March 7, 2019


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Company’s products sold abroad last year totalled €23.5bn, underscoring importance of country’s luxury sector
The corporatist spell must soon break
After forced closure of copper mine, next president will inherit country’s biggest economic challenge in decades
Also in today’s newsletter, foreign investor claims extortion by Ukraine officials and OpenAI makes breakthrough in treating eye conditions
Would an official sector creditor by any other name be treated as sweetly?
And the death of the stock size factor
Tech chiefs warn that power-hungry data centres are a bottleneck in developing AI
The greenback’s global role has endured shocks from without and within
We are trapped in old ways of thinking about inflation
Comments from European Central Bank chief point to transatlantic rift over use of seized funds
The country needs to inflate away its high debt burden
Report from Nuffield Trust health think-tank highlights impact of leaving EU on medicine supply chains
Policymaker says publishing interest rate forecasts could help to address shortfalls in communication and tackle market volatility
Governor keen to set his own course on interest rate cuts but may find it uncomfortable to move faster than the Fed
Also in this newsletter: UK inflation dips, AI demand hits electricity supplies, the rise of ‘Quit-Tok’
Robert Hessen RIP

Economic and business historian Robert Hessen died on Monday, April 15 at age 87.

I wrote some reminiscences of him on my Substack site, “I Blog to Differ.”

Here I want to link to his 2 contributions to my Concise Encyclopedia of Economics.

One is his article “Corporations.” Here are two key paragraphs.

Here’s a key paragraph:

To differentiate it from a partnership, a corporation should be defined as a legal and contractual mechanism for creating and operating a business for profit, using capital from investors that will be managed on their behalf by directors and officers. To lawyers, however, the classic definition is Chief Justice John Marshall’s 1819 remark that “a corporation is an artificial being, invisible, intangible, and existing only in contemplation of law.”1 But Marshall’s definition is useless because it is a metaphor; it makes a corporation a judicial hallucination.

I so often hear people say that corporations are created by the state. It happens especially when I’m on talk shows dealing with callers. That’s false. I always think of how well Bob Hessen dealt with the issue in his article:

Attempts by economists to define corporations have been equally unsatisfactory. In 1917 Joseph S. Davis wrote: “A corporation [is] a group of individuals authorized by law to act as a unit.”2 This definition is defective because it also fits partnerships and labor unions, which are not corporations. Economist Jonathan Hughes wrote that a corporation is a “multiple partnership” and that “the privilege of incorporation is the gift of the state to collective business ventures.”3Economist Robert Heilbroner wrote that a corporation is “an entity created by the state,” granted a charter that enables it to exist “in its own right as a ‘person’ created by law.”4

But charters enacted by state legislatures literally ceased to exist in the mid-nineteenth century. The actual procedure for creating a corporation consists of filing a registration document with a state official (like recording the use of a fictitious business name), and the state’s role is purely formal and automatic. To call incorporation a “privilege” implies that individuals have no right to create a corporation. But why is government permission needed? Who would be wronged if businesses adopted corporate features by contract? Whose rights would be violated if a firm declared itself to be a unit for the purposes of suing and being sued or holding and conveying title to property, or that it would continue in existence despite the death or withdrawal of its officers or investors, or that its shares are freely transferable, or if it asserted limited liability for its debt obligations? (Liability for torts is a separate issue; see Hessen 1979, pp. 18–21.) If potential creditors find any of these features objectionable, they can negotiate to exclude or modify them.

His other entry in the Encyclopedia is “Capitalism.” It’s full of gems. Here’s the opening paragraph:

Capitalism,” a term of disparagement coined by socialists in the mid-nineteenth century, is a misnomer for “economic individualism,” which Adam Smith earlier called “the obvious and simple system of natural liberty” (Wealth of Nations). Economic individualism’s basic premise is that the pursuit of self-interest and the right to own private property are morally defensible and legally legitimate. Its major corollary is that the state exists to protect individual rights. Subject to certain restrictions, individuals (alone or with others) are free to decide where to invest, what to produce or sell, and what prices to charge. There is no natural limit to the range of their efforts in terms of assets, sales, and profits; or the number of customers, employees, and investors; or whether they operate in local, regional, national, or international markets.

Here’s another great paragraph:

In early-nineteenth-century England the most visible face of capitalism was the textile factories that hired women and children. Critics (Richard Oastler and Robert Southey, among others) denounced the mill owners as heartless exploiters and described the working conditions—long hours, low pay, monotonous routine—as if they were unprecedented. Believing that poverty was new, not merely more visible in crowded towns and villages, critics compared contemporary times unfavorably with earlier centuries. Their claims of increasing misery, however, were based on ignorance of how squalid life actually had been earlier. Before children began earning money working in factories, they had been sent to live in parish poorhouses; apprenticed as unpaid household servants; rented out for backbreaking agricultural labor; or became beggars, vagrants, thieves, and prostitutes. The precapitalist “good old days” simply never existed (see industrial revolution and the standard of living).


Despite these constraints, which worked sporadically and unpredictably, the benefits of capitalism were widely diffused. Luxuries quickly were transformed into necessities. At first, the luxuries were cheap cotton clothes, fresh meat, and white bread; then sewing machines, bicycles, sporting goods, and musical instruments; then automobiles, washing machines, clothes dryers, and refrigerators; then telephones, radios, televisions, air conditioners, and freezers; and most recently, TiVos, digital cameras, DVD players, and cell phones.

That these amenities had become available to most people did not cause capitalism’s critics to recant, or even to relent. Instead, they ingeniously reversed themselves. Marxist philosopher Herbert Marcuse proclaimed that the real evil of capitalism is prosperity, because it seduces workers away from their historic mission—the revolutionary overthrow of capitalism—by supplying them with cars and household appliances, which he called “tools of enslavement.”1 Some critics reject capitalism by extolling “the simple life” and labeling prosperity mindless materialism. In the 1950s, critics such as John Kenneth Galbraith and Vance Packard attacked the legitimacy of consumer demand, asserting that if goods had to be advertised in order to sell, they could not be serving any authentic human needs.2 They charged that consumers are brainwashed by Madison Avenue and crave whatever the giant corporations choose to produce and advertise, and complained that the “public sector” is starved while frivolous private desires are being satisfied. And having seen that capitalism reduced poverty instead of intensifying it, critics such as Gar Alperovitz and Michael Harrington proclaimed equality the highest moral value, calling for higher taxes on incomes and inheritances to massively redistribute wealth, not only nationally but also internationally.3


Now do Japan

I have frequently argued that China has the world’s largest economy, at least if measured in PPP terms. (Of course in per capita terms they are still only a middle-income country.)  Others insist on using market exchange rates, which suggest the US economy is still significantly larger. Fair enough.

But you need to be careful when drawing implications using market exchange rates. They do tell us something about China relative to the US, but they tell us nothing about China in absolute terms. Thus it’s a mistake to look at graphs showing China’s (US dollar) GDP stagnating in recent years and assume that the Chinese economy has stopped converging on developed country status. After all, there is more than one pair of exchange rates.  So let’s now do Japan.

The following graph shows the ratio of China’s per capita GDP and Japan’s per capita GDP. In 1994, I got married in Beijing. At the time, China’s per capita GDP was about 1% of Japan’s. That’s really low. By 2022 (the last year shown), it was over 37% of Japan’s and still rising fast. Now it’s close to 40%. So if we really believe that market exchange rates are the right way to think about China’s growth (I don’t), we’d have to conclude that China is rapidly converging on developed country status.  Just since 2010, it gone from about 10% to 40% of Japan’s per capita income.

Of course the weak yen overstates China’s advance. But just as the yen is an outlier on the low side, the US dollar is an outlier on the strong side. Most other developed countries have relatively weak currencies when measured against the US dollar, and thus it makes more sense to regard the dollar as unusually strong—we are the outlier.

This leads to some quite misleading graphs if you rely on comparisons using market exchange rates:

Notice that Japanese workers have gone from almost twice as well paid as American workers in the mid-1990s, to just over 1/3 as well paid today.  To be clear, I’m on record arguing that the poor performance of the Japanese economy is somewhat real (and not just demographics), but this vastly overstates the problem.  The yen has become dramatically weaker, especially in real terms.  The Japanese economy is mediocre, but not horrible.

PS.  Some have argued that Chinese data is unreliable.  But any tourist that visits China (both cities and rural areas), quickly discovers that the country looks significantly richer than suggested by the official per capita GDP (roughly $13,000, vs. $85,000 in the US.)  And China is now about 70% urban, so the poor countryside (which is no longer anywhere near so poor as it was) is no longer a plausible explanation.  China as a whole is still middle income, but significant portions of China look quite developed.  (Shiny new airports, subways, expressways, shopping malls, affluent urban neighborhoods, etc.)

On Fairness – Aesop vs Sesame Street

The YouTube algorithm is a mysterious thing. It’s supposed to recommend videos you might like, based on videos you’ve watched and rated before, but as far as I can tell the recommendations are generated randomly by a half-asleep chimpanzee. Still, just as broken clocks are still right twice a day, random suggestions can manage to highlight things worth checking out. A while back, the YouTube algorithm put, of all things, a clip from Sesame Street in my recommended videos. This episode featured a guest appearance by Brett Goldstein, best known for his role in Ted Lasso as the hot-tempered and extremely foul-mouthed professional athlete Roy Kent. Curiosity got the better of me, so I checked it out. 

(As an aside, the writers of this episode seemed to include a metaphorical wink to any adults in the audience who are familiar with the Roy Kent character – when Goldstein is told that the letter of the day is F, he responds by saying how much he loves using the letter F.) 

In the clip, Goldstein and a Sesame Street character named Tamir have just finished baking cookies and announce they will be revealing the word of the day. Tamir tells us that the word of the day is “fairness.” Goldstein responds by telling the audience that “fairness is when each of us gets what we need.” This immediately causes Cookie Monster to appear and declare that he needs one of the cookies that Goldstein and Tamir just made. Goldstein agrees that Cookie Monster should be given one of the cookies because that would be fair. Shortly after this, they decide to go play some soccer but first need to clean up the mess made from baking the cookies. At that point, they tell Cookie Monster that fairness requires him to help them clean up the mess they made. 

Of note, Cookie Monster being given a cookie and helping clean up the mess isn’t presented as an example of a fair exchange. It’s not that Cookie Monster offers to help them clean up the mess in exchange for one of the cookies, and then both parties agree that would be fair. Each act is treated as independent of, and unrelated to, the other. If Cookie Monster had happened to show up after the mess had been cleaned, fairness would still have required him to be given a cookie he had no part in creating, and if Cookie Monster had arrived after the cookies were gone, fairness would still have required him to use his labor cleaning up a mess he had no part in making.

What this immediately brought to mind was a story from my own childhood that also aspired to teach a lesson about fairness, albeit with a very different conception of what that means. I’m referring to Aesop’s fable of The Ant and the Grasshopper. On the off chance you’ve never heard this fable, it can be briefly summed up as follows:

In the summer months, an ant and a grasshopper lived in a field together. The ant spent his days toiling, collecting food and storing it underground in his nest. The grasshopper spent his days relaxing, playing music, and living in the moment with no worry for the future. When the winter came, the grasshopper was left cold and starving, unable to find food, while the ant stayed secure in his nest and fed himself with the food he stored away as a result of his toils.

Now, by the definition of “fairness” given by Sesame Street, we should conclude that this is a story about the unfairness suffered by the grasshopper. After all, “fairness” is when each of us gets what we need, and in the winter months, the grasshopper needed food and shelter but didn’t get any. Ergo, the grasshopper going hungry while the ant remained fed was, by definition, unfair. But that wasn’t the moral of the story. Instead, it was considered obvious that the grasshopper’s fate was completely fair, because fairness wasn’t taken to mean “each of us gets what we need,” but something more like “each of us gets what we earn.” Even if you needed something, you couldn’t simply take it away from someone under the guise of “fairness.” Fairness didn’t give you the right to insist others be made worse off for your benefit, with you owing them nothing in return. 

Of course, none of this is to speak out against helping those in need. Offering to help someone clean up in the kitchen, or offering to share some cookies you just made, is a very nice thing to do, and I would do that myself. But it’s taking things a bit too far to demand that others give you their cookies or help clean up your mess because otherwise it’s not fair. That turns virtue into vice, and converts kindness into self-absorbed entitlement. 

Prisoner’s Dilemma: A Simple Model of War

Economic models of cooperation and conflict are often based on the Prisoner’s Dilemma (PD) of game theory. As simple as this model is, it helps us understand whether or not a war will be fought, where “fought” includes escalation steps through retaliation—the current situation between the government of Israël and the government of Iran.

Assume two countries each governed by its respective ruler, S and R. (In the simplest model, it may not matter who the ruler is and whether it is an individual or a group.) Each ruler faces the alternative of fighting with the other or not. By definition of a PD, each ruler prefers no war, that is, no mutual fighting; let’s give each ruler a utility index of 2 and 3 for a situation of fighting and not fighting respectively. A higher utility number represents a more preferred situation (a situation with higher “utility”). Each ruler, however, would still prefer to fight if he is the only one to do it and the other chickens out; this means a utility number of 4 for that situation,  the top preferred option for each of them. The worst alternative from each player’s perspective is to be the “sucker,” the pacifist who ends up being defeated; the utility index is thus 1 for the non-fighter in this situation.

No cardinal significance must be attached to these utility numbers: they only represent the rankings of different situations. Rank 4 only means the most preferred situation, and 1 the least preferred, with 3 and 2 in between. A situation more preferred can simply be less miserable, with a smaller net loss.

This setup is represented by the PD payoff matrix below. For our two players, we have four possible combinations or situations of “FIGHTING” or “NO fighting”; each cell, marked A to D, represents one of these combinations. The “payoffs” could be sums of money; here, they are our utility rankings, which we assume to be the same for the two players. The first number in a cell gives the rank of that situation for S (the line player, blue in my chart) given the corresponding (column) choice by R. The second number in the cell gives the rank of that situation for R (the column player, red in my chart) given the corresponding (row) choice of S. For example, Cell B tells us that if S does not fight but R does, the latter gets his most preferred situation while S is the sucker and gets his worst possible result (being defeated or severely handicapped). In Cell C, S and R switch places as the sucker (R) and the most satisfied (S). The player who exploits the sucker is called a “free rider”: the bellicist gets a free ride to the detriment of the pacifist. Both S and R would prefer to land in Cell A than in Cell D, but the logic of a PD pushes them into the latter.

The reason is easy to see. Consider S’s choices. If R should decide to fight, S should do the same (Cell D), lest he be the sucker and get a utility of 1 instead of 2. But if R decides not to fight, S should fight anyway because he would then get a utility of 4 instead of 3. Whatever R will do, it is in the interest of S to fight; it is his “dominant strategy.” And R makes the same reasoning for himself. So both will fight and the system will end up in Cell D. (On the PD, I provide some short complementary explanation in my review of Anthony de Jasay’s Social Contract, Free Ride in the Spring issue of Regulation.)

This simple model explains many real-world events. Once a ruler views his interaction with another as a PD game, he has an incentive to fight (attack or retaliate). The ruled don’t necessarily all have the same interest, but nationalist propaganda may lead them to a contrary belief. One way to prevent war is to change some payoffs in the ruler’s matrix so as to tweak his incentives. For example, if S or R realizes that, given the wealth he may lose or the other’s military capabilities—if war  threatens his own power, for example—war would be too costly. The preference indices will change in the matrix; try 4,4 in cell A and 3,3 in cell D, with 2,1 and 1,2 in the other diagonal. New incentives will have eliminated the PD nature of the game.

Another way to stop the automatic drift into Cell D is for the two players to realize that, instead of a one-shot game, they are engaged in repeated interactions in which cooperation—notably through trade—will make Cell A more profitable than a free ride over several rounds. However, this path is likely to be inaccessible if S or R are autocratic rulers, who don’t personally benefit from trade and individual liberty as much as ordinary people. The possibility of transforming a PD conflictual game into a repeated cooperative game was brilliantly explained by political scientist Robert Axelrod in his 1984 book The Evolution of Cooperation (Basic Books, 1984).

Like all models, this one hides some complexities of the world. It does not explicitly incorporate deterrence, which is essential for preventing war as soon as one of the players views the game as a PD. But when deterrence has not worked—one did attack—the question is whether a counter-attack, and which sort, will have a better deterrent effect or will just be another step in mutual retaliation, that is, open war.

In the current Middle East situation, religion on the Iranian rulers’ side makes matters worse by countering rational considerations of military potential. Preferences are thus likely to differ from a PD matrix. “When you shot arrows at the enemies, you did not shoot; rather God did,” goes a saying among Iranian radical zealots (quoted in “Iranians Fear Their Brittle Regime Will Drag Them Into War,” The Economist, April 15, 2024). You cannot (always) lose with God on your side.

Good shooting his arrow, by Pierre Lemieux and DALL-E

God or Allah shooting the arrow, by Pierre Lemieux and DALL-E


In an earlier post, I listed some questions for interventionists to consider before advocating their interventions.  This is part of my ongoing crusade to get interventionists to think about things as they actually are as opposed to a blank slate.  These two modes of thinking I call “status quo reasoning” (seeing the world as it is) versus “state of nature reasoning” (seeing the world as a blank slate).

Some recent research demonstrates the importance of status quo reasoning.  In a new working paper at the National Bureau of Economic Research entitled “The Market and Climate Implications of U.S. LNG Exports” James Stock of Harvard University and Matthew Zaragoza-Watkins of UC Davis examine how the US moving from a net importer of natural gas to a net exporter has affected greenhouse gas emissions.  For a while after fracking began in the US, natural gas prices became disconnected from other energy prices as the US market was flooded with natural gas and export options didn’t really exist.  However, over the course of 2012-2016, approvals were granted and LNG export terminals were built, allowing the US energy companies to export LNG around the world.  By tapping into the global market, US natural gas prices “reconnected” to world energy market prices: natural gas prices rose and began moving in tandem with oil and coal, as has been the historical trend.  

What is interesting is their discussion on climate effects.  In their abstract, they write:

“We estimate that the domestic gas price effect of this recoupling is comparable to a $30/ton carbon tax.  For coal prices, which are coupled to gas through competition in the power sector, this effect is comparable to a $20/ton carbon tax.  Using the NREL ReEDS model, we estimate that this recoupling reduces US 2030 power sector CO2 emissions by roughly 145 million metric tons” (emphasis added)

Many supporters of a carbon tax erroneously claim there is no price on carbon. That is the fallacious “state of nature” reasoning I discuss above. In the state of nature, there is no price of carbon. But in the real world, there is a price on carbon.  There may not be a monetary price, but there is always some form of price.  When natural gas (a considerably cleaner producer of energy than oil and coal) entered the market, carbon use fell.  Furthermore, as the price of natural gas coupled with other energy prices, people economized on natural gas usage (which, though cleaner than other sources of energy, still releases CO2), as well as on oil and coal.  All in all, the effect of this was a reduction of carbon emissions as if a carbon tax was applied!  The market, quite unintentionally, helped solve the externality by imposing a price on carbon.

What’s more, this market alternative to carbon taxes is probably, on net, more efficient than a similar carbon tax.  That is, even though this coupling had the same effect as a $30/ton carbon tax, it likely did so with less waste.  Whenever we talk about public policy, we must discuss the political process and how the sausage is made.  Politics is a messy business, and imposing a carbon tax is no different.  Even if we assume that the tax is passed costlessly and without any political shenanigans surrounding it, there are still the administrative costs of the tax (that is, any cost incurred while administering the tax: hiring people to collect it and calculate it, audits, and so on), which reduce its effectiveness.  But with this market process, those potential costs do not exist.  

In a state of nature, the interventionist could propose a carbon tax too high (or too low).  But, taking the status quo into account, in looking at the total effects and not just the marginal effects (as Ronald Coase stressed so long ago in The Problem of Social Cost), we have a much clearer picture of what interventions may be necessary and which may not.  


Do you recall that student back in middle school, frantically waving his hand trying to get the teacher to call on him? That’s how I feel when I read the following sort of news story:

As the US economy hums along month after month, minting hundreds of thousands of new jobs and confounding experts who had warned of an imminent downturn, some on Wall Street are starting to entertain a fringe economic theory.

What if, they ask, all those interest-rate hikes the past two years are actually boosting the economy? In other words, maybe the economy isn’t booming despite higher rates but rather because of them.

It’s an idea so radical that in mainstream academic and financial circles, it borders on heresy — the sort of thing that in the past only Turkey’s populist president, Recep Tayyip Erdogan, or the most zealous disciples of Modern Monetary Theory would dare utter publicly.

Most mainstream economists view MMT as a crackpot theory, and they are probably right.  But there’s another “MMT” that actually can explain these recent trends:

But the new converts — along with a handful who confess to being at least curious about the idea — say the economic evidence is becoming impossible to ignore. By some key gauges — GDP, unemployment, corporate profits — the expansion now is as strong or even stronger than it was when the Federal Reserve first began lifting rates.

That MMT is called “market monetarist theory”.  And unlike the other MMT, it is perfectly consistent with mainstream economic theory.  So why does the press do so many stories about the fringe MMT, and almost none about the more reasonable MMT?  I suspect it is because market monetarism doesn’t give easy answers.  Journalists wish to know how to interpret rising interest rates, and we respond that one should not even try to interpret rising interest rates.  To do so would be to engage in the fallacy of reasoning from a price change.

In the fringe MMT, there is no natural rate of interest.  Tomorrow, the Fed could wave a magic wand and set nominal interest rates at zero, without impacting inflation.  It’s simple, easy to explain.

In contrast, we emphasize that central banks usually respond to changes in the natural interest rate.  They are roughly as likely to overreact as they are to underreact to a rise in the natural rate, and thus we should not expect to see any clear correlation between rising rates and changes in aggregate demand.  And we don’t.

In fairness, the trendy new Wall Street theory does have an “it depends” aspect:

This is, the contrarians argue, because the jump in benchmark rates from 0% to over 5% is providing Americans with a significant stream of income from their bond investments and savings accounts for the first time in two decades. . . .

In a typical rate-hiking cycle, the additional spending from this group isn’t nearly enough to match the drop in demand from those who stop borrowing money. That’s what causes the classic Fed-induced downturn (and corresponding decline in inflation).

The fallacy here is pretty obvious.  In terms of the effect on income, interest payments are always a zero sum game.  One person pays money and another person receives money.  It’s true that bondholders are now getting a larger flow of interest income from the government, but that’s always true of higher interest rates (and was even more true in the early 1980s, when much higher interest rates preceded two recessions.)

In contrast, the market monetarist explanation doesn’t rely on any implausible assumptions.  Rather we simply assume that the natural (or equilibrium) interest rate is hard to estimate (a generally accepted claim), and that the Fed will attempt to move interest rate targets to an appropriate level (another generally accepted claim), and that an unbiased central bank will make errors in both directions. Thus, rising interest rates should have no reliable impact on aggregate demand.  

But that’s so much less interesting to journalists than the ideas of MMTers, Turkish political leaders and Wall Street traders dabbling in folk economics.

PS.  Those on the other extreme from MMTers are equally off base:

To be clear, the vast bulk of economists and investors still firmly believe in the age-old principle that higher rates choke off growth. As evidence of this, they point to rising delinquencies on credit cards and auto loans and to the fact that job growth, while still robust, has slowed.

That’s equivalent to saying the vast bulk of economists and investors engage in reasoning from a price change.  Of course job growth has slowed, as unemployment has fallen to the natural rate.  Unlike in 2020-21, we no longer have a vast reserve army of unemployment to hire from. But job growth is still extremely high for a period of sub-4% unemployment.  The economy is still overheated.  We are still waiting for the tight money policy to begin.

HT:  Michael Darda

Means, or Ends?

Years ago, I read Banker to the Poor: Micro-Lending and the Battle Against World Poverty by Muhammad Yunus. In the book, Yunus describes the origins and purpose of the Grameen Bank. This bank specializes in offering small loans to people in poverty to help them begin to attain self-sufficiency. This isn’t a charitable organization – it’s a for-profit bank, and Yunus stresses in the book that the need to be profitable is part of what makes Grameen effective at achieving its goal of lifting people out of poverty and freeing them from a cycle of dependency. Curiously, he found that his very success in alleviating poverty was met with condemnation from leftists. The complaint wasn’t that Grameen was ineffective at achieving those goals – they were upset precisely because Grameen was highly successful at improving the lives of the poor and destitute. Yunus recalls how leftists seriously complained that by improving people’s lives and helping them become self-sufficient, Grameen was “robbing the poor of their despair and their rage.” This is certainly an odd objection, to my mind. I tend to see rage and despair as bad things to be freed from, not good things we should prevent from being robbed away.

Still, there was something about Yunus’s own political analysis that always bugged me. When discussing if Grameen Bank should be thought of as a left-wing or right-wing enterprise, Yunus makes an apples and oranges comparison. He says that Grameen can be seen as right-wing because of his belief that “the government, as we now know it, should pull out of most things except for law enforcement, the justice system, national defense, and foreign policy” while leaving “its other functions” to the “private sector.” He sums up by saying that “Grameen supports less government – even advocating the least government feasible – is committed to the free market, and promotes entrepreneurial institutions.” 

Yet, says Yunus, there are also things that make Grameen a left-wing organization. These include how Grameen is “committed to social objectives – eliminating poverty, providing education, health care, and employment opportunities to the poor; achieving gender equality through the empowerment of women; ensuring the well-being of the elderly. Grameen dreams about a poverty-free, welfare-free world.” And, according to Yunus, “All these features place Grameen on the political left.” 

Do you see why this is apples and oranges? 

When evaluating what makes a person (or organization) right-wing, Yunus describes things in terms of means, while when describing what makes a person (or organization) left-wing, he switches to describing things in terms of ends. While I am generally willing to accept people’s stipulated definitions when evaluating their arguments, this kind of apples-to-oranges difference is a serious defect. If you want to define what separates the political left from the political right, you should define both sides in terms of means, or of ends. Defining one by means and the other by ends is just bad lexicography. 

I favor thinking of left vs right in terms of a difference about what means are appropriate to employ, and not (necessarily) a difference about sought-after ends. Dan Moller argues the same in his book advocating libertarian political philosophy, Governing Least: A New England Libertarianism. Moller writes:

The disagreement between libertarians and their antagonists is not over how much values like freedom or equality matter, but over whether it is permissible for the state to use force to promote these values in various ways. To see this, notice that libertarians and their opponents may in fact agree that equality or fraternity is of great importance; they could join forces and work tirelessly on behalf of some such value, provided these contributions were voluntary. As long as anti-libertarians focus merely on how much they care about equality, or how terrible poverty is, or on their vision of a better world, they have made no progress at all in identifying a point of disagreement…Nor is there any need to settle whether happy “communitarian” values should triumph over the base “atomism” of libertarians. The question isn’t whether to view ourselves as lonely islands or amiable communities, but whether the state should create the relevant community by compulsory means; we can all agree that marriage is a blessed state while insisting that it emerge voluntarily. We would avoid a world of confusion, in other words, if only those arguing for the state promoting some value would add the rider, “…and I favor the use of threats and violence to promote this value if need be.”  

Agreement over means doesn’t require agreement about ends. Two people might favor identical means regarding policy and institutions, while anticipating or even hoping for different outcomes. And two people might seek to bring about identical outcomes, but disagree about what policies or institutions will most effectively achieve those ends. In my understanding, it makes more sense for the latter difference to be what maps out the difference between the political left and right. That is, it makes sense to speak of left-wing or right-wing policy, but much less sense to speak of left-wing vs right-wing outcomes. 

But there are worse offenders out there than Yunus. The socialist writer Nathaniel Robinson, for example, seems to define politics through a conflation of means and ends, such that socialism is a system that uses a particular set of means, but at the same time it only counts as socialism if it also achieves the ends socialists desire. Thus, Robinson defines things in a way where Venezuela’s decent into madness gives him no pause or any reason to revaluate the policies he advocates – because of Venezuela he says that “if there isn’t equality, there isn’t socialism” and as a result “since my politics demand equality, you can’t indict my politics by pointing to a highly unequal society.” But “politics” isn’t an outcome – it’s a process. Politics is not an end – it’s a means by which ends are achieved. Robinson’s conflation of the two amounts to saying “you can’t indict the processes I advocate by pointing to outcomes that don’t reflect my desires.” 

Many critics of socialism have argued that the processes inherent in socialist policies inevitably result in a highly unequal, authoritarian society. Milton Friedman summed up the idea by saying “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.” Most importantly, critics of socialism have specific arguments for why socialist policies, when implemented, end up delivering Venezuela-style results. To respond to this concern by simply defining socialism so that it only counts as socialism if the results are what socialists want is the intellectual equivalent of sticking your fingers in your ears and yelling “LA-LA-LA I CAN’T HEAR YOU I CAN’T HEAR YOU!!!”

David Schmidtz’s Living Together articulates one more reason why I prefer to think of political divides as a difference of means, rather than ends. Schmidtz writes:

Political ideals are not points of convergence. The liberal political ideal is not that we embrace the same religion, but that we don’t need to. The ideal is everyone choosing for themselves…Our actual historical experience is that truly climbing is not toward being on the same page as much as toward not needing to be on the same page – toward learning to be at peace with the humbling fact that we live among people who have destinations of their own. 

That is, political ideals aren’t about what destinations we are trying to reach – they are about the framework of rules and institutions allowing us to all get along with each other and seek out our own destinations, even in the absence of agreement about what ends ought to be reached. 


Military Age Males

Lately I’ve been watching Fox News Channel more than usual. I’ve noticed Jesse Waters (who replaced Tucker Carlson, who replaced Bill O’Reilly) using a phrase a lot: military-age males. He invariably uses it to refer to immigrants, typically illegal immigrants.

Glenn Reynolds at Instapundit also did it recently.

When you observe the males they’re talking about, you know just as much about these males as Waters, Reynolds, et al do; in other words, not much.

They could just as easily go to UC Berkeley, wander around the campus, and notice that 90% or more of the males there are “military-age males.”

But they don’t refer to male U.S. college students that way.

So why do they refer to immigrants as “military-age males?” I think it’s to subtly plant in the listeners’ minds the fear that a hostile foreign government is sending these males here to help them take over or at least somehow undercut American society.

Could a substantial percent of these military-age males be actual military personnel, but in disguise? Sure, they could. But it seems unlikely.

Occam’s Razor applies here.

The more-likely explanation is that they want to get the hell out of the country they’re from because this country (the United States) is so much less oppressive and so much better in other ways. In fact, it wouldn’t be totally surprising if some of those military-age males were fleeing conscription. That was a strong motivator for their counterparts who came here between 100 and 150 years ago.

Some Counterintuitive Thoughts on Monetary Policy

Here are five observations about recent trends in monetary policy:

1.  The Fed would really like to avoid any further increase in interest rates. This psychological aversion to interest rate increases in not rational, and it actually makes it more likely that the Fed will find it necessary to raise interest rates even further.  That’s because this sort of “reversal aversion” is itself a form of forward guidance, which makes monetary policy more clumsy.  It increases the risk that disinflation will reverse course, requiring further rate increases.

2.  I’ve seen claims that Jay Powell privately prefers Biden to Trump.  People often cite the fact that he refused to cut interest rates as often as Trump would have liked, and that he refrained from tightening monetary policy in late 2021 as Biden was considering whether to re-appoint him as Fed chair.  I don’t know if these accusations of political favoritism are true (I’m skeptical), but if true it implies that Powell ended up greatly helping Trump and hurting Biden, even while appearing to be trying to do the opposite. 

The message here is clear.  People worry a great deal about political bias.  But when it comes to monetary policy, policy mistakes are a far greater problem than policy bias.

3.  has a new essay in Bloomberg:

Rather than maintain a policy reaction function anchored by excessive dependence on backward-looking data, the Fed would be well advised to take this opportunity to undertake a belated pivot to a more strategic view of secular prospects. Such a pivot would recognize that the optimal medium-term inflation level for the US is closer to 3% and, as such, give policymakers the flexibility to not overreact to the latest inflation prints.

As I detailed in a column last month, this path would not involve an explicit and immediate change in the inflation target given the extent to which the Fed has overshot it in the last three years. Instead, it would be a slow progression. Specifically, the Fed “would first push out expectations on the timing of the journey to 2% and then, well down the road, transition to an inflation target based on a range, say 2-3%.” . . . 

While not without risks, such a policy approach would result in a better overall outcome for the economy and financial stability than one that sees the Fed run an excessively tight monetary policy.

I agree that this would result in a better outcome for the economy over the next few years.  But I don’t believe that it’s a good idea.  Ideally, the Fed would shift to a 4% NGDP target.  But if they insist on sticking with inflation targeting, they should stay at 2%.  This is a classic example of the time inconsistency problem.  The best policy for the next few years is not always the best long-term strategy.  In the long run, there are huge gains from creating a clear rule and sticking with it.

4.  Brad Setser expresses some widely held views regarding China’s exchange rate policy:

China needs to look for policies that move it closer toward book internal and external balance – and that (uncomfortably) means limiting the use of classic monetary policy tools.

But it is also reasonable that China made a real effort to use its domestic policy space to support its own recovery—and so far it has not been willing to provide direct support to lower income households, or to consider reforms to its exceptionally regressive tax system. Logan Wright and Daniel Rosen foot stomped these points in a recent article in Foreign Affairs.

Ultimately, of course, China sets its own exchange rate policy; it has a long history of ignoring external advice that goes against its self-perception of its own interests. But there is no reason why China’s trade partners should encourage China to move toward more flexibility right now, when it would only help China export more of its own manufactures to a reluctant world. Pragmatism should rule.

I have exactly the opposite view.  China should avoid fiscal stimulus and instead rely on monetary stimulus, even if this results in currency depreciation.  I also doubt that this sort of yuan depreciation would result in a larger Chinese trade surplus.  Monetary stimulus would likely boost Chinese investment, which tends to lower its current account surplus.  It might also boost domestic saving, but probably by a smaller amount.  In other words the substitution effect resulting from a weaker yen is likely to be weaker than the income effect resulting from easy money boosting GDP growth. 

5.  John Authers at Bloomberg has an interesting graph showing the contribution of 4 key sectors to the overall (12-month) rate of CPI inflation:

Food, energy and core goods are much more strongly affected by “supply shocks” than are services.  But monetary policy does impact even the prices of these goods.  Thus you can think of the red area (services) as almost entirely reflecting monetary policy, and fluctuations in the black, blue and grey areas as reflecting a mix of monetary (demand side) and supply side factors.

Service sector inflation stopped improving after October 2023, which is a worrisome trend. 

When Prediction Is Not Enough (with Teppo Felin)

Image created via DALL-E3 with prompt "create a drawing of the wright brothers using AI to help them with their first flight" If the Wright Brothers could have used AI to guide their decision making, it’s almost certain they would never have gotten off the ground. That’s because, points out Teppo Felin of Utah State University and Oxford, all the evidence said human flight was impossible. So how and why did the Wrights persevere? Felin explains that the human ability to ignore existing data and evidence is not only our Achilles heel, but also one of our superpowers. Topics include the problems inherent in modeling our brains after computers, and the value of not only data-driven prediction, but also belief-driven experimentation.


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