Samuel Gregg: On Economic Misconceptions

Quote

One of them is the notion that wealth is a fixed amount. This is called the “zero-sum game” fallacy. It implies that one person can only become wealthy by other people becoming poor. Entrepreneurship and the right institutions in place (especially the rule of law) are the factors that nullify that myth.
Another misconception is how the economic value of something is determined. It’s not through the labor that creates an object or service. Rather, it’s through the subjective value that is attached to the good or service by hundreds of thousands of people in a market place. The price of a book I write is not determined by how many hours I spent working on it, but by what people are willing to pay for it. And what they are willing to pay for it is determined by how much they want it compared to all the other books, services and goods they want.

Then there is the notion that free trade can only benefit the wealthy or wealthy countries. Again, if you look at the stories of how nations escape poverty, it’s not through subsidies, protectionism and closed markets. Rather, it’s through entering what St. John Paul the Great called the circles of exchange and embracing institutions such as rule of law.

The whole question regarding economic misconceptions is a fascinating one — so much so that we even have a course at Acton’s summer university program on that topic. We address and correct common economic fallacies, and this is something that many people — Catholic, Eastern Orthodox, evangelical and Jewish — find extremely helpful.

Read more: Cultivating Capitalism’s Compatibility With Catholicism.

VN:F [1.9.22_1171]
Rating: 10.0/10 (1 vote cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

To Lift Up the Poor, Must We Soak the Rich?

Quote

Ross Douthat,

Before we talk about significantly expanding our investments in education, elementary and collegiate, how confident should we feel that our existing “investment” in the “future productivity” of the poorest Americans is reaping value-for-the-dollar rewards?

You can read the whole thing here: “To Lift Up the Poor, Must We Soak the Rich?”

h/t: Acton PowerBlog.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Individualist Not Collectivism

Quote

Yuriy Gorodnichenko and Gerard Roland (2010) …. presented a model showing that while an ethic of individualism produces dynamic effects on growth, an ethic of collectivism produces only static gains.  They also found evidence that individualism significantly contributes to long-run growth.  In a subsequent paper (Gorodnichenko and Roland, 2011) they explored the effect that other factors might have on long-run growth and found that individualism was the most important and robustly significant factor of all.

David Rose (2011),The Moral Foundation of Economic Behavior (links added), p. 15.
h/t: Cafe Hayek
VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

The Cost of Politics

While we often pass laws for laudable ends–indeed to support and encourage goals that are firmly rooted in the Gospel such as the material care for the poor or to provide health care for those in need–political and social conservatives (Christian or not) are often highly critical of these laws. While it is easy, too easy in fact, to dismiss such opposition as mere selfishness or indifference, arguing policy on this level causes us to be unclear about the political and social costs inherent in laws that favor outcomes that are morally praiseworthy. In a nutshell, political means tend to foster not reconciliation but further division and for reasons that are largely inherent to the political process even when it is operating in another wise healthy and morally good fashion.

This at least is the conclusion that I come to when I read a recent post by the economist John Goodman. Though the essay’s title has a bit of a polemical edge (When Liberals Run Cities.), the substance of Goodman’s analysis is worth giving serious consideration. Take a look:

What I mean by “liberalism” is the political philosophy that apologizes for and defends the Franklin Roosevelt approach to politics. That approach encourages people to organize around their economic interests and seek special favors from government at everyone else’s expense (see here and here.)

To understand the mechanics of that process, we need to turn to public choice.

Groups versus individuals. Think of the political system as a marketplace. But unlike a normal market, where people purchase things as individuals, there is rarely ever a policy change that affects only one person. Policy changes usually pit two groups against each other ― those who favor the change and those who oppose it. A proposed increase in the wages of sanitation workers, for instance, pits sanitation workers against taxpayers and everyone who receives sanitation services.

Public goods and public bads. In economics, a “public good” is a good that can be consumed by everyone once it is produced ― even those that did not contribute to its production. By definition, public goods can’t be produced and sold to individuals. So if they are produced at all, they must somehow be paid for collectively. For this reason public goods are often described as a “market imperfection.”

In politics, almost everything that happens is a public good to those who favor the change and a public bad to those who oppose it. If a law passes that benefits me, I enjoy those benefits whether or not I contributed to the effort to pass it. If a law harms me, I suffer the harm regardless of whether I contributed anything to try to defeat it.

Whereas economic markets are occasionally imperfect, the political system is perpetually imperfect almost by definition.

Free riders. Because almost everything that happens in the political system is a public good or a public bad, each of us has an incentive to hold back and be a free rider. Various groups do various things to overcome this inclination.

In many cities, the sanitation workers have formed a union that collects mandatory dues and has an established communication network to help organize and motivate its members. On the other side, residential consumers of sanitation services generally have no formal organization, other than the occasional homeowners association. Business consumers of sanitation services may rely on trade associations and other organizations (such as the Chamber of Commerce).

On balance, though, the producers of city services are much better organized and their interests are far more concentrated than the consumers of those services. So even though the consumers outnumber the producers and can potentially outvote them, the political price the producers as a group are willing to pay in city elections is often higher than the price offered by their opponents.

Political prices. Just as there are prices in a normal market there are prices in the political system. The “price” people are willing to pay to elect a candidate or obtain a legal change is the effort they are willing to make per dollar of benefit they expect to receive. The effort may consist of voting, campaign contributions, get-out-the-vote efforts, lobbying, etc. But because of the free rider problem, the effort people make understates ― and in most cases greatly understates ― their real interest in the issue.

Would you be willing to make 10 cents of effort in return for a dollar of benefit? Of course. But in the political system, you never get the opportunity to trade a dime for a dollar as an individual. What counts is the effort entire groups are willing to make. And this creates a problem.

Political equilibrium. Just as economic markets have a tendency to gravitate toward equilibrium prices and quantities, the same is true in politics. I won’t go into details here, since I have done that elsewhere. But let’s jump to an important bottom line. In order to get optimal government, we need the political prices paid by every pair of opposing groups to be the same, for every issue. When this doesn’t happen, we get bad government. And the greater the dissimilarity in prices, the worse the governance will be.

Absent a counterforce, Detroit’s experience is almost inevitable. As taxpayers escape to other jurisdictions, the political imbalance grows, leading to higher taxes, deteriorating services and more taxpayer migration. The ultimate end is a “corner solution” in which a bankrupt city falls under the control of a judge or some other non-democratic entity. This result is in no one’s interest. But no single group is in a position to stop it. If all the interest groups could get together and agree to show restraint (by asking less from the system and taking less), the unfortunate demise could be avoided. But there is no mechanism that allows this to happen.

A discontinuity. Each of us is a member of more than one group. In fact we are often members of groups with opposing political ends. Sanitation workers, for example, are consumers of sanitation and other city services as well as producers of city services. It is in their role as producers that they tend to be organized and in a position to exert political influence. But that doesn’t mean they lose their consumer interest.

There is one thing that city workers can do as individuals to derail the demise I just described. Even though their union dues and their organized activities are supporting more of same, they can enter the voting booth and secretly vote for the opponent. When this happens, there is a major discontinuity in the normal political process.

The result is the election, for example, of Republican mayor Michael Bloomberg in New York. And because he doesn’t get to be mayor through the normal processes, he arrives in office owing hardly anyone anything. Thus he can take on the teachers unions and reform the schools and institute other reforms, just like his Republican predecessor, Rudy Giuliani.

For this to happen, however, there must be enough voters who put the general interest above their own union’s special interest. New York had enough such people 40 years ago. In more recent times, Detroit did not.

Your thoughts are welcome.

In Christ,

+Fr Gregory

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

Middlemen: Market Makers or Parasites?

Quote

Source: Free-Eco.org.

Market Makers or Parasites?

The merchant, the middleman, the mancgere. Many

people tend to think of him as a necessary evil, raising prices and exploiting nearly everyone. But this is quite wrong, and is wrong in a way so fundamental that it makes one wonder why most people seem to have no conception of how real economics works.

The fact is that middlemen are the means by which markets become “perfect” or, at least, approach perfection, where perfection means a single price and reliable quality. Arbitrage is the discipline that reduces differences in price, providing accurate signals on relative scarcity and engendering enormous flows of resources and labor towards their highest-valued use.

 

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

What’s caught my eye…: “Job Gentrification”

Quote

As wages go up, workers with greater skill, human capital, and experience start to compete for these jobs, and, being better workers, they will beat out the kind of workers who are currently getting Walmart jobs. Call this phenomenon job gentrification. If Walmart increases its wage significantly, this will be very good for the people who end up working at Walmart. But that doesn’t mean it will be good for the kind of people who currently are getting the low-paying jobs at Walmart.

Read the rest here.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)

What’s caught my eye…

Quote

From Pastor Douglas Wilson comes this…

One last thing. I would like to address a few words to those evangelicals who have been seduced by leftist economics, or who are in some way flirting with leftist economics. You may have cannonballed into the deep end, like Jim Wallis, or you may just be sidling sheepishly in that direction, with some cover provided by distributist literature. You think that the language of compassion is more biblical, and the idea of communitarian sharing makes you feel warm all over. You think that businessmen who know how to add and subtract are those who are in the grip of mammon-lust. You don’t like the hard lines of clear thinking, and the blinking sums on their calculators do nothing but harsh your mellow.

Do me a favor, and look at Detroit. Look at the failure of all the compassionate nostrums. Look at the collapse of real integrity. Look at the grasping and demented idiocy of the unions. Look at the abandonment of government’s true functions. Look at the wreckage of human lives. Look at the ruin of a once great city. Look at what aching greedlust does. Behold the handiwork of your compassion.

Look at what mammon in sheep’s clothing can do.

Read the rest here.

VN:F [1.9.22_1171]
Rating: 0.0/10 (0 votes cast)
VN:F [1.9.22_1171]
Rating: 0 (from 0 votes)