The Economic Freedom of the World Annual Report 2022, published by the Fraser Institute, is available for download (pdf) here. It reports on the economic freedom for the year 2020. The exec summary begins with: Continue reading “Economic Freedom of the World 2022”
Category: Economics
World without Economics
The world can get along fine without economics and economists.
Imagine being shipwrecked on an uninhabited island with a bunch of your companions. Unfortunately there’s no chance of being rescued but fortunately the island has lush vegetation and is nicely wooded. To flourish, or even just to survive, you need skills and technology.
To survive and thrive, you would need people in your group who could farm, build shelters, make cloth, mine and refine ores, make tools, provide medical services, and do a whole variety of things. One profession, however, you wouldn’t need are economists. A society can get along perfectly well without economics and economists.
Or can it? Continue reading “World without Economics”
Markets
The economy is too important for it to be left to the impersonal machinery of markets. Economics only concerns itself with money and profit. It totally neglects to consider that people matter.
The problem with capitalism is that it neglects the human being. Instead, it deifies profits, productivity and efficiency. It completely ignores humanity. Socialism, by contrast, cares about people. It’s there in the very word—socialism has social in it. Therefore, it must be good.
Markets are by construction amoral, if not immoral. Therefore, markets must be regulated by the government, and whenever markets fail to work out the socially optimal outcome—which is perennially and everywhere because markets are heartlessly driven by pure greed—the government must intervene and set things straight. Continue reading “Markets”
Value, Price, and Cost
Often used interchangeably, the three concepts — cost, price, and value — are related but distinct. They are elementary and understanding them precisely is essential for reasoning about our world of production, exchange and consumption. People, including yours truly before learning economics, don’t even realize that they are confused about those simple concepts.
Let’s begin with value since it’s personal and therefore most intuitive. I want what I value, and vice versa. In nearly all cases, I have to give up something (S) in exchange for what I want (W). Logically, I must value S less than I value W if I do the exchange voluntarily. It would be irrational for me to give up something of greater value in exchange for something of lesser value to me. Continue reading “Value, Price, and Cost”
Maintaining Agreement
“And the main, most serious problem of social order and progress is . . . the problem of having the rules obeyed, or preventing cheating. As far as I can see there is no intellectual solution of that problem. No social machinery of “sanctions” will keep the game from breaking up in a quarrel, or a fight (the game of being a society can rarely just dissolve!) unless the participants have an irrational preference to having it go on even when they seem individually to get the worst of it. Or else the society must be maintained by force, from without — for a dictator is not a member of the society he rules — and then it is questionable whether it can be called a society in the moral sense.”
Frank H. Knight. “Intellectual Confusion on Morals and Economics” (Jan 1935. The International Journal of Ethics.) Continue reading “Maintaining Agreement”
What is Wealth?
“The serious fact is that the bulk of the really important things that economics has to teach are things that people would see for themselves if they were willing to see. And it is hard to believe in the utility of trying to teach what men refuse to learn or even seriously listen to.” — Frank H. Knight
Conflating the words money and wealth is an easy mistake to make because in most everyday parlance we use the two interchangeably — if you are wealthy, you have a lot of money, and if you have a lot of money, you are wealthy — without loss of comprehension.
But money is a measure of wealth, not wealth itself, just like kilogram is a measure of mass but is not itself mass. They are not the same. They have to be distinguished if we are to reason cogently about the nature and causes of wealth of people (and progress in our “inquiry into the nature and causes of the wealth of nations.”)
I have written a fair bit about wealth and money over the years. Time for a TL;DR version. Continue reading “What is Wealth?”
IRS
I love IRS. Not the “Internal Revenue Service” but “increasing returns to scale”.
Understanding the economic concept of “returns to scale” is useful for understanding the tremendous increase in the production of wealth in our modern world.
A bit of vocabulary first. The stuff that goes into production are called “factors of production.” The vocabulary is the same as in basic arithmetic where the product is derived from factors — for instance, the factors 2 and 3 when multiplied yield the product 6.
When you increase the factors, the product increases. That is, the “scale” or the size of the operation increases and therefore the product increases. If the increase in production is proportionate to the increase in the factors, then we have “constant returns to scale.” Continue reading “IRS”
CORE – The Economy
It’s hard to overestimate the importance of public understanding of the fundamental principles of economics and some of the many uncontested facts (facts that are generally accepted by acknowledged peers of experts) of economic history. The lack of public understanding — worse still a misunderstanding — invariably leads to awful misery that could have been avoided by teaching the public a few essential details of the nature of our social world and how it works.
We have to be taught and we have to learn how to think about our world, just like we have to be taught how to read, write, reason logically and do arithmetic. Unlike comprehending and speaking natural languages, we cannot instinctively read, write, reason or do arithmetic; we have to learn. Reading, writing and doing arithmetic is “unnatural.”
Let’s recognize that the basic principles of economics are unnatural and therefore run counter to our intuition. Our natural instincts lead us to think and believe in ways that are almost always at odds with the facts and the true nature of our economic (therefore social) world. Briefly stated, this is so because our instincts evolved over evolutionary time-scales of tens of millions of years when humans lived in small groups of a few dozen people, hunting, gathering and foraging to survive. Only in the very recent past of around 200 years — the blink of an eye compared to hundreds of thousands of years — the world changed so dramatically that nearly everything that made sense in the long past was rendered totally irrelevant and wrong. Continue reading “CORE – The Economy”
Economists as Camp-following Whores
“The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently relational to allow predictions to be made. Just as no physicist would claim that “water runs uphill,” no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teachings of two centuries; we have not yet become a bevy of camp–following whores. “
That’s a favorite quote from James M. Buchanan. He wrote that in the 1990s in response to a Wall Street Journal interview in which the disemployment effect of minimum wage legislation was questioned.
The theoretical case that minimum wage laws adversely affect low-skilled workers is as sound as anything else in economics. The empirical evidence is also as sound as the empirical evidence for “dog bites man.” What makes the news is when “man bites dog.” That exception does not invalidate the general case that dogs bite men. Continue reading “Economists as Camp-following Whores”
On Monopoly
“I am confused about the correctness of government interference to break monopolies. Sometimes I think this is good. I do believe that a free market without competition is terrible. But if the government starts deciding what a “monopoly” is and what is not, we have just let in a thin wedge that can corrupt free markets beyond any limit. But then, if the government does not break monopolies, who will? Can the free-markets self-correct? Has it ever happened in practice?”[1]
Those are not easy questions to answer in a blog post since the issues involved are many and far from trivial. Volumes have been written on the definition and analysis of the economic concept of monopoly, and experts frequently disagree on what, if any, harm monopolies do, and what should the policy response be.
My thinking has evolved since I first began learning economics. Trained in the neoclassical tradition, I used to think that monopolies were harmful for the economy, and therefore government intervention was required to break them up for economic efficiency and consumer protection. However, the more I studied Austrian economics, the more I realized that monopolies weren’t the great threat to economic health as they were made out to be. Continue reading “On Monopoly”
