04 Oct 2017

Does the Rest of Society Care if You Work?

David Friedman, Economics 32 Comments

So if you followed my orders, you have already listened to my critique of Paul Krugman, when he claims that the rest of society doesn’t benefit if rich people work more. (Krugman says that free-market economists like to claim that workers get paid their marginal product, so–he concludes–they can’t then turn around and say marginal income tax cuts will shower benefits on society at large.)

Well, one of my economist friends reminded me of the below passage from David Friedman’s classic book, The Machinery of Freedom. Check it out:

The media provide a striking example of the difference between the effects of public and private property, but it is an example that shows only part of the disadvantage of public property. For the ‘public’ not only has the power to prevent individuals from doing what they wish with their own lives, it has a positive incentive to exercise that power. If property is public, I, by using some of that property, decrease the amount available for you to use. If you disapprove of what I use it for, then, from your standpoint, I am wasting valuable resources that are needed for other and more important purposes—the ones you approve of. Under private property, what I waste belongs to me. You may, in the abstract, disapprove of my using my property wastefully, but you have no incentive to go to any trouble to stop me. Even if I do not ‘waste’ my property, you will never get your hands on it. It will merely be used for another of my purposes.

This applies not only to wasting resources already produced, but to wasting my most valuable property, my own time and energy. In a private-property society, if I work hard, the main effect is that I am richer. If I choose to work only ten hours a week and to live on a correspondingly low income, I am the one who pays the cost. Under institutions of public property, I, by refusing to produce as much as I might, decrease the total wealth available to the society. Another member of that society can claim, correctly, that my laziness sabotages society’s goals, that I am taking food from the mouths of hungry children.

Consider hippies. Our private-property institutions serve them just as they do anyone else. Waterpipes and tie-dyed shirts are produced, underground papers and copies of Steal This Book are printed, all on the open market. Drugs are provided on the black market. No capitalist takes the position that being unselfish and unproductive is evil and therefore that capital should not be invested in producing things for such people; or, if one does, someone else invests the capital and makes the profit.

It is the government that is the enemy: police arrest ‘vagrants’; public schools insist on haircuts for longhairs; state and federal governments engage in a massive program to prevent the import and sale of drugs. Like radio and television censorship, this is partly the imposition of the morals of the majority on the minority. But part of the persecution comes from the recognition that people who choose to be poor contribute less to the common ends. Hippies don’t pay much in taxes. Occasionally this point is made explicit: drug addiction is bad because the addict does not ‘carry his share of the load’. If we are all addicts, the society will collapse. Who will pay taxes? Who will fight off foreign enemies?

Do you see the potential problem here? Let me spell it out.

(A) Years ago, when I read David Friedman’s book, I’m pretty sure I gave him a mental high-five when he argued, “In a market economy, everybody keeps what he produces, so nobody else feels threatened by a person’s work effort. So it fosters a live and let live approach.”

(B) Last week, when Krugman argued that the rest of society doesn’t care if rich people work more, I went ballistic.

Am I just a hypocrite or can we reconcile this?

02 Oct 2017

Contra Krugman: You Have Homework

Contra Krugman 17 Comments

All right, I must insist that if you are a regular reader of this blog, you should listen to the latest Contra Krugman. It’s on the short side and is pretty focused on economics. (If you don’t normally listen, you’re probably thinking, “Isn’t that what every episode is like?” Eh, yes and no.)

Tell me if you think I am right in the comments, or if you think I’m misunderstanding Krugman / leaving out something important.

Then tomorrow, I’m going to bring up something else. But I think it’s best if you just focus narrowly on Krugman’s blog post and my response in the episode, and then consider the subsequent thing that I will bring up.

01 Oct 2017

The Year of Jubilee and Human Capital

Religious 4 Comments

My study partner and I are going over Leviticus 25 and we are reading Matthew Henry’s (full) commentary. In the year of Jubilee (which happens every 7 cycles of 7 years, so scholars say it is either every 49 or 50 years), all property returns to the family. In other words, no matter how foolishly you conduct your financial affairs, if you’re a child of Israel you can’t permanently alienate your birthright.

There’s obviously a ton of spiritual significance to that (and how it relates to the gospel message of salvation), but check out this commentary from Henry:

By this means it was provided, [1.] That their genealogies should be carefully preserved, which would be of use for clearing our Saviour’s pedigree. [2.] That the distinction of tribes should be kept up; for, though a man might purchase lands in another tribe, yet he could not retain them longer than till the year of jubilee, and then they would revert of course. [3.] That none should grow exorbitantly rich, by laying house to house, and field to field (Isa. 5:8), but should rather apply themselves to the cultivating of what they had than the enlarging of their possessions. The wisdom of the Roman commonwealth sometimes provided that no man should be master of above 500 acres.

Now a secular libertarian would bristle at the above; it sounds too much like Piketty. But my point is this: Given what would actually happen to the Jewish people in the coming centuries, could one argue that this institution of the Jubilee prepared them by making the most industrious Jewish people develop their human capital “intensively,” rather than acquiring large tracts of land as other nations would?

Does this institution help explain why the Jewish people seem remarkably resilient in the face of periodic diasporas?

29 Sep 2017

Tax Reform

Tax policy No Comments

I have a new post at IER talking about tax reform. I used this chart to argue that it’s totally fine for GOP to cut taxes, period. (No need for “revenue neutrality.”) If you’re worried about the debt–which you should be–then cut spending too, which is also at historically high levels.

27 Sep 2017

Tom Woods and I Rip Each Other

Contra Krugman 2 Comments

In the latest Contra Krugman, the official topic is the Graham-Cassidy health insurance bill, but Tom and I make fun of each other. Make sure to keep listening for the Easter egg at the end. Older listeners: Which song am I quoting?

26 Sep 2017

Bursting Erdmann’s Bubble

Austrian School 18 Comments

[EDIT: I’ve added Erdmann’s second graph below.]

In a previous post I was talking about Austrian business cycle theory and the housing bubble. Kevin Erdmann thought he blew us up by posting these two charts:



Erdmann asked, “Would anyone care to make an ABC interpretation of those two graphs? Did low rates cause the bubble in Phoenix?”

Everyone see why he thinks it’s a mic drop? It looks like the Phoenix housing bubble followed rates up and then down, i.e. the exact opposite of the Austrian story.

But of course, Erdmann is conveniently starting his chart when the housing bubble really kicks in. If you take a longer view, you see this:

And yes, that looks consistent with the claim that it was unprecedentedly low interest rates that sparked the bubble, and then when policymakers began raising rates, they pricked the bubble.

26 Sep 2017

Wealth vs. Annual Output: It Depends on the Context to Know Which One Free Market Economists Support

Trade 16 Comments

Recently with the endorsements of the claim that hurricanes might be “good for the economy,” free market economists took to the airwaves to explain that this “broken window fallacy” foolishly focuses on the flow of output, while ignoring the stock of wealth. In other words, just because a natural disaster might boost official GDP, that is hardly an indicator of prosperity, because it’s simply replacing the portion of our accumulated wealth that had been destroyed.

In that context, I found it ironic when in our reading group tonight we covered this passage from Larry White’s The Clash of Economic Ideas:

Smith began The Wealth of Nations with the proposition that what matters for a nation’s well-being is not its hoard of accumulated treasure (as two centuries of mercantilist writers had believed), but its annual output or “produce,” the flow of goods and services, or what we today call national income or gross domestic product. It is this annual output that provides, either directly or by being traded for imports, “all the necessaries and conveniences of life which [the nation] annually consumes.” The Kingdom of Spain in Smith’s day had large hoards of gold and silver taken from the New World, but lower per capita consumption than Britain or the Netherlands. [White pp. 210-211]

Does everyone see the tension? White is literally saying that real GDP indicates prosperity; don’t get distracted by accumulated wealth, the way those silly mercantilists did.

Now to be sure, there’s not really any contradiction here. The mercantilists were wrong, and the people committing the broken window fallacy are indeed committing a fallacy. (Sometimes it’s possible that free market economists accuse someone unfairly of committing the fallacy.)

Even so, I thought it was ironic that the elevator pitches on both issues would end up yielding contradictory dicta for the layperson.

Also, even after we account for all of the subtleties, I now think it is flat out WRONG if free traders mock the accumulation of precious metals as foolish. To take Smith’s example (assuming White is presenting it fairly): The kingdom of Spain really is richer, if it has bigger stockpiles of gold and silver. For example, if there’s a bad harvest, the Spanish can use that stockpile of metal to import food from abroad.

Smith says what is prudence in the conduct of every family can scarce be folly in a great kingdom. Right, and every household maintains a checking account balance as well as cash in wallets and purses. If a households runs a trade surplus with the rest of the world and adds $1,000 to its checking account balance, nobody would say, “That will just raise prices, that’s dumb, that doesn’t actually make you richer.”

In general, I think free market economists need to just take a step back and reconsider their standard arguments more carefully. Don’t worry, you’re not going to end up endorsing tariffs. But some of our standard thought experiments don’t really prove what we claim, and it’s weird when our casual discussions (like the broken window fallacy and mercantilism) end up contradicting each other.

22 Sep 2017

“Libertarian Law and Military Defense”

private law 2 Comments

You just thought I’d sit back and phone in episodes of Contra Krugman from now on? Nope, I’m still pushing forward the boundaries of an-cap theory, baby.

For real, there is some new stuff in here that isn’t in my earlier work.