Wednesday, September 1, 2021

The Afghanistan War Was a 20-Year Failure in Central Planning

The Afghanistan War/nation-building project is now confirmed as a complete failure—and a costly one, in both lives and resources.

Brown University’s Watson Institute estimates the US spent $2.2 trillion over the 19 years, increasing the tax burden of every American by $6,000. Further, the Watson Institute estimates “241,000 people have died as a direct result of this war. These figures do not include deaths caused by disease, loss of access to food, water, infrastructure, and/or other indirect consequences of the war.”

Yet, in the end, it was all for nought. The US-sponsored Afghan government collapsed shortly after the lethally botched US military withdrawal, and the Taliban are once again in power. Only now, they are armed with billions of dollars worth of US military gear.

Who’s to blame?

In a recent speech, President Biden laid much of the responsibility for the failure of the regime on the Afghani forces for being unable to hold off the Taliban. The administration has also been quick to place blame on the peace agreement the Trump administration made with the Taliban before he left office.

However, the failure of liberal democracy in Afghanistan isn’t the fault of the Afghani military, the Biden Administration, or the Trump Administration. In reality, the failure of US nation building is a failure of central planning which was doomed to be a disaster from the very beginning.

In 2007, Professor Chris Coyne of George Mason University published a book titled After War: The Political Economy of Exporting Democracy. The subject of the book surrounded the inherent problems of trying to export liberal democracy. Dr. Coyne broke these problems into two categories: knowledge problems and incentive problems.

The knowledge problem of centrally planning the establishment of other governments is that, despite the fact that politicians know what democracies look like superficially, they don’t know what underlying conditions are necessary to foster a healthy liberal democracy. For example, differing belief systems and cultures may be incompatible with any familiar form of liberal democracy. The US Constitution, for example, rose up within a specific context. Merely “airdropping” a constitution into a country doesn’t mean the underlying context will match with the constitution. It turns out airdropping political institutions is more difficult than airdropping supplies.

Gen. Stanley McChrystal, a former top commander in Afghanistan, once boasted, "We’ve got a government in a box, ready to roll in.” By now it should be obvious to everybody how much hubris was wrapped up in that claim.

Similarly, Dan Sanchez pointed out in 2016 that US central planners miss out on important local knowledge which cannot be codified. This decentralized knowledge is referred to by Nobel Prize-winning economist F.A. Hayek as the knowledge of, “the particular circumstances of time and place.” While central planners may like to believe they can access this knowledge, there is simply no way for them to centralize all this disparate, uncodified knowledge to serve the central plan.

Coyne continues by explaining the incentive problem associated with nation building. Even if central planners were able to solve the knowledge problem in theory, it’s unlikely they’d be able to implement their solution. Why? The implementation of the plan is controlled by US politicians who face incentives incompatible with successful nation building.

Consider the incentives of the bureaucracies associated with reconstruction efforts. Bureaucrats improve their position by taking on more roles and by increasing their bureau’s budget. Since there is a limited amount of funding available, this means bureaucrats have to compete with one another for funding.

So, despite the fact that successful nation building may call for different bureaus to work together, there is no guarantee that doing so will be to the benefit of bureaucrats.

It’s also important to note that US politicians are subject to the incentives provided by special interest groups. Through campaign contributions and lobbying funds, special interest groups influence policy.

Perhaps, for example, the path to liberal democracy in Afghanistan involves the US troops gaining citizens’ trust by not using indiscriminate drone bombing. In this case, drone bombing would be bad for the prospect of liberal democracy, but it would still be good for the bottom line of military weapon manufacturers. In that case, that special interest group may exert pressure on politicians to use these unhelpful tactics.

Ultimately, the assumption that America can spread liberal democracy via military action was wrong. It relied on conceptualizing state central planners as both being able to collect the requisite knowledge and being immune to conflicting interests in implementing plans. However, in the real world, this assumption does not bear out. Knowledge and incentive problems abound.

So there’s no need to play the blame game with Trump or Biden. The blame for the disaster in Afghanistan falls squarely on the experts in Washington, DC, who began this crusade nearly 20 years ago.

The question is now, how should we hold these experts accountable for this disaster?

Peter Jacobsen
Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. 

This article was originally published on FEE.org. Read the original article.

Why Inflation Is at a 12-year High

Yesterday, the Bureau of Labor Statistics (BLS) released numbers indicating that the average price level of consumer goods has risen 4.2% since this time last year. This is the highest rate since 2008. In other words, the average consumer making the same salary this year has taken a pay cut when you consider what their paycheck can actually buy.

How does the BLS know this? One way the BLS keeps track of inflation is by using the consumer price index (CPI). The CPI uses some of the common goods urban consumers buy, and they keep track of the prices of these goods each year.

A CPI growth of 4.2% means this “basket” of goods the average urban consumer buys has gotten 4.2% more expensive. Economists call this measure inflation.

The CPI is by no means a perfect measure of inflation, nor could any measure be, but it provides some kind of benchmark to compare how much prices are changing over time.

Why is inflation increasing now? It’s all about the money. Imagine tomorrow that suddenly all US money becomes a 10x larger number. Ten dollar bills become 100 dollar bills, bank accounts with $10,000 turn into accounts with $100,000, and the four quarters in your cup holder transform into a 10 dollar bill.

This might sound nice at first, but consider what happens next. If prices stay the same, suddenly people rush out to buy new things. Suddenly, a student with a $7000 student loan can buy a Porsche. Someone can afford a down payment on a house who was months away before. A kid with a generous allowance buys a flat-screen TV.

But now the problems appear. All cars for sale are being driven off the lot. TV shelves are empty. House offers pour in only minutes after listing. There is more money, but the exact same amount of goods exist. With so many customers demanding new goods, sellers have 10 customers fighting over one product. So what happens? The price is bid up.

In fact, prices in this world will make, on average, the same change as bank accounts. One dollar candy bars become $10, average quality TVs cost thousands of dollars, and the $100,000 two-bedroom in Kansas becomes a million-dollar purchase.

If more dollars chase the exact same goods, prices will rise.

Although the above example is simplified, the general idea holds in the real world. Unfortunately, not everyone has gotten 10x more money, but new money has been introduced to the economy.

The quantity of money (measured as “M2” by the Federal Reserve) has increased more than 32.9% since January 2020.

That means nearly one-quarter of the money in circulation has been created since then. As the following graph shows, a change like this is unprecedented in recent history.

Image Source: Federal Reserve Bank of St. Louis Series M2SL

The newly printed money helps fund the slew of trillion-dollar coronavirus spending which benefitted massive corporations. It also is an attempt to satisfy consumers’ demand to hold money so they will be comfortable spending again. And spending they are.

As lockdowns end and finally allow consumers to return to normal economic activity, the new money begins to move through the economy more quickly. Banks have more money to lend out and people are building new homes. As more homes are built, the demand for wood increases. As the demand for wood increases, the price of wood goes up. Sound familiar?

Although the new money won’t hit all markets at the same time, and it may take some time for demand to return to pre-lockdown levels, the inflation numbers indicate this process has begun. In order for inflation to slow down, either spending would have to slow down, or the government would have to lower the money supply.

None of this means hyperinflation is coming tomorrow or ever. In fact, it could be a blip caused by a low CPI benchmark. But given all the new money floating around, it shouldn’t surprise anyone if this rate of inflation were to persist or increase.

The Federal Reserve members aren’t worried, and, in fact, they claim to not be considering contractionary monetary policy until inflation is this level for some time. Many economists argue inflation would need to be much higher to be worth worrying about. But inflation need not be hyperinflation to be harmful to many. Inflation’s effects are not equal.

After a year of lockdowns leading to job losses and pay cuts, many Americans aren’t in a position to pay 4.2% higher prices. It’s easy for someone with a comfortable job or nest egg to scoff at these price increases, but working-class and poor Americans feel the difference.

At a time when Americans work to rebuild their savings to protect their families from future uncertainty, is it wise to ignore a policy that slowly eats away at their savings while they scramble to find new coupons for groceries or consider taking a much longer public transit route to save on gas? These struggles are worth consideration.

So will inflation rise? Will it fall? No one can say for sure. But we can say for sure that inflation doesn’t need to be in the double digits to hurt.

Peter Jacobsen
Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. 

This article was originally published on FEE.org. Read the original article.

Thursday, December 3, 2020

Walter Williams's Students Explain What Made Him Such a Great Economics Teacher

Editorial note: We at the Foundation for Economic Education mourn the passing of Walter Williams, a great economics educator and a long-time friend of FEE who distributed our publications and cheered on our work. We are forever grateful to Dr. Williams for his heroic contributions to the cause of economic freedom and understanding.

Walter Williams, renowned economist—and my teacher—has passed away. He was 84. His accomplishments as a researcher, teacher, and public intellectual are too great to number in a single article, so I’ve decided to write about the side of Dr. Williams I was blessed to experience personally: Walter Williams the teacher.

“I think you’re right, but it’s kind of clumsy.”

Those were the first words Walter Williams said to me after my long-winded answer to a question about the paradox of value. Dr. Williams, like all great teachers, understood the most important thing in economics was getting the fundamentals right. Like the great UCLA Basketball coach John Wooden taught each of his players to tie their shoes, Dr. Williams had us tie our proverbial shoes every lecture in our PhD Microeconomic Theory class. Concepts and phrases like “production”, “utility”, and “consumption” we took for granted were often the target of refinement by our professor.

However, he never did so to tear us down. Rather, he pushed students to perform at the highest level he could by probing our knowledge with grace and humor. His examples were both relatable and funny.

Although there are too many examples to include, I’ve added testimonials by some of Dr. Williams’s students over the years about what they enjoyed about him as a teacher. But first, I’d like to offer one last anecdote of my own.

Dr. Williams once posed a puzzle to us which was originally posed by his teacher (the late, great Armen Alchian) for which he claimed to have no satisfactory answer. He asked, “why is it that present generations produce goods from which future generations many years ahead of them benefit? That is the people who built the Brooklyn bridge, they’re all dead, but current generations benefit from their sacrifices. Why’d they do that?”

Dr. Williams batted our answers down with relative ease. Although, to my knowledge, he never received a satisfactory answer, Dr. Williams has become a subject of his very own puzzle. I’m reminded by a poem by William Allen Dromgoole about an old man who, after crossing a large stream, took time to build a bridge behind him. When a fellow traveler asked him why he bothered to build a bridge after already passing, the old man responded:

This chasm, that has been naught to me,

To that fair-haired youth may a pitfall be.

He, too, must cross in the twilight dim;

Good friend, I am building this bridge for him.

Like the subject of his puzzle, and the old man in Dromgoole’s poem, Dr. Williams was a bridge-builder.

In the 40 years he served as professor at George Mason University, Dr. Williams imparted the fundamentals of economics in the property rights tradition of UCLA to his students. He could have gotten by with being less focused on teaching, as he had multiple streams of income, but instead he produced in the minds of his students an understanding of economics that will long outlast him and bless many a “fair-haired youth.” Despite the fact that my cohort was one of the last groups of students lucky enough to see him lecture, we will not be the last of his students. Dr. Williams’s influence will continue to operate in a generation of economics teachers which, like a sturdy bridge, will continue his legacy.

I would like to take one more stab at Dr. Williams’s puzzle: why do mortal beings, like he himself, create value that will outlast them? Dr. Williams once described love as when you receive utility because another person receives utility. So, although Dr. Williams would scorn my unfalsifiable preference-based explanation, I believe this is the reason why he worked so hard for his students. Dr. Williams loved his students and the science of economics, and that is why he bequeathed so much to us.

Finally, I’m only one student of Dr. Williams.

To make his own impact clearer, I’ve gathered testimonials from just a few of his many former students.

“Walter was a friend of FEE’s and a friend of mine as well—a one-of-a-kind friend. He never failed to return a phone call or respond to an email. He went the extra mile when we asked him for anything. And in his love for liberty and sound economics, he was solid as a rock. We will never forget his plainspokenness, his generosity, his candor. He leaves behind a lasting legacy to which we should all aspire.”

– Lawrence W. Reed, President Emeritus, Humphreys Family Senior Fellow and Ron Manners Global Ambassador for Liberty.

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Join us in preserving the principles of economic freedom and individual liberty for the rising generation

“I had the honor and privilege to be a student in Professor Williams’s PhD Microeconomic Theory course. For 3 hours every Tuesday night during the Fall of 2013, I was completely ‘hooked’ by his clarity of thought, wittiness of presentation, and colorful anecdotes, all of which illustrated to me how a consistent and persistent application of the economic way of thinking can explain human action in all its manifestations. He has been a role model that I’ve strived to emulate as a teacher of economics.”

-Rosolino Candela, Associate Director of Academic and Student Programs, Mercatus Center

“Walter Williams was a first-rate economist. He was an inspiring and compassionate teacher, an accomplished scholar, and a master at communicating complex economic ideas to the public.”

-Christopher Coyne, Professor of Economics, George Mason University

“My favorite memory from Williams’s class comes from his lecture on producer theory. He asked the class why profit maximization required the marginal cost function to be increasing at an increasing rate. I eagerly raised my hand, Williams called on me, and I began explaining why this is was a necessary condition for profit maximization. After about 10 seconds, Williams interrupted me and said, ‘you were right, but then you kept talking,’ which got a laugh from everyone in the class, including me. This is how we was as a teacher: brilliant, clever, sharp, and demanding. I will miss him greatly.

- Bryan Cutsinger, Assistant Professor of Economics, Angelo State University

"Dr. Williams gave his life to the teaching of economics, each day in class and until the end. Aside from his mastery of the principles, what stood out to me in his microeconomics class was the individual way he dealt with each student. Williams revealed his brilliant wit and mischievous sense of humor when dealing with more confident students, but with shy students like myself, he became gentle and almost grandfatherly. He was also the first person I told about my interest in studying the family from the economic perspective, and he took time to introduce me to some classic research and encourage me in my work.

His memory will live on in each of his many, many students as they seek to emulate his profound love for teaching and deep commitment to thinking properly."

-Clara Jace, PhD Fellow, George Mason University

“My fondest memory is when Professor Williams asked the question: ‘I know oleomargarine is a substitute for butter, but what else is a substitute for butter?’ Professor Williams was pushing us to consider that there is some substitution effect caused by the price change of any good no matter how unrelated the goods under consideration may seem.

Well, the joke's on Professor Williams, because his example proves that there are never any substitutes for experience, common sense, and unflinching honesty. No matter how cheap or expedient it became to signal political correctness or how expensive it became to firmly stand by your convictions, Professor Williams would never switch to the cheaper alternative. He was the corner solution who couldn't be put in the corner.”

-Stuart Paul, Economics PhD Candidate, George Mason University

“The best thing I can ever say about Professor Williams is that he was a master at making me feel just ‘dumb’ and ‘ignorant’ enough to motivate me to study hard. Walking home from campus on late Tuesday nights after his graduate micro class, I often second-guessed my decision to get a PhD in economics. This was the result of the mild humiliation to which I subjected myself every week by attempting (and failing) to answer the questions he asked during class. How could I ever get my PhD in economics if I couldn’t even answer right just one of his questions?

The last day of classes, Professor Williams began testing our understanding of the material one last time. This edition of the show had a biblical theme. He went through a long list of peculiar obligations one finds in the Old Testament. I only remember two of them. The prohibition of wearing clothing made for the other gender and the rule that one could work his land with the aid of two oxen or two donkeys, but not one of each. He then asked us what economic notion may explain such rules. Without raising my hand, I blurted “price discrimination!” Professor Williams turned towards me for a second, smiled, and went back to his lecture. I was not sure my answer was right (when it came to his questions, no answer ever seemed to be) but I interpreted his smile as acknowledging that I had an economic thought. It was my first such thought. It was as if something had ‘clicked’ in my head and now I could just think like that, like an economist. That’s what Professor William taught me and generations of students before me, and for which I will be forever grateful.”

-Ennio Piano, Assistant Professor of Economics, Middle Tennessee State University

One student, wishing to remain anonymous, made clear the point that Dr. Williams tried to get the best out of all students. The student, worrying about issues with concentrating during exams, asked for the chance to take the exam separately from the rest of the class with a longer exam period. Dr. Williams, however, was confident in the student’s ability and encouraged the student to take the test with the rest of the class in the normal time period and see how it went. The next week, Dr. Williams announced to the class that that student earned the highest grade in the class on the exam.

“Williams was a model teacher of economics. While no topic was off the table, he placed a premium on clarity and conciseness, a standard to which he held himself and his students. It is from Williams that I learned the value of asking students to solve as-of-yet unsolved puzzles themselves using the simplest economic tools. Following in Williams's footsteps, I myself spend the first five minutes of each class I teach trying to puzzle through similar questions with my students, to great effect. My favorite quote from Williams's class was ‘Need is a vacuous concept.’ No other quote better communicates his teaching style with as little context. I'm very grateful to have taken a class with him.”

-Henry Thompson, PhD Fellow, George Mason University

“Professor Williams was a unique gentleman and scholar. As students, we were all mesmerized by his talents for explaining and communicating his passion for the economic way of thinking. For him, economics was about analyzing the everyday life of individuals. It applied and belonged to all. Professor Williams thought there was no room for the word ‘need’ in economics. We always live in a world of trade-offs with costs and benefits needing to be balanced. He would apply that seemingly simple idea relentlessly with striking illustrations. One day, to explain the indifference principle, Professor Williams narrated that he once entered his home in the dark. His wife said: ‘Walter, you scared me to death!’ Professor Williams’s answer? “I guess I haven’t bought enough life insurance.” Although having Walter Williams as teacher was, as he would argue, not a need, it was a privilege which we all valued dearly. May he rest in peace.”

-Louis Rouanet, PhD Fellow, George Mason University

Peter Jacobsen
Peter Jacobsen

Peter Jacobsen is the Gwartney Professor of Economic Education and Research and Ottawa University, and he is a PhD candidate at George Mason University. He was born and raised in the Omaha metropolitan area and moved to Cape Girardeau to obtain his BS. After finishing his BS he worked in banking for a year then began to pursue his PhD at George Mason University in Fairfax, Virginia. Peter is currently completing his dissertation while fulfilling his passion for teaching economics to the students of Ottawa University.

This article was originally published on FEE.org. Read the original article.

Friday, March 13, 2020

The Importance of Family in Society





Decades of anti-family policy in the United States has resulted in declining marriage rates and the breakdown of the family. This should be very concerning to us. The cause of this collapse needs to be examined, so that we can understand the effects of this policy on society and culture generally.

Over the last century and half there has been a substantial decline in marriage rates which is problematic for a number of reasons. Pope John Paul II reminds us in Apostolicam Actuositatem that the family is "the first and vital cell of society", after all, families are where children should learn to become citizens and form agency which guides them the rest of their lives. The alarming decline of women who marry is indicative of not only changing societal attitudes but misguided public policy. Decades of introducing new government assistance programs has negatively shifted incentives and public opinion on the importance of marriage, especially with the advent of the welfare state and anti-family tax laws.

This general decline has disproportionately affected Hispanic and African-American women. The largest decline of marriage rates for vulnerable groups coincides with the establishment of "The Great Society" which disincentivizes marriage through government support programs. This presents a few pressing questions such as why do politicians possess such variation in their visions regarding the role of government in society, and why do those with good intentions endorse policy with such poor results?

Regardless of geographic location, leaders and citizens of a nation have significant variations of opinions on how society should function, and in what manner. Dr. Thomas Sowell explores this variation in A Conflict of Visions; Ideological Origins of Political Struggles by dichotomizing these societal visions into two broad categories; the constrained and the unconstrained vision. He illustrates how well-meaning people arrive at largely different conclusions for policy in society even if they have similar goals.

The unconstrained vision is characterized by valuing rationality and expert knowledge above all else, in contrast to systematic knowledge and individualistic choice in the constrained vision. The unconstrained vision also believes that society can be guided to an ultimate goal, or that the human condition is perfectible. The French Revolution is often cited by Sowell as the archetype for the unconstrained vision in which those intellectuals who spoke 'on behalf of the people' were given the powers of life and death over their counterparts.

Although there are many dangers in the unconstrained vision, what is most concerning is the disregard for the family and the public policy that results from this viewpoint. William Godwin, a champion of the unconstrained vision, argued that we fundamentally restrict the effect of knowledge on future actions if we bind ourselves today.
"To those with the unconstrained vision, this means that being bound by past decision represents a loss of benefits made possible by later knowledge. Being bound by past decisions, whether in constitutional law cases or in marriage for life, is seen as costly and irrational"-A Conflict of Visions, pg. 79

Those who believe marriage is irrational largely misunderstand temporal praxeology and the relationship that families play in society as a whole. Focusing solely on remaining flexible in future actions necessarily wastes precious resources, such as time and youth, in a world of uncertainty.

People only act to remove expected uneasiness or improve their situation in the future, so all action must be directed forward as the present and past are largely irrelevant to considerations of action. It is also worth noting that all time is not homogeneous as we have a strong preference to sooner rather than later. This temporal sequencing helps to illustrate that time is scarce and people must economize their time much like any other finite resource. Ludwig von Mises in Human Action details the difference between temporal economization and economization of consumer goods;
"The economization of time has a peculiar character because of the uniqueness and irreversibility of the temporal order. The importance of these facts manifests itself in every part of the theory of action...The economization of time is independent of the economization of economic goods and services." Human Action, Part 1 pg. 101
If we continually delay action (marriage for instance) in hopes of later knowledge leading to better outcomes we inherently sacrifice time and youth. In the unconstrained vision marriage and family are nothing but weights that drag us down, although this is not the case, as families are of vital importance for a healthy society. Mises warned of socialist propaganda that promised a sexual utopia that would cause marriage to disappear along with private property as socialism pledged not only wealth for all but universal happiness in love.

Both Mises and his similarly prolific protege Friedrich Hayek saw families as having a vital role in a market economy and a flourishing society. Hayek in his work The Fatal Conceit expresses his belief that we live in two worlds simultaneously; small intimate groups or firms and then larger markets in 'the great society' (not to be confused with government policy of the same name mentioned earlier). In the small groups there is highly localized knowledge and decentralized decision-making between familiar individuals, whereas in the great society large markets allow for anonymity. In smaller groups Hayek, along the same lines as Adam Smith, believed that self interests could be extended to those immediately surrounding us. These small groups allow for altruism that is not possible in larger markets, largely due to the higher costs of acquiring knowledge on other actors. Hayek echoes this in Individualism: True or False where he suggests that we can't know more than a small fraction of society and that we act on the knowledge of those that are immediately surrounding us. This is important as families bridge the gap between the two 'different worlds'. Families are the most efficient way to allow for both tacit and explicit learning that is required to be an actor in larger market places. Families are where we learn social cues and develop heuristics to help us succeed. Granted, this learning can take place outside the family, but who has a stronger incentive than a parent to instruct a child? What bureaucrat has more relevant knowledge to transform you into a productive member of the community in which you are born? This combination of regional experiences and highly decentralized systematic knowledge is critical and the former should be cautious not to crowd out the latter. A healthy balance of student, state, and family is essential for a highly diverse population to coordinate action and allow for individual autonomy.

Many who hold the unconstrained vision of the world do so with all the best intentions. Problematically no mix of experts can lead us to a societal goal. It is extremely difficult to identify and pursue such a goal while simultaneously allowing individuals the freedom to pursue their own ends. Many with the unconstrained vision seem to fundamentally misunderstand the need to prioritize the immediate future and families rather than delaying decisions until we feel we have all the knowledge, as ultimately we fail to economize time in an efficient manner. Lastly, the impact of the family is largely ignored in regard to its role in social cohesion. This disregard and disintegration of such an important institution is nothing but a stepping stone to socialism, as well as government paternalism, and should not be tolerated any longer.

Wednesday, February 5, 2020

Are Economists Basically Immoral? Lessons from Paul Heyne

Are Economists Basically Immoral? Lessons from Paul Heyne
By Dr. Russ McCullough
Originally published by Liberty Fund: https://www.econlib.org/library/Columns/y2020/McCulloughimmoral.html
Questions are not scarce in economics, and the title of this book poses a whopper: “Are Economists Basically Immoral?”1
Spoiler alert, the answer is “no”. However, it is easy to see how economists get a bad rap when the public thinks economics is all about greed and maximizing profit. A book that uses this question for its title was on a Liberty Fund table at a conference I went to during my first year of teaching. It is a collection of papers that Paul Heyne wrote before he died much too young. The title caught my attention.
In graduate school, I often sat in church wondering what God’s objective function is—one of the burdens of being naturally curious and trained in The Economic Way of Thinking2 (another book of Paul Heyne’s). The collection of Heyne’s essays in this book resonated with me in multiple ways and influenced my outlook on the overlap of faith and economics. It changed the way I deliver some content in my principles of economics lectures in a positive way—for example, opening students to the idea that the endowment of resources came from God. In 2018, my colleague and I started a podcast called Faith and Economics3 where each week we dive into the type of content Paul Heyne did. Like Heyne, my passion since teaching my first principles class is to bring economics to the masses. Being a graduate of Concordia Lutheran Seminary, Heyne’s depth of knowledge in biblical doctrine was vast, and therefore he was a unique man to engage both college students and fellow economists alike. Many of Heyne’s works contained in this collection are completely secular, too. I think he exercised prudent judgement in knowing when to bring in faith and when it was better left to another time. Together, these papers touch on issues I hope all students and professors of economics are mindful of as they explore how they can flourish better in the economy they live in.

Economics and Ethics

“Morality has more to do with intentions than with results; so the person who tried to run you down with his car is morally more culpable than the person who actually ran you down but while trying to get to church.” What a great comment! You can almost imagine sitting in a class with Heyne debating an example like this. It clearly sets the stage for how people can get confused by morality and outcomes.
  1. Heyne illustrates this further with another example about hunger. He pushes back on a statement like, “Hunger is an injustice.” As he explains, generally speaking, “no one intends the hunger of other people” and therefore there is no injustice. An individual who goes hungry is the result of a complicated mess of choices that people have made, some of those made by the individual and others external to the hungry person. That outcome is not immoral. A bad outcome could be changed with a change in “the whole web of incentives people face”. This is where economics can help. Economists are trained to think about incentives and unintended consequences. Heyne has a wonderful way of articulating these fuzzy topics throughout his writing.

Paul Heyne was also a pioneer in helping people understand Adam Smith, who is too often misunderstood as a purveyor of capitalist greed. He is one of the earliest writers to highlight the distinction between economic systems and the morality of people participating in those systems. His analogy to a traffic system is great:
  • An economic system that successfully coordinates the efforts of millions of people will necessarily work like an urban traffic system: Individuals will pursue their own goals, obeying general rules of the game, in response to the net advantages they perceive in their immediate environment, and adjusting those net advantages in the process so that they more adequately accommodate the diverse wants and abilities of the participants.
Since the outcomes of the impersonal commercial society are from a “complex interplay of mostly impersonal decisions” and are a “varied and unpredictable product of effort and luck”, we are left confused to what degree a different system would have been better. Some people continue to hold out hope that better planning could lead to better outcomes, despite the terrible track record central planning has. Heyne helps people better understand Smith’s insight that the public interest is best served when people have freedom to follow their own self-interests.
While it would appear that we are sacrificing “society” for gains from trade, Paul is quick to emphasize that it is impossible for the government to “extract just outcomes from the economic system” and that efficiency gains from the market system can allow individuals to better foster personal relationships, community, and family. People who attribute materialism, consumerism, and selfishness to capitalism are confusing personal morality with impersonal markets.

Economics and Theology

“Heyne unpacks the self-interest paradigm in Christian Theology as elegantly as he unpacks it for Adam Smith.”
Before reading this book, I sometimes struggled reconciling my faith and economics. Using reason, I have come to appreciate Christian apologetics, and I think Paul Heyne would have, too. People of all faiths and secular historians agree that there was a man named Jesus who lived on earth. Was this guy a Liar, Lunatic, Legend, or Lord? Christians, of course, support that Jesus Christ was Lord. How then does the Lord, who committed the most unselfish act in human history, reconcile himself with self-interested people? Heyne unpacks the self-interest paradigm in Christian Theology as elegantly as he unpacks it for Adam Smith. He spends time identifying the tension that exists between the New Testament and Homo economicus—the rational, self-interested, economic man of neo-classical economic models.
The Beatitudes of Luke and Matthew, revealing “Blessed are the Poor” (Luke 6:20), certainly seem to contradict the prudent nature of Homo economicus. “Do not lay up for yourselves treasures on earth” (Matthew 6:19) does not appear consistent with a consumption smoothing model and 401K plans. In Acts 2:45, early Christians “sold their possessions and goods and distributed them to all, as any had need”—this certainly sounds like Jesus has a socialist agenda. Heyne tackles all these Biblical truths, arguing that Homo economicus and capitalism are consistent with Biblical principles. At the heart of the matter is the “sweetness of Homo economicus”—he must be a persuasive character because capitalism demands voluntary behavior of people engaged in exchange, while socialism is coercive through government making more choices for individuals and forcing payment through taxes.
The Roman Catholic Church, more specifically the popes who penned the social encyclicals beginning in the late 19th century, is another target of Paul’s writing. I find this educational and entertaining as I was raised Catholic but married a Missouri Synod Lutheran and subsequently became a member of the church and a supporter of the Lutheran Confessions of faith. In several of Heyne’s writings, he critically analyzes the social encyclicals and defends capitalism. Furthermore, he reminds the reader that Homo economicus is alive in all of us—those in the pulpit, those in government, those in elite colleges. His writing about theological topics goes the way of Public Choice Theory in economics. He closes out one paper as follows:
  • Impartiality and omniscience have not been granted to any of us, not even to government officials and bishops. We are only human. And the same is true, I think, of Homo economicus. When properly understood, he is merely human.

Teaching Economics

For more on economics and ethics, see Ethics and Economics, by Stephen R. C. Hicks in the Concise Encyclopedia of Economics. See also the EconTalk episode Larry Iannaccone on the Economics of Religion, and “How We Failed Our Economics Students and Caused Low Government Approval Ratings” by Russell S. Sobel, Library of Economics and Liberty, Nov. 4, 2019.
Heyne’s vocation was teaching economics. Like me, he took personally the comments from people who took economics in college and said, “It was the most boring course I ever had,” or just gave a sigh and a roll of the eyes that told it all. Looking back on my last twenty-five years of teaching, I think we have made some progress on these responses, and I think professors like Paul Heyne were influential in bringing economics to life. He believed in teaching economics through telling stories. He criticized mainstream methods that focused on optimization and problem solving as if the solver had omniscience. His approach was consistent with the Austrian school of thought, focusing more on the process of discovery than the solution. He would agree with Thomas Sowell that there are no solutions for problems, only trade-offs. He highlighted the complexity of economic problems, stating that the focus should be on the “plausible stories” rather than on specific solutions to mathematical problems. Treat every principles class “as if this were the last one” that the student will ever take—because it likely is!

Economic Method and Policy Commentary

As a fan of F. A. Hayek, Paul would lean toward limited government—not based so much on allowing maximum individual freedom, but rather on the claim that the government has no chance of having enough knowledge to make centralized decisions in an effective way. Moving toward market-based solutions like school vouchers that, based on ethical arguments rooted in individual freedom, allow choice for options that best fit a dynamic and “unmanageably complex” economy is the best direction to take economic policy from the status quo. That said, Heyne was not afraid to challenge heavyweights he respected like Milton Friedman and Lionel Robbins on their attitudes towards the “positive only” science of economics. They argued that economists should stick to efficiency and let others debate equity. I think Heyne successfully up-ends an argument of theirs by concluding, “A defense of efficiency is, in any particular case, a defense of some particular distribution of rights.”
Don’t overlook the Policy Commentary section near the end of the book! Here Heyne masterfully works through an explanation of how an economy that is unmanageably complex can “still work quite satisfactorily.” “Not everything that works is managed and our economy is just such a system.” Hayekian and Smithian thought is woven into his words on policy recommendations. It would be fun to see Heyne debate some of the conscious capital scholars and practitioners today. His depth of knowledge in morality, ethics, faith, and economics really makes him one of the best scholars to defend profit maximization as a social good. He shows how Adam Smith’s arguments always relied on:
  • … not being misled into supposing that profit maximization is an alternative to such objectives as obeying the law or pursuing humane personnel policies. Business executives will usually find that profit maximization requires law-abiding behavior and diligent attention to the interests of employees. Those who attack the profit maximization criterion by assuming that its acceptance entails disregard for legality or for people are attacking a straw man.
He continues his argument into the standard criticisms of international trade and profit maximization. Should a company be forced or encouraged “to pull out of a racist country?” The unintended consequences may do more harm than good to the oppressed people of that country. “Is that social responsibility or elitism?” Should workplace conditions be the same for Malaysia as they are in the United States? The truth is that people in “desperate poverty do not assign as high a value to occupational safety as do people in the United States.” When firms do not enter a country where expected profits are higher, the people who live there in poverty continue without a job that would greatly help their current condition. As long as the labor exchange is voluntary and transparent about the workplace hazards, global profit maximization fights poverty—it does not create it. Heyne turns out to be quite a prophet in this regard; since Heyne wrote in 1982, the research and data using the Economic Freedom Index of the World by the Fraser Institute strongly supports the argument that global capitalism has reduced global poverty much more than any altruistic aid programs.
Public choice theory is another area that Paul articulated well through his continued support of the often-misunderstood Adam Smith. He contends “that the pursuit of private interest for Smith had to be within the bounds of justice” defined by this qualification. While our institutions currently incentivize a profit-maximizing firm to expend considerable resources on lobbying, it is not “just” for the system to be designed that way. Therefore is not within the bounds of pure capitalism according to Heyne. The claim that profit maximization is socially responsible rests on the assumption that the actions taken are just and legal. However, if business executives wield a great deal of power through special interests, the system created will not create social responsibility but rather laws that favor the few. Rationally ignorant voters will not find participation in political markets in their best interest and will cause democracy to eventually overturn the potential that capitalism offers to create socially desirable outcomes. Heyne writes,
  • … a political system is democratic if its laws result from competition between legislators for citizen votes. The basic problem with democracy is that special interests have an enormous advantage in this competition. We are not governed by the will of the majority but by the wills of innumerable minorities.
His clarification of private property within the social system of capitalism is helpful because of his insight that “property rights are rights with respect to other people, and are therefore inescapably social, not private.” These rights combined with rules that state that only voluntary exchange is allowed create a fabulous social phenomenon where individual success “depends on your ability to persuade other people to cooperate” with you. Ultimately, efforts to curb or change the virtue of profit maximization are misplaced. Those efforts should instead be made to create better rules of the game so that the rent seeking benefits of lobbyists and other special interests are reduced, and political markets are made more competitive.
To conclude, Heyne’s collection of essays is provocative and will enlighten the reader with regard to not only what free markets can do for wealth accumulation for the average citizen, but also how Christianity is consistent with free market principles. Heyne’s writing is for both secular and Christian audiences alike. Economic history, theology, teaching economics, the morality and ethics of markets, and the foundations of free market principles to guide policy are all wrapped up in this wonderful collection of papers. Heyne’s intellectual dabbling in both kingdoms helped me become a better economist and will enlighten anyone’s thinking on today’s biggest issues.

Footnotes
[1] “Are Economists Basically Immoral?” And Other Essays on Economics, Ethics, and Religion, by Paul Heyne. Edited by Edited and with an Introduction by Geoffrey Brennan and A.M.C. Waterman.
[2] Paul L. Heyne, Peter J. Boettke, and David Prychitko, The Economic Way of Thinking. Pearson Series in Economics. Available at Amazon.com.

*Russ McCullough is the Wayne D. Angell Distinguished Chair of Economics at Ottawa University.

Tuesday, January 21, 2020

Chile, Is Income Inequality a Problem?


Income inequality has been a hot topic for some time and it is a driving factor in the desire for economic policy reform across the globe. An uneven distribution of income seems to justify a top down solution if it redistributes unfair allocations of wealth. This, however, is not a clever strategy as the focus should instead be on what type of economic policies increase the well-being and individual freedoms of all, not just the elite. Increasing economic freedom and encouraging laissez-faire market policies are the only ways to lift the poorest among us from abject poverty and enjoy a significantly better quality of life relative to those who suffer from the plagues of planned economies.

Economic Freedom

Economic freedom, which is measured globally by both the Fraser Institute and Heritage Foundation, shows how free private individuals and businesses are in a country's economy. The Fraser Institute determines economic freedom based on 5 factors; size of government, legal systems and property rights, sound money, freedom to trade internationally, and regulation. To put things into context, Hong Kong is 1st, the United States is 5th, and Venezuela is the least free country measured. While this data is important, what actually matters is how economic freedom translates to a better life for those who enjoy it.

First and foremost, unhampered markets allow for resources to meet the needs of consumers in a very personal way. The Fraser Institute describes the cornerstones of economic freedom as
“...personal choice, voluntary exchange, open markets, and clearly defined and enforced property rights. Individuals are economically free when they are permitted to choose for themselves and engage in voluntary transactions as long as they do not harm the person or property of others. When economic freedom is present, the choices of individuals will decide what and how goods and services are produced.”

Imagining an economic system in which the consumer is king should entice and excite us. You and I decide which producers will flourish and which entrepreneurs will become household names based on their merits, not their noble lineage or some other arbitrary designation of power. With our consumption preferences everybody has the freedom to pursue their own ends by whatever purposive action they see most fit.


Economic Freedom and Income Inequality

Economic freedom and income inequality do not have a clear relationship. Research by Bergh and Nilsson (2010) found that 80 countries from 1970-2005 who experienced increasing economic freedom also realized a higher level of income inequality. Is this an unfair byproduct of capitalism or is it an illustration of consumers rewarding producers who meet their needs the best? While it appears to be the latter, many are still blind to this fact and ultimately disregard that each consumer was made better off through voluntary transactions. Wealth is not a zero-sum game and the rich don’t get rich by taking from the poor, instead they create more wealth and value for society as a whole.

Chilean Social Unrest

One important consequence of income inequality is the social unrest it has been known to cause, particularly of late in South America. Chile offers an opportunity to examine the impact of economic freedom on income inequality. The country has been devastated by riots and protests that have been occurring since October 18, 2019 in response to a multitude of social injustices. While Chileans may have every right to be upset, demanding immature economic policy is sure to exacerbate the problems. Political scandal and corruption is rampant all throughout South America indicating many of these problems are not unique to Chile, but what was special about Chile is the last four decades of pro market policy.

Allowing the market to operate with minimal government intervention has helped them become one of the freest and wealthiest countries in South America, especially when compared to their direct neighbors. Chile has significantly higher average wages measured in $USD (adjusted for Purchasing Power Parity). Chile's closest neighbor's wages are almost 44% lower than domestic levels, and Chilean wages will only continue to grow if capital continues to accumulate and human capital is allowed to develop further.

Another phenomenon that both protesters and media appear to ignore is the historic decrease in income inequality that has occurred in the same time frame discussed above. This is illustrated by the country’s GINI coefficient, a statistical measure of the distribution of wealth in a country, where a 0 is completely equal distribution and 1 (100) would be all the wealth residing with one person. In 1990 Chile’s GINI was 57.20 compared to 46.6 in 2017.
 

Whether this reduction in income inequality was the direct result of economic freedom is difficult to determine. More equal distribution can also occur through coercive policies such as high marginal tax rates, yet this damages the country’s overall long-term wealth. Instead, if that money were to be reinvested or saved, capital accumulation would generate positive spillovers for the poorest of citizens. Over time this creates downward pressure on prices as businesses are able to operate with more efficient tools and the population increasingly develops human capital, creating a more productive workforce. While in some cases economic freedom may lower income inequality, in others it may increase it, but that is acceptable as long as everybody (including the bottom 10%) can enjoy the benefits of a wealthier society.

While the GINI coefficient and average wages may indicate that the median conditions are better than neighboring countries, these measurements tell us nothing about those who are worse off. World Bank estimates that Chile’s poorest 10% of the population has 1.9% share of the country's income, higher than all border countries. Even though Chile does not have the largest GDP in the region, the poorest Chileans still have higher incomes than their immediate counterparts.

Country
Total GDP in $USD
Bottom 10% Share of GDP
Bottom 10% Share of GDP  in $USD
10% Of Total Population
Average Individual Share of Income For Poorest 10% Of Country
Chile
$277,746,000,000.00
1.90%
$5,277,174,000.00
1,847,043.90
$2,857.09
Argentina
$624,696,000,000.00
1.80%
$11,244,528,000.00
4,404,481.10
$2,552.97
Peru
$211,007,000,000.00
1.20%
$3,587,119,000.00
3,144,429.70
$1,140.79
Bolivia
$37,509,000,000.00
1.7%
$450,108,000.00
1,119,285.40
$402.14

*All Figures from 2017

https://data.worldbank.org/indicator/SI.DST.FRST.10?locations=CL-AR-PE-BO&name_desc=false
https://data.worldbank.org/?locations=CL-AR-PE-BO



In short, protesters have every right to bring to light atrocities committed by their government. It is wrong, however, to assume that the same government, or any other mix of bureaucrats, can deliver financial freedom through interventionist policy and coercive action. Instead, the focus should be on empowering individuals to pursue their own ends through free exercise in the market. Admittedly this could distort the distribution of income but at the expense of no individual --voluntary exchange is not a zero-sum game. Granting consumers the power to reward the producers who best serve their interests allows for concentration of income, but everybody, regardless of their share of that income, is made better off.
"Only because inequality of wealth is possible in our social order, only because it stimulates everyone to produce as much as he can and at the lowest cost, does mankind today have at its disposal the total annual wealth now available for consumption. Were this incentive to be destroyed, productivity would be so greatly reduced that the portion that an equal distribution would allot to each individual would be far less than what even the poorest receives today.”- Ludwig von Mises, Liberalism, 1927.

Jacob C. Maichel is a Graduate Assistant at the Gwartney Institute and an MBA student at Ottawa University

Bergh, Andreas, and Therese Nilsson. 2010. “Do Liberations and Globalization Increase Income Inequality?” European Journal of Political Economy, 26(4):488-505.