Man-of-System Madness!

Merch madness…

(Don Boudreaux) Tweet Every Spring in the U.S., many Americans are tuned in to what is called “March Madness.” (This madness usually occurs in early April, but because of Covid-19, it actually is occurring in 2021 in March. In 2020 it was cancelled by Covid Craziness.) Sixty-four – well, now more, but traditionally 64 – college basketball teams are invited to participate in the NCAA Division I basketball tournament.

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Café Hayek isn’t a sports or betting blog; it’s an economics blog.

Here’s the relevance.

Production involves matching different inputs together in ways that generate outputs that are useful to human beings. And production is ‘better’ the more useful are the outputs produced relative to the value of the inputs used to produce these outputs. If McDonald’s produces one million Big Macs this year using only half of the inputs that it used last year to produce one million Big Macs, there are more resources available this year to produce goods and services that last year were too costly to produce. McDonald’s improved efficiency at producing Big Macs makes increases the wealth not only of McDonald’s shareholders but of countless people who have nothing at all to do with McDonald’s, either as owners, workers, or customers.

And so we, simply as denizens of the modern economy, should care how well different inputs are combined with each other to produce outputs. Suppose that $X value of some good can be produced in one of two ways: (1) by combining input A with input B; or (2) by combining input A with inputs C and D.

Which is the better way? The answer is easy: the one with the lowest cost. If here using inputs A, C, and D costs less than using inputs A and B, we should all want this good produced with inputs A, C, and D.

Nothing is easier than to write ‘We should produce as efficiently as possible’ – which, in effect, is just what I wrote. The challenge in this complex reality of ours is to actually achieve production that is as efficient as possible.

To the extent that we let government override market decisions and processes, we let government do the equivalent of trying to fill out a perfect NCAA tournament bracket. The actual play of each game determines which team, at least under the particular circumstances – and at the particular times – of the games, is the best team. Likewise, the actual play of market competition determines which particular combination of inputs is the best way of producing some (given) output.

It would be folly to think that we can eliminate the need to actually carry out the competition of tournament games by having some ‘experts’ fill out the brackets in order to determine which teams are best. It would be even greater folly to think that we can eliminate the need to actually carry out market competition by having some ‘experts’ write down ahead of time which is the ‘best’ method of producing some (given) output.

The latter folly would be greater than in the basketball-tournament case for at least two reasons. First, unlike in the basketball-tournament case, in the economy we must also somehow figure out what is the best combination of goods and services to produce. The ‘best’ outcomes in the basketball tournament are simply those outcomes that emerge from the playing of the games fairly. In the economy, though, the relative ranking of ultimate outputs – of consumer goods and services – must be made such that all production effort is geared to producing those goods and services.

Second, there are only 64 teams in the NCAA tournament, with only one eventual ‘winner’ (which can be thought of as a final consumer good). In the economy, there are literally trillions of resources and hundreds of billions of ‘winners’ – that is, final consumer goods and services the production of which justifies using inputs. The complexity of the economy is untold magnitudes greater than is the complexity of the NCAA basketball tournament.

Source: Man-of-System Madness!

The Texas Blackout Blame Game

The Texas blackouts are shaping up to be the costliest disaster in state history, and the loss of life remains unknown. People are justifiably very angry. And when people are angry, politicians look around for someone to blame. Many have trotted out their favorite villains for the occasion. Many on the right have picked Don Quixote’s old enemy, the windmill, while many on the left jumped at the chance to blame deregulation. Neither explanation really holds up. While it will be some time before all the specifics are known, what we do know doesn’t support any easy political narrative.

The central fact about the chain of events that led to the blackouts is deceptively simple: It got super cold.

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The sheer size of the supply hole makes it hard to blame either wind or deregulation for the failure. While pictures of frozen wind turbines may be evocative, ERCOT’s forecasts do not rely on a large amount of wind to sustain the system—and wind ended up meeting those expectations. Some have argued that the low cost of wind power over the last decade has forced the retirement of more reliable power plants that could have helped make up the gap had they been there. I’ve addressed those arguments at length elsewhere; here I’ll add that many of the recently retired Texas plants were rendered unprofitable not by wind but by the fracking-induced fall in natural gas prices. And given how many thermal plants failed, it doesn’t seem plausible that having a few more of them would have made the difference.

Similarly, there is little reason to think that Texas’ competitive electric system is to blame. ERCOT’s most recent winter forecast included a worst-case scenario for the grid that roughly predicted the needed demand but underestimated the amount of generation that would be unusable by almost half. A more centralized or state-run electric system almost certainly would have relied on the same forecast and ended up in the same situation. In retrospect, it’s easy to blame generators for not doing more to protect their plants from cold. But if a plant had known that unprecedented cold was coming and had weatherized, it would now be reaping millions in benefits. The problem was not a lack of incentives but a lack of imagination.

Source: The Texas Blackout Blame Game

Socialism Doesn’t Work

Last week, I reported on two myths about socialism. My new video covers three more.

Myth No. 3: Socialism works if it’s “democratic.”

As the Democratic Socialists of America put it, “Society should be run democratically—to meet public needs, not to make profits for a few.”

Sounds nice. If socialists are elected, then we’ll have a more just society.

But Venezuela’s socialists were elected.

“They can start off democratically elected,” says economist Ben Powell, director of the Free Market Institute at Texas Tech, but “once they centralize control over the economy, it becomes impossible to ‘un-elect’ them.”

Hugo Chavez was elected but became an authoritarian who chose his successor, Nicolas Maduro. Maduro now gets “elected,” by having opponents arrested and “ordering state employees to vote for him or they lose their job,” says Powell.

“Socialism always becomes authoritarian?” I ask.

“Everywhere you try socialism, that’s what you get,” he replies. “It’s hard to exercise political freedom if you don’t have economic freedoms. If you’re dependent upon the state for your livelihood, you lose your ability to use your voice to oppose [the state] because you can be punished.

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“They do in Scandinavian countries!” say socialism’s promoters.

That’s myth No. 4.

Scandinavia does have big welfare programs, but capitalism pays for them.

The socialists call Sweden socialist, but that’s just wrong. “Volvo is a private company,” says Powell. “Restaurants and hotels are privately owned. Markets organize the vast majority of Swedish economic activity.”

Sweden did once try socialism. The result was high taxes, inflation, and economic decline. It’s an example of how people in prosperous places often don’t know what made their lives better.

In 1950, Sweden was the world’s fourth-richest country. Then Sweden tried socialism. Suddenly, once industrious Swedes started taking sick days. Wealth creation stopped.

“Talent and capital stormed out of Sweden to escape taxes and red tape,” writes Swedish historian Johan Norberg. “Businesses moved headquarters and investments to more hospitable places. IKEA left for the Netherlands…Bjorn Borg and other sports stars fled to Monaco.”

Sweden recovered only when it ended its socialist experiment. They cut taxes, government spending, and sold state-owned businesses.

After economically ignorant politicians like Bernie Sanders called Scandinavia “socialist,” Denmark’s prime minister even came to America to say: “Denmark is far from a socialist planned economy. Denmark is a market economy.”

In fact, in rankings of economic freedom, Denmark ranks as more free market than the United States.

Myth No. 5: Socialism is completely different from fascism.

In Congress, Rep. Louie Gohmert (R–Texas) called Hitler a “socialist.” Rep. Steve Cohen (D–Tenn.) took offense, shouting, “It’s the Nazis that were terrible, not the socialists!”

But Nazis were “national socialists.” There are differences between fascism and socialism, but “both replace market decision-making with command and control,” says Powell. Fascism “leaves private ownership in nominal terms” but neither system allows individual freedom. “You lose…control over your own future. Only under capitalism do you have the freedom to say, ‘No.'”

Socialism appeals to people today because it promises “equality and social justice,” but look at its track record. In Russia, Cuba, North Korea, Nicaragua, Vietnam, and China, socialism has meant a loss of freedom.

Socialist experiments also failed in Israel, India, Great Britain, Afghanistan, Syria, Algeria, Cambodia, Somalia, etc. There are no socialist success stories.

Only capitalist countries create real wealth.

Source: Socialism Doesn’t Work

The Shark Tank Approach to Financing a College Education

A publicist emailed me recently, promoting a new book by Scott MacDonald, Education Without Debt (which I might review in the future after reading the book). In the email, the serial entrepreneur Mark Cuban (who, among other things, owns the Dallas Mavericks) was quoted as saying, “We can talk about Republican and Democratic approaches to the economy, but until you fix the student debt bubble and the tuition bubble, we don’t have a chance. All this other stuff is shuffling deck-chairs on the Titanic.”

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That is precisely what Income Share Agreements (ISAs) are about. Students go to an investor and say “I want to develop my human capital and my ability to provide valuable goods and services to the economy, but I need financial help.” And then the investor agrees to provide some assistance, say $80,000 over four years, in return for some “equity” in the student, say 14 percent of the student’s post-graduate earnings for eight years.

This has lots of advantages over student loans. From the student perspective, the financial risk of going to college is substantially (depending on the level of financial involvement) passed from a financially inexperienced teenager to an experienced investor. The government is removed from the process. The terms of the ISA will vary with prospects for financial success. Engineers and accountants attending top flight schools will get dramatically better terms than fine arts or sociology majors attending the College of Last Resort. Students who drop out of school or fare poorly getting a job are not burdened with a massive debt burden.

Source: The Independent Institute

This also puts someone’s skin in the game. As it stands, the student loan program doesn’t put anyone’s money at risk, except for the taxpayers. And that’s a group too diffuse to have any real say in how it’s spent.

It would be a big improvement if the college were responsible for making good on loans used to pay for majors like Deconstructed Art History Studies. When their endowments are on the line, they may wind up steering students into fields in which people can actually make a living and pay back their loans.

An ISA puts the burden on one person or group. (A tech company might fund students who major in computer science or some other field they need graduates in. Think of Jerry Pournelle’s book, Higher Education where asteroid mining companies educate promising students in the fields they need to recruit.)

What I believe now, part 2: strong imperfection

What I mean by “strong imperfection” is that human beings and their societal arrangements are very far from perfect. We are nowhere close to utopia, and we cannot see how to get there.

A major reason for this is lack of knowledge. We know today much more than we knew one hundred years ago. It seems reasonable to expect that in another hundred years, today’s level of knowledge will seem low. If we look at all of the past beliefs that today seem wrong-headed, we should be hesitant to commit to what we believe now. On this topic of what we do not know, check out the econtalk podcast with Russ Roberts and Michael Blastland.

The implications of this are:

1. We should be humble about predicting the consequences of public policies. In an economics textbook, a single “market imperfection” is shown in isolation, with the implicit assumption that everything else is perfect. Under those assumptions, the right tax, subsidy, or regulation can reliably produce improvement.

Most economists are familiar with the “theory of the second best,” which points out that trying to fix one problem, when there are other problems or constraints, can make things worse. This is a useful concept, but it only scratches the surface of strong imperfection.

2. We should welcome trial-and-error learning. The economic and social progress we have made is largely due to trial and error, not central planning. Because of strong imperfection, we know that many flaws and problems still exist. It is likely that solutions will come from trial and error going forward, just as in the past.

3. We should try to limit the number of personal flaws that we see as inexcusable. Both as a society and as individuals we should try to extend tolerance and forgiveness. Given our current state, I do not think we can do away with prisons, but I think we should be aiming in the direction of limiting their use. I also think that we should be reducing the number of “firing offenses” in the work place, not adding to them. As individuals, we should aim to reduce the set of excuses for cutting people off as friends.

4. We should avoid the “nirvana fallacy,” which involves comparing the current state to a perfect state. The most realistic change is likely to be from an imperfect current state to another imperfect state.

5. We should resist becoming Manichean. The motives of opponents are usually not as bad as we are inclined to make them out to be.

Source: What I believe now, part 2: strong imperfection

Edward Glaeser’s “Four Freedoms” Strategy for Revitalizing American Capitalism

Harvard economist Edward Glaeser is one of the world’s leading experts on housing, urban development, and economic mobility. In a compelling recent article published in the City Journal , he lays out a “four freedoms” strategy for revitalizing American capitalism by expanding opportunity for the young.

Source: Edward Glaeser’s “Four Freedoms” Strategy for Revitalizing American Capitalism

The first of the four freedoms is the freedom to learn, which is being fought by, of all entities, the teachers’ unions.

The other three are, stronger right to work, greater freedom to sell and to launch new businesses, and freedom to build.

Quotation of the day on socialism as a machine for empowering insiders…

…. is from Edward Glaeser’s article “ How to Fix American Capitalism “:

What many young people today don’t realize is that socialism is a machine for empowering insiders. Few insiders have ever been rewarded more assiduously than the nomenklatura of the Soviet Union. Few governments have been as gray—in every sense of the word—as the Brezhnev regime. A vast expansion of the American government, as imagined by today’s Democratic Socialists, would create its own privileged elite.

From its inception, by contrast, capitalism was designed for outsiders. Its original apostles, such as Adam Smith, argued that entrepreneurs needed freedom from the royal regulations that limited trade and the formation of new enterprises. When the government controls decisions to work or to start a business, political pull becomes a prerequisite for success. The whole point of economic freedom is that all people—not just the connected—can use their talents to help themselves and, potentially, to change the world.

Source: Quotation of the day on socialism as a machine for empowering insiders…

Giving thanks for the magic of the marketplace, the invisible hand of strangers, and no turkey czars

This Thanksgiving post has been an annual tradition at CD and I feature a slightly revised version again this year! Like in previous years, most of you probably didn’t call your local supermarket ahead of time and order a Thanksgiving turkey this year.

Source: Giving thanks for the magic of the marketplace, the invisible hand of strangers, and no turkey czars

YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trick…

YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trickle-Down Economics’ Get Wrong . 1. Blaming Free-Market Capitalism for the COVID-19 Crisis This is probably Pope Francis’s weakest argument of all.

Source: YOU’RE GOING TO NEED A BIGGER BLOG: What Pope Francis’s Attacks on ‘Free Markets’ and ‘Trick…

Quotation of the Day…

(Don Boudreaux) Tweet … is from page 307 of Kristian Niemietz’s important 2019 book, Socialism: The Failed Idea That Never Dies : Since economic activity cannot be coordinated by scarcity signals – i.e. market prices – the only substitute is command and control. When people do not behave in the way economic planners want them to behave, the state needs to use force to make them comply.

DBx: Do not overlook this reality: Industrial policy is not a series of recommendations that the state kindly offers to citizens. It is, instead, a set of commands that the state imposes on its citizens. The state will enforce these commands against any and all who resist them, with violence if necessary. Government officials will cage you if you refuse to obey their orders. And if you resist this caging with sufficient stubbornness, these same government officials will see to it that you are killed.

Source: Quotation of the Day…