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Why Trump and Sanders See Losers Everywhere – Article by Steven Horwitz

Why Trump and Sanders See Losers Everywhere – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Competition and the Zero-Sum Fallacy

Donald Trump, Bernie Sanders, many political actors, too many intellectuals, and much of the general public share a false and destructive belief about the nature of exchange: that economic activity is something akin to a battle or a full-fledged war in which the goal is for one group to “defeat” another. We see this mentality across the political spectrum.

Zero-Sum Losers

Think of the ways Trump and others on the political right talk about international trade. The basic framework is to see other countries as enemies in competition with us. The goal of trade policy is somehow to “beat” them, because if they are “winning” by selling us a lot of stuff, we must be losing. The result is mistaken policies such as Trump’s proposed 45 percent tariff on Chinese imports.

We see the same us-and-them thinking on the left, where progressives perceive a persistent battle between capital and labor, each trying to defeat the other. For leftists, capital is always the winner and labor is always the loser — unless the government intervenes. The appropriate policy response, from this perspective, is either to limit capital’s gains or, if you’re a bit more radical, to help labor vanquish capital once and for all. One of the related beliefs on the left is that the wealth of capital comes at the expense of labor. That is, capital’s gains come from labor’s losses.

Both arguments share the underlying belief that the winners’ gains must come at the losers’ expense. Economic activity, and specifically wealth creation, is at best seen as what economists would call a “zero-sum game.”

In zero-sum games, the winners’ gains do, in fact, come at the losers’ expense. Think of a poker game where each person buys $100 worth of chips. If there are five players, there is $500 to be apportioned out. If the game ends with me having $250, then the remaining $250 will be split among the other four players. My gain of $150 comes from others’ losses. Playing the game creates winners and losers because it simply reallocates fixed wealth around the group.

Positive-Sum Winners

Market economies, however, are not zero-sum games. Consider the profits of entrepreneurs like Steve Jobs or Bill Gates or Mark Zuckerberg or any of thousands of lesser-known inventors who have become fabulously wealthy by providing us with products and services that we value. Their gains are not our losses. To the contrary: markets are what we call positive-sum games. Entrepreneurs make huge profits, but they can only do so by providing us with products and services we value more than what we give up to obtain them.

Every time you get something yummy from a food truck, for example, you demonstrate the mutual benefit of trade: the truck owner gets your money and you get something delicious to eat. You both gave up something you valued less than the thing you acquired. Trade is made of win.

So when people complain that the United States is “losing to China,” presumably because we have a trade deficit with them, they are falling for the zero-sum fallacy. A trade deficit simply means that we are buying more of their goods and services than they are of ours. This doesn’t mean “they” are winning. First, there’s no “they.” The winners are individual Chinese sellers and the people they employ on one side, and individual US consumers on the other. Portraying trade as a contest between countries is deceptive: trade is always among specific individuals and groups.

Second, both sides are winning. Chinese sellers get US dollars and US consumers get products they like at low prices, which frees up income to buy other goods and services, creating jobs in other sectors of the US economy. Those US dollars, it is worth noting, make their way back to the US as Chinese firms invest in US assets, funding everything from private-sector construction to a small part of our government debt. The dollars we spend on Chinese goods do not just disappear; they come back as investments in US capital goods.

It would be more accurate to see what’s happening here as Chinese sellers arriving at the US border with boatloads of cheap goods for us to buy. Under what logic are we made worse off by the “gift” of lower priced goods?

Misunderstanding “Competition”

I suspect that much of the zero-sum thinking we see with trade is based on a misplaced application of the idea of “competition.” Competition in the market does share a number of features with the sorts of competition that people are more familiar with: sports, games, and war.

All are what F.A. Hayek called “discovery procedures.” We play games as a way to discover which individual or team is best. There’s no way to know who the best hockey team is without the discovery process of the Stanley Cup playoffs. We can’t know the answer just by looking at statistics, as every major upset in sports history demonstrates. In markets, we discover who is producing the best product at the best price by letting sellers and buyers compete. One might say the same about war.

Despite these similarities, however, there’s a critical difference: athletic competition and war are zero-sum and negative-sum games, respectively. In sports, one team wins and the other loses, or there’s a tie. Both of those outcomes are zero-sum. War destroys human and physical capital, and even when one country “wins,” everyone is worse off, making it negative-sum.

Market competition, by contrast, is positive-sum. When sellers compete with other sellers to keep prices low, it’s true that some sellers will win and others will lose, but in that process, all of the buyers win, too, not to mention the other people who will receive more income because the buyers who are paying less for the original product can now buy their products. Wealth is not redistributed, as in a poker game, and there is not an offsetting loser for each winner, as in sports. Instead, additional wealth is created. That makes it a positive-sum game.

Seeing the Bigger Picture

CEOs are used to seeing this process from the narrow perspective of their firms, which often do lose in competition with other firms, leading them to believe the same principles apply between countries, or for the economy as a whole. This may explain why Donald Trump thinks he can “defeat” China in the same way he might outcompete another firm. It also explains why Sanders can believe that we are in a competition to preserve jobs. By focusing on the growth in manufacturing jobs in China, Sanders sees trade as “stealing” US jobs rather than being part of the larger competitive process responsible for the overall growth in US jobs and wealth.

Yes, markets share much with other forms of competition, but the key difference is the one that matters. Markets are positive-sum games, and they are not about one country, one group, or one class defeating another. Competition and trade are the way we produce cooperation and mutual benefit. Failing to understand this important difference easily opens the door to demagogues on both the right and the left.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Now If Someone Could Just Invent Actual Reality Goggles – Article by Bradley Doucet

Now If Someone Could Just Invent Actual Reality Goggles – Article by Bradley Doucet

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The New Renaissance HatBradley Doucet
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It seems like virtual reality goggles are the hottest tech gadget at the moment. I mean, they’ve been around for a while, but I guess they’re really coming into their own. But allow me to put on my grumpy-old-man hat for a second and say that what the world could really use in 2016 and beyond are some actual reality goggles. You know, so that wearers could see reality as it actually is, instead of as they imagine or wish it to be.

The value of such a tool would be incalculable. Of course, if you were wearing a pair and looking at another pair, then you would instantly know the true value of this invention, measured in dollars, or ounces of gold if you prefer, or even (leaving out the middleman altogether) in utils of happiness. But for now, I think we can safely assume that it would be worth a lot.

For instance, say you were reading an opinion piece arguing that the minimum wage should be bumped up to $15 an hour. A little display in the upper right corner of your actual reality goggles might pop up, with a tiny graph illustrating how, as long as they are allowed to fluctuate freely, prices are determined by supply and demand. Raise the price of labour artificially with a legislated price floor, though, and the amount supplied will become greater than the amount demanded. In other words, while some workers will benefit from higher wages, others will become unemployed. This illustration might be followed by suggestions of better ways to help the less fortunate.

Or say you were watching a certain Nobel Peace Prize winner condemn the politics of fear in his State of the Union address. Your goggles might remind you that politicians of all stripes use fear to manipulate you, whether it’s fear of immigrants or fear of markets, fear of recreational drugs or fear of guns (unless held by police, soldiers, or politicians’ bodyguards). They might give you a quick lesson on how realistic different fears are, how statistically likely or unlikely they are to come true, and whether you might be exaggerating the dangers posed by immigrants, markets, drugs, or guns, while underplaying their potential benefits.

Or again, imagine that you’re wearing these goggles while seeing an ad for a really big lottery. Your goggles might point out to you that your chances of winning are infinitesimal, that you’re more likely to get hit by a bus or a lightning bolt, and that a $10-million jackpot and a $1.6-billion jackpot would be almost identically life-changing. And if they caught you nodding your head when you saw that Internet meme proposing that $1.6 billion was enough to wipe out poverty in a nation of 300 million, it would administer a mild electrical shock to your temples and send you back to primary school.

Of course, the real question is whether anyone would want to buy such a useful gadget. Do we want to see the world as it really is, or are we content to misperceive it? Are we happier believing that we are already wise and well-intentioned, or do we want to learn what kinds of actions would actually be of benefit to ourselves, our loved ones, and the wider world? As I don’t have a pair of actual reality goggles on hand to tell me the answer, your guess is as good as mine.

Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL’s English Editor.

The Good Old Days of Poverty and Filth – Article by Sarah Skwire

The Good Old Days of Poverty and Filth – Article by Sarah Skwire

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The New Renaissance HatSarah Skwire
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A Cultural Historian Decries Profit and Progress

Standing in a luxury hotel, cultural historian Luc Sante daydreams about the good old days of homeless alcoholics lighting trash fires in the streets of Manhattan’s Skid Row.

“Over there, next to the flophouse hotel,” Sante reminisced to the Guardian, “is where Nan Goldin lived and worked. Forty years ago there were still lots of vacant lofts here that had been burlesque and vaudeville theatres during the era when storefronts were saloons. There were bars solely inhabited by bums, their heads down on the counter. At night they’d be lined up outside the missions and Salvation Army hostels — veterans from World War Two, from the Korean War, from the Vietnam War. At night, trash fires would be lit in oil drums.”

The French have an elegant phrase for what Sante is doing. They call it nostalgie de la boue, “longing for the mud,” which means a romantic yearning for a primitive or degraded behavior or condition.

The phrase, which was coined by a French dramatist in 1855, has been around for a while and usefully describes the very real way in which the wealthier and healthier inhabitants of modernity look back at the past through a misty, romantic haze.

While it annoys historians when we put a soft-focus filter on history, it doesn’t generally do a lot of damage. We don’t need every medieval romance novel to remind us that the heroine’s breath didn’t smell like cool mint Listerine. It’s probably for the best that the historical re-enactors at Colonial Williamsburg don’t actually use authentic colonial medical remedies for their health problems, and visiting tourists are certainly grateful for modern plumbing and street sanitation. Even the BBC’s determinedly authentic 1900 House had a phone and modern fire protection in case of emergencies.

Any lover of history will occasionally find him or herself dreaming about attending a performance in the pit at Shakespeare’s Globe, or roughing it in the saloons and shacks of a gold rush town. Some of us may even have recently spent an entranced hour or two playing with the Victoria and Albert Museum’s “Design-a-Wig” website. But a good student of history will acknowledge that the Globe was undoubtedly loud, smelly, crowded, and occasionally even dangerous for playgoers. And the rugged romance of the gold rush town is offset by the knowledge that you were probably far more likely to die of gangrene or cholera than you were to strike it even moderately rich. And those glorious 18th-century wigs? Heavy, hot, smelly, and prone to harboring bugs.

But a real case of nostalgie de la boue goes further than the soft-focus filter that ignores the unpleasantness of the past. Rather than ignoring the historical “mud,” nostalgie de la boue actively longs for that kind of unpleasantness and insists that without it, life is less authentic, less meaningful, and altogether worse.

And that is where Luc Sante seems to be. While he is quite correct to note that the ribaldry of Paris has long been a desirable antidote to the humorless Puritanism of American cities, Sante goes entirely off the rails when he insists that his praise for the “materially poor but … imaginatively free and creatively rich” inhabitants of Paris is not a romantic vision.

According to Sante, people ask him, “How can you be promoting the life of the poor in the 19th century when so many of them didn’t eat every day?”

Sante concedes, “Well yeah, it’s bad, but is it really any worse than the situation today when everybody’s fed but you have an incredible percentage of New Yorkers who live in the shelter system – including people who have regular jobs?”

The horrors of the shelter system aside, there’s a great deal to be said for a world where more and more people are fed better every year, and my guess is that a great number of the imaginatively free Parisians that Sante dreams of would have enjoyed the occasional extra baguette. It is possible to value historical creativity and intellectual independence without also having to praise historical dietary deficits. (And it is worth noting, should Sante happen to read this, that the feeding of all those extra people is not due entirely, or even primarily, to “the shelter system.” It’s the market economy and all that goes with it that is making the world better fed every year.)

Sante continues his nostalgia for the mud when he argues, “In the Paris I write about, people ran businesses to make a living, not to make a profit. Cafes, bars: they’re no longer public institutions or part of a community. There’s no possibility for eccentric self-determination amongst the shopkeepers.”

The distinction Sante draws between “making a living” and “making a profit” is not particularly clear to me. It suggests, perhaps, an unstated assumption that there is such a thing as an agreed-upon “correct” amount of profit for a business or businessperson to make — beyond which all profit becomes filthy lucre. Possibly he is making an equally indefensible assumption that businesspeople in the past weren’t interested in being as successful as they could be and that it is only our postmodern cynicism that has unleashed the drive for profit.

Maybe Sante means to say that unlike today’s businesses, the businesses of years ago “made a living” by helping to create a community among their customers rather than just “making a profit” by selling stuff. I think that thousands of today’s small business owners and their Facebook pages, Etsy stores, and farmer’s market stands would beg to differ with his assessment of their importance to their communities.

There’s not necessarily always a problem with nostalgie de la boue. It’s how we got Peaky Blinders, the renewed interest in home canning, restaurants that serve bone marrow, and the great revival of folk music spurred by O Brother Where Art Thou?, after all.

Sante, though, has so much mud in his eyes that he is blind to the tangible and important progress that has been made in human wealth and welfare. His mucky nostalgia leads him to claim that our increasing wealth — which has given us more health, more discretionary income, more food, and more free time — is a danger more pernicious than terrorism. “Money, for me, may not immediately kill people in the way terrorism does, but it does certainly change the fabric of daily life in much deeper and more insidious ways.”

That is a statement of such offensive ignorance that it could only be made by a man standing high above the former Skid Row, looking down through glass, with room service and maid service only a phone call away. I wonder if the men and women in the photographs that Sante treasures would have said the same?

Sarah Skwire is the poetry editor of the Freeman and a senior fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis. She is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

What Are Your Odds of Making It to the 1%? – Article by Chelsea Follett

What Are Your Odds of Making It to the 1%? – Article by Chelsea Follett

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The New Renaissance HatChelsea Follett
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They’re better than you think

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. …

But economic reality is very different — people move up and down the income quintiles and percentile groups throughout their careers and lives.

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (as the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees — and their heirs — lost their top 400 status between 1982 and 2014.

heirsSo, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of US income-earners, you’re still quite possibly part of the global top 1 percent.

Cross-posted from HumanProgress.org.

Chelsea Follett (Chelsea German) works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

What’s Changed Since 2010? – Article by Daniel Bier

What’s Changed Since 2010? – Article by Daniel Bier

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The New Renaissance HatDaniel Bier
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Quite a lot, it turns out

This interesting little table from Goldman Sachs shows a few ways the world changed in the last five years.

Some highlights since 2010:

  • The UN Food Price Index fell by a third.
  • The price of oil fell by two-thirds.
  • Venture capital investments in the US doubled.
  • Global smartphone penetration increased from 19 percent to 75 percent.
  • The cell phone price index fell by over half.
  • Average wages in China rose by more than 50 percent.
  • Beijing air pollution is down by a third.
  • The cost of sequencing a genome fell by 97 percent.
  • The number of summer AirBnB guests increased from 47,000 to 17 million.
  • Bitcoin’s value increased 1,500 fold.

But, as GS points out, 2015 was not all good news:

  • Economic growth has slowed.
  • Life expectancy has not changed much.
  • Africa’s share of global trade remained near 3 percent.
  • The Patriots won the Super Bowl.
  • Japanese GDP per capita remains flat.

Still — on the whole and for most people — things are changing for the better, in more ways than we could ever anticipate.

Here’s to a better today.

(Check out the other data below — lots of amusing and intriguing items.)

chart-11Click on the image for a larger version.

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

3 Kinds of Economic Ignorance – Article by Steven Horwitz

3 Kinds of Economic Ignorance – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Do you know what you don’t know?

Nothing gets me going more than overt economic ignorance.

I know I’m not alone. Consider the justified roasting that Bernie Sanders got on social media for wondering why student loans come with interest rates of 6 or 8 or 10 percent while a mortgage can be taken out for only 3 percent. (The answer, of course, is that a mortgage has collateral in the form of a house, so it is a lower-risk loan to the lender than a student loan, which has no collateral and therefore requires a higher interest rate to cover the higher risk.)

When it comes to economic ignorance, libertarians are quick to repeat Murray Rothbard’s famous observation on the subject:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Economic ignorance comes in different forms, and some types of economic ignorance are less excusable than others. But the most important implication of Rothbard’s point is that the worst sort of economic ignorance is ignorance about your economic ignorance. There are varying degrees of blameworthiness for not knowing certain things about economics, but what is always unacceptable is not to recognize that you may not know enough to be speaking with authority, nor to understand the limits of economic knowledge.

Let’s explore three different types of economic ignorance before we return to the pervasive problem of not knowing what you don’t know.

1. What Isn’t Debated

Let’s start with the least excusable type of economic ignorance: not knowing agreed-upon theories or results in economics. There may not be a lot of these, but there are more than nonspecialists sometimes believe. Bernie Sanders’s inability to understand why uncollateralized loans have higher interest rates would fall into this category, as this is an agreed-upon claim in financial economics. Donald Trump’s bashing of free trade (and Sanders’s, too) would be another example, as the idea that free trade benefits the trading countries on the whole and over time is another strongly agreed-upon result in economics.

Trump and Sanders, and plenty of others, who make claims about economics, but who remain ignorant of basic teachings such as these, should be seen as highly blameworthy for that ignorance. But the deeper failing of many who make such errors is that they are ignorant of their ignorance. Often, they don’t even know that there are agreed-upon results in economics of which they are unaware.

2. Interpreting the Data

A second type of economic ignorance that is, in my view, less blameworthy is ignorance of economic data. As Rothbard observed, economics is a specialized discipline, and nonspecialists can’t be expected to know all the relevant theories and facts. There are a lot of economic data out there to be searched through, and often those data require careful statistical interpretation to be easily applied to questions of public policy. Economic data sources also require theoretical interpretation. Data do not speak for themselves — they must be integrated into a story of cause and effect through the framework of economic theory.

That said, in the world of the Internet, a lot of basic economic data are available and not that hard to find. The problem is that many people believe that certain empirical facts are true and don’t see the need to verify them by actually checking the data. For example, Bernie Sanders recently claimed that Americans are routinely working 50- and 60-hour workweeks. No doubt some Americans are, but the long-term direction of the average workweek is down, with the current average being about 34 hours per week. Longer lives and fewer working years between school and retirement have also meant a reduction in lifetime working hours and an increase in leisure time for the average American. These data are easily available at a variety of websites.

The problem of statistical interpretation can be seen with data on economic inequality, where people wrongly take static snapshots of the shares of national income held by the rich and poor to be evidence of the decline of the poor’s standard of living or their ability to move up and out of poverty.

People who wish to opine on such matters can, again, be forgiven for not knowing all the data in a specialized discipline, but if they choose to engage with the topic, they should be aware of their own limitations, including their ability to interpret the data they are discussing.

3. Different Schools of Thought

The third type of economic ignorance, and the least blameworthy, is ignorance of the multiple perspectives within the discipline of economics. There are multiple schools of thought in economics, and many empirical questions and historical facts have a variety of explanations. So a movie like The Big Short that clearly suggests that the financial crisis and Great Recession were caused by a lack of regulation might be persuasive to people who have never heard an alternative explanation that blames the combination of Federal Reserve policy and misguided government intervention in the housing market for the problems. One can make similar points about the Great Depression and the difference between Hayekian and Keynesian explanations of business cycles more generally.

These issues involving schools of thought are excellent examples of Rothbard’s point about the specialized nature of economics and what the nonspecialist can and cannot be expected to know. It is, in fact, unrealistic to expect nonexperts to know all of the arguments by the various schools of thought.

Combining Ignorance and Arrogance

What is missing from all of these types of economic ignorance — and what is often missing from knowledgeable economists themselves — is what we might call “epistemic humility,” or a willingness to admit how little we know. Noneconomists are often unable to recognize how little they know about economics, and economists are often unable to admit how little they know about the economy.

Real economic “expertise” is not just mastery of theories and facts. It is a deeper understanding of the variety of interpretations of those theories and facts and humility in the face of our limits in applying that knowledge in attempting to manage an economy. The smartest economists are the ones who know the limits of economic expertise.

Commentators with opinions on economic matters, whether presidential candidates or Facebook friends, could, at the very least, indicate that they may have biases or blind spots that lead to uses of data or interpretive frameworks with which experts might disagree.

The worst type of economic ignorance is the type of ignorance that is the worst in all fields: being ignorant of your own ignorance.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Good News, Bernie Sanders: Average Workweeks Are Getting Shorter – Article by Chelsea Follett

Good News, Bernie Sanders: Average Workweeks Are Getting Shorter – Article by Chelsea Follett

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The New Renaissance HatChelsea Follett
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Capitalism is letting people choose more leisure

Senator Bernie Sanders recently tweeted the following:

sanders.tweetFortunately, the gruelingly long workweek described by Sanders is not the norm. In fact, leisure time has been on the rise. In 1950, an average U.S. worker worked 1,984 hours a year, or about 38 hours a week. In 2015, an average American worker worked 1,767 hours, or about 34 hours a week.

workhours

That means that the average U.S. worker had 217 more hours for leisure or other pursuits in 2015 than in 1950. That is about 9 days of extra time.

The 50-hour workweek described by Sanders is more common in China, where the average worker worked 2,432 hours in 2015, or around 47 hours a week.

This post first appeared at HumanProgress.org.
Compare other countries over time with their interactive dataset.

Chelsea Follett (Chelsea German) works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Comparative Advantage: An Idea Whose Time Has Passed – Article by Michael Munger

Comparative Advantage: An Idea Whose Time Has Passed – Article by Michael Munger

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The New Renaissance HatMichael Munger
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The Division of Labor Is the Engine That Drives Prosperity

Many economists will tell you that the most important principle in economics is comparative advantage — the idea that it is expensive to grow oranges in Alaska or to flood rice paddies in Saudi Arabia, so Alaska and Saudi Arabia should import oranges and rice, respectively, and base local production on the advantages of local conditions. We got this idea from classical economist David Ricardo, who famously observed in 1821 that England and Portugal would both be wealthier if Portugal exported its wine and imported England’s textiles, and vice versa.

Ricardo’s principle even demonstrated the advantages of trading with those who are less productive at everything. For example, my wife is an attorney. She is also a fast and accurate typist. Yet she hires a secretary who is considerably slower at typing. Secretaries get paid less than attorneys, so if my wife specializes in law and the secretary specializes in typing, my wife can earn more for her firm and a secretary gets a job. Both end up better off. That’s true even though my wife is better at both jobs: comparative advantage means trade helps everyone.

Division of Labor Trumps Comparative Advantage

The problem is that fixed comparative advantage — derived from weather, culture, and location — is vanishing in the modern world. Ricardo’s classical formulation leaves no space for human creativity, no role for division of labor, and no room for innovation to affect the dynamics of cost.

So economists have it wrong, as my friend Russ Roberts argued in 2010. The most important principle in economics is opportunity cost. Here’s proof: you can define opportunity cost without resorting to comparative advantage. But you can’t possibly define comparative advantage without invoking opportunity cost.

The notion of comparative advantage is empirically misleading, because it sounds deterministic. There are few situations where fixed factors make the relative opportunity costs of different actions immutable. Instead, cost and productivity differences are endogenous, the consequence of human ingenuity and the division of labor. Today’s cost advantage for one country may disappear if another country finds a better, cheaper way to produce the product. And the way to specialize is to exploit the division of labor.

Sock City

What nation lost the most manufacturing jobs from 1990 to 2000? China. That may seem surprising, given the media stereotype of how we “ship US jobs overseas,” but it’s true (PDF). In 1990, Chinese manufacturing meant large sheds filled with hundreds of people working with sewing machines and other small tools. The scale was huge, with at least 100 million manufacturing workers. But productivity was terrible.

In the late 1990s, China began to automate, taking advantage of division of labor. A thousand women with sewing machines in a barn turned into 25 women running enormous machines in a factory, with a gigantic increase in productivity. A fraction of the workers produced 10 times as much output, increasing productivity a hundredfold and forcing 97.5 percent of the workers out. But those workers found new jobs, as China used the division of labor more and more effectively. The country’s advantage was not climate, not soil quality, but human action consciously designing production processes that were cheaper and faster.

Nowhere did productivity rise faster than in the city of Datang in Guangdong Province. Part of Datang is actually called “Sock City,” because more than a third of all socks sold in the entire world (yes, the world) are manufactured there. Datang boasts more than 8,000 hosiery makers ringing the city center, and they produced more than 11 billion pairs of socks in 2012. The socks you’ll find at Walmart — or even at Neiman Marcus or another more upscale store — were likely made in or around Datang.

The concentration of manufacturing at Sock City means this: there is a well-developed labor market for exotic sock-making specialties. The occupations that are well known in Datang don’t exist elsewhere, because no other location has been able to take such full advantage of the division of labor. What limits the division of labor in Datang? Only the extent of the market, just as Adam Smith said in The Wealth of Nations. And remember that Datang is producing at a rate of nearly two pairs of socks per year, for every human on the planet. Datang’s market is Earth.

It wasn’t always that way. Datang does not have any comparative advantage, at least not in the way Ricardo meant. The climate is not especially favorable, the city is not near an essential natural-resource base, and sock making is not part of traditional culture. Datang’s dominance is new and is overtaking historical frontrunners like Fort Payne, Alabama, the self-proclaimed Sock Capital of the World.

Fort Payne “began making stockings in 1907 and once boasted of producing 1 of every 8 pairs worn on the planet,” writes Don Lee in “The New Foreign Aid,” published April 10, 2005, in the Los Angeles Times. However, he explains,

China’s advantages in the global marketplace are moving well beyond cheap equipment, material and labor. The country also exploits something called clustering in a way that the United States just can’t match.… Industrial clusters are like one-stop production centers, achieving economies of scale and driving innovation by geographically bunching suppliers, manufacturers and contractors.…

Meanwhile, American producers, pummeled by imports from China and elsewhere, saw their share of the US hosiery market fall from 69% in 2000 to 44% in 2003, according to the latest industry data.

Comparative advantage is fixed and exogenous. Opportunity cost is mutable, the product of innovation. Datang’s Sock City itself may soon lose its dominance.

Who “should” produce socks? Comparative advantage here is no guide; the situation is more like comparing two street porters who appear to be quite similar. One of the street porters figures out ways to make socks much more cheaply. Over time, the advantage in opportunity cost grows because of the improvements in dexterity, tool use, and design of new production processes. Human ingenuity created an opportunity for nations to specialize in activities where their opportunity costs were lower. Specialization and trade are what produce prosperity, and opportunity costs guide the choice of what each country should specialize in. My comparative advantage today may be your comparative advantage next year. But all the street porters started out the same.

Focus on Opportunity Cost

Economists routinely act as if three related key concepts — division of labor, comparative advantage, and opportunity cost — are distinct.

They are not. Comparative advantage is not a separate concept at all. It is simply an explanation of the implications of the division of labor (the engine that drives prosperity) and opportunity cost (the concept that guides the choice of which activities a person, or a nation, should specialize in).

Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.

Let’s downgrade comparative advantage from our list of key concepts in economics, and recognize that the human mind is the mainspring of a market economy.

Michael Munger is the director of the philosophy, politics, and economics program at Duke University. He is a past president of the Public Choice Society.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Two Arguments in Favor of Economic Inequality

Economic inequality continues to be a major political issue even as the headlines scream about terrorism and climate change. Bernie Sanders has made it a centerpiece of his presidential campaign, and other candidates have addressed it along the way. And a recent study by the Pew Research Center has added new, though misplaced, fuel to the fire of those concerned about inequality.

The Pew study has been discussed in the media, and one key point has been grossly misunderstood. Among other things, the study found that the American middle class is shrinking and is now just under half of the population. Commentators quickly began to refer to the “hollowing out” of the middle class and to tie this study to the concerns about growing inequality.

However, a close look at the data shows that the middle class has shrunk since 1971 because more members of the middle class have moved up the income ladder than down it.

Don’t believe me? Look for yourself at the terrific graphic that the Financial Times created to illustrate the data:

ft2015inequalitygraphYou can watch as the folks on the left slowly slide to the right over 44 years. When you compare the 1971 distribution with the 2015 one, what do you see? A growth in households earning around $80,000 or above, adjusted for inflation, since 1971 and a significant decline in those making less than that amount (with the exception of the folks right around $0). It’s true that there’s not a fat middle class anymore, but why should that trouble us if there are more high-income households and fewer low-income households overall?

The funny part of this is that if you read the story in the Financial Times that accompanies this graphic, it’s as if they never actually looked at the graphic they produced. Their narrative is at odds with it, as the narrative proclaims the doom-and-gloom story that the graphic actually refutes. As they say, never let the facts get in the way of a good story.

This growth in household income may, to some extent, be a by-product of the same economic processes that have produced the concerns about inequality, illustrated in this graphic by the significant growth of the ultra-rich.

There are far more very rich people today than there were 44 years ago, but the growth of the upper class has gone hand in hand with the enrichment of a large number of less-well-off households. Are there ways in which economic inequality is good, then? I think the answer to that question is yes. If so, then, what are they? Here are two defenses of economic inequality that proponents of the free market could make.

First is the more obvious one: growing inequality is good because it might be a consequence of economic institutions that produce all kinds of results that we think are desirable. For example, if competitive markets lead to peace and rising prosperity for all but also create inequality along the way by allowing some folks to get very rich, then we should at least tolerate that inequality because the things that produce it also produce other things we like.

This is the usual defense libertarians invoke, and it’s a good argument. The critic, however, might say that even if the defense is true, it doesn’t prove that inequality is necessary for that result. There’s a difference between saying, “Good economic institutions will produce inequality while creating good economic outcomes for all,” and saying, “Good economic outcomes for all can’t be produced without inequality.” The critic would likely ask how reducing the inequality that markets produce will harm their ability to produce those good results.

And here is where we come back to the Pew study and get a second defense of inequality. One way the middle class (and all of us) has become richer in the last generation is that the cost of so many goods and services has dropped in terms of the number of hours we have to work at the average wage in order to purchase them. The lower price of basic goods has enabled more and more people to afford things like large TVs, smartphones, and new, cheaper medications.

One thing that has made this process happen is inequality. In The Constitution of Liberty, F.A. Hayek argued,

A large part of the expenditure of the rich, though not intended for that end, thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.… Even the poorest today owe their relative material well-being to the results of past inequality.

Having a group of very rich people is what enables yesterday’s luxuries to become today’s basics.

There are two parts to this process: cost bearing and discovery. The very rich are able to afford the high prices of new technologies, thereby providing an incentive for firms to market new and expensive products. Once the rich pay the high initial price and cover the fixed costs of research and development, sellers can begin to price closer to the much lower marginal cost of producing additional units, making the good much more affordable to more people.

But the rich are also an economic canary in the coal mine that informs producers whether they are getting it right.

For example, a critic of inequality might complain that no one “really needs” a $100,000 luxury car with all kinds of new high-tech gadgets on it. But the fact that some can afford it and want to buy it helps the car companies figure out which new features might be popular. Rear-view cameras were once only available on top-end cars, but they have slowly become a standard feature. The same may soon be true of collision warning systems now available on high-end models of some cars.

In fact, everything we think of as basics today was once the province of only the well-off. The first microwaves were expensive and bought mostly by the rich. I can remember my parents paying about $900 for a VCR in the late 1970s. VCRs, of course, fetch a price close to zero these days. The rich who bought the early LCD TVs helped manufacturers defray the fixed production costs and figure out what people wanted, and now these TVs are in the vast majority of houses at a more affordable price.

The inequality at any point in time is a key part of the process that creates wealth for the rest of society over the years to follow. The very rich enable producers to experiment and cover their costs, and that makes more goods more affordable for the rest of us, from fun toys to life-saving necessities.

The inequality produced by the market is a key part of how the market moves forward, enriching all of us in the process. And that’s why the middle class is shrinking: the rich, through the competitive market, have helped make the middle class richer.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Thanks to “Wiretapping” Laws, Your Cell Phone Is a Felony Machine – Article by Gary McGath

Thanks to “Wiretapping” Laws, Your Cell Phone Is a Felony Machine – Article by Gary McGath

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The New Renaissance HatGary McGath
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The prosecutions are clearly meant to chill free speech

In 2006, police in Nashua, New Hampshire, filed charges against Michael Gannon for using a security system in his home. When he brought a security recording to the police to back up a complaint about how he was treated, they arrested him and charged him with “felony wiretapping” — recording what happened in his own house. They were later forced to drop the charges under intense publicity.

The relevant New Hampshire law is titled “Wiretapping and Eavesdropping,” but it isn’t restricted to electronic communications.

It’s a felony if someone “willfully intercepts, endeavors to intercept, or procures any other person to intercept or endeavor to intercept, any telecommunication or oral communication.”

Intercepting means “the aural or other acquisition of, or the recording of, the contents of any telecommunication or oral communication through the use of any electronic, mechanical, or other device.” Oral communication means “any verbal communication uttered by a person who has a reasonable expectation that the communication is not subject to interception, under circumstances justifying such expectation,” but the law doesn’t define “reasonable expectation.”

Recording what someone else says can be a felony unless it falls under the reasonable-expectation exception. Burglars don’t expect to be recorded. I live in the same city as Gannon; if thieves broke into my home and I recorded their activity, would I dare bring the evidence to the police?

The New Hampshire law is a “two-party consent” law; you can’t even record your own conversation with someone else without letting him or her know. Nine to twelve states, depending on interpretation, have two-party consent requirements.

In recent years activists have successfully pushed back against using those laws to prevent or punish recording police activity. Courts have held that when they’re on duty, cops don’t have a reasonable expectation of privacy. Governments can still use the law against people who record other public speech, though.

In 2015, in Portsmouth, New Hampshire, Christopher David was charged with felony wiretapping for recording a conversation on a public street. He recorded a private citizen telling him he could be prosecuted for running an Uber vehicle, which the city has banned. It’s easy to suspect the city is going after him for competing with the city’s taxis, but officially, his “crime” is recording words directed at him in public.

Illinois had a similarly draconian law often used to punish recording the police, which the state’s Supreme Court struck down. The court held:

The recording provision of the eavesdropping statute … burdens substantially more speech than is necessary to serve a legitimate state interest in protecting conversational privacy. Thus, it does not survive intermediate scrutiny. We hold that the recording provision is unconstitutional on its face because a substantial number of its applications violate the First Amendment.

Any legal prohibition ought to satisfy the question, “What harm to someone does it deter?” Recording a person who comes up to you in public and tells you something doesn’t injure him in any way. If he’s giving away information he doesn’t want known, that’s on his own head.

Eugene Volokh notes that without a clear definition of privacy, prohibitions ostensibly designed to protect it can seriously infringe on free speech. “Once restrictions on people’s speech are accepted in the name of ‘privacy,’ people will likely use them to argue for other restrictions on ‘privacy’ grounds, even when the matter involves a very different sort of ‘privacy.’” This is a serious matter, because “the right to information privacy — my right to control your communication of personally identifiable information about me — is a right to have the government stop you from speaking about me.”

Modern technology allows anyone to make video recordings in public, and if anyone’s voice is picked up without consent, the recording could be a crime punishable by years in jail. David Rittgers, an attorney and legal policy analyst at the Cato Institute, argues, “I think in this modern age where everyone has a ‘felony machine’ in their pocket — a cell phone — the [all-party] consent law is outdated.”

When the government surreptitiously captures records of our private communications, it tells us we shouldn’t worry if we have nothing to hide. When we record people speaking openly in public, quite a different standard applies.

Most of the debate about abusive wiretapping and eavesdropping laws has focused on their use to protect police officers caught misbehaving. The problem doesn’t stop there, though. When “reasonable expectation of privacy” isn’t clearly delimited, any recording of what people say in public can become an excuse to throw people in jail.

Gary McGath is a freelance software engineer living in Nashua, New Hampshire.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.