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It boggles my mind how more economists don't understand that government intervention/regulation, is a hinderance to economic growth. And I'm not even college educated.

This is a good reason why free market economists need to do more work in empirical case studies rather than harping on about theory. While theory is very important, and as Mises correctly points out necessary before such a study can be done, some will not be convinced simply by theory. Instead, researchers, especially within the Austrian research program, need to show how economic theory, that is sound economic theory, can reveal the concatenation of empirical events and augment our understanding of them. For better or for worse, the economist can no longer be a pure theorist, but rather he must use empirical evidence as examples to show that his theories are relevant. If economists do not do this, then they run the risk of being dismissed as "utopian economics" as Cassidy so cleverly did in _How Markets Fail_.

Like it or not the invisible hand is invisible to all but those who have the theory that enables them to perceive it. It is only when analysis is written from such a perspective that it can shape the public dialogue. Surely not every study will become famous for that requires either a bit of luck of a reputation for good scholarship, so there needs to be a lot of work before the fruits will be had. However, if no work is done then work like this essay of Cassidy will frame the debate and this will be to the stark disadvantage of all sound economic theory. Ergo, it seems we are in the curious position that the best way to advance Austrian theory is to do Austrian empirical studies.

thanks for providing some helpful links. I rarely find people who actually argue for a state dominated society, but all the lefties at school push this sort of ideology. Plus important left wing intellectuals push this, Chomsky in particular. Thanks again

People who cite China fail to recognize that insofar as China has moved from communism to mercantilisim, this is a drastic move toward economic freedom relative to where they once were. It is a testament to the power of free markets that if you allow even a toehold that economic miracles begin to take place.

I wonder if doing work on other kinds of spontaneous orders, as I did here:

http://studiesinemergentorder.org/current-issue/sieo3-195/

on the spontaneous orders of the arts, might be helpful along these lines when it comes to developing theory. Here is what I mean. In the case of the arts and literature, for example, there is not a lot of political baggage. Most people agree that government should not intervene and interfere with artistic/literary production. By analyzing the spontaneous social order of artistic/literary production, we can see what one looks like in its purest form.

"Observation is not analysis, it requires analysis. And the tools of analysis are provided by economics."

Pete, aren't you in danger of moving in a circle here? We know that economic models say free trade works; these folks (Cassidy et al.) are claiming, "In theory, fine, but that doesn't match reality." Now, if you demand they use the very models they are arguing don't apply, then of course their argument will collapse.

The issue that most people, economists and economic historians aside, is that the magnitude of the protectionism relative to the other costs of overseas trading with the US were small. Now that transportation costs are so much smaller, the impact of a small tariff is relatively much bigger.

Excellent response, Dr. Boettke! Historians are the #1 enemy of economics today, and they are the chief slaves of the post hoc fallacy.

I often ask historians, how do you know whether the economy grew because of state intervention or in spite of it? They never have an answer.

About China, I ask them, what changed when China began to develop? Did the state intervene less in the economy or more? Clearly it began to intervene less in the economy before development began.

Before 1979, Chinese were starving to death. The US fed them with massive loans to buy our grain.

Gene,

I am making a simple point -- what happened, while important, doesn't tell us why something happened, let alone how it happened. Economic analysis provides us with the means to specify the mechanism at work that answer why and how questions. I am in favor of sweeping historical sociology, but only I would contend if it is guided by good theory.

I don't believe I am caught in a circular argument, but perhaps I am. I think I am rather making a rather straightforward argument. Theory is required to frame observation. What we disagree on is the implicit and explicit theory that is being advocated by those who see "state capitalism" as the source of the development of a nations economy.

Liah Greenfeld is a great historian who is unusually willing to buck political correctness in her discipline. But she is not an economist, and her dismissive reaction to economic theory indicates the problems economists have in trying to "sell" their message. She is also logically rigorous, so she is the last person one would expect to be using "post hoc, ergo propter hoc" analysis. However, one person's post-hoc-ergo-propter-hoc is another person's common sense. If one brushes off economists as peddlers of sweeping aprioristic proclamations with no connection to reality, one is left with "obvious" correlations, as between protectionism and economic growth.

In short, if economists want to talk to people outside their discipline, they have to persuade their audience that they are not delivering "timeless laws," but rather are reaching conclusions tailored to historical specifics. As Gene Callahan says, if you don't want a John Cassidy to think you are begging the question, then, as hsearles says, you have to do historical research case by case. And you should publish it in books, not solely in econ journals.

The only tried and true path to sustainable economic growth is increasing productivity. In theory, government could pursue policies that increase the speed of this process. Unfortunately for most of the developing world, their track record is not very impressive. Market participants are much better judges of which sorts of investments will be productivity enhancing. More importantly, when they aren’t, they fail.

Cassidy’s logic is pervaded by the error that confounds most analysis that passes as economic thinking: the fallacy of composition. If you want to understand an economy, you must look at the individual sectors and aggregate them.

Fears of Asian tigers are not new; those old enough to remember the 1980’s fears of Japan’s economic rise should feel the déjà vu. When the curtain was pulled back by McKinsey Global Institute analysts, the dual nature of Japan’s economy became clear: half of Japan’s economy was outperforming the US, whereas half lagged it considerably. Productivity levels in steel, automotive parts, metal-working, cars and consumer electronics were world class, while computers, soap and detergent, beer and food processing were subpar.

Notably, the areas where Japanese productivity levels exceeded US levels were sectors where unionization (automotive parts, cars) and protectionism (steel tariffs) plagued US industry. In contrast, industries where the US was more productive – most notably food processing – were industries where protectionism favoring Japanese mom and pops was most prevalent.

Micro-level evidence shows quite clearly that protectionist industrial policy allows inefficient producers to avoid investing in improving their performance at the expense of consumers. In the long run, however, when these barriers to adopting market-frontier technology are removed, the formerly protected industries are trounced by market-leading competition.

Look no further than the US Auto industry for evidence. When Japanese producers began producing on US soil, we finally saw the end of Oldsmobile and Pontiac, and US carmakers productivity increased dramatically (via competition and hiring Japanese producers’ employees). Detroit lost (and remains a ghost town), but US consumers won. Eventually, the chickens come home to roost.

The particulars are different in Korea and Brazil, but the thrust is broadly consistent – governments’ efforts to protect their industries do so in the short-run at the expense of their consumers, and ensure the long-run demise of the protected producers. See Bill Lewis’ The Power of Productivity for the cases cited.

So how does this relate to China? Yasheng Huang’s Capitalism with Chinese Characteristics highlights the genuinely market-oriented nature of post-1978 Chinese economic reforms – particularly in the agricultural sector. In contrast, the 1990s saw Chinese policymakers obsessed with industrial policy favoring infrastructure – especially real estate. We can see the result in cities that have emerged in recent decades in the Pearl River Delta. We have no way of knowing what sort of infrastructure market-participants would have demanded in the absence of these actions by the CCP. The opportunity cost is also hard to know due to the relatively opaque Chinese banking sector, which the state uses to funnel capital according to its whim.

How can we know if the Chinese model will be successful?

Optimistically, the Chinese can look at the way we live, and conform their ways to ours. They can look at the most productive models of social organization, and adopt them readily. This is what they have been doing for some time, as multi-nationals are more than happy to teach them our ways of engineering and managing production. They Chinese should rely on these models of growth more than they do, as they are productivity enhancing, and thus sustainable.

Pessimistically, the process of malinvestment takes time to run its course; Detroit was not abandoned overnight. I would wager that for every Shenzhen, we will see a Motor City (or two), and many more Cleveland’s. In essence, the CCP is making the high-risk, high-return bet that they can speed the process of transition relative to the trial and error of an undisturbed market process. Thus far, it has served them quite well. But that does not mean that risk has disappeared. It may very well be building up in the system and that when things turn sour, it is far worse than we can imagine.

Finally, Gordon Wood’s explanation of US economic development in The Radicalism of the American Revolution seems more satisfying than Greenfield’s. It was our unique opportunity for independence from established interests – namely monopolistic British incumbents – and the creation of lots of small Madisonian factions who ensured genuine, robust competition, and the productivity improvements associated. US agriculture – from Virginian and Carolinian tobacco, to Deep South cotton – was the best in the world in spite of subsidies, not because of them. Accordingly, US agricultural production produces more with less today because production processes generated by Cargill and Archer Daniels Midland, not because of the Farm Bill.

An excellent post raising the pertinent issues.

Using "state capitalism" to describe 18th century Britain or the 19th century US is anachronistic. The ante-bellum US federal government was quite small. There was no centralized "planning."

We had tariffs, but many thousands of miles of coasts and borders. There was de facto free trade in most items.

Remember that Adam Smith became a customs official, but it appears to have been a sinecure. Perhaps a subordinant engaged in some enforcement.

Napoleon introduced the Continental blockade, and great wealth was made running it. I'm told that the principal banking houses in Britain had their origin in the wealth earned in that trade. The Corn laws were repealed mid-century.

In the 1930s, liquor was openly available in NYC. Canadian whiskey was smuugled down in great quantity. Was anyone thirsty by the end of official Prohibition?

The first Austrian economics conference took place in Vermont in 1974. One of the first things I noticed was that none of the liquor bottles had federal tax stamps on them. I wonder where they came from?

A related point can be seen in this graph:

http://visualecon.wpengine.netdna-cdn.com/wp-content/uploads/2011/03/ChinavsEgypt.png


However, this should not be construed as indicative of China's or Egypt's model actually driving prosperity; I would venture that many of the gains shown arose from free-riding off of commercial, financial, institutional, and technological innovations developed in more economically liberal nations.

Hey Jerry, how did the Continental blockade lead to British wealth? Perhaps there can be some parallels which can be drawn with that event, and the hypothetical scenario of British secession from the EU.

Alston,

MIght it demonstrate the power of markets that, when they are freed even just a little bit, it has profound positive consequences?

Troy,

You're entirely correct. I was referring more to the uptick in Egypt in the 1800s and the subsequent gains in China before market liberalization; others have used this graph as a counterargument to the assertion that free markets have driven the huge worldwide gains in prosperity since the mid-late 1800s. The huge gains in China in the more recent decade or two are definitely due (imo) to China's slight loosening of their markets.

I am growing slightly weary of counter-factuals, as I hope to illustrate with the following bad example.

Michael Phelps won 8 gold medals in swimming at the recent Beijing Olympics. Later it was discovered that he was/is a Marijuana smoker. Just think what he might have achieved had he not been putting poison in his body!

I find similar arguments against trade policy to be similarly unpersuasive.

I'm not sure about the continental blockade making Britain richer.

I would certainly be interested in some research on how much tariffs actually mattered. I know that at least before the 19th century in Britain there was a lot of smuggling.

The natural break-offs would be related to the portability of the good, the cost of getting caught smuggling and the size of the tariff.

Hi Peter,

I enjoyed the "end of the free market" greatly.
I agree with you idea. State Capitalism is a political tool rather than economic development tool.

Thanks for recommending a few more books on this topic.

Love the neighbor. But don’t get caught.

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