"Globalisation encourages the capitalist engine of growth. If people understood how generous that engine has been they would have less enthusiasm for protectionism or socialism or environmentalist or economic nationalism in any of their varied forms. Most educated people believe that the gains to income from capitalism’s triumph have been modest, that the poor have been left behind, that the Third World (should we start calling it the Second?) has been immiserised in aid of the First, that population growth must be controlled, that diminishing returns on the whole has been the main force in world economic history since 1800. All these notions are factually erroneous. But you’ll find all of them in the mind of the average professor of political philosophy."
~ Deirdre McCloskey from her review of Thomas Friedman’s The Lexus and the Olive Tree and John Gray’s False Dawn
In January Javier Milei explained to a room of Davos delegates to the WEF forum how the world works, and how economic progress and prosperity happens. This is an excerpt. [Milei's speech was originally in Spanish, and the English version at the WEF website has been transcribed by AI. I have edited slightly it for smoothness and clarity. Emphases mine]
Xenophon ... [first] highlight[ed] the benefit of private property by stating that the owner's eye fattens his cattle. [Or as the English saying has it: "It's the master's eye that makes the mill go"]... Xenophon then delves into the dynamic realm, noting that efficiency also entails increasing wealth: that is, increasing the available quantity of goods through entrepreneurial creativity, namely through trade, innovation, and recognising opportunity. ...
"[T]he institution of private property deserves a separate chapter. By focussing on it, the Austrian School of Economics from Mises, Hayek, Rothbard, Kirzner and Hoppe to Huerta de Soto has demonstrated the impossibility of socialism, thereby dismantling the illusory idea of John Stuart Mill that postulated independence between production and distribution; a form of academic deafness that led to socialism, and cost the world the lives of 150 million human beings -- while those who managed to survive the terror, did so in absurd poverty.
In line with [those writers'] previous remarks, and consistent with Xenophon's second [point], economic theory has identified four sources of economic progress.
First, there's the division of labour, which was illustrated by Adam Smith through the pin factory example. At its core, this is a mechanism that generates productivity gains, manifested as increasing returns. Although its limit is determined by market size, the size of the market is positively affected by this process. However, it is also worth noting that this virtuous process is not infinite and that its ultimate limit lies in the endowment of initial resources.
Second, there is the accumulation of capital, both physical and human. With regard to physical capital, the interaction between saving and investment is crucial, highlighting the fundamental role of capital markets and of the financial system in carrying out such intermediation. On the human capital side, the focus should not be limited to education alone, but should also include the development of cognitive capacities from birth, as well as nutrition and health, basic elements for gaining access to education and the labour market.
Third, there is technological progress, which consists in being able to produce a greater quantity of goods with the same amount of resources, or to produce the same output using a smaller quantity of inputs.
Finally, there is entrepreneurial spirit, or rather the entrepreneurial function, which, according to Professor Huerta De Soto constitutes the main driver of the economic growth process. Because, although the three factors mentioned are important, without entrepreneurs, there can be no production, and living standards would be extremely precarious.
In fact, the entrepreneurial function is not so much focused on short-term efficiency, but rather on increasing the quality of goods and services, which, in turn, leads to higher standards of living. On this basis, what truly matters is to expand the frontier of production possibilities to the maximum extent possible.
Thus, dynamic efficiency can be understood as an economy's capacity to foster entrepreneurial creativity and coordination.
In turn, the criterion of dynamic efficiency is inseparably linked to the concept of the entrepreneurial function, which is that typically human capacity to perceive profit opportunities that arise in the environment and to act accordingly to take advantage of them. This makes the task of discovering and creating new ends and means fundamental, driving spontaneous coordination to resolve market imbalances.
Moreover, this definition of dynamic efficiency proposed by Huerta de Soto coherently and appropriately combines Schumpeter’s idea of creative destruction with North's concept of adaptive efficiency.
Naturally, given the role of the entrepreneurial function, the institutions under which it develops are of vital importance. In this regard, both Douglass North and Jesús Huerta de Soto consider one of the key functions of institutions to be that of reducing uncertainty.
So, while North presents them as a set of humanly devised constraints that structure social interaction in a repetitive manner, Huerta de Soto considers that these institutions, conceived by human beings, emerge spontaneously from a process of social interaction without being designed by any single individual, and that they reduce uncertainty in the market process.
As Roy Cordato points out, the appropriate institutional framework is one that favours entrepreneurial discovery and coordination. Accordingly, within this framework, economic policy should aim to identify and remove all artificial barriers that hinder the entrepreneurial process and voluntary exchanges.
Given the decisive influence of institutions on economic progress, this directs our attention to the importance of ethics, as societies that adhere to stronger moral values and ethical principles in support of institutions will be dynamically more efficient and will therefore enjoy greater prosperity.
Accordingly, the fundamental ethical problem is a search for the best way to foster entrepreneurial coordination and creation.
Therefore, in the field of social ethics, we conclude that conceiving human beings as creative and coordinating actors entails accepting axiomatically the principle that every human being has the right to appropriate the results of their entrepreneurial creativity.
So the private appropriation of the fruits of what entrepreneurs create and discover is a principle of natural law because if an author were unable to appropriate what they create or discover, their capacity to detect profit opportunities would be blocked, and the incentive to carry out their actions would disappear. Ultimately, the ethical principle just stated is the fundamental ethical foundation of the entire market economy.
So, what we've just demonstrated is that free enterprise capitalism is not only just but also efficient and also that it is the one that maximises growth.
RELATED: Here's Per Bylund at the latest Ludwig Von Mises conference explaining that it's entrepreneurs, not politicians, who change the world for the better.
"People have it all wrong" about AI and robots, says philosopher Harry Binswanger.
Robots are going to take your job? No doubt.
What if robots take all the jobs? Hint: They can't.
You may not keep this job. But your next one will pay so much more. How can we know that? Because, he argues, "We’re all going to get richer. The more that AI and robots can do for us, the richer we will get."
How so? Because AI and robots makes everyone’s labour far more productive -- and the result will be more goods produced, and hence "more wealth in the whole economy."
More wealth means more savings. More savings means more investment. And "more investment means more goods produced, which means a drop in the cost of living, which means a rise in the standard of living."
But how can he be so sure that if your job is replaced you'll be able to find a new one and "take part in this bonanza?"
The temptation is to answer by finding things robots won’t ever be able to do. “Robots will never be great chefs.” “Robots will never be venture capitalists.” “Robots will never write a first-rate symphony.”
That’s irrelevant. The point is that even if AI and robots could do everything better than any human being, that would enhance, not undermine, the value of human labour.
Why? The explanation comes from applying here an important truth discovered two centuries ago. In 1817, the great English economist David Ricardo identified “The Law of Comparative Advantage.”
Ricardo's Law of Comparative Advantage explains that no matter how poor you country may be at producing stuff, if both you and others specialise in what they each do best then, at the end of the day, we are all better off. It's best, for example, if Scotland trades whisky with France for claret and burgundy, rather than the other way around. ("It is the maxim of every prudent master of a family,"explained Adam Smith, "never to attempt to make at home what it will cost him more to make than to buy.")
Equally, the best way for New Zealanders to get cars and electronics is not to try making cars and electronics ourselves, but to process grass into milk powder, meat and wool so that New Zealanders can trade for those fancy devices. And when we do, we're all better off. ( If you're struggling with the concept, because it is remarkably subtle, PJ O 'Rourke's short explanation is one of the funniest on record, and undoubtedly the only one using Courtney Love to help explain things.)
Recognising that self-same principle of Comparative Advantage applies between people as it does to countries, economist Ludwig Von Mises expanded Ricardo's Law to make it "one of the most beautiful laws of the universe." Calling it the Law of Association he showed that specialisation allows even the less productive to benefit from working with the more productive -- or what his student George Reisman characterises as 'what the productive cleaner gains from the genius inventor.'
Even if the inventor can clean faster than a given cleaner, it still pays him to hire that cleaner because off-loading the cleaning work saves him time. He can then use that saved time in the area of his comparative advantage: inventing and selling more stuff.
Likewise, even if there comes a time when the robots can do everything better and faster than human beings, [even] more wealth will be produced if robots and humans each specialise in what they do best. Super-robots would produce more for us if we save them from having to do things that are less productive [for them].
(Of course we won’t be trading with robots: robots own nothing. Robots are owned by people, and those people will be paid for selling robots or for renting them out, just as you can rent power tools from Home Depot today.)
The Law of Comparative Advantage means humans will never run out of productive work to do. There will always be tasks that you don’t want to waste your rented or owned robots’ time in doing.
If you’ve got a robot building you a swimming pool, you don’t want him to stop to cook you dinner.
A chainsaw is a lot more efficient than a knife at cutting. But you don’t use a chainsaw to slice a loaf of bread. Particularly not if that chainsaw is being used by a robot to clear a place for a tennis court in your backyard.
So, rather than panic over “the rise of the machines,” let’s bear in mind the Law of Comparative Advantage ....
And let's recognise that "even with science-fictional super-robots, there will still be money changing hands and a price-system, just as now. You will still be paid for working in the field of your own comparative advantage.
New kinds of jobs will appear, as they always have when technology advances. Ironically, most of the jobs people are afraid of losing -- such as programming jobs or truck-driving jobs -- were themselves created by technological advances. There used to be an American saying: “Adapt or die.” Having the same kind of job as your father and grandfather did is not the American dream.
What new types of job will be created? I can no more project that than a man in 1956 could have projected that today there would be jobs in something called “social media”; or that money can be made by driving for Uber and by renting out living space through AirBnB.
The robots will make work much easier, more interesting, and much better paid.
It's a busy week. This week also marks the 250th anniversary of Adam Smith's Wealth of Nations, the first in-depth exploration and explanation of (in PJ O'Rourke's words) why some nations are prosperous and wealthy and other places just suck.In honour of the anniversary, here are several of Adam Smith’s most insightful observations:
It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. [The Wealth Of Nations, Book I, Chapter II]
It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. [The Wealth Of Nations, Book I, Chapter I]
Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. [Lecture in 1755, quoted in Dugald Stewart, Account Of The Life And Writings Of Adam Smith LLD, Section IV, 25]
It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. [The Wealth Of Nations, Book IV Chapter I]
By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? [The Wealth Of Nations, Book IV, Chapter II]
Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. [The Wealth Of Nations, Book IV Chapter VIII]
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. [The Wealth Of Nations, Book IV Chapter VIII]
To widen the market and to narrow the competition, is always the interest of the dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution... It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. [The Wealth Of Nations, Book I, Chapter XI]
It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. [The Wealth Of Nations, Book II, Chapter III]
There is no art which one government sooner learns of another than that of draining money from the pockets of the people. [The Wealth Of Nations, Book V Chapter II Part II]
Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [The Wealth Of Nations, Book IV, Chapter II]
What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. [The Wealth Of Nations, Book I Chapter VIII]
The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. [The Theory Of Moral Sentiments, Part VI, Section II, Chapter II]
"These reforms dismantled the import quotas and regulatory walls that had kept Australian manufacturers comfortable and unchallenged for the better part of a century. Industry had to compete with the world. Not because a regulator told firms to behave, but because Japanese cars and European appliances were suddenly on showroom floors, at prices local manufacturers could not match.
"Yes, competition law played a part. But the real transformation came from opening the economy.
"Take household appliances. During the reform period, the number of local manufacturers shrank and the industry became more concentrated. By the logic of competition law, this should have been a disaster. Fewer producers means less competition. Consumers should have suffered.
"They did not. Prices fell and choice exploded. Tariffs on refrigerators dropped from 47.5 per cent to 5 per cent. In 1999, the Productivity Commission studied what had happened. It attributed the gains to trade reforms that reduced “barriers to market entry,” not to competition law. Anyone in the world could now sell a fridge in Sydney.
"The economist Israel Kirzner, now 96 and long overdue for a Nobel Prize, spent his career at New York University making exactly this point. His work shaped my own doctoral research in the law and economics of competition.
"Kirzner’s central argument is that competition is not a snapshot of how many firms happen to sit in a market at any given moment. It is a process, driven by entrepreneurs spotting opportunities and entering markets to challenge incumbents. A market with two players can be fiercely competitive if both know a third could arrive tomorrow. A market with twenty can be sleepy if regulation keeps the twenty-first from showing up.
"Hawke and Keating grasped this, perhaps instinctively. The way to make an economy competitive is to open it up, let foreign goods in, let new businesses form and remove the barriers that protect incumbents from challenge. Competition law can help keep the game honest once the field is open.
The horse "Smith" is Adam Smith. He represents the gains from trade and division of labour about which Adam Smith spoke so well.
"Schumpeter" is the horse representing gains from invention, from new technology, from all the gains that innovation brings.
Together they drive the race forwards.
But "Stupidity" is the horse sponsored by the government, and trained by big-government worshipping economists. He bumps into the others, bites at their heels, and generally gets in their fucking way. 'Stupidity' represents every stupid idea, every stupid regulation—and all that insane tinkering with counterfeit credit as if it were the way to economic nirvana.
He takes it all backwards.
We can see Leg One of that race below: Mark Perry's famous “Chart of the Century,” tracking the price of 14 items over the last quarter-century.
It's pretty clear that when 'Smith' and 'Schumpeter' can run largely unhindered, then nearly everyone gets better off. Even if the change in average hourly wages is taken into account, all but five of the items tracked above give those two horses (and every wage-earner) a win.
It's only when 'Stupidity' is allowed a free rein that he starts to come out ahead. (And I'm fairly sure that an analysis using NZ data would show something very similar.)
“The weaker the government, the better it is for innovation.”
~ Joel Mokyr
"Today, the Nobel Prize in Economics was awarded to Joel Mokyr (Northwestern University), Philippe Aghion (London School of Economics), and Peter Howitt (Brown University) “for having explained innovation-driven economic growth.”1 This follows a recent trend for the Committee to award to economics focused on economic growth, following Acemoglou, Johnson, and Robinson in 2024 and Kremer, Duflo, and Banerjee in 2019...
"One of the big mysteries of human history is the so-called 'hockey-stick of prosperity.' That is, the fact that, for much of human history, standards of living were virtually unchanged. Very little separated the Roman citizen in 1AD from the British citizen in 1700. But, starting in the 1700s, standards of living skyrocketed. ...
"Enter Mokyr, Aghion, and Howitt. Collectively, their work helped explain why this growth happened, why it happened where it did, and how it is sustainable. ...
"Hurrah! Joel Mokyr has been awarded the Nobel Prize in Economics. One of the greatest economic historians of our time. If you haven’t read him yet, start with 'The Lever of Riches,' 'The Gifts of Athena,' 'A Culture of Growth,' and 'An Enlightened Economy'."
"Mokyr's key insight is that one needs more than inventions that work—one needs a culture of knowledge-seeking, innovation, progress.
"Note the abstract from his now-classic 2005 paper [below], pointing us from the Industrial Revolution to the broader Enlightenment culture within which it arose—and to the earlier Baconian philosophical revolution.
"Ideas, especially philosophical ones, are fundamental to economic growth."
"Joel Mokyr of Northwestern University talks with EconTalk host Russ Roberts about the future of the American economy. Mokyr rejects the claims that the we are entering an area of stagnation or permanently lower economic growth. He argues that measured growth understates the impact on human welfare. Many of the most important discoveries are new products that are often poorly measured and not reflected in measures such as gross domestic product or income.
"The conversation closes with a discussion of the downsides of technology and why Mokyr remains optimistic about the future."
"Prime Minister Christopher Luxon specifically reference[s] Ireland and Singapore as 'two economies we often look to for inspiration on investment and technology.'
"This kind of comparison has been a familiar refrain in New Zealand politics. ...
"But ... such comparisons are simplistic and misleading.
"Unlike Ireland, New Zealand does not sit at the junction of the European Union and the United States. And it is not a logistics-finance hub strategically perched on global shipping routes like Singapore.
"Rather, New Zealand is a distant, mid-sized economy whose digital sector has largely grown by meeting domestic demand rather than exporting at scale. ...
"The Ireland and Singapore analogies obscure more than they reveal. New Zealand is not an anchor point in global trade and data flows ... Neither represents a path that can ... be easily transplanted elsewhere."
"You see the retreat of industry in rich economies as a benign, inevitable drift toward services. On the ground it looks rather less idyllic. The real delusion is the belief that advanced societies can live off spreadsheets while their physical base erodes. Service innovation is welcome, but someone still has to pour the concrete and draw the wire. Better to recognise that reality now than relearn it in a hot war or a cold winter. ...
"De-industrial economies are not more efficient. They are merely importing other people's efficiency and exporting their own purchasing power.
"The lesson is not to seal borders behind tariff walls—Donald Trump's metals duties in 2018 proved how self-harming that can be—but to run an active, open industrial strategy. Permit planning that allows large plants to be built in years, not decades; use public co-investment where spill-overs are obvious ...; use trade among allies so that capacity is pooled rather than duplicated."
"Every one of the tariff letters ends by noting 'These Tariffs may be modified, upward or downward, depending on our relationship with your Country.' No American company is going to open a new factory based on the protection offered by a tariff [that] could disappear before the concrete sets."
"They're not even letters. They're posts on the President's social media platform. .... So far: Japan 25% South Korea: 25% Malaysia: 25% Kazakhstan: 25% (very niiice) South Africa: 30% Laos: 40% Myanmar: 40% ... PLUS the sectoral tariffs"
"Reminder: the US has a FREE TRADE AGREEMENT with South Korea, signed by the President (GWB) & implemented into LAW by Congress, and TRUMP HIMSELF signed a mini-deal w/ SK in 2018. Now ALL South Korean imports get a 25% tariff — for now. NO incentive for South Korea (or anyone else) to negotiate with him."
"Unlike most of the countries Trump is shaking down with tariffs, South Korea has a free trade agreement with the U.S. (KORUS) that was ratified by Congress. The Constitution gives control of trade policy entirely to Congress, the president has no legal authority to do this."
"Trump punishes nice allies while he has not imposed any tariff on Russia or Belarus & no new sanctions either. Trump is transparently for our enemies & against our friends."
"[T]he logic is not just wrong - it’s economically backwards. Here's why:
"First, tariffs are not paid by foreign countries. A 40% tariff as an example goods means U.S. importers pay 40% more. Those importers pass the cost to consumers. Tariffs are taxes — and they hurt Americans, not the governments being 'punished.
"Second, the letter treats the trade deficit as a threat. But a trade deficit isn’t inherently bad — it’s a reflection of dollar dominance. The U.S. dollar is the world’s reserve currency. Foreign nations want to hold dollars and invest in American assets — like U.S. Treasury bonds, real estate, and equities. This demand for dollars keeps the currency strong and allows Americans to buy more goods from abroad. That’s what creates a trade deficit — not weakness, but strength and global trust. So while countries exports goods to the U.S., the U.S. exports financial assets to the world. That’s not losing - that’s global balance.
"Third, the idea of retaliatory tariffs — 'if you raise yours, we’ll raise ours higher' — is not a strategy. It’s a threat that damages diplomacy, disrupts supply chains, and raises costs for American companies and consumers alike. Trade is not a zero-sum game. This kind of mercantilist thinking — where every deficit is seen as a loss and every surplus as a win — belongs in the 1700s. In a modern, interconnected global economy, it’s outdated and harmful. Bottom line:
Tariffs are taxes on Americans
Trade deficits reflect dollar strength, not weakness
Retaliatory trade policy only hurts U.S. businesses
"Economic nationalism may sound tough, but it’s American wallets that take the hit."
"Trump: What people don’t understand is... the country eats the tariff, the company eats the tariff and it’s not passed along at all… China is eating the tariffs.
"Fact-check: False. Costs associated with tariffs are almost universally passed to consumers."
UNFORTUNATELY CHRIS TROTTER, WHO OFTEN writes so well, can be found peddling another dangerous historic myth. This one, this time, about the Great Depression. (about which there are many, many myths, most of which would be destructive if believed.)
If were to be believed — if his recommendations were to be followed, on the back of his myth-making — it may well cause another.
Writing to advocate that the Luxon government be more spendthrift, Trotter says
When the 1929 Wall Street Crash sent the economy of the United States into a tailspin, the experts of the day called upon the administration of Herbert Hoover to apply the accepted remedies. Accordingly, Hoover’s Treasury Secretary, Andrew Mellon, responded with his now infamous instruction to:
“Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate. It will purge the rottenness out of the system.”
In following this advice, however, the Hoover Administration inflicted extreme hardship on millions of Americans, and in so-doing not only liquidated itself, but also came alarmingly close to liquidating the whole capitalist system. It took an American aristocrat, Franklin Roosevelt, with more intelligence and a bigger heart than Hoover and his conventional wisdom, to rescue American capitalism from itself.
Mutatis mutandis, the response of successive New Zealand governments to the Great Depression mirrored the conventional economic thinking of Mellon and his advisers. Saddled with obligations it could no longer afford, the Reform and United Parties cut, cut, cut, and cut again – unleashing massive deprivation and misery across the country. This time it was Labour that came to capitalism’s rescue.
He could not be more wrong.
And wrong in virtually every sentence.
LET'S START WITH MELLON'S alleged "instruction" to "liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate" —liquidate all monetary assets in summary, at whatever price may be gotten for them, in order to "purge the rottenness out of the system."
Fact is, it would have, if that programme were followed — as it had been following the much greater crash in 1921. (Sometimes called "the forgotten depression," or "the crash that cured itself.") But the “quote” was not Mellon's but Hoover’s, his president, and it was him contrasting the “liquidationist” programme of the type successfully followed in 1920 with the “interventionist programme” he intended to follow instead.
It didn't work.
The more Hoover tried to carry out his interventionist programme from 1929 to 1932— inflating wages, trying to raise falling prices, spending like a drunken merchant-man, adding enormous debt to a government all but crippled by the inability to pay it down — the more things spiralled down into the mire.
We might have done nothing [said Hoover]. That would have been utter ruin. Instead we met the situation with proposals to private business and to Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put it into action.... No government in Washington has hitherto considered that it held so broad a responsibility for leadership in such times.... For the first time in the history of depression, dividends, profits, and the cost of living, have been reduced before wages have suffered.... They were maintained until the cost of living had decreased and the profits had practically vanished. They are now the highest real wages in the world. Creating new jobs and giving to the whole system a new breath of life; nothing has ever been devised in our history which has done more for ... "the common run of men and women." Some of the reactionary economists urged that we should allow the liquidation to take its course until we had found bottom.... We determined that we would not follow the advice of the bitter-end liquidationists and see the whole body of debtors of the United States brought to bankruptcy and the savings of our people brought to destruction.
Featured in Hoover's plan were increased taxes, lowered interest rates, huge deficits, public dams, public works, restrictions on immigration and trade, and government regulation of banking, finance, industry and labour markets.
Hoover's heavily interventionist programme — doing everything to raise prices when demand had already collapsed — failed miserably. Unlike the solution found in 1921 (to lower prices to meet lower demand), which saw things turn around within eighteen months, things were still dire four years after the 1929 crash when Trotter's hero Franklin Roosevelt took over.
And then, with even less intelligence and much less honesty, Roosevelt doubled down.
In the 1932 election campaign, Franklin Roosevelt accused Hoover (accurately) of “reckless and extravagant” spending, of thinking “that we ought to center control of everything in Washington as rapidly as possible,” and of presiding over “the greatest spending administration in peacetime in all of history.”
And that was all true.All of it—all the spending, all the alleged “stimulus”—all an attempt to keep up wages and prices and keep the engine ticking over in the manner to which Trotter et al suggest we do today with far less reason, and much less room to manoeuvre. .
And it had failed. It had failed spectacularly.
it failed just as monumentally when Roosevelt tried it.
By 1933, when Roosevelt took over in the States, nearly 13 million Americans were unemployed. Yet when the Second World War began, after eight years of further intervention by Mr Roosevelt (whose advisers conceded their New Deal was based on the “Hoover New Deal”), nearly 12 million were still unemployed (unemployment had never dropped below 20% for the whole of the decade) and Roosevelt was to embrace a world war as a way to get the unemployed out of his hair.
We do NOT want any sort of repetition of that!
BUT WHAT ABOUT TROTTER'S argument that the Reform and United Parties here had followed the liquidationist programme and failed, and had to be rescued in 1932 by Michael Savage's Labour.
Well, Trotter has finally hit on the one fact in his screed in which he's right. Gordon Coates's and George Forbes's Reform and United Parties did inadvertently follow a semi-liquidationist programme. Despite their own interventions, and despite the US's disastrous Smoot-Hawley tariffs, they did allow prices to fall, which (along with Australia and the UK adopting similar programmes) did eventually allow green shoots to appear here by 1932. So that by 1935 when Savage's Labour was elected ... well, things were already on the upswing.
It wasn't at all that "Labour that came to capitalism’s rescue," as Trotter alleges.
It was, instead, that capitalism, even in the muted form allowed to it, allowed Labour to take the credit for a job already done, and to spend up heavily — helping poorly-informed writers like Trotter to confuse effect for cause.
Fat is: the First Labour Government simply reaped the benefits of the recovery that was already under way. As economic historian John Gould outlines:
From 1934 overseas prices were recovering and the country [New Zealand] could not help but be better off. The [Labour] Government benefited, too, from a balanced budget, a buoyant public revenue, and a healthy reserve in London, inherited from its predecessor. It made good use of these propitious circumstances. Its initial step was simply a Christmas bonus for the unemployed – a symbolic if small pledge of humanitarian readiness to cut corners.
It went on, in the busy session of 1936, to restore wage and pension cuts, to bring in a basic wage, a 40-hour week, and a major programme of public works; it built up the unions by bringing back compulsory arbitration and adding to it compulsory membership of unions; it embarked upon a great housing construction programme; it brought in a price scheme for dairy products which guaranteed the farmer a reasonable income; it tried, without notable success, to encourage secondary industry so that there would be more jobs for wage earners.
The Government's opponents never tired of inquiring, “Where will the money come from?”; the Government's answers were never explicit, but in fact a good deal of the money came from State credit created by the Reserve Bank. This institution, by an Act of 1936, had become a fully governmental body; where these expensive programmes could not be financed out of current revenue or overseas funds, the Government simply borrowed from its own bank. Neither the housing programme nor the guaranteed price could have been financed without such credit. Labour had collected most of the Social Crediter's votes in 1935, and this, which was far from their desires, was their reward, a policy a good deal more Keynesian than Douglasite, however.
The cornerstone was set in the arch in 1938. Already the government had shown its concern with public health and welfare; in 1938 the two were integrated into a “social security” system by which the State guaranteed medical advice, medicines, hospital services to all whatever their means, and a wide range of pensions to all likely to suffer hardship. In part the scheme was financed by special taxation, in part from general revenue. It was, among other things, a ready vote winner in 1938; its attractiveness, together with the Government's energetic record and the National opposition's general nervelessness, proved irresistible.
But the spending, while just as irresistible, proved too much. The Labour boom ended in another bust, confusing later writers who were less than careful at their economics. Because the Labour victory in 1938 came just in time ...
Hard on the heels of the victory came tribulation. Thanks in part to public works construction ... draining overseas reserves, in part to a flight of private capital from the country, scared by a government that still seemed “socialistic”, in part to a sag in prices for exports jeopardising the guaranteed price system, and in part to the unsympathetic attitude shown by London financiers to some £16 million of debt shortly falling due, things looked ominous in 1939. The debt was converted on rather stringent terms; exchange and import controls were applied.
But the real saviour [for Labour] was the war that broke out in September. Once again farm exports were at a priority and the mobilisation of resources for the war effort permitted the introduction of more thorough controls than would have been tolerable in peacetime.[1]
From 1929 to 1935 the United/Reform programme was semi-liquidationist, and it semi-succeeded.
It succeeded to such an extent that from 1935 to 1938, Labour could take the credit, apportion blame elsewhere, and deliver profligacy as from a horn of plenty.
And then, as Margaret Thatcher observed so sagely many years later, like all socialists they began to run out of money.
What saved Labour however was price controls, rationing, and war.
I do trust that Mr Trotter does not want any of that either.
[1]John Gould, ‘1935-49: The Labour Regime,’ in An Encyclopaedia of New Zealand, ed. A.H McLintock, 1966
FRENCH EXISTENTIALIST PHILOSOPHER Jean Paul Sartre famously stated “Hell is other people,” and he wrote many books attempting to prove it.
Unfortunately, all he proved to most readers was that Hell is reading Jean Paul Sartre books.
A century earlier his countryman Frederic Bastiat discovered, argued and helped to prove something very different; that other people are the very opposite of hell. Said Bastiat in his own magnum opus Economic Harmonies:
“All men’s impulses, when motivated by legitimate self-interest, fall into a harmonious social pattern.”
This is the big lesson that economics can give to philosophers: that the world is not made up of the “fundamental antagonisms” between people that some philosophers find everywhere; antagonisms alleged to be ...
Between the property owner and the worker. Between capital and labour. Between the common people and the bourgeoisie. Between agriculture and industry. Between the farmer and the city-dweller. Between the native-born and the foreigner. Between the producer and the consumer. Between civilization and the social order.
And, to sum it all up in a single phrase:
Between personal liberty and a harmonious social order.
What economics can teach philosophers (and what Bastiat can still teach economists) is that other human beings need neither be a burden nor a threat, neither a hell nor a horror but a blessing.
This is the greatest lesson economics can teach: that in a society making peaceful cooperation possible we each gain from the existence of others.
What a great story to tell!
TO START TO TELL THIS long story, a story that all of economics really serves to show, let’s begin with a short story—an excerpt, from a short story by a great short story writer: O. Henry. As his characters sit down in their wilds to break their fast with something “composed of fried bacon and a yellowish edifice that proved up something between pound cake and flexible sandstone,” they begin to reflect on The Perfect Breakfast:
Such a breakfast, they sigh, might only be possible in New York. "It's a great town for epicures,” they say. As is virtually every city. We take for granted now that in virtually every cafe in every city in the country we can sit down to the perfect breakfast. We reach over to Brazil or Kenya for our coffee and down to Christchurch for our mushrooms and rolls; to Pokeno, or Vermont, for our bacon and head further down to the Waikato to dig a slice of butter out of a Te Rapa urn and then turn over a beehive near a manuka patch in Nelson for our honey.
This is the Miracle of Breakfast: that we can eat like the gods for the cost only of a few dollars thanks to the freedom to trade, the division of labour and the 'invisible hand' of the market. And we take this for granted. We take it so much for granted that, rather than celebrate sharing the meal that gods eat on Olympia, we complain if our eggs are too cold.
And we don’t need long arms to enjoy it: we need the arms and minds of other people who are free to produce, free to trade, free to enjoy the fruits of their own labour by trading those fruits with others.
This is the lesson integrated by all of economics: that when you remove force and fraud people are a blessing rather than a curse. Thanks be to the freedom to trade, the division of labour and the 'invisible hand' of the market that makes it possible.
This is the great lesson of Economic Harmonies hinted at by Adam Smith, made explicit by our friend Frederic Bastiat, and developed in specific areas by the likes of Friedrich Hayek and Ludwig Von Mises. Bastiat first noticed it in a visit to Paris. Paris gets fed, he observed, yet no-one celebrates the miracle:
A light we term self-interest. It is this, says Bastiat, that is at the root of all the Harmonies.
Think about it. On our own we can produce barely anything in a single day. If we were to permanently endure self-sufficiency or life in the wilds not only would the meal of ambrosia perpetually elude us, our lives would be one long round of much labour for very little reward. (That's the point of Robinson Crusoe if you remember.) We need others to keep us supplied as we now take for granted—with food, with drink, with iPods, iPads and the very roofs over our head—but how to enlist those others in our aid? Simple: we rely on trading with those others. On voluntary cooperation. In short, we offer them their own profit in return for ours.
We appeal, in short, to their own self-interest, a point made by Adam Smith in the part of his famous book where he invokes his most famous metaphor:
And so we do. By pursuing our own self-interest, through our production, our trade, our enterprise, we ensure “Paris gets fed.”
But there is no central planner here. That is the second part of this miracle: the “resourceful and secret power that governs the amazing regularity of such complicated movements” is not the result of government planning but the opposite: it is a naturally developed “spontaneous order” regulated by this “inner light” of self-interest and the power of free exchange. That power, that light, “is so illuminating, so constant, and so penetrating, when it is left free of every hindrance” it produces the order we take so much for granted.
This, Bastiat’s great lesson of spontaneous order, was taken up by Friedrich Hayek, observing society relies on the spontaneous order arising out of our voluntary cooperation.
This great miracle can only happen when each of us is free to follow our own road, to make use of our unique knowledge and circumstances to pursue our self-interests, so promoting that of the society more effectually than when we really intend to promote it.
SO WHAT EXPLAINS THIS Miracle of Breakfast then? Bastiat’s own conclusion is summed up in three points:
Free exchange
Self-interest
Spontaneous order
Or in one idea:
“That the legitimate interests of mankind are essentially harmonious.”
This, then, is the great lesson integrated by economics, if we are willing to hear it:
That human interests do not require acts of sacrifice…
That bettering the condition of one person does not necessitate the worsening of someone else’s…
That one person’s wealth does not necessitate another person’s poverty….
That the creation of wealth requires only that everyone mind their own business and get the hell on with it. ...
THERE IS ONE SINGLE lesson in economics everyone needs to learn, says Henry Hazlitt — the one lesson that might allow them to best understand the field and avoid the errors of bad economists. It is this, below:
Today is already the tomorrow which the bad economist yesterday urged us to ignore. The long-run consequences of some economic policies may become evident in a few months. Others may not become evident for several years. Still others may not become evident for decades. But in every case those long-run consequences are contained in the policy as surely as the hen was in the egg, the flower in the seed. From this aspect, therefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.
Take that fully on board and you'll already know more than most bad economists — and certainly more than any of the alleged economists kissing Trump's ring. [For the whole lesson, you can download and read pages 3 to 7 of Hazlitt's seminal book Economics in One Lesson. It's that simple.]
HAZLITT NATURALLY APPLIES THAT lesson over several policy areas. Including tariffs. An excerpt:
And this brings us to the real effect of a[n American] tariff wall. It is not merely that all its visible gains are offset by less obvious but no less real losses. It results, in fact, in a net loss to the country. For contrary to centuries of interested propaganda and disinterested confusion, the tariff reduces the American level of wages. Let us observe more clearly how it does this. We have seen that the added amount which consumers pay for a tariff-protected article leaves them just that much less with which to buy all other articles. There is here no net gain to industry as a whole. But as a result of the artificial barrier erected against foreign goods, American labour, capital and land are deflected from what they can do more efficiently to what they do less efficiently. Therefore, as a result of the tariff wall, the average productivity of American labor and capital is reduced. If we look at it now from the consumer’s point of view, we find that he can buy less with his money. Because he has to pay more for sweaters and other protected goods, he can buy less of everything else. The general purchasing power of his income has therefore been reduced. Whether the net effect of the tariff is to lower money wages or to raise money prices will depend upon the monetary policies that are followed. But what is clear is that the tariff—though it may increase wages above what they would have been in the protected industries—must on net balance, when all occupations are considered, reduce real wages. Only minds corrupted by generations of misleading propaganda [and presidential baloney] can regard this conclusion as paradoxical. What other result could we expect from a policy of deliberately using our resources of capital and manpower in less efficient ways than we know how to use them? What other result could we expect from deliberately erecting artificial obstacles to trade and transportation?
It's interesting, to me at least, to see what I wrote that first week, and whether any predictions came right—or if any ideas the blog promoted took hold. It turns out that...
its more true than ever that the revolution libertarians and Objectivists are trying to foment is inside people's heads—even if most of them have forgotten that
increasing ignorance of the Holocaust does indeed "run the risk of history repeating itself"
the IRA and other paramilitaries have still, mercifully, mostly given up the gun
as another Pope heads to the out door, the reputation of his Church is if anything in even poorer health
In that time I've written about 4.5 million words words across nearly 15,000 posts, which have attracted 54,639 comments (thank you).
Over those twenty years, those 15,000 posts have enjoyed precisely 15,742,467 page views.
And my Top Ten posts of all time (below) features quotes from Stephen Hicks, Steven Pinker, architecture by my teacher Claude Megson, and guest posts by sundry others. My sole personal contribution to the Top Ten however is my Family Tree of Economics. Of which, to be fair, I am very proud—decent "trees" are still a rarity.
PS: Credit again to Richard Goode for calling my bluff when I told him I should start blogging—a few taps of a keyboard and he turned around and said "There you go." So I did. (Thanks Richard.)
"There’s a fundamental problem with Donald Trump’s new trade policy: it fails a test that actual 5th graders can pass. I know this because I tried explaining his 'Liberation Day' trade plan to one last night. Here’s how that conversation went:
“Imagine you want to buy a toy at a store which costs $50. You pay for the toy and walk away with it. The President looks at that transaction and says ‘wait, you paid the store $50 and the store paid you nothing, therefore the store is stealing from you. To 'fix' this, I’m going to tax the store $25. From now on that same toy costs $75.”
"The 5th grader looked at me like I was crazy. 'Whaaaaaaat? None of that makes sense. If I pay for something, it’s not stealing. And taxing the store seems stupid, and then everything is more expensive. Why would anyone do that? That can’t be how it works.' "This is the core problem with Trump’s 'Liberation Day' trade policy: it fundamentally misunderstands what trade deficits are. And if you think that’s bad, just wait until we get to the part where this policy declares economic war on penguins and our own military base. ...
"The policy, unveiled yesterday afternoon, is called a 'reciprocal tariff plan,' which is a bit like calling a hammer a 'reciprocal pillow.' The premise is that since other countries have high tariffs on us (they don’t), we should have high tariffs on them (we shouldn’t). But that’s not even the weird part. "At the heart of this policy is a chart. Not just any chart, but what might be the most creative work of economic fiction since, well, Donald Trump launched his memecoin. Trump proudly displayed these numbers at a White House event, explaining that they showed the tariffs other countries impose on the US. He emphasized repeatedly that the US was being more than 'fair' because our reciprocal tariffs would be less than what other countries were charging us. "There was just one small problem: none of the numbers were real tariff rates. Not even close. "At first, observers assumed the administration was simply inventing numbers, which would have been bad enough. But the reality turned out to be far more stupid. ...
"All of this glosses over the fact that 'reciprocal tariffs' are not reciprocal at all. Trump’s team is making up fake tariff numbers for foreign countries based not on anything having to do with tariffs, but on trade deficits, which is just an accounting of inflows vs. outflows between two countries. It’s only reciprocal because the Trump team faked the numbers. "On top of that, Trump can only impose tariffs (normally a power of Congress) based on the International Emergency Economic Powers Act and the National Emergencies Act. Both laws require there to be an actual 'emergency.' The only emergency here is that nobody in the administration understands what trade deficits are....
"So to sum up where we are:The administration invented an economic emergency
To justify a policy based on made-up numbers
Generated by an AI formula that came with explicit warnings not to use it
Which they’re now using to launch trade wars
against:
Penguins
Our own military
And presumably Santa’s Workshop (someone check for a North Pole entry)
"And while the penguins and military base make for amusing examples of this policy’s incompetence, the real damage will come from applying this same backwards logic to basically all of our actual trading partners — countries whose goods and services make American lives better and whose economic relationships we’ve spent decades building. And who, historically, welcomed back American goods and services as well. All of that is now at risk because someone couldn’t be bothered to learn what a trade deficit actually is. And the American electorate deciding that’s who we wanted to govern the country. "When your trade policy is so fundamentally misguided that you’re declaring economic war on flightless birds and your own armed forces, perhaps it’s time to admit that the 5th grader from the beginning of this story wasn’t just smarter than the administration — they were dramatically overqualified for Trump’s Council of Economic Advisers."
