste of Brenner in his review of Invention of Enterprise.

Old Ideas from Undead Economists?

A recent EconTalk has John Quiggin, left-of-center author of Zombie Economics, discussing ideas with Russ Roberts, moderator and pro-market guy. Quiggin names his book such because he asserts that there are many economists clinging to ideas that have been thoroughly thrashed and should be discarded, yet they continue to emerge and thrive.  Foreign Policy has a summary of  Quiggin’s five most egregious “undead” ideas:

I'm an idea zombie

The Great Moderation: the idea that the period beginning in 1985 was one of unparalleled macroeconomic stability that could be expected to endure indefinitely.

The Efficient Markets Hypothesis: the idea that the prices generated by financial markets represent the best possible estimate of the value of any investment. (In the version most relevant to public policy, the efficient markets hypothesis states that it is impossible to outperform market valuations on the basis of any public information.)

Dynamic Stochastic General Equilibrium (DSGE): the idea that macroeconomic analysis should not be concerned with observable realities like booms and slumps, but with the theoretical consequences of optimizing behavior by perfectly rational (or almost perfectly rational) consumers, firms, and workers.

The Trickle-Down Hypothesis: the idea that policies that benefit the wealthy will ultimately help everybody.

Privatization: the idea that nearly any function now undertaken by government could be done better by private firms.

Roberts certainly doesn’t agree with Quiggin’s overall assessment, though they do find much to agree on.  This is a great EconTalk for those who think that economists all drink from the same cup.

Econ 300 students might listen to the part about the Efficient Markets Hypothesis and compare it to what Landsburg says in Chapter 9.

And, if you like the dead-undead econ riff, you might check out Todd Buchholz’s now-classic, New Ideas from Dead Economists.

Regime Uncertainty: Did the New Deal End the Great Depression?

There is a continuing debate, as you must know by now, as to whether Keynesian fiscal stimulus is an effective macroeconomic policy tool, especially with the US economy stuck in its current doldrums.  There is probably no bigger detractor to this idea than Robert Higgs of the Independent Institute.  Many on the Keynesian side say the $750 billion fiscal stimulus wasn’t big enough.

Robert Higgs says phooey.

Higgs argues that the whole Keynesian paradigm is out of whack, that, in fact, more robust governmental involvement in times of a crisis creates pervasive uncertainties for the private sector.  This “regime uncertainty,” whether it be from potential tax increases or other regulatory hurdles, shakes investor confidence and stifles capital formation.  Who is going to play a game when the rules of the game are subject to potentially radical change?

Those of you who have taken Economics 240 might recall Higgs’ “ratchet effect,” but he is perhaps better know for this regime uncertainty idea.  Higgs forwarded some of these arguments in the Journal of Economic History, and has recently bolstered it both in the Independent Review. He doesn’t see this as a unifying macro theory, but more as an element that is generally ignored (or ridiculed) by many macro theorists.

You can also catch Higgs talking about these issues with Russ Roberts on EconTalk.

The Liberal Arts and UCLA Economics

Again, welcome back to those returning to campus.  I’m looking forward to getting back myself and cranking up the 300 class.  Meanwhile, a few weeks ago we instituted a segment titled “free market Monday,” which will emphasize the ideas of some seriously pro-market economists.

In that spirit, here is a piece of interest from the latest edition of Econ Journal Watch — an interview with William Allen (of Alchian and Allen fame) about his path to a professorship UCLA, as well as the heyday of the UCLA economics department under the leadership of Armen Alchian (of Alchian; Alchian & DemsetzKlein, Crawford, & Alchian fame, among others).  Allen begins with a shout out to the liberal arts, as he extols the virtues of his time at Iowa’s Cornell College:

[E]specially for one who is headed for graduate work, there is much in favor of first attending a small liberal arts college. At Cornell, there was a great deal which could be learned about the various aspects of the world and its evolution in the mandatory year-long freshman courses in English, history, and the social sciences. The learning was facilitated by classes of small size taught by non-T.A.s, and by much interaction with fellow students in the dorms and dining halls. And one can be captain of the tennis team without being a professional jock.

I’m not sure that the mandatory nature of the courses was the linchpin of his undergraduate education (at least I hope not, since my alma mater has no such requirements), but certainly writing and discourse are important.  Indeed, one of my professors in graduate school said that liberal arts students seemed to have a better feel for what an interesting question is.

Continue reading The Liberal Arts and UCLA Economics

Art Mart

We're #1!

Although economists as a whole are a pretty imperialistic bunch, the economic analysis of the art world has been a rather undeveloped field of inquiry.  One notable exception is Northwestern’s David Galenson, who has published widely on the topic, and even developed a ranking system for the greatest art work based on “visual citations” (number 1 is Picasso’s “Les Demoiselles d’Avignon.”)

Some of Galenson’s recent work examines how artists have earned a living over time and how that has shaped both the nature and creativity of their work.  The New York Times piece cited above summarizes this argument:

To Mr. Galenson markets are what make the 20th century completely different from other eras for art. In earlier periods artists created works for rich patrons generally in the court or the church, which functioned as a monopoly. Only in the 20th century did art enter the marketplace and become a commodity, like a stick of butter or an Hermès bag. In this system, he said, breaking the rules became the most valued attribute. The greatest rewards went to conceptual innovators who frequently changed styles and invented genres. For the first time the idea behind the work of art became more important than the physical object itself.

It’s an interesting topic, especially for those interested in innovation and the arts.  You might consider checking out Galenson’s book, Conceptual Revolutions in Twentieth-Century Art (available at The Mudd), for a fuller explication.  You can read a summation of his argument over at my favorite clearinghouse, VoxEu, or yesterday’s piece in The American.

This might be a good I&E Reading Group selection or a building block for an independent study.

Austrian Economics and Politics

The Wall Street Journal profiles one of the standard bearers of Austrian economics, Pete Boettke of George Mason University, who blogs at Coordination Problem.  The title of the piece is is “Spreading Hayek, Spurning Keynes,” so you know where he’s coming from. This, of course, is a topic we have touched on before.

The blog wasn’t always called Coordination Problem, either.

The resurgence of Austrian economics does have its hazards, Mr. Boettke says. The antigovernment fervor on cable-television shows and the Internet may have popularized its theories, but it also “reinforces the idea to critics that these are crackpot ideas,” he said. He has tried to distance himself from conspiracy theorists and even dropped “Austrian” from the name of his blog. But he hasn’t yet thought of a better term.

If you are unfamiliar with the Austrians, here’s Bottke’s description of Austrian economics at The Library of Economics and Liberty.   We also have Israel Kirzner’s take from the New Palgrave Dictionary of Economics, available from campus IP addresses (thanks to the good folks over at The Mudd).

Kirzner is an especially important thinker about entrepreneurship, so those of you interested might take a peek at what he has to say.  You might also check out Peter Klein’s The Capitalist and the Entrepreneur, which is some of the most mature work fusing the Austrian school with transaction cost economics.

Should Ideas Be Left to the Free Market?

The good folks at Organizations & Markets ask why economists haven’t paid closer attention to the economics of free speech. The classic piece on this is Ronald Coase’s “The Market for Goods and the Market for Ideas” (available from campus IP addresses).   Coase asks why the rationale for goods’ market regulation doesn’t carry over into the realm of the market for ideas. Here is how he characterizes the prevailing attitudes:

In the market for goods, the government is commonly regarded as competent to regulate and properly motivated. Consumers lack the ability to make the appropriate choices. Producers often exercise monopolistic power and, in any case, without some form of government intervention, would not act in a way which promotes the public interest.

Fair enough. But then,

In the market for ideas, the position is very different. The government, if it attempted to regulate, would be inefficient and its motives would, in general, be bad, so that, even if it were successful in achieving what it wanted to accomplish, the results would be  undesirable. Consumers, on the other hand, if left free, exercise a fine discrimination in choosing between the alternative views placed before them, while producers, whether economically powerful or weak, who are found to be so unscrupulous in their behavior in other markets, can be trusted to act in the public interest, whether they publish or work for the New York Times, the Chicago Tribune or the Columbia Broadcasting System.

Coase wrote the piece in the early 1970s, partly in response to federal regulation of commercial advertising, wondering whether there is a difference between firms schlepping products via commercial advertisements in the goods market is really any different than an article or an editorial in the New York Times.

Improbably, Time Magazine carried an article on Coase’s article and summarized his position nicely:

Coase challenged two assumptions that, he says, have created the distinction in public policy: 1) that consumers are able to distinguish good ideas from bad on their own, though they need help in choosing among competing goods; and 2) that publishers and broadcasters deserve laissez-faire treatment while other entrepreneurs do not.

It might be tempting for us to dismiss Coase’s argument as glib posturing, or as an example of economists being too clever for our own good. But how we define and constrain free speech is a central element of our political system.  President Obama, in fact, spent his weekly radio address admonishing the recent Supreme Court decision that removed many legislative controls of corporate campaign financing.  One would suspect that Coase was arguing to relax regulation of the goods market, not extend regulation to the ideas market, but the proliferation of the internet and other news sources has perhaps muddied the waters so much that the distinction is unrecognizable.

So, more to come, I suspect.

Free Market Monday

The air temperature here in Wisconsin has settled down to humane levels, signaling the school year is nigh. So, to kick off our Free Market Monday, let’s check in with Guy Sorman at the City Journal on the origin of our current financial crisis.

Sorman interviews many of the heavyweights — Calomiris, Fama, Zingales, Cochrane, Taylor, and a host of others (including James Hamilton at EconBrowser, who I’ve never thought of as a “free marketeer”). If you recognize some of those names, it is clear that the emphasis here is mainly on the role of the financial sector.

Some interesting thoughts, including this coda:

Every economist I interviewed agreed that ballooning American and European debt poses a huge threat to long-term prosperity. The debt will be paid either through inflation, which would make everyone poorer, or—a far better scenario—through economic growth that would increase both individual and government revenues. Unfortunately, by increasing taxes and imposing the wrong regulations, Western governments are hindering entrepreneurship and hence growth, Cochrane says.

Ah, entrepreneurship and growth.  It’s all coming back to me now.