EconTalk http://www.econtalk.org/ Economics podcasts for daily life Hosted by Russ Roberts Copyright 2008 Mon, 05 May 2008 06:30:00 -0500 http://www.movabletype.org/?v=3.121 http://blogs.law.harvard.edu/tech/rss Nye on Wine, War and Trade John Nye of George Mason University talks with EconTalk host Russ Roberts about his book, War, Wine, and Taxes. The conversation covers the history of Britain and France's trade policy, why the British drink beer and why Ricardo's example of Britain trading wool for Portuguese wine is bizarre. Nye turns the traditional story on its head--he argues that France was more of a free trader than Britain and that the repeal of the Corn Laws was not the dividing line between Britain's protectionist past and free trade future. At the end of the discussion, Nye emphasizes the importance of domestic free trade for economic growth.

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0:36Intro. Traditional view of British trade policy: mid-1800s move toward free trade starting with the repeal of the Corn Laws in 1840s. By contrast, the French are traditionally viewed as intransigently protectionist. Bernstein podcast; word "corn" is misleading--it means grain. Repeal of corn laws lowered price of grain. Accompanied understandings of Smith that wealth is not gold and Ricardo, comparative advantage. Economic success of England is seen as reflecting the virtues of free trade. Revisionist take: Smith condemned the mercantilist system and its various tariffs. At the time he was writing, most of the Corn Laws didn't exist; and many of the most significant tariffs remained afterwards. Ricardo's example of comparative advantage was the exchange of British cloth for Portuguese wine. Horrible example of comparative advantage--Portugal was an extremely inefficient producer of wines and was exporting wine to Britain only as a consequence of the tariffs that favored Portugal; Methuen Treaty of 1704. Statistics comparing average tariffs in Britain and France--total value of customs duties divided by the value of imports--graph illustrates fall in British tariffs do fall after Corn Laws but remain at a very high level. French average tariffs started lower and remained throughout. Average tariff is not the only measure, but other measures show similar results, for most of the 19th century.
10:04Through ¾ of the 19th century, French had lower tariffs than Britain; both had falling tariffs. The fall didn't actually start with the repeal of the Corn Laws, though. Look at average tariff levels in England or France and see if by looking at the data you can pinpoint the repeal of the Corn Laws; what you see is there is no sudden drop; slow steady fall starting before the repeal of the Corn Laws. French path is choppier but they start from a lower level. How did the perceived story come to be viewed as the correct story? Trivial answer: the British told us they were free trade. But many tariffs they removed were on items that were not significant for trade. More serious answer: The focus on free trade was on industrial products and Britain moved quickly to remove tariffs on those goods; but England had the comparative advantage in those goods. Equivalent would be if Japanese removed their tariffs on cars and electronics but kept their tariffs on rice; we wouldn't look at them as free traders. Don't want to just look at the printed tariff rates. Wine, sugar, coffee, rum, tea were a very important part of British trade going back the 1600s and were the center of the controversy. Overall trend: if it wasn't an intellectual triumph of Ricardo and Cobden, what was it? Combination of genuine technological transformation of the Western world pushing countries to become more productive; and also a general political economy movement and understanding that opening trade was beneficial, plus special interest groups. Also, financial markets and capital markets were becoming better.
17:41Tariff still on wine in 1850 in both France and Britain. Did tariff on wine have a crucial impact on these economies? How had this been overlooked? Detective story putting together the work of wine historians, fiscal historians, commercial historians, but never quite put it together. Go back to the 1600s, time of Louis XIV, Britain and France were trading partners, and Britain had a big trade deficit in things like wine, silks. British felt if they could eliminate trade in those things they would have a trade surplus, and a surplus was viewed as a good thing--the mercantalist viewpoint. British were roughly a quarter of the population of French, yet the British imported a great deal of wine. Glorious Revolution, William of Orange, House of Hanover takes over, basically a coup, more agreement between Parliament and the Crown. Increased power of the state. Now the state could more credibly incur debt because it was credible that they could repay the debt by raising taxes. Britain and France at war: Nine-years War and War of Spanish succession; for a quarter century wine and many other products were suddenly not entering the British economy merely because of the war, 1683. Alcoholic drinks were not just popular but probably the safest drink at that time since water was not very clean. Booze provided nutrition as well, beer was thought of as a staple. Research: 18th century, largest item in the budget of Dutch orphanages was beer. Behavioral control plus nutrition. Home-brewed ciders.
25:35No wine coming in from France, but wine from Portugal was available--Port, Porto, as a drink, though, was not available and the quality of the available wines was not good. Fortified wines--dump brandy into the wine to keep it from spoiling during transport. "Factories"--processing zones where stuff was made in Portugal for re-export to Britain. Many of these "factories" switched to producing wine for export to Britain. To this day, names like Sandeman, English names, are the labels for port. Could export only to Britain. The relationship between Britain and Portugal from this period was institutionalized in the Methuen Treaty, guaranteeing that the Portuguese will receive a tariff that is never to exceed 2/3 of the tariff received by any other country on wine and spirits; in exchange for which they must receive cloth free of tariff. Ricardo's example--why did he choose it? 1713, war is over. But now new groups are making money hand over fist. Opening up trade with France again mobilizes the industry and they lobby the Crown. Government obliges by imposing new onerously high tariffs on French wines. Fixed tariffs, not percentage tariffs. Volume-tariffs discourage the lowest quality of wine. Imagine a tariff of $20/bottle. Distorts consumption toward the high end. At low end, alternative is beer. As a result of the tariffs French exports fall by 90% relative to before the war, and are only consumed by the most wealthy. Explains why Britain is a beer-drinking as opposed to wine-drinking nation today. John Bull, British pub image. Insignificance of wine: Protection of French wine protected not British wine but its substitute--beer. What is the impact on France? Painful for France but not crippling. French substituted toward producing higher and higher quality wines. Research and innovation in France. Wine was the second or third largest cash crop for export at the time even though the volume was small; large in value, had effects on land values.
35:36Taxes. Would you expect the state to let the domestic beer brewers to keep their profits from this industry that was created by the tariff on wine? Previously tax revenue was hard to raise; tax revenue was hard to raise on beer, in part because there were many small producers. Now the government had both a carrot and a stick: If you want to keep the protections, you'd better pay your taxes. Alliance forms between the state and the leading brewers. State moves from encouraging free trade in domestic beer to limiting entry to breweries--from many hundreds to less than a hundred. Easier for the breweries to maintain an oligopoly if your prices can be monitored and easier for the government to deal with politically. The loser in this is the consumer. Industry now siding with government. Sugar tariff--sugar is the largest single input for alcoholic beverages. Revenues to the state grow 5 times the size of GDP at the time of Adam Smith. Used to fund war--U.S. War of Independence. The French had trouble collecting tax money. Standard of living in Britain may have suffered, though it was the center of the industrial revolution. Tax burden is conjectured to have been the cause. War is not good for the economy. Can't pick and choose which wars, though. Protection of sea lanes.
42:56So Britain, while increasingly free trade, was not really free trade. France was actually more free trade, slowly and steadily moving toward freer trade. Role of trade and development today: Populist protectionists such as Pat Buchanan point to the late 19th century as the glory days of the U.S. economy, high growth rate, claiming that the cause was protectionism. During that period we had high tariffs. Industrial sector employs smaller percentage of people today but thrives because of technological progress. More important point: free trade was of secondary importance between Britain and France. Domestic trade was more relevant. Today we take for granted the virtues of internal trade, but for France, it was a patchwork of different internal trade areas. Easier for Bordeaux to trade with London than with Strassbourg. When Smith talked about free trade, he meant trade and exchange in general, not just internationally. Britain worked to encourage domestic trade and benefited from it by the end of the 19th century. France had to go through more struggle. Napoleon imposed a uniform set of rules on the domestic economy. True across Europe: Germany unified the trading system as a precursor to political union. Rise in British productivity from the industrial revolution overwhelmed the problems caused by their tariffs. Protectionists worry about trade deficits. From 1750-1914 there may not have been a single year in which Britain ran a trade surplus--but that's when Britain ruled the world. Role of technology--to the extent you can trade freely within your country you start to get some economies of scale. If you take away the economies of scale you take away many of the advantages. Suggests that British innovation was driven by the fact that they were successful in domestic trade. American revolutionaries made a big point about this fact in issues on open interstate commerce. Not a justification of tariffs. It's a way of pointing out that you can't use superficial measures of its benefits or drawbacks. Hard to find evidence that free trade is generally harmful to nations. Supporters of free trade should acknowledge that it's no panacea. A nation which is corrupt, inefficient, and has a poorly functioning domestic market may not benefit from free trade.
53:45Bernstein cites the work of economic historians, impact of trade on growth is small. Counter: really hard to measure. In general, till recent economic history the natural barriers to international trade were so great and governance was so corrupt and inefficient meant that the other things are secondary. Technologies so inefficient meant there was so much room for development. Interest groups have to develop to lobby for opening up, say in ports, instead of the historical interests acting to limit trade.
55:40Only around 1870 had the average tariff in Britain finally become somewhat low level. What changed in the political economy? Tobacco Settlement: government created an oligopoly, industry likes it because it keeps out new entrants; taxes tobacco users to finance the state. Big thing that changed: the groups that were benefiting from protection were getting weaker at a time when the industrialists who wanted freer trade were getting much stronger. Technology-driven. Second, an 1849 Parliamentary Inquiry showed that lowering tariffs would raise customs revenue but they were worried that the short-run disruptions would be so great that revenue would go down. Income tax experimentation. In 1860 British agreement with France removed the remaining French prohibitions on remaining products in exchange for British reduction of wine tariffs. Other European nations noticed bilateral trade agreement and didn't want to get locked out. Signed bilateral treaties with Britain and France right away. Trigger system, interlocking economies. England and France ultimately become allies after being enemies for centuries. EU seems unlikely to go to war with each other. Income and corporate taxes dwarf tariff revenue today; but in 19th century, excise taxes and tariffs were more important as sources of revenue than income taxes. Early small version of income tax in 1850s, considering various revenue sources as trade-offs.
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/05/nye_on_wine_war.html. http://www.econtalk.org/archives/2008/05/nye_on_wine_war.html http://www.econtalk.org/archives/2008/05/nye_on_wine_war.html John Nye Mon, 05 May 2008 06:30:00 -0500 Bernstein on the History of Trade William Bernstein talks with EconTalk host Russ Roberts about the history of trade. Drawing on the insights from his recent book, A Splendid Exchange: How Trade Shaped the World, Bernstein talks about the magic of spices, how trade in sugar explain why Jews ended up in Manhattan, the real political economy of the Boston Tea Party and the demise of the Corn Laws in England. The discussion closes with the political economy of trade today and the interaction between trade and income inequality.

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0:36Intro. Survey of trade history and history of the world. Spice trade. How did spices become so important in ancient times? Salt, sugar, rosemary, sage, relatively cheap today; even saffron. Expensive, fine spices: Nutmeg and mace, cloves, cinnamon, from Molucca Islands; less expensive: pepper. Europeans already had access to most other spices. Myth: the spices suppressed the smell of rotting meat--these imported spices were very expensive and meat was cheap, so it didn't make sense to buy spices to preserve meat. They were expensive because they came from so far away. Valued because of the mystery that surrounded them. Perfect marketing storm. Godiva chocolate and Gucci shoe--status symbol. Pepper did come in relatively large volume. Wealth was limited, though, so a small number of the elite of Europe were generating a lot of the trade of the day. Pepper came from the Malabar Coast, relatively straight shot to import it to Venice. Architecture in Venice today was generated by the wealth from the spice trade. Trade in luxury items in early period, through 1600, 1700, only elite could afford long-distance goods. Ballast goods in hull of ship--porcelain, rice. Second period: evolving middle class could afford cotton, coffee, tea. Invention of modern transport, steam engine, mass goods could go around the world relatively cheaply. Copper production.
8:57We think of trade as trade for things you can't make yourself. Spices require specific climate conditions. Today we mostly trade in things we choose to let others make. In ancient world it was strategic trade, primary trade in ancient period was in most strategic materials, copper and tin, none in Mesopotamia and so they had to to southern Arabian peninsula to get it. Bronze was consumed by the Mediterranean Basin, tortuous supply chain--we still don't know where they got it. Today we live in a Ricardian world.
11:23Sugar. Sugar is dirt cheap today. At one time it could be considered a fine spice, very expensive, not because it came from far away but because it's brutally hard to manufacture. Have to cut cane, boil it down, requiring vast amounts of wood; requires vast skill to refine. Gradually became less expensive. Sugar plantation was road to wealth. New World had easy access to fuel in big forests, to slave labor, and three-roller mill was a technology advance that allowed three or four slaves to crush vast amounts on cane. Sugar is the heroin of food stuff. No society ever decreases its consumption of sugar. Vast long distance industry. In the year 1494, King Manuel of Portugal gave an ultimatum to the Jews: leave or convert. After a decade or so, began slaughtering the Jews, who wound up in Amsterdam--including Ricardo family--Portuguese-speaking. Portuguese settled Brazil, became world's largest sugar producer, Dutch West India Company; Jews migrated to Brazil. Holland and Portugal engaged in a war to control the spice trade; in Western hemisphere, the Dutch didn't succeed but tried; Portuguese-speaking Jews. Dutch Jews scattered back home or to North America; 23 Jews in mid-17th century went to NYC. David Ricardo's family sent him to Amsterdam for school from England because they'd started there--before they came to Amsterdam they went first to Italy, free trade state. Amsterdam still has a large Jewish community in the diamond business. Milton Friedman's suggestion: In an anti-Semitic world it's better to have your capital in portable form; and human capital is highly portable. Diamonds are small and portable.
20:08The Portuguese and the Spanish were doing well. What happened to them? Real question is how did they rise so rapidly? Brook podcast: most Portuguese ships had only a thin upper crust of Portuguese crew. Dog that caught the car. 1498, Vasco da Gama rounded the Cape. Trade was run by largely Muslim merchants, sharing largely similar Shariia commercial law, devastated by Black Death, in the 14th century, which was spread by trade. So da Gama's ships cruise into a world which is broken and take over. But never able to control the entrance to the Red Sea, so it allowed spices to leak through that route to Venice. So the Dutch, with greater capital and better capital markets, were able to sweep the Portuguese out once they got their act together.
25:18Boston Tea Party. Revisionist history by the victors is common. Columbus was ridiculed not because he thought the world was round but because he got the size very wrong. Very lucky that he bumped into the New World. Story of Tea Party is that they were patriots; taxation without representation. In 1773, Britain trying to help the East India Company by opening up the colonies. Previously they weren't allowed to sell in the colonies, which meant smuggling and high taxes. When Britain in 1773 allowed them to sell directly to the colonies, the middlemen were up in arms because it drove the price of tea down to half of what it had been. Middlemen and smugglers got together and painted themselves and started throwing the tea into the harbor. First anti-globalization riot. Protectionist in spirit. Opposite of their being against the tax. Story originally broken by Arthur M. Schlesinger, Sr. early 20th century article.
29:37Corn Laws in England, Cobden. Import and export of corn, which meant grain, not American corn, which is called maize in Europe. Primarily wheat. After 1689, England was for a while a big exporter of grain. Later part of 18th century they began to import grain. Price stable till Napoleonic wars, which caused spike in price. Government guaranteed domestic producers, landed aristocracy, a price, via a subsidy. In 1804 and 1815, Draconian Corn Laws were passed causing distress amongst the poor. Cobden was a cotton manufacturer but was also in favor of free trade, morally cogent issue. Got Corn Laws repealed. Mostly only landed aristocracy could vote. Postage evolved, penny post. George Orwell's view was that technology advantaged the state, but it actually empowers those who are powerless. Originally postage was very expensive; paper expensive and reused. Man by the name of Taylor gets together with Cobden and pass the penny post, allowing you to send letters for a penny; come up with idea of a stamp. "There go the Corn Laws," Cobden supposedly shouted--poor people could now communicate cheaply. Peel, Tory leader, realized he had to go against the landed interests of his party. Romantic economists' idea that it was Cobden's eloquence but it was probably the actions of the affected poor. Joe Stiglitz: Even if Cobden had a stammer and spoke only in Yiddish the Corn Laws would have been repealed. John Nye: next week's podcast, France was more free-trade than we think.
38:35Henry Martyn, credit to Doug Irwin. Late 17th-early 18th century. "Considerations on the East India Trade," obscure tract; destroys mercantilist ideology of the era. Mercantilism, idea that nation was wealthy in proportion to the amount of gold and silver it had, beggar thy neighbor. Martyn realized it made no sense, countries rich by virtue of what they can consumer. Looked at Holland, rich because they consumed; Spain dirt poor though they have all the silver. Quote. "We only plough the deep." Principle of specialization of labor, spinner and cloth worker. Did he influence Smith? Quote: why it's good to buy things from abroad. When you can buy things more cheaply from others it's a good idea.
43:36Bernstein's book, good illustration of comparative advantage. Quote: famous attorney, skilled at woodworking as well; better off hiring the less efficient carpenter and working five hours in his own profession. Ricardo's insight has won the day among economists, but a lot of people today are very skeptical of the virtues of trade. Maybe they don't understand it. Maybe they understand it better than economists because, some groups struggle from particular kinds of trade. Economists do ignore that people are hurt, directly related to education and income. High school graduates tend to not favor free trade, minimum wage jobs likely to be lost with trade swings. Free trade always harms certain minorities. Wool weavers of England thrown out of work in late 17th century and rioted after the import of cotton. Have to have a better safety net. Current political candidates and free trade. 1999 analogy to wool weavers--people rioting in Seattle were political activists, upper middle class, not the same people who were likely to be thrown out of work. In America we have a dynamic labor market, so even high school graduates can find some work. Maybe earn less; but that can happen for other reasons than trade, e.g., technology advances. Cause of increase in income inequality in the U.S.: trade, skill premium, or tax policy. No data allow you to separate them out cleanly. Paul Krugman, Conscience of a Liberal, claimed tax policy; but now working paper saying maybe it is trade. Political issue, hard to find truth.
53:30Bernstein: neurologist, financial expert, and now an historian. What next? Neurology for 25 years, some teaching; became interested in finance to save for retirement, small advisory service; writing about finance became interested in Angus Maddison. The Birth of Plenty, institutional origins of modern prosperity. Wife quipped: "If you wanted to write a cookbook you'd write it." Violation of Ricardian principle of specialization.
57:33Pat Buchanan: 19th century in America was protectionist and we need to return to that. Before 20th century trade really wasn't that important. Wagner, Sachs: intra-national trade was more important than international trade. Can't afford to be protectionist now. Empirical work in this area is hard to tease out. Episodes of protectionism are surprisingly ineffective at reducing trade. Other forces going on; but maybe tariffs are not enforced very well. Smoot-Hawley and the Great Depression--did it cause the Great Depression? Now it would devastate the world economy. Modern situation is different because there is more trade and also because the nature of the trade is different. Smithian insight into trade, technology. Would a rise in protectionism affect the flow of technology to the U.S.? Certain groups will get more power. China. Paul Romer: if we limit the extent of the market the incentive to use technology gets smaller. Peace dividend cut into when people are told repeatedly that trade with China is like an invasion. Brad DeLong. Look at Europe, at war with itself since the beginning of time; but now with the trade intertwining there, war within Europe is unlikely. The Choice, financial/money argument for trade, is only a small part. More important part is the dynamism it produces in our economy that lets each generation pursue its dreams. "When goods cannot cross borders, soldiers will."
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/04/bernstein_on_th.html. http://www.econtalk.org/archives/2008/04/bernstein_on_th.html http://www.econtalk.org/archives/2008/04/bernstein_on_th.html William Bernstein Mon, 28 Apr 2008 06:30:00 -0500 Roberts on the Least Pleasant Jobs EconTalk host Russ Roberts talks about the claim that for capitalism to succeed there have to be people at the bottom to do the unpleasant tasks and that the rich thrive because of the suffering of those at the bottom. He critiques the idea that capitalism is a zero sum game where to get ahead, someone has to fall back. He also looks at the evolution of the least pleasant jobs over time and how technology interacts with rising productivity to make the least pleasant jobs more pleasant.

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0:36Intro. Survey summary: over 500 filled out the survey. ITunes; listening: car, home. Favorites: Munger. About one third from outside U.S. Diverse backgrounds. 90,000 downloads per month.
6:48Inequality, mobility in economic system. "Capitalism requires someone at the bottom to do the menial task"--system requires poor people to do the unpleasant jobs. Implication is that if the poor got rich and didn't want to do those jobs any more, capitalism would collapse. Widely held view. Is the claim reasonable on economic grounds? Do poor people sustain the prosperity of the rich? Is an underclass necessary? Is the system designed to keep poor people poor? What would happen if the poor got richer--would that be good or bad for the rich? Similar questions with the wealth of nations: do wealthy nations oppress the poor ones? In colonial times the rich nations took the poor nations' resources; today they take the poor nations' labor. According to this view we need to keep these nations poor because otherwise our system of living will take a hit. Domestic variation on this theme: Wal-mart pays low wages. Another variation: top few percent of income distribution keep all the productivity for themselves and don't share it with others. Implicit in all these claims is the idea that the economic pie is zero-sum: your slice comes at the expense of my slice. To get ahead, you have to push people down. Sam Walton, Bill Gates: their wealth obviously comes from other people. Implication is that if they hadn't existed, everyone else would have more money. Other implicit claim: someone is in charge--the rich, the top 1%, the richest nations, the World Bank--they decide. But rewards are fundamentally emergent, result of individual choices, not top-down.
13:04Editorial writer once explained to Roberts that the top 1% are keeping all the gains for themselves. Roberts asked: How have they managed to do that? Response: Well, we just haven't figured that out yet. They've weakened the power of labor unions is one argument. But unions have been weakening in the U.S. not since the 1970s--which some have argued was the high-water mark of the U.S. economy (misreading of data)--or they point to Reagan and the air traffic controllers' strike. Problem with both arguments is that labor unions' high water mark was the 1950s, falling steadily since then. More likely that ability of unions to unionize the service jobs that have grown is small. Productivity changes. Is that good or bad? People who think that the economy is being controlled have to have an argument about how that's happening. Unions; minimum wage--only a small group of people, less than 3%, earn minimum wage, never important part of the economy.
19:08Zero-sum game argument. First, top 1% are not the same people: LeBron James, Sergei Brin have vaulted into the top 1% because they provided something people liked. Top 1% have larger share of the pie because of their providing more. Education is a route to prosperity; no one stops people from innovating, coming up with ideas like Google. P.J. O'Rourke: Wealth is not a pizza. One person's success makes other people richer, not just in a monetary sense but in full sense of the word. Complaints that Gates and Walton have to be charitable, have to give something back implies they took their wealth. But they got wealthy by providing. People gave money to them but got something in return. Wealth is not fixed pie; one person's share does not mean others get less. You'd be happier in 2008 with a smaller share of the total pie relative to 1908 because the pie is so much bigger. Getting a large share doesn't mean you've pushed others down.
23:21Claim: Our well-being depends on the suffering of others who are at the bottom, who are willing to do horrible things that I'm not willing to do--cutting our lawn, painting our houses--and similarly as a nation. In this view the goal of life is to get one of the good jobs, basketball player, corporate lawyer. In this view, jobs are like boxes, bar-codes for salaries by job. In conspiratorial view, we have to make sure there are people who will be desperate enough to take these jobs. Marxist variation. America wants to have the good-paying jobs, designing the software, not just retailing it. Late 1980s Frontline documentary: Japan was getting the jobs designing Nintendo and the U.S. was getting stuck with the customer service part, the low-paying jobs; conspiratorial view, Japan was conspiring to do this. Ironically, ten years later, people were worried that the U.S. was losing all the customer service jobs to India; outsourcing. Ross Perot: It's better to make computer chips than potato chips. Alternative view: The jobs that are available depend on the people who are interested in them and their skill levels. Your salary depends not on the box you are in but in the skills you bring to the job. Which jobs are done depend on the skills of the people in them. If Haiti decided the road to wealth was to start a pharmaceutical industry, they probably wouldn't be successful. Similarly, Russ can't just decide to be a highly-paid basketball player because at his height and jumping skills he wouldn't succeed. China under Mao, everyone was going to have a steel foundry in his backyard, but if you are bad at making steel it would be inefficient; made China very poor.
31:06Jobs at a point in time: garbage collection. Lots of ways to collect garbage. Can walk along and pick it up; can have a truck; or current world in U.S. can have a really fancy truck--collector is mostly a truck driver, driving a truck with an arm that picks up the garbage can and empties it mechanically. In poorer societies there are many more people in the business of collecting garbage; more pleasant in the U.S. than elsewhere. Technology substitutes for the person. Sounds bad but it's good! Profitable to use the machine. Not inherently good for America to have lots of people picking up garbage. Perot image of computer chips vs. potato chips is of people in white suits in computer chip industry vs. image of people peeling potatoes and slicing them and putting them hot oil, emptied and put into a bag. Low skill, low technology, mostly labor, menial work. Turns out that's not how bagged potato chips get made in America: A truck full of potatoes dumps them into an enormous machine which peels them and slices them and fries them and flavors them very precisely and bags them and crates them. Almost no workers other than running the computerized machine and making sure it is working. Much more pleasant and remarkably inexpensive. Hidden jobs--designers and builders of the machine. Over time, the types of jobs that get done in a successful economy changes. Some jobs no longer exist--ice man, toting ice. The ice man's standard of living is better when that awful job is eliminated. Transition can be abrupt, challenging, difficult; but we don't need people to do that, shovel manure, etc. In 1900 40% of the American workforce was in agriculture; now 2%. Incredibly better technology. All those people were freed up to do other stuff that makes people's lives better--including theirs, farm work is dangerous and hard. Wasn't dictated top down. Didn't need low-skilled people, we don't need to keep those people down at the bottom of the ladder. We want technology to come along and eliminate those jobs. Paradox. Sounds harsh, but that's how our standard of living evolves. Year in year out, the average worker's life gets better.
43:24Schumpeter podcast, creative destruction. New things come along that are better, freeing up resources to do other things. In a dynamic economy like the U.S. the costs of that are relatively small, happens quickly, labor force is dynamic. People find new skills. In other economies it may not work as well. Being a waiter, relatively low-skilled--used to be a job someone would aspire to in the U.S. In most restaurants in the U.S. waiting is done by college kids, fast food none at all. Dish washers in the 1920s made a living, but it wasn't pleasant. Nothing inherently demeaning about manual labor; but it's hard. Most dishwashing in America is now done by machines. People figure out cheaper and cheaper ways to mechanize the process; at the same time dish washers are paid more, making it more rational to replace a person with a machine. No one says we have to keep people at the bottom so that we can have our dishes washed. Marxist view: if poor people escape from poverty we won't have anyone to do that. Answer: those jobs have disappeared because people got richer and because technology came along to relieve people of that hard labor. Russ's grandfather, Memphis, Great Depression, small house and yard, had a lawnmower; a push mower, not the kind available today, cast iron, very heavy, hard to push. Hired someone to cut his lawn, from the penal farm, prison with work release program, Albert, very humid conditions. Driving by you might say it's a good thing there are poor people here to do it for him or he'd have to do it himself--journalist's perspective. Really not true. Cutting a lawn in 2008 is really different than then, better technology. Lawnmower itself is motorized, even stand-up motorized mowers that someone in the business can invest in, making it a bargain. Immigrants often do this work. Their kids will often do a lot better. Have to look over time. Least pleasant jobs get eliminated or get more pleasant over time.
56:44We don't have an incentive for people to stay poor. Not zero-sum. Their gains as they move up do not come at our expense. China--fear that they will catch up so we will fall behind. Untrue. China has improved its standard of living is by selling us stuff they can make more cheaply than we can, which is good for both of us. China's success increases our success. Improves our lives. Inequality doesn't sustain the system. Masks what is going on. The poor help the rich by working for them, but the rich help the poor by hiring them. Way to get ahead in a market economy is to provide something of value. No conspiracy to keep the poor stuck at the bottom. No one is in charge or manipulating the system, though there is lobbying and political pressure. Individual choices, mobility, opportunity, education. Thanks to Eli Dourado and Rosie Fike for help with this podcast.
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/04/roberts_on_the.html. http://www.econtalk.org/archives/2008/04/roberts_on_the.html http://www.econtalk.org/archives/2008/04/roberts_on_the.html Russ Roberts Mon, 21 Apr 2008 06:30:00 -0500 Coyle on the Soulful Science Diane Coyle talks with EconTalk host Russ Roberts about the ideas in her new book, The Soulful Science: What Economists Really Do and Why it Matters. The discussions starts with the issue of growth--measurement issues and what economists have learned and have yet to learn about why some nations grow faster than others and some don't grow at all. Subsequent topics include happiness research, the politics and economics of inequality, the role of math in economics, and policy areas where economics has made the greatest contribution.

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0:36Intro. How has the thinking of economists changed? Growth is central question. Adam Smith. Recent understanding, data. Economic historians, Angus Maddison and others doing painstaking work looking at growth series since the 1980s. Theory: what you put in is what you get out, growth depended on labor and capital. Solow model. Now better insight on how technological progress could snowball; and why human capital matters; endogenous growth. Feedback loops. Growth miracles, rare but dramatic. Using "L" as labor as an input is a crude measure of the input of people to growth. How reliable is the econometric work trying to measure the separate factors that contribute to growth? Crude estimates. Brad DeLong's paper on ways we construct GDP. TV show on life in 1900 and the reason that women in the family wanted to quit show was she couldn't get shampoo, which wasn't invented till the 1930s. Macroeconomic regressions are broad-brush, can't be used mechanically, but good theoretical understanding backed up by evidence. Need to think about the microeconomics, why do markets work, what kind of incentives do people face, what incentives do people face to get good education when there are no good jobs.
8:00Challenge: Go back to Adam Smith, insights into the wealth of nations, argued in first 25 pages that crucial factors were specialization, trade, extent of the market, and interaction of those factors with technology. Have we really added much via the formal approaches? Endogenous growth theory of Paul Romer and Robert Lucas: is it Adam Smith in more formal clothing? Clarity of thought brought about via mathematics. All the great economists since Smith have been very adept at mathematics and formalism. What you should then do is throw away the formalism. Economists ought to be able to also explain in Smith's terms. Formalism also helps you with the econometrics, data, helps with public policy, modeling transportation systems, auctions; built on formalism. Given the quality of the data, which is disappointing, and given the obsession with econometric technique, couldn't you argue that the formalism has actually done more harm than good? Fads that have come out of that theory have done harm to the poor people of the world. What have we learned about growth, development policy, bringing people out of poverty? Fads have used crude regressions to justify pouring in money that hasn't been used well. But development economics has moved away from that to a more sophisticated debate. Jeff Sachs, Bill Easterly. More realism about the limits of our capacity to move an economy onto the path of growth. Humility. But did they say the same thing in 1975--now we know what doesn't work? Solow model, focus on K (capital) and L (labor), and we just need to add more investment and education. Context changes over time so conclusions will change over time. WTO, Japan, Korea, developed with a lot of protections of domestic industries; but goods people were making were much simpler in the 1960s.
17:02Markets don't work as well in some countries as they do in the U.S., social norms, 1870 markets in the U.S. Nuanced understanding of institutional effects over time. Creative destruction tolerated and advocated by many in the U.S. because recovery is so fast. But what if the recovery were slow? Charles Dickens. Institutional context matters, depend on whole array. Property rights. Formalism isn't very good at handling those institutional details. Case studies, Hernando de Soto, bureaucratic barriers. Controlled experiments in development policy, education in different villages. Abhijit Banerjee, MIT.
20:53Happiness. Victorian House (actually 1900s House): PBS show, strict enforcement of the time period. Extraordinarily harsh life. Frontier House, 1880 frontier. Pregnant woman who wanted to give birth on the show wasn't allowed on. Not clear that if you asked people in 1900 if they were happy and if you ask people today that they would say they are happier. Asking people how they are feeling they don't report that they are feeling happier. GDP per capita can grow without bounds over time; happiness is an emotion that you can't imagine growing without bounds over time. Upper bound on how high that variable can grow. Paul Ormerod. Evidence looking at cross-sections of people shows that happiness does go up with income; depends on other factors. What are the implications for policy and for the data we collect? GDP is the target of policy because it's easy to measure and we know what it is. Human development index, HDI. There are better indicators such as life expectancy, clean water, that can be targeted by policy, but correlated with GDP. Social stability, mental health. Money is not sufficient for happiness. Inequality: is that an area where government might play a role? Evidence that societies that are too unequal are not stable; but how much inequality is too much? China, cities vs. rural areas. Evolution literature. Sense of fairness is offended with too much inequality.
28:49Class warfare, rhetorical device. Ask people what their income is. Most people know their annual salary but struggle to tell you what their benefits are worth. What percentile do you think you are in in the income distribution? Most people don't know. Have you moved up or down in the last 10 years? No idea in relative terms other than what you hear. People can tell if their real disposable incomes are going down, taxation. Envy if people are getting extremely rich. Tax policy in Britain, efforts to make incomes more equal, large redistributive effects but even so incomes have become unequal, superstar effects, people who can leverage their skills, movie stars, impact of technology and globalization have increased the effect. Sherwin Rosen and Ed Lazear. 19th century, skills in short supply were filled by education system. Trade unions. Global inequality swings can take a long time to go into reverse. Wages of high school graduates are flatter than returns to higher education in the U.S.; and in the U.K. as well. Complex to keep track of the individuals; harder globally, Bill Gates compared to someone impoverished from Benin; Brazil looks poorer than France based on averages. If you raise taxes on the wealthy and lower them on the poor, unintended consequences. Thomas Sowell, the essence of economics is to say "And then what?"
37:35Happiness research and GDP. Human development index. Is there any comparable index for more developed economies? Take away from GDP, rather than adding to it, pollution. Constructed so that you cannot get any improvement. Don't add in new products, technological improvements, price declines. More sense to look at a whole array of indicators. Australian government, asked people what they cared about, can put your own weights on them. Resource depletion emphasized by environmentalists, extrapolate from today's conditions; economists instead look at how behavior adjusts. Population Bomb, Julian Simon bet, technology adjusted. Food prices, ten years right time period. Simon was a big fan of population growth, more people leads to higher per capita income. Can't think of any countries with declining populations where real per capita income has grown. With new technologies people have become more aware of what the rest of the world is like. Doesn't tell you anything about the trends or the causes of the trends. China's improvement carries a lot of weight in the world population. India; Africa; many other countries in Africa where there is hope. Mobile phones in African countries, explosion of business opportunities. Edges people from the informal into the formal economy. Business and banking over the mobile phone. Advertising, small business opportunities. Easterly, small scale.
46:08Economics is not as narrow as the caricature. George Stigler quote: "There is only one social science and we are its practitioners." Max U, Deirdre McCloskey podcast. Economics is now much less about rational choice. Behavioral finance, influence of psychology, how people make choices about financial decisions that will affect them far into the future, risk aversion, loss aversion. Coyle was early 1980s Harvard graduate school; at Chicago looked down on other social sciences, similar at Harvard. Sociology of economics, few women do economics, 50-50 in high school, declines at higher levels. Departments have dropped economic history requirement. Is economics a male field? Workshop system at Chicago is aggressive. Intellectual arrogance, great if you are good at it. Gladiator aspect to academic life, more prevalent in economics, may not appeal to women on average.
52:11Economics in England vs. the U.S. Big difference is between Anglo-Saxon world and continental Europeans. Partly subjects; and partly English language. More cohesive today. Schumpeter biography, McCraw podcast, different currents of intellectual life. In 1930s extremely different schools of thought in economics.
54:38Optimism. Where has economics done well? Much better on macroeconomic policy, now much greater consensus than in the 1970s. Competition policy: use of economics to inform anti-trust decisions, mergers. Theory about how markets work, more competitive markets, benefits have been measured. Market design: licenses now sold by auction, excludes petty corruption, license goes to person who will use it most efficiently. Game theorists, focus on market imperfection; law and economics, market shares are misleading--not sure which side has won. In U.S. more tolerant of mergers than we were before but every ten years we take a large firm and beat it up. IBM, Microsoft, cereal industry. Competition Authority in the U.K., merger oversight, network industries, technology industry. In the U.S. antitrust policy is politicized, lobbying of senators and administration. Independent body in U.K., members appointed by the Minister, government department, 8-year nonrenewable term, 50 people, mixed expertise. In U.S. often has to be equally split between Republicans and Democrats; not same in U.K. Extended warranties for expensive items.
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/04/coyle_on_the_so.html. http://www.econtalk.org/archives/2008/04/coyle_on_the_so.html http://www.econtalk.org/archives/2008/04/coyle_on_the_so.html Diane Coyle Mon, 14 Apr 2008 06:45:00 -0500 Coyne on Exporting Democracy after War Christopher Coyne of West Virginia University and George Mason University's Mercatus Center talks with EconTalk host Russ Roberts about his book, After War: The Political Economy of Exporting Democracy. They talk about the successes and failures of America's attempts to export democracy after a war. In some cases, Japan and Germany, for example, after World War II, American efforts have led to stability and democratic institutions. In many other cases, Cuba, Somalia, and Haiti, for example, and so far, Iraq, American efforts have failed, often repeatedly and have sometimes made things worse. Coyne tries to identify factors that lead to an improved likelihood of success or failure. Ultimately, he concludes that a non-interventionist posture accompanied by unilateral free trade is more likely to benefit citizens under repressive governments.

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0:36Intro. Post-war reconstruction: democracy not successful in Iraq but were successful in Japan and Germany after WWII. But those are only a two data points. Cuba 1898-early 1920s (not talking about the Bay of Pigs), U.S. intervened three times. McKinley, 1898-1902 for civil unrest, then 1906-1909, 1917-1922. Political instability; result was Batista 1940-1959, Castro, 1959-recently. U.S. made significant investment, with very little return. Could argue that they made things worse. U.S. puts regimes in place that are friendly to its interests but that do not necessarily benefit the citizens themselves. Two themes: law of unintended consequences; other is law of intended consequences--maybe our goal really was to put regimes in place that were friendly to our interests even if it didn't benefit the citizens. Assume goal of intervention might lead to liberty and democracy.
6:27Why has intervention been so unsuccessful in Iraq? What incentives face Iraqi people that are causing it to go so badly? Incentive: factor that provides motivation for particular course of action. Reconstruction process is all about incentives. Do citizens have incentives that align with liberal democracy? In the case of Iraq: historical experience of the various groups, Kurds, Sunni, Shia; actually more complex, subgroups. When you don't get along with various parties it's hard to establish liberal democracies. Transaction costs, bargaining costs, are higher than they might be because the groups don't trust each other. Ideally if Iraq could move toward a decentralized democracy with a market economy, the pie would get dramatically larger. But if you don't know if that will happen and what your share of that pie will be, people may fight so much over that that they forego the gains. When you get the parties around the table they don't want to negotiate because they don't trust each other, in part because of history of the groups coercing each other in the past. Issue of credible commitment: why would they think the commitment, whatever they agree on, is binding, if the enforcers--the U.S.--will leave shortly? Even if they do trust each other you have additional problems because people fight over who gets the bigger share and are willing to use violence to keep people from cooperating. McCain, stay 100 years, but part of the conflict involved U.S. statement that we are not occupiers. Get involved with politics the longer you stay. Citizens don't view us as benevolent liberator. The longer you stay you can enforce contracts, but at the same time you can't say we are here to liberate you to engage in self-determination, but if we don't like the outcome we can change it, at the point of a gun if necessary.
14:18The word "occupier" can mean something neutral, coercive, or exploitive. Car bombs in the news make it look like occupation must be oppressive. But it doesn't have to be oppressive. It could mean that the car bombers think they'll do better in a world where there is chaos and where the U.S. is not controlling things. Iraqis want to have a more dominant role than they have with the U.S. there. If you don't feel like you are part of the game and won't have a role in the new Iraq, one response is to fight the occupation; and one form of that is terrorism. Other factors also influence terrorism. How the U.S. perceives the occupation is very different from how the Iraqi citizens view it, as well as other countries. We view ourselves as being benevolent. Who doesn't like private property, wealth, representative government? But Iraqis don't necessarily view it that way. Role of fear: incentives change dramatically; cooperating can be seen as a badge of honor or as a badge of shame.
19:17Is anything going well in Iraq? Hussein is gone. Is there any source of optimism for the creation of liberal democracy in Iraq? Different factions, small incentives to cooperate, impose social costs on each other. Are there any positive signs? Best we can hope for is some kind of stability, cooperative equilibrium, but not one that we like or that is what our initial goals were when we went in. Likely we will have troops there for a long time, maybe not continuous but may have to re-enter. Not too long ago the U.S. was supportive of Hussein; funding and arms to Bin Laden when he was fighting the U.S.S.R. Incentives for politicians--hard to exit and hard to stay for political reasons. Cuba analogy--we've been involved a long time.
23:05Japan and Germany. Why did they turn out differently? Initially looked like no cause for optimism. Japan had no democratic leanings; Germany was only a democracy briefly under Weimar Republic. Both were relatively developed countries; had national identities, no internal conflict within groups or subgroups. Both were nation-states involved in a conflict and had clearly lost, official surrenders; clear that the Allies were in charge when they entered, clear that they were being occupied. Psychological as well as physical devastation. Many Japanese were initially scared of us. Tried to provide food, services; respected their rights and property. U.S. troops didn't have to worry about getting shot at; makes it easier to carry out reconstruction. Infrastructure can only be used successfully if it can be used in cooperation and peace. A school is not useful if it can be blown up. Microsoft culture is what makes it the company it is. If its building burned down, rebuilding it would just be a matter of resources. The MS building in the middle of Iraq wouldn't be useful; culture isn't there to use it. Underlying culture and institutions existed to use the infrastructure in both Germany and Japan. Is that hindsight? Japan had a culture of militarism; people were certainly unsure of what their role would be in the post-war world and new hierarchy. Why didn't they try to disrupt the reconstruction as we see in Iraq? Protests, problems with food delivery. But there were already national institutions in place that had carried over. MacArthur realized that to overcome the trust issues he had to overcome the trust issues. First thing he did was have his picture taken with the Emperor--viewed as being a leader. Used the Emperor to help sell reforms, facilitated cooperation among the citizens. Played a key role in writing the Constitution; passed it through the Diet, got their approval. Improved the credibility of the efforts, lowered the transaction costs. Meeting the Emperor could have gone the other way. Communist element as well that wanted a say in the new Japan.
35:05On the surface the Iraqi story looks somewhat similar. What's the difference? Japanese citizens vs. Iraqi citizens; in Iraq people have primary identifications within their group or subgroups. We all want different stuff; is my group or subgroup being represented? Constitution was approved by a representative body but the U.S. played a key role in selecting the people in the representative body. Baathist party members couldn't be trusted; but then people disenfranchised. Japan much more inclusive because existing political institutions existed. Diet before the war had limited power but was well-established institution, well-known by Japanese citizens. Instead of wholesale change it was tinkering on the margins. Lower-cost effort (not monetary cost). Not suggesting that sparing Hussein would have been a good idea. Emperor didn't need to coerce citizens to get their cooperation. Iraq was relatively peaceful inside the country under Hussein; but how did you get that peace? If you were a threat to it, throw you in jail or kill you. Large segments of the population didn't trust Hussein, whereas the Emperor had the affection and respect of the Japanese citizens.
39:56Germany. International war, national government that we were fighting and that we defeated; clear government that we were taking over. Lucius Clay. MacArthur had a lot more unilateral power in Japan than Clay had. Clay received a lot of influence from D.C. Reconstruction of Germany was successful not because of occupation but despite it. Kept many economic controls, rationing schemes, that were in place under the Nazis; didn't allow market forces to operate. Doing same thing in Iraq. Central planning, attempting to rationally construct a set of institutions that can't ever be constructed by a foreign government. Ludwig Erhard went on the radio and lifted the price controls. Knew economy was suffering under the controls and rations. Clay scolded him; Erhard responded that if he'd told them they wouldn't let him do it. Occupation had brought him in as an advisor. Key driver behind the opening of the economy. Wasn't the central planning. Historical accounts, all this infighting between government agencies and bureaus. Seen in Iraq now. Public choice problem. People blame Bush for having no plan, not trying hard enough. But another way to view it is that the bureaucrats measure success by the number of their employees and size of their budgets, so you get infighting between agencies and bureaus. Not limited to Iraq or Republican administration. Issue of government and ability of government to centrally plan the complex array of institutions necessary for liberal democracy. Failures are bipartisan if you look at it historically.
47:08Somalia and Haiti: U.S. tried to do something from the top down and failed. More relevant for Iraq and Afghanistan. Also more relevant because the threat to the U.S. in the future is not likely to be from a superpower but from weak and failed states and rogue groups. Noble motivations, U.S. and U.N. went into Somalia just to keep the peace. Mission creep; one way to get power is to expand the mission. Humanitarian aid brought to one side is viewed by the other side as helping the enemy and shoot. U.S. had to decide whether to shoot back or to exit. Black Hawk Down. Trying to impose solutions top-down where it doesn't fit. Haiti: Aristede overthrown, U.S. restored him to power; elected originally, sham, but friend of the U.S., illiberal. Liberal in the classical sense, devoted to liberty. Care about liberal democracy, protection of property, civil freedoms, don't want elected person able to exploit the minority. Majority rule. Hamas is a democracy. Organizing elections is the easy part. Establishing binding constraints on the people who win the election is the hard part. Collective decision making but winner can't abuse minorities or its political rivals. Aristede's rivals didn't view him as legitimate and used violence to overthrow him. U.S. went in 1994, there until 1996. Failed in our goals, Aristede forced into exile. Looked to U.S. to intervene to help him retain his power. No investment in infrastructure, subsistence level because government takes your stuff. Policy makers have a fetish with nation states; but consider alternatives. Trying to prop up states might get democracy but not liberal democracy. Good argument for allowing weak and failed states to collapse. Pure cost on their citizens, provide benefits to their cronies at the expense of their citizens. Empowering the worst governments in the world. When a state is collapsing it indicates something. Like most interventions it's motivated by the view that we can do better; but when we recognize the limits, unintended consequences, public choice issues, we should be skeptical.
58:07Optimism for Iraq initially: highly educated population, commercial infrastructure. Why was that wrong? Debate over foreign aid. Foreign aid is a form of intervention, to manipulate outcomes. Development/ foreign aid debate. They don't save enough, so we need to fill up the gap; fails; well, they just don't know how to use it; invest in schools; giving them money to invest, why aren't we seeing convergence to development? Incentives and information, lack of property rights. Information problem, don't know how to allocate aid correctly because there is no market feedback or profit-loss mechanism. Easterly's work: have to focus on the searchers, the low level, not top-down. Education is an input, human capital, invest in it to produce other stuff. But need other inputs. Iraq had some entrepreneurship. Why hasn't U.S. been able to leverage that? There was private initiative, but profit opportunities were minimal. Workers in factories waited for directives. Black market, merchants, but big issue is one of security. Worrying about safety, curfews make it hard to engage in trade. State is important, police, but the state can't be everywhere. People are cooperative on their own. Where those beliefs and values are absent at the present moment in time, need continued coercion and force to maintain certain amount of cooperation.
1:04:45Ex post it's easier to look smart than ex ante, before the fact. Before the fact, people thought Iraq would turn out well. Historical challenge: Germany, back to reconstruction in 1945 compared to 1919. After WWI, Kaiser pushed from the scene, democracy imposed, and it failed. Reparations burden, inflation; but probably not the only answer. At the time people said it had always been ruled by a King so you can't expect it to just become democratic. Unintended consequence led to worst leader in history. WWII comes along, but could make same argument. What was different? At the time or before the fact we don't know. Always doubts. Implication is that we should be skeptical towards doing it. If we don't know how to go about getting liberal democracy, even if we come up with a list of institutions we want, an ingredient list, we shouldn't be surprised when we get bad outcomes. Germany, people point to the Marshall plan, but monetary resources don't do anything by themselves; right time in history, too broad; factors came together. Lucius Clay over time became less directly involved and allowed citizens to do their thing. Emergent path. Identifying factors and using them out of context is worthless. Insurgency against the U.S. occupation in Germany after WWII, but nothing major. American Civil War, chance that South would refuse to accept the peace. North let people keep their horses, could have fought. Lee's leadership. No counterpart in Germany. U.S. did utilize existing institutions, didn't completely dismantle them. Can work in both directions. A national leader can be in charge for many different reasons and can maintain power in many different ways. Success is unpredictable and low probability. Going against that is that people desire to make the world a better place. What can we do? Non-intervention and unilateral free trade. Strategy has been to isolate them, refuse to trade with them, impose sanctions. But trade is a powerful and voluntary mechanism of change. Typically hurt the citizens and provides bad leaders with fodder to speak out against the U.S. Instead, we should integrate, allow them to exchange and interact with our citizens. Free trade increases wealth but also has cultural benefits. Tyler Cowen's work. People have to self-determine, decide they want freedom. We want them to choose it.
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/04/coyne_on_export.html. http://www.econtalk.org/archives/2008/04/coyne_on_export.html http://www.econtalk.org/archives/2008/04/coyne_on_export.html Christopher Coyne Mon, 07 Apr 2008 06:30:00 -0500 McCloskey on Capitalism and the Bourgeois Virtues Deirdre McCloskey of the University of Illinois at Chicago and the author of The Bourgeois Virtues talks with EconTalk host Russ Roberts about capitalism and whether markets make people more ethical or less. They also discuss Adam Smith's world view, whether people were nicer in the Middle Ages, and the role of prudence and love.

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0:36Intro. Often hear it said: "Sure, capitalism delivers the goods, but it deadens the soul." Standard defense is that it delivers the goods: we get air conditioners, cars, etc. But to really answer it we really need to look into whether participation in the market is corrupting. Sweet commerce; you can make the argument that we are improved by capitalism--commerce. Wordsworth: "Getting and spending we lay waste our powers." Adam Smith: The Theory of Moral Sentiments, context of ethics, virtues for The Wealth of Nations, which is not a recommendation to get and spend. Obsession is dangerous; there are other obsessions besides monetary obsession. Prudence: rational economic man, Max U (Maximum Utility), is not a very satisfying life, and most people do not behave only that way.
6:46Implications, given that people do not always behave that way even though as economists we often treat them as if they behave that way? As economists we are specialists in prudence only; but we have to be careful about over-specializing, assuming that psychologists, lawyers, etc. will each take care of their own specializations. But that was not what Adam Smith suggested for economics. Economics of religion, Gary Becker type argument, what is religion about? Iannaccone podcast. Economic approach has many insights but leaves some things out. Question of balance. Marglin podcast, Dennis Robertson, our economic system lets us economize on love: meant that by dealing with strangers for our monthly "needs" and desires (McCloskey drums into to grad students to not use the word "needs") we can save our love for those who matter. These richer views have simply not been in the textbooks. Danger in this talk of corrupting community. If we keep saying to each other that greed is good and we should take love off the table so far as our economic life is concerned has the danger that if we talk that way we may start to act that way. It can be corrupting of our spiritual lives and love. Marglin is persuaded by the notion that markets are arm's length, far away, green eyeshade transactions, don't need to be concerned. But markets are more embedded. Max U, Paul Samuelson; people live in communities and like communities, so they make the office into their communities. They make economic transactions into exchanges of love.
14:47Quote, p. 24: "I claim that actually-existing capitalism, not the collectivism of the left and the right,...". Historical perspective: the past versus today. Agriculture in 13th and 14th century England had very high rates of violent crime. Sweet commerce has made us rich enough that we do not have to steal or be as violent. Marxists say that on the contrary things have gotten worse; but Marx and Engels themselves pointed out that even up to the 18th century there had been improvement. Discussions of Shakespeare in coffee shops weren't possible before. Tyler Cowen. News is not perfect but on the whole good. Romanticized notion of the past. In the Middle Ages people didn't think that's what the Middle Ages was like. Market places were available for sale, trade and commerce of a very thorough-going sort. Prostitution. In the 19th century there developed this romantic idea that somehow there was this world we have lost that was wonderful. Main nasty features was that though there was commerce, people were not encouraged to be inventive. Man as a cog in a machine, on an assembly line. But harvesting the grain was a lot like that, swinging a scythe all day long. We have machines now to do that for us. Even the nostalgic don't want to go work on those farms. There are pleasures from exercising one's body, but it's hot, unsatisfying toil. Charlie Chaplin himself is an excellent example of the opportunities capitalism provided. Cruel remark that Groucho Marx made to a communist friend who asked him for a job, "No, I don't want to give you a job; I don't want to make you a wage slave." Threshing involves hundreds and hundreds of hours of work, stick attached to another stick which you flail at the grain to shake off the part you could eat. We've escaped from that routine; but also, having responsibility for yourself, being allowed to go from job to job, improves you ethically. We're all self-respecting capitalists, owning our own human capital. "Every man is a merchant." Russ's agricultural experience, kibbutz in the Negev, volunteers had choice of only working from 4 a.m. to 11; picked peaches; cleaning dust out of drain pipe with a pin.
29:01People are seen to move voluntarily from agriculture to mills because they preferred them. Marxists call it false consciousness. China: state of partial employment in poor villages versus working 11 months of the year for 6 days of the week in Shanghai. Freedom point: When people have the choice, they choose a capitalist life. The capitalist life is a life of free choice. Marxist claim is that it enslaves other people, but problem with that argument is that it depends on the notion of unequal exchange. We can reject foreign and domestic free trade and go back to working 12 hours a day in agriculture. Some people want to live that life. Amish choose a hard life on spiritual grounds, some carefully regulated modern amenities. We all make this kind of choice--some people do not have cable to self-restrict temptations. Ethical choice. Mistake to think of ethics as only about how you treat other people; it is also about how you treat yourself and your God. Those other things, the transcendent God and oneself are not necessarily damaged by capitalism.
34:39Kibbutz loss of population, people tire of it; pin, making the desert bloom. What about capitalism makes us more ethical? Converging causes: longer life expectancy, which comes along with modern prosperity. Your investment in yourself becomes more important. If you are going to die at 35 it matters less to invest in spiritual matters. High income allows you to read more. Start work age later, retire earlier, more time for spiritual improvement. A life in capitalism values the individual. The individual is encouraged to think of herself as mattering. Decisions aren't being made by the central planner, by tradition, by neighbors. Anthropologists make this point: material consumption is not about material things but about self-definition. Not just about entertainment and how much ice cream you can eat but about meaning. Modern young person can think of having many types of jobs. In the 1950s you could be a normal teenager or a rocker, rebel, James Dean. Now there are 30 possibilities, conforming nonformist, non-conforming conformist. John Adams, choose what kind of person you are going to be. Castes in India, Europe, had to work only one job whole life. Not just our wealth but the way capitalism works. Making deals. Person who takes responsibility is a novel idea. The great chain of being from the king down to the dog put you in your position from birth, much less social mobility historically. Centrally planned socialism doesn't come with choice; even worker ownership has an unsatisfactory element of compulsion. Before the early 19th century, responsibility instead meant answering, having a response. Invention, not merely invention.
43:52Counterpoint: romanticize that freedom in the modern world. But maybe university professors have this freedom; but so many people can't do that and lead the equivalent of a 16th century life but with much less security, no village safety net, can't rely on government. Weren't many safety nets in the Middle Ages; people were obsessed with security. Can see it in fairy tales, Grimm's fairy tales read as historical documents. No scene of being helped by your community. Even when as in Sweden and Holland safety nets work well, mainly what they turn out to be is a way of employing people. Great danger of people saying "I gave at the office," I don't need to have real concern for my neighbor because he can go down to the government office and be saved. Katrina--government forces worked extremely poorly; Wal-mart, church groups, sheer individuals worked better. Celebration of capitalism balances celebration of socialism.
48:34Discipline of economics, McCloskey was Russ's teacher of micro, style of economic teaching that is puzzle-solving, intuition based. Profession has become more Samuelsonian, more mathematical. Where would you like economics to go if you had your druthers? Teaching 18-year olds. Adam Smith, more Smithian economics, economics where maximizing is in a context of ethics where the economic actor is thought of as being a human instead of a maximizing machine. The Economic Conversation, elementary book, students and faculty are urged to talk about economics. It's not the math itself that's the problem; it's the thinking that mathematical thought is the same thing as economic thought. Math is a tool. If all we do is run models over and over again, what is point of scholarships? Chess problems, econometrics. Hayekian direction as Russ's personal revolt against Max U. Either the use of emergent market based thinking or the conversational exploration of concepts are hard to write exams for. Compulsion to grade. Time-consuming to give a grade. When we have to give a grade we fall back on the Max U kind of problem. Language is how an economy operates and it's how a science operates. An emergent market is a talk shop. Austrian approach: These conversations are creative and that's why they can't be formulated as exam problems. Information. Talk about the role of language in the economy. Best economic education tragically takes place outside the classroom. "Aim high in steering."
]]> Posted by Russ Roberts at http://www.econtalk.org/archives/2008/03/mccloskey_on_ca.html. http://www.econtalk.org/archives/2008/03/mccloskey_on_ca.html http://www.econtalk.org/archives/2008/03/mccloskey_on_ca.html Deirdre McCloskey Mon, 31 Mar 2008 06:30:00 -0500