We’re wrapping up our discussion of international trade in Econ 100 today with an analysis of tariffs and import restrictions. The defense of protectionism is a classic example of the Broken Window Fallacy in action.

Suppose the government decides to impose restrictions of some kind on automobiles produced in Japan. To the untrained eye, this looks like a great idea. More Americans are employed making cars, and they earn higher incomes. Detroit booms. It’s easy to see autoworkers’ nice cars and nice houses and conclude that protectionism is a great idea.

But there’s more to this than meets the eye. What we don’t see are the hidden costs of protectionism. The first is the waste from using costly production methods. Protectionism changes manufacturers’ incentives, and they use capital and labor that could have been better-used elsewhere to produce (say) cars. The economic imagination is useful here. If people weren’t making cars, they could be making medical devices. Or tacos. Or automotive repair services (it stands to reason that if you can build cars, you can probably also fix them). Or any of a number of other things. As Russell Roberts points out in The Choice, there might be some short-run costs for workers who have trouble retooling; however, free trade leads to new opportunities for the next generation.

The second cost comes from the fact that tariffs increase the price of cars. When prices rise, people demand less of something. Consumers are worse off because they have fewer cars, and the cars they are no longer buying are cars that would cost less than consumers are willing to pay in the absence of tariffs. Interventions like tariffs raise the incomes of some workers by impoverishing others.

The third cost comes from the change in incentives when it is discovered that people can raise their incomes by getting favors from the government. At best, favors from the government are a zero-sum transfer from one group of people to another. In reality, however, people use scarce resources to effect these transfers. Consider just one cost: the cost of flying to and from Washington, DC. The plane that is flying auto executives and union representatives from Detroit to DC could be used for something else, like flying people from Detroit to New York for business or from Detroit to Los Angeles for a vacation. The prospect of subsidies, tariffs, and other benefits from the government means that people will take valuable resources that could have been used to create wealth (planes, the time and energy of flight attendants and pilots, bags of roasted peanuts) and instead use them to transfer wealth. On net, we’re all worse off.

On Political Incentives and Subsidies:

On the Broken Window Fallacy:

*Interested readers might be wish to read The Choice by Russell Roberts. In it, a television manufacturer is visited by the ghost of David Ricardo. Hilarity ensues, and the case for free trade is explained beautifully. The link is to my Amazon Associates Account; any revenue I get from Amazon Associates sales will go to the Fellowship Memphis “Engage Memphis” fund:

I’m working on a couple of chapters for a volume on institutions and economic growth in Tennessee, and I was wondering if anyone in the Mises network knows much about the influence of religious organizations on prohibitions of sex, drugs, alcohol, and different activities in Tennessee specifically. If so, please leave a comment below or email me (art-dot-carden-at-gmail-dot-com).

I spent part of yesterday afternoon making Economics Memes for my classes. You can find the results here. The memes are to complement my “Nine Principles of Economics” post and my IHS “Economics on One Foot” video.

If you’re on the road at all this holiday season, be on the lookout for a few things. First, look for enormous amounts of unused and/or decaying productive capacity. You’ll see plenty along the way from Memphis to Birmingham, but I suspect this isn’t the only route along which you’ll see lots of crumbling buildings and rusting cars. Second, be on the lookout for boxes and piles of unused junk–tchotchkes of Christmases past in particular. Third, if you go shopping, be sure to look for trinkets and baubles with which you might stuff various stockings but which will likely end up in one of the aforementioned boxes and piles of unused junk next Christmas.

It’s easy to observe these and say that the macroeconomic problem is insufficient aggregate demand in the face of sticky wages and prices. I think that’s superficially appealing, but I don’t think it’s right. On closer inspection, I think it’s clearer that what we’re observing is a massive misalignment between what has been produced and what would actually make people happy.

Why aren’t prices adjusting, and why aren’t resources being repurposed and redeployed more rapidly? I think one reason is that we have lots of laws and restrictions that prevent it. In this light, listen for pleas to give money to this or that organization that seeks to alleviate poverty in developing countries by distributing chickens, goats, sewing machines, or water buffaloes. These probably help a little bit, but the most valuable thing you could probably give one of the world’s poorest people is a Green Card or a U.S. passport. I agree with Tyler Cowen that we have picked a lot of low-hanging fruit, but I think one way to help fix our long-run economic woes is to grow more low-hanging fruit. International free trade in labor is one way to do this.

Is the road to prosperity paved with Chia planters shaped like President Obama’s head (HT: Elizabeth Douglas)? Almost certainly not, unless they are ground up and mixed with paving materials. The policies of macroeconomic stabilization combined with restrictions on trade are preventing the emergence of what Arnold Kling calls “patterns of sustainable specialization and trade.” Or, to borrow from Hayek, the aggregates on which policy is based conceal the fundamental mechanisms of change.

If you’re looking for something to read as Christmas itself approaches, I humbly offer some of my contributions, each of which is short enough to read in a long, long, long line at your local mall, mega-retailer, or independent merchant. Merry Christmas, and may the spirit of Retsyn be with you all year long.

1. “How Economics Saved Christmas.” The conflict between the Grinch and the Whos boils down to one issue: property rights.

2. “Ruining Christmas: An Economist’s Guide.” What you see isn’t what you get during the holidays.

3. “Last-Minute Christmas Gifts: Spectacular? Special? Spirit of Retsyn?” Looking for last-minute gifts? Here are a few questions to answer.

4. “Twelve Clicks of Christmas.” What is wasting your time this holiday season? (“reading this post.” Ouch.)

5. “Christmas and Consumption.” Consumption per se doesn’t create economic growth. Follow the links to classic defenses of Ebenezer Scrooge.

Happiness, thy name is coffee.

In today’s edition of “The Calling,” Steve Horwitz highlights the glory of the Keurig coffee maker, which represents a real step forward for coffee drinkers everywhere that isn’t fully captured by standard measures of well-being like Gross Domestic Product. For more on the same, here’s Jeffrey Tucker’s take on the Keurig from December of last year and my January 2010 discussion of economic progress during the Naughties.

I continue to be amazed by the world in which I live: I can sip gourmet coffee brewed in my Keurig while Boomer, our pet Cylon, cleans the floors. I can communicate with pretty much anyone anywhere in the world through social media. Almost any Sesame Street clip my kids would want to watch is available on the internet at the click of a button. I can find pretty much any cuisine, anywhere with just a few buttons on my phone. Indeed, thanks to my phone I was able to successfully find my way around Milan on foot last fall when I lost my passport and was stuck there for an extra day or two. Jeffrey Tucker is right: It’s a Jetsons World.

Considered in isolation, none of these innovations seem that spectacular. It’s easy to dismiss things like the Keurig as playthings of the relatively well-off that are inconsequential when people are suffering (“let them drink decaf French roast!”) but they illustrate the broader social processes by which a better world emerges. To borrow Donald Boudreaux’s illustration, Keurigs and Roombas and iPhones are drops in the Prosperity Pool. Individually, they may not seem like much but in aggregate they add up to something incredible.

In this video, Chris Coyne explains the difference between “makers” and “takers,” and he notes that the Occupy movement is correct to be outraged that the returns to taking (as opposed to making) are so high. Consider some of the names we associate with massive wealth today, though, like Gates, Bezos, Walton, Page, Brin, Zuckerberg, and Jobs. They didn’t get rich by taxing hapless subjects or by making gilded googaws for the super-wealthy. They got rich by finding better and cheaper ways to bring better and cheaper stuff to the masses. Here is Joseph Schumpeter’s oft-quoted passage from Capitalism, Socialism, and Democracy on “the capitalist achievement:”

There are no doubt some things available to the modern workman that Louis XIV himself would have been delighted to have yet was unable to have–modern dentistry for instance. On the whole, however, a budget on that level had little that really mattered to gain from capitalist achievement. Even speed of traveling may be assumed to have been a minor consideration for so very dignified a gentleman. Electric lighting is no great boon to anyone who has money enough to buy a sufficient number of candles and to pay servants to attend to them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars, and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort.

I reiterate these points here and here.

Modernity does come with a new set of problems, affectionately called “First World Problems,” but as long as voluntary social processes aren’t short-circuited by intervention we can come up with creative ways to fix them. Consider the Keurig again. You can get a little refillable basket for it, and I’ve found that it helps solve a problem for weak-willed coffee drinkers like myself. I try to avoid having too many K-Cups around the house, and the one-cup-at-a-time technology plus the trouble of refilling the little basket raises the marginal cost of cups of coffee and helps me drink less of the stuff when I’m at home.

Again, modern innovations like the Keurig, the iPhone, the Sonicare, and the Roomba might seem trivial in a world where starvation is still all too common, but this misses the big picture. Wealth and poverty aren’t created by shifting the distribution of fixed quantities of resources but by social institutions that create incentives to be makers rather than takers.

Updated 10:33 AM: Last year, Mark Perry compared the prices of goods in the 1964 Sears catalog to the goods available in 2010 (HT: David Youngberg).

Obligatory Disclosure: I received no valuable consideration from the makers of the products mentioned in this post in exchange for mentioning them here.

I was in a Christian bookstore earlier today and noticed a couple of titles ringing alarm bells and tying fears of economic collapse and the end of oil to end-times prophecy. One of the reasons I love economics is that it forces us to be honest with ourselves about our beliefs. The well-worn objection to the “we’re going to run out of oil” thesis is that anyone who truly believes this should be loaded up on oil futures: falling future supply will ostensibly mean much higher prices, so anyone with better knowledge than other market participants about what is going to happen to the oil market can profit handsomely by acting on this knowledge. Yes, this depends on specific institutional conditions like well-functioning markets, but it highlights the fact that the social institutions and the incentives they generate are what matter, not the quantity of crude petroleum in the Earth’s crust.

In May, lots of people had a hearty laugh at the expense of Harold Camping, who had prophesied that the world would end on May 21, 2011. As I pointed out at the time, markets can help us “(p)rove all things” and “hold fast that which is good.” Specifically, superior knowledge relative to other market participants means profitable opportunities and, as Michael Munger points out in this EconTalk podcast, a golden opportunity to correct others’ mistakes. Are we to trust the superior wisdom of someone who is unwilling to act on it? One might be claiming to do so by publishing books and articles sounding the alarm bells, but as we all know, talk is cheap.

I also wondered how many of those laughing at Camping and his followers “nonetheless nod sagely, furrow their brows, and reach for their checkbooks whenever professional doomsayers in the environmental movement like Lester Brown and Paul Ehrlich warn of overpopulation, the end of oil, and the end of prosperity in spite of track records littered with doomsday predictions that failed to come true.”

The effect on flesh-and-blood human beings is not to be discounted. First, people have limited time and energy with which to worry about the end of the world. Second, as Christmas approaches, we do well to realize that Ebenezer Scrooge was wrong about the “surplus population.” As long as we have the institutions right, we aren’t going to run out of oil and we aren’t going to have “too many” people. The tragedy is that people who are attempting to change the institutions so as to conserve oil or curb population growth through non-market channels are undermining the very mechanisms that make society resilient to population pressure, political uncertainty, and other problems.

Doomsday prophecies crop up with distressing regularity. Here’s an idea for a graduate student looking for a paper or dissertation topic: look at the track record of alarmist books in the ECONOMAGEDDON genre. This might be a useful line of inquiry because ideology matters for the formation of economic and social policy. Paul Ehrlich’s The Population Bomb, for example, probably remains as (inexplicably) influential as it is (explicably) wrong. This would admit a potentially interesting test of the track record of Christian versus secular economageddon books. Do those who claim divine authority have a better track record than those who don’t?

My most recent Forbes piece explains how to use the economic way of thinking to ruin Christmas. In this light, I found Steven Landsburg’s take on Yoram Bauman’s claim in the New York Times that economics increases Grinchiness especially interesting. I haven’t read Bauman’s underlying paper, but in his NYT summary he points out that economics majors are less likely to give money to two activist groups (they were given the option during registration for classes).

Willingness to donate to left-of-center advocacy organizations is hardly a robust test of the treatment effect of economics on public-spiritedness for a couple of reasons. To continue some of Landsburg’s examples, it shouldn’t be surprising that economics education reduces a student’s faith in government action in much the same way that med school would reduce a student’s faith in the power of healing crystals. Yes, there are difficult cases to be made for markets, but jumping from those cases (public goods, externalities, incomplete information, etc.) to “we need government intervention to fix it” is a mistake because it doesn’t carry the economic analysis far enough. Sadly, Bauman’s op-ed contributes to the popular view of economics that comes from Gordon Gekko’s “greed is good” speech in Wall Street. For a useful corrective, here’s Michael Munger in last week’s EconTalk.

I think there’s a subtler point to be made, though, and one I address briefly in my Forbes article. I don’t think we can make a correct inference about the treatment effect of a person’s benevolence by looking at how taking economics classes affects his or her giving to advocacy organizations and charities. Economics might make some people more selfish in the socially questionable sense, but it also makes people wiser about how they use their resources. To use just one example from this semester, my students (presumably) learned that raising money to buy people out of slavery might actually make the problem of slavery worse.

Paradoxically, economics can make people less selfish while giving the appearance of increased selfishness. Particularly as I have read Robin Hanson’s blog, I have come to believe more and more that most “charity” is conspicuous: the primary motive is to signal that we care about poor people, and the secondary consequences are just that: secondary. To paraphrase Thomas Sowell, a lot of charitable endeavors are not about actually helping people so much as they are about showing that we are on the side of the angels. For some people who immerse themselves in the economic way of thinking, the Dismal Science helps them look past their (selfish? greedy?) fixation on others’ approval and shows them that a dollar might alleviate more human suffering if it is put in the bank rather than a donation box. I’ll leave an explanation of this as an exercise for the interested reader.

I plan to write a lot more about this in 2012. For now, here’s a bit of advice on better charity that I wrote a few years ago, largely drawing on arguments made by Tyler Cowen in his excellent Discover Your Inner Economist.

Look for more over the next few weeks and months. Good intentions aren’t the same thing as good results, and I plan to discuss a few ways to strengthen those links.

I’ve been intrigued by the Occupy movement and have written a number of articles and posts on it for Forbes and the Mises Blog. I see this as a teachable moment: a lot of people are angry, but their anger is misdirected. The problems that have them so exercised are the faults not of free markets, but of the rent-seeking society that, if I may be perfectly frank, they helped establish (Jason Brennan has more).

I learned earlier that today was “Occupy the Ports” day, with the goal of throwing “a wrench in the gears of the 1%” and “disrupt(ing) the economic machine that benefits the wealthiest individuals and corporations at the expense of the vast majority of the people of this planet.” After a quick scan of their website, my sense is that they aren’t offering a highly nuanced and sophisticated critique of the systematic distortions of international trade by special interests and their political allies. my sense is that they are opposed to international trade as such. My sense is that people are not as upset about the way incentives are distorted as they are about the fact that people respond to them.

If you’re rejecting a set of political institutions that have distorted the incentives to which people respond, that’s one thing. If you’re rejecting economics as a way of understanding the world, that’s something else entirely. As I wrote in this piece, “There are a lot of opinion leaders out there who are marketing very dangerous ideas–not dangerous in the ‘cool people speaking truth to power and threatening the establishment’ way, but dangerous in the ‘people will die if this vision is realized’ way.” Pretending that you can repeal the law of comparative advantage falls in the latter category.

Fortunately, this is a teachable moment. I just skimmed Manuel Ayau’s “Not A Zero-Sum Game: The Paradox of Exchange,” which can be downloaded for $0. I’ve done a handful of videos for the IHS LearnLiberty project. Three are on the basics of trade; the first one goes through an example of how trade creates wealth. One of my favorite pieces of popular economics is and always will be Paul Krugman’s “Ricardo’s Difficult Idea.” The chapter on international trade in Cowen and Tabarrok’s Modern Principles of Economics is excellent. Finally, two quotes are appropriate. Murray Rothbard writes for a lot of us:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

The second quote is from Ludwig von Mises, who writes with characteristic passion in chapter six of Epistemological Problems of Economics, titled “The Psychological Basis of the Opposition to Economic Theory“:

Scarcely anyone interests himself in social problems without being led to do so by the desire to see reforms enacted. In almost all cases, before anyone begins to study the science, he has already decided on definite reforms that he wants to put through. Only a few have the strength to accept the knowledge that these reforms are impracticable and to draw all the inferences from it. Most men endure the sacrifice of the intellect more easily than the sacrifice of their daydreams. They cannot bear that their utopias should run aground on the unalterable necessities of human existence. What they yearn for is another reality different from the one given in this world. They long for the “leap of humanity out of the realm of necessity and into the realm of freedom.” They wish to be free of a universe of whose order they do not approve.

I spent a good chunk of yesterday grading in the library at the University of Memphis. My goal was to lash myself to the mast long enough to get through a few stacks of assignments, and as I can’t access the wireless network at UM, their library seemed ideal (incidentally, I was grading assignments in which students were to evaluate Thaler and Sunstein’s claims about “libertarian paternalism”; see this issue of Cato Unbound for interesting essays). During one break to stretch, I saw that I was in the same room as the Code of Federal Regulations (CFR). Something about the CFR jumped out at me: there are seven volumes of regulations dealing with banking containing 5,618 pages of regulations at two columns of sort-of-small type per page (this includes indexes).

I’m fairly sure that lobbyists’ influence on these regulations was and is non-trivial, and this strikes at the heart of why I am not an interventionist. I have seen at least one sign from an Occupy protest in which someone claimed that “the system isn’t broken; it was designed this way.” Indeed: as Michael Munger has pointed out in several posts, the state is force. Force will accrue to those most willing to use it. The classical liberalism to which I subscribe is not the “everyone gets what they deserve, sink or swim, steely-eyed resolve and hard work will always make everything better” strawman that is so easy to dismiss. My classical liberalism, and my skepticism of government intervention, comes from recognizing that scarcity and the knowledge problem are non-negotiable constraints. Interventionists’ stubborn insistence on pretending otherwise helped create the distorted incentives that have left so many burdened with mortgages and student loan debt they can’t service.

The best discussion of the housing boom and bust that I’ve seen is still Thomas Sowell’s The Housing Boom and Bust (my review is here).* The causes of the crisis are many and complex, but let’s make no mistake: a lot of the messes in which we find ourselves came from policies aimed at making housing and higher education “more affordable.” Thoughtful opposition to these policies wasn’t rooted in disdain for or callousness toward the poor, but in an understanding of how the policies would change incentives to the ultimate detriment of the people the policies were allegedly enacted to help. In a strongly-worded polemic, philosopher Jason Brennan points out how public choice economics explains the phenomena that have caused so much outrage. To borrow from the economist Alan Blinder, doing good requires more than a soft-hearted concern for the plight of the poor. It requires a hard-headed understanding of the incentives that create and perpetuate poverty in the first place.

*–my review of his Intellectuals and Society will appear in a future issue of Economic Affairs. Here’s an interview with Sowell on Intellectuals and Society.

I’ve posted a couple of times on economics lessons I’ve learned from my kids. Here’s a post from Monday in which I explain subjective value, and here’s another post in which I explain how kids are apparently born Keynesians.

I’ve learned a lot from Jacob (age 3) and Taylor Grace (age 1.5), but their share of responsibility is about to get much larger: we learned today that our third child is due on June 28, 2012. We don’t know whether it’s a boy or a girl yet, but we’re both thrilled at the prospect of having another baby and terrified at the prospect of having to switch from man-to-man to zone defense.

One wouldn’t think that an economist’s research program would move the emotions, but I’ve found that the research of Julian Simon helps me love and appreciate my kids in ways I wouldn’t have thought possible. Simon’s essential thesis is that the human mind is The Ultimate Resource: more brains mean more ideas, bigger markets, and less suffering. To put it bluntly, Simon showed (convincingly) that we aren’t running out of natural resources and that if anything we need more people, not fewer.

I was also thrilled to learn a few days ago that Bryan Caplan and his wife are expecting their fourth child, a baby girl. Bryan summarizes what he is saying by having a lot of kids in this post: most importantly, “more people make the world a better place” and, as he discusses in his book Selfish Reasons to Have More Kids, a lot of the sacrifices we make and suffering we endure in the name of our children makes little or no difference to their long-run life outcomes. I discussed his book in a Forbes.com article at the beginning of June. I was also thrilled–and you should be, too–when I learned that my graduate school friends Ryan and Janice Compton are expecting another baby (The Globe and Mail even did a story on them).

Simon’s research shows that fears and worries about “overpopulation” are senseless. Further, expressions of those fears and worries in comments like “it is irresponsible to have more than two children” have gained a wholly undeserved degree of social respectability. As an aside, I think these are expressions of the kinds of non-material status-seeking I discussed in this post. I discussed overpopulation in my 2009 Mises University lecture on “Environmental and Resource Economics,” and I provide some useful (?) links in an accompanying post.

I propose, therefore, that we create the Julian Simon Club. Just as Gregory Mankiw has created the Pigou Club to recognize “an elite group of economists and pundits with the good sense to have publicly advocated higher Pigovian taxes,” I propose that we create the Julian Simon Club to recognize “an elite group of economists and other pundits with the good sense to have publicly advocated having more children.” Bryan is definitely a member, if he chooses to accept, and just so we’re crystal clear: I advocate having more children. Parenthood probably isn’t for everyone, and indeed there are probably a lot of people who are perfectly happy without kids. If you’re on the fence about having another child, whether it is your first or your fifth, I encourage you to take the plunge. I’m pretty sure it’s what Julian Simon would have wanted.

I’ve said before that being a father has made me a better person and a better economist. Over the summer, it taught me (in a very vivid way) that value is subjective.

My three-year-old son loves his stuffed panda, Gerard. Gerard was a gift from a friend; I didn’t realize how much Gerard had cost, but it turns out that to get another, identical stuffed panda would cost us $36(!!). Over the summer, we were driving from Memphis to Great Barrington, Massachusetts where I would be spending a few weeks as a Visiting Research Fellow at the American Institute for Economic Research. We made a few stops along the way, including a stop at a McDonald’s in Harrisonburg, Virginia, where I wrote this post. We stopped for the night in Hagerstown, Maryland. As we were getting everything ready, we made an important (and horrifying) discovery.

Gerard was missing.

And so it turned out that, as we were leaving the McDonald’s in Harrisonburg, I had apparently placed Gerard on top of the car so I could buckle Jacob into his car seat. I had forgotten about Gerard as we sped off for Maryland.

With Google, it wasn’t too difficult to find phone numbers for all the McDonald’s locations in Harrisonburg, Virginia. Miraculously, someone who worked at the McDonald’s we had patronized had found Gerard in the parking lot.

It was decision time. Gerard was safe, but he was about a 90-minute drive away. At $0.50 cents/mile for gas and depreciation, going to get Gerard would probably cost about $100 round trip, to say nothing of the inconvenience of driving when I would rather be sleeping, all else equal.

As all else was most definitely not equal, the decision was obvious: I hopped in the car, made the trip, and retrieved Gerard. According to a very narrow calculation, we could have gotten a very close substitute for Gerard for $36 plus shipping. As anyone with kids knows, though, it wouldn’t have really been Gerard–and I wasn’t about to lie to Jacob and say that it was. Suffice it to say Jacob was very happy to be reunited with the genuine article. So what is Gerard really “worth?” The calculation would certainly be different in a lifeboat situation, but on a normal day I wouldn’t sell him to you for $10,000.

To reinforce the point, here’s Don Boudreaux on subjective value:

And now, the lesson in productivity: I thought “hey, I have a few minutes and a bit of inspiration; I’ll write a blog post!” I did, but if I hadn’t, I probably would have been more focused on what I was doing and saved myself the cost of going to get Gerard. I wouldn’t have this story or the lesson, of course, but I do wish that hadn’t happened.

Obligatory Disclosure: I’ve received no valuable consideration from McDonald’s, Google, the manufacturers of stuffed pandas like Gerard, or AIER in exchange for mentioning them in this post.

The Austrian Theory of the Business Cycle is complex and sometimes counterintuitive. Roger Garrison’s lecture on The Austrian Theory of the Trade Cycle is indispensable, and I was pleased to see that his lecture “Keynes and Hayek: Head to Head” is also available on YouTube. Here, in a few words, is a brief summary of what the Austrian Theory of the Business Cycle entails.

Calculation: People appraise and bargain for goods and services in markets. Prices are the coordinators that tell people the most effective ways in which resources can be deployed. Interest rates are determined by the interaction of firms’ demands for investable resources and households’ willingness to save. Holding investment demand constant, changing interest rates indicate changes in households’ preferences for future versus present consumption. A rising interest rate indicates a reduction in the supply of saving (and an increasing demand for present versus future consumption) while a falling interest rate indicates an increase in the supply of saving (and an increasing demand for future versus present consumption).

Suppose people decide to save more. They will reduce their present consumption in order to save more for future consumption. The prices of goods for immediate consumption will fall, and the prices of investment goods will rise. Wages will fall at the point of immediate consumption, but they will rise for people farther back in the structure of production.

How do people know what to produce? When I’m 64, I might want birthday greetings, bottles of wine, or both. Enter profits and losses. Profits and losses tell firms whether they are choosing wisely with respect to what they produce. Firms that correctly anticipate what best satisfies households’ wants will be rewarded with profits while those that incorrectly anticipate what households want will be punished with losses. This is the essence of “an economy working right,” to borrow from F.A. Hayek via Garrison.

Miscalculation: When the government manipulates the money supply, the market’s signals are distorted. In Tim Harford’s book The Undercover Economist, he points out that competitive markets produce a “world of truth” in which prices reflect households’ preferences and firms’ costs of production. The Austrian theory gives us an example of a way in which prices are systematically lying. Entrepreneurs’ and managers’ appraisals are incorrect as a result of credit expansion. What looks like equilibrium isn’t, and the gap between real saving and the quantity of investable resources demanded is masked by new money. To use Professor Garrison’s term, the gap is “papered over.”

Things look great during the boom phase of the business cycle because consumption and investment are both increasing. They are increasing to unsustainable levels, though: during the credit expansion, firms initiate investment projects that cannot be realized given household savings. The structure of production is fundamentally distorted as prices, interest rates, and wages do not reflect households’ preferences. As credit expansion cannot continue forever without causing hyperinflation, miscalculations that led to malinvestments are eventually revealed.

Recalculation: If the economy is left to its own devices, miscalculations will be corrected and malinvestments will be corrected by a process of recalculation. Firms and households fix their mistakes, and resources are reallocated. Prices that are consistent with the economy’s underlying fundamentals of tastes, technology, and resource availability emerge and guide people toward what Arnold Kling has called “patterns of sustainable specialization and trade.” In other words, physical capital, human capital, and social capital are invested in lines of production that do not compromise a society’s ability to provide for its future wants.

Note: I first saw “recalculation” as a description of our current conditions in blog posts by Arnold Kling.

Steve Horwitz links to this list of “60 Things NOT To Do if You Hate the Free Market,” assembled by libertarian students at St. Lawrence University. I think it is a nice response to inane and condescending “look at all these idiots using government roads to get to their anti-tax, anti-government protests” pictures and comments. I agree that the “look at all these idiots using products made by corporations to protest corporations” pictures and comments are almost as inane (and yes, I’ve been guilty of it at times), there’s a crucial difference: Apple can’t put you in jail for refusing to buy an iPhone. Governments can put you in jail for refusing to pay for their services. When I posted this on Facebook, a friend pointed out (correctly) that a lot of private firms benefit from the special privileges only governments can dispense. I’m sure, for example, that someone will point out how Apple is a bad example because of how they benefit from IP law.

There’s a lot of truth to this. Where there are rents, there are rent-seekers. Or, as Donald J. Boudreaux has put it, “if rents can be created, they will be sought.” Over the summer, I criticized “a ruthless libertarian criticism of everything existing.” There are a lot of firms and industries that benefit from special government privileges, but if you look hard enough you will probably find that this is true of all creatures great and small.

In the ongoing discussions about the Occupy Wall Street movement, for example, I think we need to be very careful to distinguish between the very correct and very justified opposition to and anger about “crony capitalism” or special privileges and wrong-headed arguments against free markets. My impression is that what outrages the Occupiers is not merely that firms co-opt the state to increase their profits. They are upset that firms pursue profits to begin with. In short, I think that there are more than a few members of the Occupation who are suspicious not of the way that patterns of exchange are distorted by government intervention and rent-seeking special interests. My impression is that they are suspicious of exchange itself. I hope I’m wrong.

In this video, Christopher Coyne responds to Occupy Wall Street.

With every passing day I believe more and more that status-seeking drives a lot of human action. Contrary to popular wisdom, I think this is weighs in favor of free markets rather than against them. A complete discussion requires a lot more space than I have here, but I don’t think status-seeking based arguments against free markets stand up to to closer inspection.

Intervention changes the margins on which people can seek status, and while this remains untested empirically–to the best of my knowledge–I think it is at least plausible that the cure will be worse than the disease. There is more to this than the well-worn law of unintended consequences. Yes, [insert policy here] will likely worsen the problem it is enacted to address. At a different level, the moral calculus changes when we substitute the political arena for the free market. Some people support policies in spite of their consequences in order to signal their status: they vote for protectionism because they care about American workers, they vote for welfare, minimum wages, and rent control because they care about the poor, and they vote for various environmental policies because they care about the planet.

As Bryan Caplan points out in The Myth of the Rational Voter and as Thomas Sowell has discussed in a variety of books and articles, people are usually insulated from the consequences of the policies they support and therefore have weak incentives to change their beliefs when the policies fail. Briefly, if we take seriously the claim that modern pathologies are the products of social constructs, power relations, false consciousness, and other things, moving social decision-making out of the ambit of voluntary interaction and into the political sphere will most likely reinforce the very social forces and factors that produced all that is wrong with the world today.

Relative to market exchange and other forms of voluntary interaction, political decision-making in a status-seeking society frays the social fabric. Yes, there are probably people who will spend themselves into frenzies over the next few weeks in elaborate displays of conspicuous comfort and joy. Christmas probably isn’t the best example because it is a religious holiday that does lend itself to moral elitism, but keeping up with or ahead of the Joneses generally confines itself to a material status race and doesn’t go far beyond that. If I have a nicer car than Jones, I can content myself with the conviction that Jones is just a loser and nod off peacefully in my $2000 recliner, secure in the conviction that I have better stuff than he has. The harm isn’t really that great compared to status-seeking in the political arena.

The implications of status-seeking change when you place moral weight on the issues over which people are competing for status. Take charity, for example: if the possibility of a transfer changes people’s incentives sufficiently, then the entire value of the transfer might be dissipated by people waiting in line for $0 food, clothing, shelter, etc. and by others devoting their productive energies to attempts at persuading others to give.* A digression is in order lest I be misunderstood: charity is great, but not all charitable endeavors are created equal. There is an opportunity cost associated with using resources for one charitable purpose and not another, and careful economics can help us maximize the bang we get from our charitable bucks. I explain further here.

Status-seeking over moral goods and in a political environment encourages people to view one another with outright moral suspicion. If I recycle and Jones doesn’t, or if I give to the Salvation Army but Jones doesn’t, or if I drive a Prius but Jones doesn’t, then our relationship changes relative to a world in which we are seeking status over mere material goods. In these cases, the implicit message is not that I am more successful than Jones but that I am virtuous and Jones is morally suspect. This is doubly true if we are talking about voting to make recycling, charity, and high gas mileage mandatory. When status-seeking occurs on these margins, the social fabric tears because the signal is no longer simply that I’m a better breadwinner than Jones. The signal is that I’m a good human being while Jones is…something else. Jones isn’t just a lousy breadwinner. Jones is dehumanized.

There is a lot of truth in the claim that people are motivated by the search for status, but I don’t think it works as a criticism of free markets. There’s a lot of important research to be done here, and a lot of important contributions to be made to the public debate. Here, for example, is Robert Frank’s recent New York Times article on Black Friday, and here is Tyler Cowen’s response. Here’s Don Boudreaux on the market opportunity that the critics of Black Friday are missing. If you’re shaking your head because your neighbor just spent a ton of money on fancy new toys, take heart. It could be much worse.

*-Project idea for someone looking for a paper: estimate the rate of return on the Salvation Army holiday bell-ringing campaign.

This year, I tried (and failed) to give up on spectator sports. The opportunity cost of watching baseball and football is just too high, I thought. It worked until about September or October. Over the summer, I checked occasionally to see how the St. Louis Cardinals were doing–I grew up rooting for them, and I went to grad school in St. Louis from 2001-2006–and I thought it was fairly clear that I wasn’t missing anything. Then the Cardinals went on a historic tear that culminated in a World Series victory.

As an Alabama graduate, I knew college football season would be the big test. I watched a few minutes of the Alabama-Penn State game, but I finally broke down and submitted when Alabama played Arkansas. I’m at peace with it.

It’s a good time to be both a social scientist and a fan as big-time college football has descended into its annual madness with respect to determining a champion. We’re on the cusp of a handful of strange scenarios. If LSU beats Arkansas in a few hours, LSU will go to the SEC championship game against Georgia while Alabama will only need to beat Auburn tomorrow to be all but assured of a spot in the national championship game. The road to the championship would actually be easier for Alabama as a division runner-up than it would be for Alabama as a division champion. Commentators are saying LSU could probably still make it to the national championship game even if they lose to Georgia in the SEC championship game. An Arkansas victory over LSU creates an interesting (and chaotic) cycle: 11-1 Alabama will have beaten 11-1 Arkansas, who will have beaten 11-1 LSU, who will have beaten 11-1 Alabama… As at least one commentator has pointed out, SEC officials have interesting and perverse incentives over the next few weeks: if LSU beats Arkansas and then loses a close game to Georgia for the SEC Championship, the probability of an Alabama-LSU rematch for the title is still very, very high. This would also get a third SEC team (Georgia) into a big-money BCS bowl.

And just as Thanksgiving meals produce food comas, the chaos surrounding the top of the rankings in college football has produced calls to “fix” the BCS. The interesting problem, though, is that there isn’t a way to “fix” the BCS. One of the central insights in social choice theory is that, to quote Peter Boettke, “there’s no stable social welfare function.” The BCS can be tinkered with until the end of time, but there will always be some flaw in the mechanism. Even tournaments feature a lot of randomness: as much as we all enjoy bracket-busting upsets in the NCAA basketball tournament and great stories about this or that baseball team surging in the postseason, tournaments aren’t foolproof. Are they better? Maybe they are, and I’ve always been sympathetic to calls for a tournament in big-time college football. As much as we might want to think otherwise, the BCS can’t be “fixed” because there’s no One Right Way to do it (though adding Matt Ryan’s Gus Rankings to the mix might be a good idea; here’s an old article in which I discuss similar themes).

Like just about everything, I see the annual controversy about the BCS as an object lesson in the importance of markets as mechanisms for social decision-making. In a world where people have heterogeneous tastes, preferences, goals, ideas, beliefs, and so on, there’s no One Right Way to do things. This is implicit in the institutions of a free market society based on voluntary trade. To borrow from Steven Horwitz and David Friedman, the “anarchy of production” is a feature of the free market, not a bug. Order emerges from the voluntary interactions of the many buyers and sellers who make up the market. The annual BCS controversy is also instructive because it illustrates another important point. We have enormous trouble figuring out who the best teams in college football are. Answering truly important questions through non-market mechanisms is more difficult by orders of magnitude; indeed, as Mises showed in his classic article “Economic Calculation in the Socialist Commonwealth,” it’s impossible in the absence of private ownership of the means of production.

As the discussion of the UC-Davis Pepper Spraying incident has proceeded, one of the best things I’ve seen circulating is this quote from the first few lines of Frederic Bastiat’s classic “The Law:”

The law perverted! And the police powers of the state perverted along with it! The law, I say, not only turned from its proper purpose but made to follow an entirely contrary purpose! The law become the weapon of every kind of greed! Instead of checking crime, the law itself guilty of the evils it is supposed to punish!

If this is true, it is a serious fact, and moral duty requires me to call the attention of my fellow-citizens to it.

And so, fellow-citizens, I exercise my moral duty. In an extra piece I did for Forbes after the incident, I proposed that police services can and should be provided by private firms in private markets rather than by governments. It’s a proposition that a lot of people would almost certainly find crazy; however, the rash of police brutality that has been unleashed against the Occupation illustrates a deep and fundamental point about social institutions. Market processes create information and feedback that guides people toward effective and efficient solutions to the problems they confront. Political processes do the opposite. A lot of us are irrational, guided by prejudice, or otherwise flawed. These flaws are reduced (albeit probably not eliminated completely) by market processes and amplified by political processes.

21st century technology is allowing us to watch “the law become the weapon of every kind of greed” in real time. This isn’t because bad people are in positions of power, though. At the risk of being glib, the violence is inherent in the system. The problem isn’t that the wrong people are in power. The problem is that there is power for people to seize in the first place.

I’ve seen a couple of exhortations to boycott Black Friday. I completely agree with critics of the consumer economy that consumption does not create economic growth, there is far more to life than material consumption, holiday spending has gotten excessive, etc., etc. Still, some are calling for boycotts of major retailers because they “ruin workers’ holidays.” The boycotters are off base for two reasons.

First, there’s a huge collective action problem here. If you’re not in line at Best Buy, that means more space for me. For the same reason competitive pressure makes cartels break down, a nationwide boycott isn’t likely to work. There are and have been exceptions, but I don’t expect this to be one of them.

Second, workplace disamenities will be reflected in wage rates. Suppose working all night on Thanksgiving is unattractive. If so, firms will have to pay a little more in order to attract workers to jobs where that is a possibility. I’m on board with those who want to be less consumption-focused, but even if we were to stage a successful boycott that made working at Wal-Mart, Target, Best Buy, and other places more comfortable, the reduced disamenity would ultimately manifest itself in lower wages. Just as people don’t live on bread alone, they are not compensated with wages alone. As David Henderson has said, you don’t help people by taking away from them the choices they actually make. You help by giving them more options. The new options for workers won’t come from the fact that you are avoiding the mall per se; they will come from the fact that your savings can be re-deployed in other productive enterprises.

I don’t plan to buy anything tomorrow, but it won’t be because I’m trying to make a social statement. There are a lot of great reasons to avoid the hustle and bustle of malls and shopping centers on Black Friday. “Helping workers” probably isn’t one of them.

I spent part of this afternoon at my neighborhood Starbucks, where I was working on a project. As I finished up, I saw that I had a message from my wife asking me to swing by the store to pick up half a gallon of skim milk. No problem. I generally use self-checkout, but sometimes it’s a roll of the dice. This evening, I rolled the dice and lost: one of the checkout lanes malfunctioned as the person in front of me was using it, and the customers at the other self-checkout for which I was in line were having trouble with the bill acceptor. I ended up in a brief conversation with the gentlemen behind me. They were students at some of the local universities. I turned the direction toward economics and asked if they could explain our plight as a response to increases in the minimum wage.

The logic is as follows. When the price of anything rises, people search for substitutes. When governments pass laws that make low-skill labor more expensive, firms search for substitutes for low-skill labor. Some of these little bits and pieces of added cost include minimum wages, regulations on the hours that people can work, health care mandates, workplace safety regulations, and a ton of others. Firms search for substitutes, like self-checkout lanes (bonus: here’s Doug French on shadow labor).

What would the world look like if hiring low-skill labor were easier? First, people would have more and better service across the board, perhaps most especially at grocery stores and restaurants. Second, more people at the bottom of the skill distribution would be able to get their foot in the labor market door. As it stands, regulations on the low-skill labor market mean that the least of these among us have the door of opportunity slammed in their faces. Advocates of these interventions think they are redistributing resources from faceless “big business” to downtrodden workers. That isn’t what’s happening. Resources are being redistributed from some downtrodden workers to others.

Would easing the burden on the low-skill labor market mean an economic renaissance? Probably not. In aggregate, burdensome regulations on the low-skill labor market are paper cuts in the world’s largest economy. First, this doesn’t mean we should overlook the burden on the poor. Second, if you give a man enough paper cuts, he’ll bleed to death.

Anyone who has spent much time around small children probably recognizes that they are fundamentally Keynesians at heart–or if they aren’t full-on Keynesians, it’s pretty clear that they reject Bastiat, or haven’t yet read him. I’ve noticed that my kids do all they can to encourage full employment within the household: every day brings new adventures in stepping on things with sharp corners, in mysterious puddles of questionable content and origin, or on misplaced foodstuffs. They also seem to enjoy giving further expression to their apparently Keynesian worldview by building (and knocking over) towers made of blocks. This keeps Mrs. Carden and me fully employed, and there’s no doubt that our additional spending on paper towels, cleaning supplies, and electricity to run the dustbuster and vacuum cleaner stimulates the larger macroeconomy.

Sometimes, we need to get our little gales of creative destruction out of the house and to the zoo, a nearby playground, or to the Children’s Museum of Memphis, aka CMOM, which is one of our favorite places in town. On a recent trip to CMOM, I saw a new installation that holds the key to fixing high unemployment. As part of their “Going Places” exhibit, the museum has rigged up a set of conveyor belts that are supposed to simulate the system by which packages are moved around at a FedEx facility. Basically, you put one of the packages on a conveyor belt, you turn a wheel that conveys the package up to an automatic conveyor belt in the belly of the (partial) FedEx plane they have as part of the exhibit, and then the automatic conveyor belt conveys the packages to a slide where they reappear near where the whole process starts. You expend a lot of effort to move a box that ends up where it started, and while nothing is really accomplished, the kids get to learn a few lessons about motion, cause and effect, etc. They find it very entertaining.

The museum also has an earthquake simulator that we have played with a time or two. Basically, you build a structure out of blocks and then press a button to start an “earthquake.” Some structures make it through the earthquake unharmed. Some structures don’t, and the rebuilding process begins.

This got me thinking about how we could solve our unemployment problem. We should install adult-sized versions of these and pay people to turn the wheels that move the belts that carry the boxes from point A (essentially) back to point A. We should also pay people to build structures out of blocks that will then be knocked down when we press the button that turns on the earthquake simulator. Would anything be produced as a result? No. But that’s not the point. If the point of economic activity is to provide employment, then the increased expenditures and increased employment from such a scheme are just what the economy needs to get back on track.

Of course, I may be wrong:

And it’s also true that our friends at EconStories.TV might have something to say about it, as well.

Obligatory Disclosure: I received (and expect) no valuable consideration for mentioning CMOM in this post.

The new issue of Studies in Emergent Order is a special issue on Emily Chamlee-Wright’s excellent book The Cultural and Political Economy of Recovery. I reviewed Professor Chamlee-Wright’s book for Public Choice here. My contribution to the symposium began as a student’s paper for my Economic History course at Rhodes. If you’re a student, the moral of the story is this: give it your all, because you never know what opportunities might await your best work.