Coase on the case

The ignorance of the American public about the practice of capitalism works to raise the living standard of everyone, is reflected in the outcome of the last election.  Over 50% of the voters decided a man who does not believe in capitalism, or if he does it is some form of "social justice" capitalism that does not exist in the real world.  It appears Obama believes in something called "redistributive" socialism, or something the other, that bears no relationship to the magical wealth creation that is at the heart of capitalism.  In this brief post by PL's Steven Hayward, a 102 year old real economist identifies the problem with the current "crop" of so-called economists and by extension, the illiteracy of the American public on this critical subject.  Until the socialists and collectivists realize that their beliefs are counter productive, we will likely continue to hire economic illiterates like Obama to redistribute wealth all the while wealth is shrinking.  Sad but true.

COASE ON THE CASE AT 102

Ronald Coase

Ronald Coase, the University of Chicago economist, Nobel Prize winner, and originator of the widely used and misused “Coase Theorem” (about the dynamics of property rights) is still going at the ripe young age of 102.  I believe his famous essay, “The Problem of Social Cost,” remains the most-cited law review article in history, and it spawned the influential law and economics movement inside the legal academy.

Writing recently in the Harvard Business Review in an article provocatively titled “Saving Economics from the Economists,” Coase argued that much of the economics discipline today has become distant from the real world, if not in fact damaging:

Economics as currently presented in textbooks and taught in the classroom does not have much to do with business management, and still less with entrepreneurship. The degree to which economics is isolated from the ordinary business of life is extraordinary and unfortunate. . .

This separation of economics from the working economy has severely damaged both the business community and the academic discipline. Since economics offers little in the way of practical insight, managers and entrepreneurs depend on their own business acumen, personal judgment, and rules of thumb in making decisions. In times of crisis, when business leaders lose their self-confidence, they often look to political power to fill the void. Government is increasingly seen as the ultimate solution to tough economic problems, from innovation to employment.

Economics thus becomes a convenient instrument the state uses to manage the economy, rather than a tool the public turns to for enlightenment about how the economy operates. But because it is no longer firmly grounded in systematic empirical investigation of the working of the economy, it is hardly up to the task. . .

That’s not his only recent contribution.  He’s just co-authored a new book, How China Became Capitalist.  My pal Nick Schulz interviewed Coase and his co-author Ning Wang recently.  One highlight:

Nick Schulz: You are critical of much modern economics, saying it has been transformed “from a moral science of man creating wealth to a cold logic of choice and resource allocation.” How did this happen? Where did economics go wrong?

RC & NW: Adam Smith, the founding father of modern economics, took economics as a study of “the nature and causes of the wealth of nations.” As late as 1920, Alfred Marshall in the eighth edition of Principles of Economics kept economics as “both a study of wealth and a branch of the study of man.” Barely a dozen years later, Lionel Robbins in his Essay on the Nature and Significance of Economic Science (1932) reoriented economics as “the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” Unfortunately, the viewpoint of Robbins has won the day.The fundamental shift from Smith and Marshall to Robbins is to rid economics of its substance — the working of the social institutions that bind together the economic system. Afterward, economics has turned into a discipline without a subject matter, advocating itself as a study of human choices. This shift has been assisted by what Hayek (1952) criticized as the growing trend of scientism in the study of society, which took mathematical formalism as the only secure route to truth in the pursuit of knowledge. As economists become more and more interested in formalism and related technical sophistication, it becomes secondary whether the substantive questions that they choose to perfect their methods or to illustrate their theoretical models bear any resemblance to the real world economy. By and large, most of our colleagues are not bothered by the fact that what they profess is mainly “blackboard economics.”

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Mitch Daniels to the rescue

Indiana Governor Mitch Daniels speaking to a conference of the William F. Buckley Jr. Program at Yale University on November 30:

Over the next few years and maybe just months, the debts we have accumulated and that this presidency has doubled will begin to assert themselves. We must hope and work to see that an easily imaginable panic and economic ruin does not result. At best, economic circumstances will remain difficult.

Even if reserve currency status and the absence of alternatives continues to protect us a while longer, the ObamaCare legislation will take effect. Its implementation will likely be a nightmare of missed deadlines, public confusion, inconsistent exceptions, and dashed expectations. Every claim made for the bill will be shown to have been false: health care costs will go up, not down; government spending and debt will go up, not down; the economy will be injured, not benefited; people by the millions will in fact lose the health insurance they have and like. Indeed, these calamities are already evident.

These failures, abetted by the natural tendency of Americans to swing the pendulum every so often, set the stage for a powerful restoration of an architecture of liberty. Freedom’s friends must be ready, not just with cerebral prescriptions for better policy, but with a moral argument that affirms the God-given dignity of each of us, that says “Yes, you can” to everyone….

Econ 101

This simple explanation of the auto bailout by the Center for Freedom and Prosperity, should be shown in all high schools (and colleges, for that matter) throughout the land.  It makes the points that every person who has actually been in the business world understands: government should not be in the business of picking winners and losers; using taxpayers moneys for government purposes reduces the capital available to the private sector where real jobs are created;  politicians make "investments" in the economy for political reasons and not economic reasons.

This is an effective primer on economics.

The NYTimes at it again

Steven Hayward and John Hinderaker of Powerline both have posts here and here today on the Solyndra defense mounted by the NYTimes editorial page. This defense is a pluperfect example of the Times' take on the subject of economics.  Clearly and unmistakably the Times thinks the government should be in the business of picking winners and losers and that such decisions are far too important, or something, to be left to a free market solution.  It gets worse: the Times also thinks that the policy of increasing the cost of fossil fuels should be encouraged by government policies to continue to rise in order to make the renewable energy sources the viable alternative.  This attitude at a time when gasoline prices have doubled over the past three years of the Obama administration and unemployment has risen in spite of all the new government debt designed to bring it down.  The Times can't seem to put two and two together and come to the pretty obvious conclusion that rising energy costs actually causes unemployment. Duh! Most non economists can figure that one out.  It's no wonder there's so much ignorance out there about how the real world works when so many people take the Times as Gospel on almost any subject.  These two linked posts above are short and to the point.

LATimes's Michael Hiltzik

Michael Hiltzik writes two columns on economics each week for the LATimes.  He is a liberal pretty much aligned with the Democrat Party proscriptions for curing depression and recessions.  In today's column "Obama's push for jobs conjures up FDR's approach", Hiltzik endorses the Obama plan to increase government spending on the infrastructure and raising taxes on the wealthy, two major components of FDR's New Deal plan.  He also knocks Romney's recent announced plan as a "return to the Bush era".  In extolling the New Deal proscriptions, Hiltzik seems to have forgotten this revealing 1939 quote from Henry Morgenthau, a major player in the Roosevelt Administration as Secretary of the Treasury:

"We have tried spending money. We are spending more than we have ever spent before and it does not work. And I have just one interest, and if I am wrong … somebody else can have my job. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. … I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot."^[9]


Morgenthau was clearly frustrated by the fact that deficit spending by the government did nothing to reduce enemployment during the first 8 years of the Roosevelt Administration.  And yet, here we are in another recession/depression of a similar magnitude to the Great Depression of the '30's, and Hiltzik and the democrats are calling for the same failed policies Morganthau condemned.  


Hiltzik's book, "The New Deal: A Modern History, is due out sometime this week.  Whaddaya want to bet it doesn't include this Morganthau quote?

California's budget dilemma

The State of California's controller, John Chiang, recently visited the Westlake Village area and gave a talk about the budget problems he faces and the future prospects for the state.  According to the local paper, Acorn, the controller talked about how the real estate crash of '07 caused a huge shortfall in revenues and an inability to meet the obligations of the state, predicting "It's going to be a rough couple of years", before things improve.  Chiang went on to discuss how the state's future depends on the skill set of the population (education system), financial capital and infrastructure, are the most important elements of the California economy and that all three of these components are now severely weakened by this crises.  He also talks about how Californians were living beyond their means before the crises and how the state will be in even greater trouble if commodity prices increase and consumer spending decreases.  Okay, all this analysis is interesting, at least to him, but what is the state doing to bring expenditures in line with revenues and what is it doing to address the outrageous stranglehold the public service unions exert over the economy, a condition that has been a growing issue for decades?  Not a peep!  Chiang offers no advice on getting the unions under control nor how to address the pension fund shortfall that represents a claim on taxpayers that for the present, at least, dwarfs everything else he talked about.  This City Journal piece suggests some of the issues Chiang and his cohorts should be talking about because they are immediate and if they don't get addressed there will be no money for any of the big picture issues he spent his time addressing.  What we're seeing here is a public official, in office as a choice of a governor who in turn is in office as a result of union financing and support.  Think these guys are going to get a handle on the really big problem?  It's pretty clear from Chiang's presentation they would rather talk about macro economic issues than address the union issue.

ADDED: This City Journal piece sets the record right with respect to exactly how much the 1.85 million state and local government employees are costing the rest of us.  There is no way this huge imbalance can or will continue.

2012 Election prospects

Soon, and hopefully people will be analyzing and deconstructing Obama and his administration after the fact.  The likely comparison that will come to mind is Jimmy Carter and his failed administration of the late '70's.  It's hard to think of much Carter did right, especially in foreign affairs, but to his credit he did get one thing right on the economy: deregulation.  By all rights, he should get a great deal of credit for starting the deregulation ball rolling that eventually freed up the US economy from the rigid controls that inhibited competition and therefore growth especially in transportation and communications. Affordable airfares, telephone service and shipping costs all contributed positively to the fabulous growth of the economy that occurred during the '80's and 90's.  Unfortunately Obama has no understanding of the workings of our modern economy as is apparent from this article, and sees the commercial world largely through the prism of the 18th century mercantilism that Adam Smith debunked and buried once and for all in  "Wealth of Nations".  Obama also has no idea of the significance of the Austrian School of Economics and its emphasis on the incentives that drive free markets in the creation of wealth.  This latter shortcoming in Obama's education is particularly unfortunate for had he been aware of all the failed policies of Herbert Hoover in his attempt to promote recovery from the onset of the Great Depression in 1930 and 1931, he would have understood that the democrat party's Keynsian deficit financing effort and the various bailouts were not going to work.  Long before FDR's great spending debacle, Hoover tried them all, including large tax increases on income and capital and the infamous Smoot-Hawley protectionist tariff law that killed all export markets for US producers. In fact, for those who are familiar with the Hoover presidency, it is his administration that Obama's most closely resembles and will most likely be linked with not Carter's which at least gave us deregulation.

Recovery a la democrats

This post from Powerline, with its accompanying charts, unmistakably demonstrates the failure of the Obama administration's economic recovery policies.  Keynsianism is truly dead.

California and the recession

Victor Davis Hanson is a practical, intellectual farmer, much like say Thomas Jefferson without the same political office holding aspirations. What's interesting about Hanson is his understanding of the macro economics of the micro economic environment in which he finds himself in Central California.  His comments on the "wealth" of the unemployed, their access to various government social safety net programs and not least their ability to operate in a vast cash economy in which they pay no taxes on part time work (yet remain the beneficiaries of these government programs) and finally their access to credit lines and vouchers for housing and food stamps.  Hanson contrasts the "affluence" of the unemployed poor with the working poor of his grandparents 1930's generation.  He also talks about the reasons why industry is not moving into this area to take advantage of this idle and presumably cheap source of labor singling  out the state taxes and regulatory environment as principal culprits.  All in all it's a dangerous brew of unemployment and government largesse that cannot continue since we now know the socialist politicians have finally run out of other peoples's money and the prospects for jobs remain weak. Hanson thinks we are living in "dangerous times" quite possibly leading to major social upheaval on the order of magnitude that brought on the horror of the Soviet Union.  Let's hope this draconian perspective is overstated and yet until the time when we return to a system that values work over handouts and freebies to big swaths of the population, he just may be right.  After all, if the government no longer has the ability to buy a lot of people's comfy lifestyle, those people are liable to get very angry sooner or later.  Hanson's article is here.

China's looming revolution

Everyone, especially those who have visited China, is impressed by the economic activity going on in that country as well as the apparent affluence of the people in the major cities.  It seems like a disconnect that this kind of development can be going on in a communist run state where party apparatchiks are in charge.  One has to understand that the apparatchiks have allowed capitalism to work its magic by staying out of the way except to make sure the state credit machinery works for the benefit of entrepreneurs.  What we have seen is 30 years of 10% GDP growth and the creation of mountains of wealth and more millionaires than exist in the U.S.  What's missing in this equation is political freedom and all the associated values we associate with that important condition in the west.  Consequently many observers believe China is one big powder keg that one day will blow sky high, as soon as people demand their rights as free citizens.  This article by Guy Sorman articulates the dilemma facing the communist leadership and predicts an unhappy ending at some point in time.

Gross speaks...and acts by selling treasuries

Bill Gross, largest bond fund manager in the country, warns in this article in Wapo that the U.S. has a year or two to get its fiscal house in order before it faces the same issues as Portugal, Greece,  Ireland and the other basket cases with debt they can no longer manage.  Meanwhile he has sold all his treasuries because he senses inflation in the air.  Whatever this guy does in the investment arena is closely watched by all other investment managers so we can be sure they are all beginning to dump treasuries and batten down the hatches.

Economics a la Nan Pelosi

What we have here is a graph and a comment by Nancy Pelosi that perfectly captures the Progressives (Socialists) view of economics.  Ms Pelosi clearly believes that government spending creates jobs when she says the Republicans budget cuts will cost 800,000 jobs.  It would be fun to have her respond to this chart, for the record.

Collection of links to von Mises articles

Here's one on the dubious value of government generated statistics.  And here is a related article on the misuse of statisttical measurements by economists.