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.”

j

Maybe the only solution

From a political and economics point of view, this post by a commenter to an article about the debt crises by Victor Davis Hanson, sums up the thinking of many conservatives.  The dilemma in which we now find ourselves has gone beyond the tipping point to the crises point and only a major overhaul of the system can save the day.

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  glennd1 • 8 hours ago

  
  

  I'm coming to believe that the best thing the advocates of liberty and responsible govt can do is to drive the current fed govt into insolvency, so just like a corporation, we can re-organize. We should take Rahm Emanuel's admonition to "never let a crisis go to waste" to heart. We will only have the opportunity to really change the govt entitlement state, the labor laws that provide privilege to unions and to stop funding the states, localities and NGOs that are the feeder system of Progresssive careers in a crisis.

  What would that look like? Well first, the Republicans need to be much more serious in their commentary. Hanson's article is more like the tone that Boehner et al should be taking. They should make clear that we are NOW at the point of no return. They should cite studies of countries that have 100% debt to gdp ratios. The should use OECD data to show how progressive our tax system is already. They should cite the millionaire exoduse from the U.K. in which their higher tax rates have resulted much lower revenues from millionaires, or how the same phenomena is taking place in France.

  They should have a serious conversation with the American people about our unfunded liabilities. If the U.S. was a corporation, the proper reserves required would demand a total of 8 trillion in federal revenue this year. They should start and maintain a conversation on the costs and impact of the welfare state, citing the fact that half of poverty program spending goes to folks who aren't below the poverty line.

  But they don't. They just throw around soundbites and act like kids who are stuck in an "unfair" game, bemoaning Obama but never getting on offense. An example of what I'm thinking would be say a weekly YouTube video series on the absurdities of federal welfare. I wonder how many people know that 1/3 of all federal welfare spending goes to California, and much of that to illegal immigrants.

  I don't think the Republicans are up to the challenge. I don't believe the "new crop" is either. Rubio and Ryan leave me feeling like I'm talking to man-children, sorry, they have no grit. You can tell they've lived their entire lives in politics and govt, and are consummate "insiders" already. Ted Cruz may be a little better but then you also have the challenges of distancing the Republicans from the religious right a bit, as we'll never have more credibility if we keep letting the yahoos who still think Sarah Palin is a great candidate or spokesperson for anything drive this bus.

  None of the above will happen. We'll still be treated to Boehner's sonorous, measured tones. Something much more alarmist is what's called for. I'd love to see him ask, "Mr. President, do you want to run the country insolvent?" Last point, we ain't seen nothin' yet from Obama. His "offer" was his first salvo in a term that promises to offer Progressive programs in droves that will cost a mint. There is no compromise available with someone so disconnected from fiscal and economic reality.

  
  

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    BA1991  glennd1 • an hour ago

    
    

    Well put, Glenn. I, too, am of the exact mindset, and have been saying that about my state, the economic disaster that is RI. I do believe insolvency is the only cure left. Those that live by the government at all levels will soon be learning about the hard facts that Dr. Hanson outlined so well, and that includes the so-called Republican party.

    
    

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  CopperheadCSA • 5 hours ago

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  “A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a
  dictatorship. The average age of the world’s greatest civilizations has been
  200 years.”― Alexis de Tocqueville

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….

Bush tax cuts

Given the incredible demagoguing by democrats on the issue of Bush's funding two wars on the national credit card and the destructive tax cuts during his administration, this chart from Reason Magazine sets the record straight.  It is important to remember that Bush lost control of the Congress at mid-terms in '06, at which point in time the deems blocked all efforts in the House to reform Freddie Mac and Fannie Mae.

The Bush Tax Cut Issue in One Chart

Ed Krayewski|Nov. 30, 2012 4:47 pm

Federal outlays and receipts in the last two years of the Clinton Administration, all eight years of George W. Bush and Barack Obama’s first term:

In 2011, income tax revenue made up about 55 percent of federal receipts. Raw data here and here

A few notes: George W. Bush and supporters of the tax cut said federal revenue would go up after passing the cuts and it appears it did. In fact, federal receipts reached Clinton-era levels without Clinton-era tax rates in 2006, not long after all the cuts went into effect (passed in 2001 and 2003, they were tweaked with in 2005). Bush passed a tax cut as stimulus in 2008 and Barack Obama’s trillion dollar stimulus package in 2009 included some type of tax cuts as well, but does that chart look like a revenue problem or aspending problem?

And for those who would say “well of course the government has to spend more when the economy is hurting” only one question applies: has it helped? If you think so, I've got a tiger-repellant rock to sell you.

UPDATE: Reader Steve Nelson writes to point out that the deficit only started growing after the new Democratic Congress came in in 2007. “You know, the section of the US government that actually spends the money. . . . This cannot be stressed enough.” Good point.

Interesting Gallup poll

The importance of management

This story here reminds me of the time in the 1970's when, Jack Burns, the newly appointed CEO of the American distributorship of the just merged motorcycle manufacturers of Great Britain, (Triumph, BSA, Royal Enfield, and Matchless) completed his initial visit to US dealers of all these brands.  All these large displacement motorcycles were sold around the world for many years and had loyal bodies of owners who would argue endlessly and vigorously their own particular brand's superiority over the others.  They also shared common characteristics.  They were powered by large  displacement, 500-750 cc 4-stroke engines,  the design and styling was classic ruggedly masculine, the engines had a race car high performance sound, and they handled nimbly. They defined performance road motorcycles of that time in history. And, oh yes, they shared the same foibles.  They were all notoriously unreliable as a result of antiquated manufacturing  processes and the diabolically perverse Lucas electrical systems that made every trip a breath holding experience.  Despite their shortcomings nearly fifty thousands of these sporting vehicles were being sold in the US every year. The recent introduction of similarly sized, well designed modern motorcycles from Japan, substantially more refined and reliable than the British makes, was cause for concern and the reason they consolidated manufacturers and hired Jack Burns.

After his dealer survey Jack called for a meeting of the Board of Directors in London beginning his presentation for shock effect:  "I have completed my visit to all 1,500 dealers in the US and what I found was truly shocking.  Our machines are sitting on showroom floors right next to ones now being imported from Japan.  Our brand new machines are leaking oil from the engine casing directly onto the dealers's showroom floor.  The Japanese machines do not leak oil, I repeat, do not leak oil on the showroom floors.  We have a major manufacturing and quality control problem.  We must fix this problem immediately or we will not be able to compete with the Japanese."  There followed a silence of maybe 10 minutes. Finally an elderly Board member cleared his throat announcing in all his British dignity:  "Look here Jack, what you are telling us is a tempest in a teapot.  After all the purchasers of these motor bikes don't keep them in their living rooms now do they?"

Ten years later only a handful of British makes were sold in the US, but over 2 million Japanese motorcycle were being sold annually.