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… is from page 53 of the original edition of Walter Lippmann’s sometimes deeply flawed but profoundly insightful and still-important 1937 book, The Good Society (footnote deleted):

There has been no point in the expansion of tariffs, bounties, bureaucracies, inspectors, censors, police, and armies, no point in the contraction of markets, the disintegration of states, the disunion of ethnic groups – no point at which the collectivists have been able to say: “Thus far and no further.”

How can they say so? The application of their principles creates such disorder that they are never without warrant for redoubling the dose. Without abandoning their central doctrine, how can they refuse to invoke the state as savior when there is obviously so much evil that should be remedied? They have no other principle they can invoke. Like the secret of some ancient art, they have lost the principles of freedom.

The post Quotation of the Day… appeared first on Cafe Hayek.

In his 1980 book, Knowledge and Decisions, Thomas Sowell highlights the importance of social authentication and verification processes. Does this work? Is that a good idea? If it works, it survives. If not, it doesn’t. Over time, we accumulate rules, norms, and practices that make it easier for us to get things done. Some of it might be analogous to non-functional or “junk” DNA, which is “a DNA sequence that has no known biological function.” As I’ve heard it put, however, any social institution has endured because, at some point, it solved a problem.

Markets are notable institutions because they make the signals and the solutions especially clear. Profits and losses take people’s ideas out of the world of speculation and into the world of verification. A hunch becomes more than a hunch: either it is authenticated as a good idea or rejected as a bad idea. Suppose a particular type of new toaster is profitable. In that case, it means that after we tally up all the “votes” people cast by spending or saving dollars, there are more votes for making the toaster than for using the necessary resources for something else.

In a free market, the question, “Who decides?” has a simple answer. We each do, and in so doing, we all do. 

In the 1930s, the economist W.H. Hutt popularized the term “consumers’ sovereignty” to describe the market process. Consumers are sovereign, Hutt argued, when they do not delegate to a centralized, coercive authority the power they exercise by buying or abstaining. He put it this way in his classic book Economists and the Public: A Study of Competition and Opinion:

“The consumer is sovereign when, in his role of citizen, he has not delegated to political institutions for authoritarian use the power which he can exercise solely through his power to demand (or to refrain from demanding).”

Hutt sometimes uses the singular, but the plural possessive “consumers’ sovereignty” is important. As he explains, the market is a genuinely social process. What emerges—a structure of prices—is something no one designed or intended, but that takes account of everyone’s voice.

That’s cold comfort to people worried about inequality because some individual voices speak louder than others. Someone with ten times my income can “speak” ten times as loudly in a free market. However, there are far, far more people of relatively modest means than there are people of very high incomes. In aggregate, they command more purchasing power and speak as a louder chorus. 

One of the great ironies of elite humanitarianism is the way people dismiss the “voice of the people” when it cries out loudly for things the elites don’t like, like Walmart Supercenters, action movies, and professional wrestling. What the people demand loudly, as measured by letting their money talk, however, is what the market will supply dutifully. When elites claim that the market doesn’t give the people what they want, their complaint is really that the market is all too happy to oblige unwashed masses who want the wrong things.

Hutt argued that this illustrates the importance of tolerating bad taste. He equated it with religious tolerance. We might disagree with people and think them vulgar and base. But they have voices to which we should listen carefully, precisely because they are human and because those voices have important things to say about how the world operates—or should operate. In a society of free and equal people, consumers’ sovereignty means that people with refined tastes have to accept a lot of what they might consider chaff along with their cultural and commercial wheat.

Money talks in all walks of life, or more accurately, people “talk” with their money. Money and prices translate people’s inchoate ideas and preferences into a meaningful “social will,” or at least something akin to it. 

In the stage production of Les Misérables, we’re asked, “Do You Hear the People Sing?” Profit-seeking entrepreneurs can answer “yes.” When we rely on prices, profits, and losses to help us figure out what to produce and how, “the people’s”—i.e., the sovereign consumers’— messages come through loud and clear.

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Why do we see both advertising and powerful consumer habits for well-known and intrinsically similar brands? We offer an explanation based on the idea that, as in Bordalo et al. (2020), a consumer is more likely to demand a good if she recalls the pleasure it gave her in the past. In turn, the consumer is more likely to recall goods that are consumed more frequently and more similar to cues, subject to interference from other goods. Our model yields context-dependent brand habits where ads work as memory cues. It predicts that ads: i) are more effective for more habitual consumers and ii) exhibit spillovers, within and across products, that are stronger for more habitual consumers and for goods with more similar ads. Using data from NielsenIQ and Nielsen we find support for these predictions in 20 undifferentiated and highly advertised product categories. Memory offers new insights on how advertising affects market competition and consumer welfare.

That is from a new paper by Pedro Bordalo, Giovanni Burro, Nicola Gennaioli, Gad Nacamulli and Andrei Shleifer.

The post Ads as cues appeared first on Marginal REVOLUTION.

1. “…town leaders successfully convinced a court to force ICE to remove a fence around the immigration processing facility because it was erected without a permit.” (NYT)

2. Knausgaard on Dostoyevsky (New Yorker).

3. Chat with AI Ray Dalio in your spare time.

4. Rebuilding American corporate research.

5. Country rankings for AI freedom of speech.

6. 21st century civilization curriculum.  A look at where one part of “the intellectual new right” is these days.

7. New IQ results, commercial and not confirmed.

The post Wednesday assorted links appeared first on Marginal REVOLUTION.

In times of crisis, we consider what can be done to return to a path of prosperity and wealth. However, there is a tendency to mistake the previous manifestations of economic success—the sectors and products that an economy has, in the past, successfully produced—for the more fundamental source of success.

When, in 1947, Ludwig Erhard lifted price regulations and decisively shifted the German economic system away from heavy interventionism towards a free market economy, the stage was set for what is commonly—though perhaps misleadingly—referred to as the “German Economic Miracle.” The rest is history. 

Today, there is a fundamental misunderstanding of the origins of wealth that endangers the already struggling German economy’s future. This misunderstanding is also observable in other societies. The mistake is taking the really-existing businesses and sectors that have emerged under a successful economic system to be the decisive element in an economy’s growth. For example, Germany’s economic system has produced an economy focused on, put very roughly (and, strictly speaking, of course, falsely), cars. So, one may conclude that all that is necessary for protecting and reinvigorating the German economy is to protect and support the German carmakers’ ability to produce cars. Precisely this is what many commentators on the German economic situation, as well as politicians, seem to believe. According to this view, the focus must be on ensuring favorable conditions for the auto sector, a proven powerhouse of the economy in the past.

This is not necessarily false—but if it is correct, it is correct contingently, not necessarily. Consider that a system of free enterprise will lead to the production of certain goods and services, and those may well lead to a focus on cars. But it could also lead to specialization in another industry, or to more diverse economic activity. 

The goods and services that entrepreneurs focus on are not given or predetermined. Rather, in a free market, entrepreneurs who can produce profitably will succeed, regardless of the industry they operate in. It may well be that carmakers are exceptionally profitable. But the success of carmakers, or any other industry for that matter, is only worth celebrating when it is a manifestation of the healthy market economy. 

So, what’s the lesson? It is that not industrial production, nor cars, nor any other sector was the decisive element for Germany’s economic success. These are just specific manifestations of that economy in this specific time and place. What the economy needs is a system that ensures market-tested success, not the prospering of any particular industry.

Instead, the decisive factor is the economic system, where entrepreneurs must be free to flourish while also being responsible for their actions. In other words, the free market is crucial—and, historically, it was the reason for the tremendous economic growth Germany experienced. In any economy’s past, this economic success will have manifested in certain sectors being central to the economy; tomorrow, it may be precisely these sectors again, but it could also involve completely different ones. 

To retain—and in Germany’s case, regain—its economic clout, a society’s focus must be on its economic system, not on the sectors that have historically emerged as the strongest under that system. Put simply, what is required is a return to the free market, not the bolstering of one specific sector that has recently achieved success. 

Now, let me be clear that there are certainly measures that would not only promote the specific sector that has historically brought success, such as the automotive sector in Germany, but also represent a return to free market principles. Consider deregulation and lowering corporate income taxes. However, the focus must always be on the market if the objective is to rekindle the economy, rather than on any specific sector that seems promising to politicians, such as subsidizing energy prices for industry.

This misunderstanding of what constitutes economic success permeates not only German policy recommendations but also those of many other countries. To some extent, it is understandable as the success of an economy manifests, or at least is primarily visible, in specific industries. However, this is precisely to misunderstand the true origins of a society’s economic miracle. You do not enrich your citizens by protecting an industry that has been successful in the past. Rather, at the basis of economic growth we find a solid market economy—just what Ludwig Erhard had restored in 1947 when he eliminated a host of government interventions to free the citizens from the constraints that had prevented them from enriching themselves and others.

The post Don’t Mistake a Miracle for Its Cause appeared first on Econlib.

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Here’s a note to a new correspondent.

Mr. B__:

Thanks for sending along Dani Rodrik’s new paper “What the Mercantilists Got Right.”

As usual, Rodrik writes engagingly. But I’m afraid I don’t share your positive assessment of his attempt to find merit in mercantilism.

He immediately gets off on the wrong foot by arguing that the lesson of the “I, Pencil” story, as told by Milton Friedman, is today moot given that most pencils are now made in China, and that Beijing (according to Rodrik) uses subsidies, currency manipulation, and other interventions to increase pencil production in China. Forget that Rodrik never bothers to wonder which particular industries in China are necessarily being made smaller than otherwise given this state-engineered increase in the Chinese pencil industry. Instead, recognize that Rodrik misses the essential point of “I, Pencil.”

This point is that the production of that seemingly simple product requires the use of vastly more knowledge than can be had by any one person or committee of persons. Beijing might well have arranged for China to become the world’s leading final assembler of pencils, but it did not eliminate the necessary roles played by specialists from around the globe each to perform his or her individually tiny share of the work required to produce pencils.

Person A had to design the chainsaw for felling the cedar tree – person B to help drill for the petroleum that’s refined into fuel for the cargo ships that bring to China the rubber and pumice for the pencils’ erasers – persons C and D to pilot those ships – persons E and F to design and produce the software used to navigate those ships – person G to write the insurance contract making the operation of those ships economically feasible – person H to help make the dyes that turn paint yellow – person I to engineer, and person J to manufacture, the glue that’s in the pencil – person K to help make the electrical wiring that transmits power to the pencil factory – person L to know where to find graphite for the “lead” – persons J, … X, Y, Z….

The number of such persons is surely in the hundreds of millions. Each must be motivated to produce what he or she produces and to be guided to produce in ways that are coordinated with the many other persons whose efforts contribute to the production of pencils. This coordination is done overwhelmingly by prices and other market signals.

Even if – as is highly unlikely – every function for producing Chinese-made pencils is performed in China, the process for this production is not, and cannot have been, consciously designed and directed by government officials. That process requires market signals. And to the extent that Beijing overrides market signals with conscious diktats, you can be certain that the Chinese are producing pencils wastefully, at inordinately high costs, thereby making their economy less productive and the Chinese people less prosperous.

Rodrik errs on several other fronts, but his failure to grasp the essential point of “I, Pencil” is a sufficiently telling symptom of his misunderstanding of market processes and trade.

Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030

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