Economic regulation: coercive rule by political appointees vs. freely negotiated prices

"[M]ost people hold, explicitly or implicitly, that without regulation, markets could, and sometimes would, spin off into disastrous excesses of one form or another.

"The operative image of economic regulation is that of a huge truck without steering or brakes. 'We have to have those instruments of control, or the truck will go careening off the side of a cliff.'

"The truth is that government regulation is precisely the cutting of the brake lines and the seizing up of the steering column.

"The actual alternative is: government regulation vs. market regulation---which means coercive rule by political appointees vs. freely negotiated prices.

"On a free market, when price relationships begin to diverge from economic reality, they are brought back in line because of greed. Speculators, arbitrageurs, and other "profiteers" swoop in to profit from any misalignment.

"Their activity acts to eliminate the very misalignment with reality that created the profit opportunity. ... Whenever prices, including interest rates, diverge from economic reality, there is money to be made in correcting the prices by the appropriate buying and selling.

"And here's the best part: those with the best judgment of economic reality are the ones who make the most money, which means they have the most influence on the market. It is the buying and selling of the Warren Buffets (and their more speculative counterparts) that keep the economy aligned with the facts. ...

"But ... [t]o the extent there is government intervention, the minds of the profit-seekers are thwarted and rewards go not to the Warren Buffets but, at first, to the ward heelers and power brokers, then as the system devolves, power over the economy goes increasingly to those who are better at conning the public. Then, they are replaced by those more willing to use compulsion. The ruthless displace the relatively timid punks, and destruction reigns.

"So, people have it backwards. 'Unregulated' means reason sets the terms and 'regulated' means reason is quashed by political power."

~ Harry Binswanger from his post 'One contradiction in the fear of laissez-faire'

GUEST POST: The Finite Planet Fallacy

"The pie is fixed. The Earth is a closed system. You cannot have infinite growth on a finite planet." We hear this constantly, and it's delivered like a law of physics — case closed, only a compromised economist could disagree. Yet it's dead wrong, as Pedro Santa Clara explains in this Guest Post. And the mistake is revealing, because it isn't in the physics. It's in the economics smuggled inside the physics.

In short, we are not running out of matter. We are getting steadily better at making it serve us....

The Finite Planet Fallacy 

by Pedro Santa Clara

A critique I often get, whenever I defend economic growth, runs like this: “The truth is that the pie is fixed. The Earth is a closed system. You cannot sustain exponential growth on a finite planet.” It is delivered with the confidence of a physical law — as if invoking the conservation of mass settles the matter and only an economist too compromised to see it could disagree. It is the founding intuition of degrowth, of much of the environmental movement, and of the Club of Rome before them. It is also wrong, and wrong in an instructive way, because the error is not in the physics. It is in the economics smuggled inside the physics.

The argument commits a category error: it confuses matter with value. The Earth is indeed a closed system of atoms. But economic growth does not count atoms — it counts the value those atoms deliver to human beings, and that value lives in arrangement and knowledge, not in mass. The same kilogram of silicon is worth a few cents as sand on a beach and several thousand euros as the microchips etched from it. Nothing was added to the planet between those two states; not one atom. The entire difference is human ingenuity rearranging what was already there. Growth is the rising value we wring from a fixed stock of matter — and there is no law of physics that caps how cleverly atoms may be arranged. The Mona Lisa and a pile of pigment contain the same chemistry. One is worth incalculably more, and the difference is not material.

This is why the deepest engine of growth is not a resource at all but knowledge — and knowledge has two properties that demolish the finite-pie premise. It is 'non-rival'paul: if I use a recipe, a theorem, a line of code, you can use the very same one at the same instant, and neither of us has less. A barrel of oil burned is gone; an idea shared is doubled. And knowledge compounds, because every new idea is a recombination of existing ones, so the stock of possible combinations explodes rather than depletes as it grows. The pie, in other words, is not made of stuff. It is made of recipes — and the recipes are unbounded. A finite planet sets no ceiling on how much we can know about how to use it.

The closed-system picture fails on the brute facts as well. Earth is not even energetically closed: it is bathed continuously in solar energy that dwarfs all human consumption many times over, and with nuclear power the practical ceiling recedes further still — so the thermodynamic limit the argument gestures at is astronomically distant, not pressing.

Meanwhile the historical record simply refuses to cooperate with the prophecy. Resource after resource declared to be on the verge of exhaustion became, instead, more abundant and cheaper, because scarcity raises prices, and prices trigger substitution, efficiency, and discovery. This is the mechanism that cost Paul Ehrlich his famous wager with Julian Simon over the price of five metals Ehrlich himself selected, certain they would soar as the world ran out; every one of them fell. And the “decoupling” that environmentalists insist is impossible — growing an economy while shrinking its physical footprint — is now measured fact in more than thirty countries that have raised output while cutting absolute emissions and material use. 

We are not running out of matter. We are getting steadily better at making it serve us.

The surest sign that the finite-planet argument is broken is that it proves too much. If exponential growth in value were genuinely impossible on a finite world, then it could not have happened — and yet real income per person has risen something like thirtyfold over two centuries, on the same Earth, with the same inventory of atoms. The theory confidently predicts that the central economic fact of the modern era did not occur. When a model is refuted by the entire history of the thing it claims to govern, the mistake is not hiding in the history. It is in the premise — in the quiet, disastrous assumption that an economy is a warehouse of finite stuff to be divided and used up, rather than what it actually is: a growing body of knowledge about how to make a fixed world yield ever more of what human beings want.

The conservationists are right about one thing only. Atoms are finite. But wealth was never the atoms. It was always what we learned to do with them — and there is no end to that.

* * * * 

Pedro Santa Clara is a professor and entrepreneur -- Professor of Finance at the Nova School of Business and Economics and UCLA’s Anderson School of Management, and head of Shaken Not Stirred a company that promotes and manages education projects, and the Shaken Academy, which offers corporate development programmes in AI.

Pedro is also a founder and member of the Board of Trustees of Instituto Mais Liberdade, a think tank that promotes the liberal ideals of individual freedom, market economy and democracy, and a founding partner of Atrium Portofolio Managers, an asset management firm created in 1999, and of Data4Deals, a fintech startup created in 2021. 

Here's one price control I can agree with.

Price controls never control prices in the way the controllers wish.  Instead, they 'control' quantities demanded, either increasing demand (with a price cap) or diminishing it (with a floor), but in neither case can markets clear. Short-term net result is market chaos; longer-term result is withered markets.

This is generally a bad thing.

But there might be one exception. And the European Union may have just found it:

Any price cap increases demand while reducing producers' ability to meet the supply demanded. Short-term result is undersupplied markets, black markets, and reduced quality. 

But what about when it's only a notional market anyway?

Notes David Turver:

"Capping carbon prices is a small step in the right direction, but scrapping the ETS altogether would be better because paying carbon taxes to the Government won't change the weather."

Does Demand Create Supply?

Amongst the first reactions when Nicola Willis announced a coming cut in Wellington's bureaucrats came the outcry that the reduced consumer spending by those unemployed grey ones will keep Wellington "at the bottom of the pack in terms of things like economic activity," their reduced demand leading (so it's said) to a downward spiral.

The most cited author of that premise is alleged economist Nick Brunsdon, who seems to labour under the illusion that economic causality can be reversed, that demand induced by govt deficits somehow creates its own productive supply -- that if government keeps on over- spending and injecting new money into the economy, then productive wealth will follow. Fortunately, Frank Shostak is here in this Guest Post to dispel that destructive illusion ...

Does Demand Create Supply?

by Frank Shostak

By popular thinking, increases in demand cause economic growth. According to such thought, whenever the economy falls into a recession what is required is to strengthen demand. Since government is seen as an important part of total demand, what is then required is to increase government outlays, thereby lifting overall demand and hence increasing economic growth.

According to the popular view, it is also possible to strengthen overall demand through the inflationary increases in money supply. With more money in their possession, and for given prices, the so-called real balances will increase and this, in turn, will strengthen individuals’ expenditure on goods and services. This allegedly will strengthen the economy’s overall demand and will strengthen economic growth. A decline in the prices for a given money supply will also boost the real balances and thus the economic growth. 

But does it make sense that demand is the key driver of the economy?

In the free market economy, wealth-generators do not produce everything for their own consumption. Part of their production is used to exchange for the products of other producers. Hence, in the free market economy, production precedes consumption. This means that something is exchanged for something else. This also means that an increase in the production of goods and services sets in motion an increase in the demand for goods and services. According to David Ricardo,

No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.

An individual’s demand is constrained by his ability to produce goods demanded by others. The more goods that an individual can produce, the more goods he can demand.

Expanding Private Savings: Key to Economic Growth

Without the expansion and the enhancement of the production structure, it is difficult to increase the supply of goods and services. The expansion and enhancement of the production structure hinges on the expansion of production, private saving, and capital investment. Saving supports individuals in the various stages of production. It supports individuals that are employed in the enhancement and the expansion of the production structure. Hence, what matters for economic growth is not just tools, machinery, and labour, but saving and investment in capital goods.

Government Is Not a Wealth-Generator

Contrary to popular thinking, the government does not produce any wealth. Increases in government spending cannot grow the economy. By nature, the government must take from the private, productive economy to facilitate any of its actions. By doing this, the government weakens the wealth-generating process and undermines prospects for economic recovery during a downturn. According to Murray Rothbard,

Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand.

Likewise, an increase in money supply only sets in motion an exchange of nothing for something. This means a weakening in the process of wealth formation and leads to economic impoverishment.

An important factor that makes the fiscal and monetary stimulus appear to “work” is if the amount of private savings is large enough to support non-wealth generating activities while still permitting a growth rate in the activities of wealth generators. It also gives the appearance of wealth as new sectors are stimulated. Additionally, if funded by inflation, the benefits of inflation appear early and are only realised later.

If, however, voluntary saving is declining, then, regardless of any increase in government spending and inflation by the central bank, overall economic activity cannot be revived. In this case, the more the government spends, and the more the central bank inflates, the more will be taken from wealth-generators, thereby weakening any prospect for a recovery. Additionally, these measures will further distort the economy.

As one can see, not only does the increase in the expansionary fiscal and monetary policies not raise overall output, but, on the contrary, it leads to a weakening in the process of wealth generation in general. According to Jean Baptiste Say,

. . .the only real consumers are those who produce on their part, because they alone can buy the produce of others, [while]. . .barren consumers can buy nothing except by the means of value created by [actual] producers.

Conclusion

By popular thinking, increases in government spending and central bank inflation strengthens the economy’s overall demand. This, in turn, sets in motion increases in the production of goods and services. What we have here is a claim that “demand creates supply.” However, to be able to exchange something for goods and services, individuals must first have something that others want. This means that, in order to demand goods and services, individuals must produce something useful first. Hence, supply drives demand and not the other way around. Governments, by nature, must take from the private, productive sector in order to fund their activities. Increases in government spending and the money supply growth rate results in the diversion of savings from the wealth-generators to non-wealth-generators, thus undermining the wealth generating process.

* * * * 

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor’s degree from Hebrew University, his master’s degree from Witwatersrand University, and his PhD from Rands Afrikaanse University and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University. Frank’s publishes frequent posts on economics and the markets on his Substack page.

His post first appeared at the Mises Wire.

More Houses, More Choices

A new report from economists at the University of Hawai‘i makes a point that many of us have known all along: If we want to end the housing crisis, anywhere, we need to build more homes -- everywhere. That’s because each new unit creates a chain of housing openings....

More Houses, More Choices

by Keli'i Akina

A new report from economists at the University of Hawai‘i makes a point that many of us have known all along: If we want to end the housing crisis, we need to build more homes.

That’s because each new unit creates a chain of housing openings. A family that moves into a new house leaves behind an older one that is slightly less expensive, which another family moves into, freeing up another home at a lower price point, and so on.

This is often referred to as a “filtering effect,” or "churn," and it’s not just an optimistic theory—research has revealed it to be true.

Most recently, the UH economists studied the impact of a particular condominium building next to Ala Moana Center.

By tracking who moved into the building, who moved into the units they vacated, and so on down the chain, they found that the houses people left were “substantially cheaper than the new units and spanned diverse locations and housing types.” What’s more, they determined that the income-restricted units in the building led to fewer so-called secondary vacancies.

Likewise, a 2019 study published by the Michigan-based Upjohn Institute found that new housing construction “reduces demand and loosens the housing market in low- and middle-income areas, even in the short run.” Additionally, a 2023 study published in the NYU Law and Economics Journal—aimed at “supply skeptics”—found this chain of moves also benefits renters by making more rental properties available and reducing or slowing rental rate increases.

These results run contrary to the belief that addressing the housing crisis requires more controls, bans, restrictions, taxes and other burdensome measures that have been shown over decades to only exacerbate the problem.

These studies only confirm what we already knew. So why are we still debating what is the best way to ease the housing crisis? My belief is that too many lawmakers are focused more on the definition of affordability than simply allowing people to build more homes.

Simply allowing people to build more homes will result in more housing at all levels, without spending a cent of taxpayer money. All that is needed is the political will and courage to get harmful regulations out of the way.

* * * * 

Keli‘i Akina, Ph.D. is president and CEO of the Grassroot Institute of Hawaii. 

Adapted from the article first published by by the Grassroot Institute of Hawaii, and republished by the Foundation for Economic Education.

"Globalisation encourages the capitalist engine of growth."

"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

"Economic theory has identified four sources of economic progress"

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]

As early as 380 BC, Xenophon pointed out that economics is a form of knowledge that enables men to increase their wealth while arguing that private property is the most beneficial vehicle for the life of individuals.

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.

[Full speech here]

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.

What if robots take all the jobs? Hint: They can't.

"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.

Prepare to be enriched.

Thank you Adam Smith

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]

Mercy to the guilty is cruelty to the innocent. [From his 1759 work, The Theory of Moral Sentiments]

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]

"It is the opening that matters most."

 

"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.

"But it is the opening that matters most."

~ Oliver Hartwich from his post 'Dismantling the competition myth'

The Chart of the Century, in context

"Imagine a horse race between Smith, Schumpeter, and Stupidity," begins economist Peter Boettke. Who wins?

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.)

Let's hope the lesson is clear?

"Ideas, especially philosophical ones, are fundamental to economic growth."

“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. ...

"All three winners explain economic growth through technology and culture (broadly defined). ... I highly recommend the Nobel Committee’s overview of their contributions."

~ Jon Murphy from his post '2025 Nobel: Growth Through Technology and Culture'

"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'."

~ Johan Norberg

"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."

~ Stephen Hicks on the Nobel award

"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."

~ conversation with Joel Mokyr at EconLog

What's humanity's greatest ever invention?

What's humanity's greatest invention? Probably voluntary exchange between free people ...

NZ does not enjoy Ireland's or Singapore's advantages

"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."

~ Angus Dowell from his post 'Politicians love comparing NZ’s economy to Singapore or Ireland – but it’s simplistic and misleading'

" The real delusion is the belief that advanced societies can live off spreadsheets while their physical base erodes."

"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."

~ Wladimir Kraus from his letter to The Economist

A tragic Trump tariff tale tweeted

"After failing to make trade deals, Trump is now just posting letters to world leaders announcing new tariff rates."

~ Meidas Touch

"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."

~ Justin Wolfers

"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"

~ Justin Wolfers

"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."

~ Scott Lincicome

"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."

~ Aaron Fritschner

"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."

~ Anders Aslund

"[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."

~ Jon Wiltshire

"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."

~ The Intellectualist

Price controls, rationing, and war. I'm pretty sure Chris Trotter doesn't want those either!

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.

From 1929 to 1932 Hoover did the exact opposite of sitting on his hands as he should have done. Instead, he was virtually Keynes-Lite, as he himself boasted in his 1932 presidential campaign:

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