Subscribe: EconLog
Added By: Feedage Forager Feedage Grade B rated
Language: English
american  capital  capitalism  david henderson  david  frank knight  frank  friedman  income  knight  people  sanctions  years 
Rate this Feed
Rate this feedRate this feedRate this feedRate this feedRate this feed
Rate this feed 1 starRate this feed 2 starRate this feed 3 starRate this feed 4 starRate this feed 5 star

Comments (0)

Feed Details and Statistics Feed Statistics
Preview: EconLog


Last Build Date: Thu, 27 Jul 2017 02:00:50 -0500

Copyright: Copyright 2017

Friedman, Galbraith, and Wright on American Capitalism, by David Henderson

Thu, 27 Jul 2017 02:00:50 -0500

"Capitalism" has become a fighting word in the battle between East and West and for men's minds everywhere; and, like all slogans, it means many things to many men. To some "capitalism" is a term of opprobrium, signifying the oppression of little men by ruthless monopolies; to others "capitalism" is a term of hope, signifying the freedom of men to shape their own economic destinies, the unleashing of human ingenuity and energy to raise the standard of living of the masses. To all, American capitalism is a symbol of economic strength and power, of unprecedented wealth and productivity, the strength which is the hope of our friends and the despair of our enemies. So begins Milton Friedman in a June 28, 1953 discussion on NBC radio titled "What Is American Capitalism?" At the time, Friedman was a professor of economics at the University of Chicago. The other two participants were John Kenneth Galbraith, a professor of economics at Harvard University and David McCord Wright, a professor of economics at the University of Virginia Law School. It was either the late Gordon Tullock, in a conversation in 1971, or the late Ben Rogge, in a conversation in 1969, who told me that Wright was a rare bird: a conservative Keynesian. That is, he believed in countercyclical fiscal policy but not in a large government. I've posted twice now (here and here) about these late 1940s and early 1950s NBC shows. What's striking here, as already noted, is how civil the conversation is and how formal: each person calls each other by his last name. Here are some highlights. In response to Milton's question, based on Galbraith's just-released book, American Capitalism, about what is special about American capitalism, Galbraith answers: I am afraid that you give me credit for sophistication which I did not have. I do not recall that I had anything particular in mind in adding the word "American" to the title, and I would not attempt to make too sophisticated a definition of capitalism. It would seem to me that the essential point is who makes the decisions in an economy. Under capitalism the decisions are made by the people who own or manage the basic productive resources, and that is in contrast with decisions which are conformed to in a larger plan made by the state under noncapitalist forms of enterprise. In response to Milton's question about now competitive American capitalism is, Wright answers: In order to answer that, one first has to have some idea of what competition is or what monopoly is. A lot of people think that monopoly is simply big business and that competition is small business. This is quite wrong. Competition to me means the presence of several centers with alternative policies competing against one another. You can have big units, but if there are many other big units and if they are all deciding independently and being reconciled in the market, then that is not monopoly; and in the same way under the fair-trade laws you can get a lot of small units which are so bound down that there is no real competition among them at all. [Note that this discussion occurred before Lester Telser's path-breaking work that gave economists a new insight into resale price maintenance, which is what Wright was referring to when he discussed "fair trade."] Then an interesting interaction between Friedman and Galbraith: Friedman: In the actual American economy it seems to me that there unquestionably are these areas of monopoly, these areas of competition. My own feeling is that most discussion tends grossly to overstate both the magnitude and the importance of the monopolistic elements, largely because monopolies where there is only one firm in the field are more visible, partly because monopoly is so concentrated in manufacturing. [DRH note: This was a theme in much of Milton's writing over decades.] Galbraith: I am not terribly impressed by the importance of the question partly because I am less disturbed than many people about the problem of monopoly. The question, to be sensibly framed, has to be put in these terms: Is the American economy o[...]

A Knight Tale, by David Henderson

Wed, 26 Jul 2017 07:30:35 -0500


In the picture above, I'm wearing the actual poker hat that Frank Knight wore when he worked on articles. Here' the tale of how that came to be.

In the Spring of 2002, I was teaching a microeconomics class to a group of students at the Naval Postgraduate School. It was a good group and a good class. The textbook we used, by the way, was Steven Landsburg's Micro text. It was excellent.

At the end of the quarter, one of the students, Tom Verry, who had obviously enjoyed the class, came by to see me. He told me that his great uncle had been an economist. I had heard stories about someone's uncle or cousin being an economist and I always asked where and who, and typically didn't recognize the name of the economist. I asked him where he had taught. "The University of Chicago," answered Tom.

I suddenly became more interested. "What was his name?" I asked.

Tom: Frank Knight.
David (catching breath): Yes, I know of him and almost met him. [When I had visited the University of Chicago in May 1970 I had gone up to his door and was about to knock, but I heard him in a very animated conversation, apparently on his phone. I stopped and walked away, probably one of the most bone-headed decisions I had made as a 19 year old.]
Tom: I've hesitated to mention him because I liked your class and I like free markets and I don't think you would like his views.
David: Let me guess. You think he was a Communist.
Tom: Yes.
David (reaching for my copy of his mimeographed "The Case for Communism" manuscript): And you think that because of a speech he gave titled the case for Communism from the standpoint of an ex-liberal.
Tom: Yes.
David: Well, you can relax. We talked a little in class about Milton Friedman. Milton, and another guy named George Stigler, were students of Knight's. Both went on to be effective advocates of economic freedom, especially Friedman. You might even be able to argue that we wouldn't have had as much deregulation and wouldn't have had the 1981 Reagan tax cut if not for your uncle Frank. [That might be a stretch, but I think a case could be made.]

Tom was very glad to hear that. His whole attitude to his uncle Frank changed.

A few years later, Tom sent me Frank Knight's poker hat in the mail.

Addendum: I asked Tom his permission to tell his story and I received this answer:

You certainly may. I consider it [and your introduction to microeconomics] a pivotal point in my learning about human behavior. I still use your lessons frequently. Maybe you can conclude your blog with a photo of you wearing Frank's green visor and complete the loop of how serendipitous the exchange was.


Frank Knight's Case for Communism, by David Henderson

Tue, 25 Jul 2017 13:28:31 -0500


When I posted on Frank Knight's case for Communism the other day, I also put it on up on Facebook and had some people wondering about context. Those of us who are fans of Frank Knight don't think of him as a Communist. Milton Friedman and James Buchanan, to name two well-known economists, credit Knight for much of what they learned when they studied in the Ph.D. economics program at the University of Chicago: Friedman well before WWII and Buchanan after.

First, it probably goes without saying, but I should say it anyway. There is no way that Frank Knight believed in Communism. Second, the hard part, then, is to explain why he gave the talk he gave. My own view, having read about him over the years, is that he saw how idiotic the policy debate had become and had a moment, or maybe a few months or a few years, of despair. In researching this post, I came across a 2009 article by Harvard historian Angus Burgin. It's titled "The Radical Conservatism of Frank H. Knight," and is published in Modern Intellectual History, 6, 3, pp. 513-538.

Burgin, to his credit, takes Knight's 1932 talk seriously. He doesn't fall into the trap of thinking that Knight was really advocating Communism, but he dismisses, I think correctly, Rose Friedman's view, expressed in Two Lucky People, that the lectures [there were apparently more than one] were "tongue-in-cheek." Much of the lecture I quoted was tongue-in-cheek, but that term is too glib. I really do think, based on reading about the man, that he was in despair. Rose points out though, in her account of the episode, "When asked some years later for permission to publish the lectures [there were more than one], Knight is said to have responded, 'I wish I could unpublish them.'"

I can't do justice here to Burgin's highly nuanced article. I recommend that you read it yourself and draw your own conclusions.

By the way, in rereading Rose Friedman's reminiscences of Knight, I particularly liked these two:

A Catholic priest doing graduate work in economics registered for Knight's course one quarter. His presence in clerical garb was doubtless an irritation to Knight. After two weeks or so in the course, the priest politely complained to the chairman of the department, "I registered for a course in the History of Economic Thought, not one in [sic] the misdeeds of the Catholic Church," and asked for, and received, a refund of the fee he had paid for the course.

My favorite verb in that story is "received."

And the other Rose Friedman comment I liked:

We have often remarked that two-thirds of his students never got anything from him, and the rest never got anything out of two-thirds of his remarks, but that the remaining one-third of one-third was well worth the price of admission. To this day we find ourselves often prefacing a comment, "as Frank Knight would say."

Postscript: Within the next day or two, once I figure out how to post a picture that I can't seem to rotate 90 degrees, I will tell a story about a former student that relates to Frank Knight. Teaser: the picture is of me wearing something that Frank Knight is wearing in the picture above.


Do you really want to include capital gains?, by Scott Sumner

Tue, 25 Jul 2017 07:22:18 -0500

I frequently argue that income is a meaningless concept, as it includes capital gains (and losses) in asset values. Indeed the problem is even more basic, as income mixes labor income and all investment income, which is like adding apples and oranges. No, it's even worse, like adding strawberries and watermelons, and talking about the number of "fruit". Because income is a meaningless concept, income inequality is also meaningless. But let's say I'm wrong, and let's assume that capital income actually measures something interesting. What then? In that case, the income of the top quintile would almost certainly be highly cyclical. Consider the following graph, showing the total stock market capitalization in the US: Notice that stock market capitalization fell by 23.4% of GDP between 2001 and 2002, and by 44.5% of GDP between 2007 and 2009. What happens when stock market capitalization falls by nearly a quarter? Let's consider the top quintile of the population, which owns the vast majority of stocks. Capital losses of 23% of GDP would sharply cut into their income from other sources. The top quintile earns about 55% of total income, or 43% after taxes and transfers. If the income inequality data were accurate, it should show a huge drop in the share of income earned by the top quintile, any time the stock market crashed. But we don't see that---income shares are pretty stable from year to year. The problem here is that while income proponents claim to care about capital gains and losses, what they actually measure is realized capital gains and losses, which is meaninglessness on steroids. It takes an already meaningless concept (capital gains) and only counts those amounts that show up on tax returns when people buy and sell stock. Economists agree that there is no functional difference between a realized capital gain and an unrealized gain, indeed realized gains often are not even consumed, rather simply reinvested in another financial asset! If you really believe that we should be measuring capital gains, and including them in with income, then we ought to include the unrealized gains as well. If we did that, we would observe massive declines in the income of the top 20% in bear markets like 2001-02 and 2007-09. Do you recall Americans basking in the glow of a dramatic improvement in "equality" in 2009? Neither do I. And that's because its consumption inequality that matters, and consumption inequality did not change dramatically during the Great Recession. A few points on the data: 1. Foreigners own a portion of the American stock market. However, Americans own lots of foreign stocks as well. Since foreign markets crashed at about the same time, I think these are still ballpark estimates of capital losses for Americans from the bear market in stocks. 2. During 2007-09, the top 20% also saw large capital losses in real estate. Thus the data above understates the total capital losses incurred by the elites in 2007-09. It would not surprise me if total income earned by the top 1%, or perhaps the top 0.1%, actually turned negative during 2008. (It did for me.) That is, their capital losses outweighed labor income plus interest and dividends. But obviously it would be silly to include the top 1% in with homeless people in income inequality data. It's consumption that matters. 3. Conversely, huge gains also distort the picture. When I file taxes next year I'll have to report a huge capital gain, as I am selling my house for about a million dollars more than I paid for it. And yet nothing really changed for me this year. I am buying another house of roughly equal value. Nothing has changed in terms of my flow of housing consumption; I occupy the exact same number of square feet as when I bought the house in 1991. It's all just housing inflation, which in coastal areas has outpaced the CPI. This is not to say that I am not in some sense "rich", or deserve to pay lots of taxes. I could choose to live [...]

Three Thumbsuckers, by David Henderson

Mon, 24 Jul 2017 12:58:18 -0500


When I was writing a lot for Fortune in the late 1980s and early to mid-1990s, an editor of one of my articles casually referred to it as a "thumbsucker." I thought it was an insult, but he explained to me that it meant simply that readers couldn't simply scan it but needed to read it carefully and think about it.

I read three good thumbsuckers this morning. Here they are:

1. Arnold Kling on Tyler Cowen's interview with Atul Gawande. Gawande had said:

In the 1950s, we had no real FDA, and you had the opportunity to put out, to innovate in all kinds of ways, and that innovation capability gave us modern cardiac surgery and gave us steroids and antibiotics, but it also gave us frontal lobotomies, and it gave us the Tuskegee experiment and a variety of other things.

Arnold points out that Tyler didn't challenge Gawande. Arnold does, writing:
The primary reason we abhor frontal lobotomies and the Tuskegee experiment is lack of patient consent. Patient consent is not the focus of the FDA at all. You do not need an FDA to enforce the patient's right to consent. In fact, you can argue that the FDA acts contrary to patient consent, because it tells people what drugs they cannot have even if they are fully aware of the evidence regarding the risks of the drugs and the data on the drugs' effectiveness.

2. The "settled" science is now unsettled:
In the 150 years since Schwendener, biologists have tried in vain to grow lichens in laboratories. Whenever they artificially united the fungus and the alga, the two partners would never fully recreate their natural structures. It was as if something was missing--and Spribille might have discovered it.

He has shown that largest and most species-rich group of lichens are not alliances between two organisms, as every scientist since Schwendener has claimed. Instead, they're alliances between three. All this time, a second type of fungus has been hiding in plain view.

From Ed Yong, "How a Guy From a Montana Trailer Park Overturned 150 Years of Biology," The Atlantic, July 21, 2017.

3. The change in Congressional procedure that started in 2006:

In 2017, it is useful to recall that this process used to apply to each and every government activity that required a dollar from the U.S. treasury, each and every year. For the past 11 years, however, all the money drawn from the treasury have come from single "continuing resolutions" (CRs) or "omnibus" bills, drafted in secret by "leadership" staffers, executive branch officials, and lobbyists, on which there have been no hearings and which few members have ever read, and on which few if any amendments have been allowed. These "Cromnibuses," served up as the government runs out of spending authority, end up being passed by the majority party's near unanimity.

From Angelo Codevilla, "Restoring the Republic Means Reimposing 'Regular Order'", American Greatness, July 23, 2016. HT2 Instapundit.


Caplan in Paris, by Bryan Caplan

Mon, 24 Jul 2017 08:16:51 -0500

(image) I'm speaking in Paris this Thursday for Students for Liberty.  Details here.

P.S. Here's what I thought the last time I was in Paris nine years ago.


Joseph Rago RIP, by David Henderson

Sun, 23 Jul 2017 20:11:01 -0500

Wall Street Journal editorial writer Joe Rago died this week at the age of 34. If you read the Review and Outlook editorials--the unsigned editorials that are published on the left hand side of the editorial page and reflect the views of the editors--chances are the ones you read about health care in the last few years were written by Joe. The Journal published highlights from some of his editorials but unfortunately they are gated. Here are some highlights, followed by my personal reminiscence. From "The Obamacare Crossroads," March 20, 2010, just before the bill was passed by the House of Representatives: Democrats are on the cusp of a profound and historic mistake, comparable in our view to the Smoot-Hawley tariff and FDR's National Industrial Recovery Act. Everyone is preoccupied now with the politics, but ultimately at stake on Sunday is the kind of country America will be. . . . In our world of infinite wants but finite resources, there are only two ways to allocate any good or service: either through prices and the choices of millions of individuals, or through central government planning and political discretion. This choice is inexorable. Stripped of its romantic illusions, ObamaCare is really about who commands the country's medical resources. . . . A self-governing democracy can of course decide that it wants to become this kind of super-welfare state. But if the year-long debate over ObamaCare has proven anything, it is that Americans want no such thing. . . . The ugliness of the bill, and of its passage, means that some or all of it might be repealable, but far better not to make the tragic mistake in the first place. From "Race Against the Cure," June 29, 2011: More broadly, the Avastin fight is about the FDA and its desire to more tightly control the development of cancer drugs. Avastin was initially approved under the FDA's "accelerated approval" process that is supposed to speed treatments for terminal illnesses and unmet medical needs. Dr. Pazdur, the New England Journal of Medicine and the rest of the medical-political establishment have decided that accelerated approval's flexibility is too friendly to commercial drug developers, and in Avastin they've found a pretext to gut it. The FDA's anti-Avastin campaign is enforcing a culture of research and development that will discourage the innovation, investment and risk-taking that will be necessary to produce the next generation of cancer treatments. More imminently, thousands of women may die more quickly and live with more pain because government regulators substitute their own opinions about clinical meaningfulness for those of oncologists and their patients. From "The Political John Roberts," June 26, 2015: For the second time in three years, Chief Justice John Roberts has rewritten the Affordable Care Act in order to save it. Beyond its implications for health care, the Court's 6-3 ruling in King v. Burwell is a landmark that betrays the Chief's vow to be "an umpire," not a legislator in robes. He stands revealed as a most political Justice. . . . Justice Scalia quips acidly that "we should start calling this law SCOTUScare," but the better term is RobertsCare. By volunteering as Nancy Pelosi's copy editor, he is making her infamous line about passing the law to find out what's in it even more true than she knew at the time. I met Joe only once, when he was at Hoover for a week and I drove up to see him. We had a very pleasant talk, mainly about health care and health economics. I tried unsuccessfully to talk him out of his view that Medicare should be so open-ended, paying for edge-of-the-envelope treatments and paying so much for people whose health indicators suggested strongly that they were in the last few months of life. He did agree, though that that was a big driver of increasing Medicare spending. My favorite pieces by him were on the FDA. I will miss him and his work. [...]

Frank Knight on John B. Watson, by David Henderson

Fri, 21 Jul 2017 21:47:05 -0500


I dug out of my library a famous unpublished (until 1991) 1932 mimeograph (those under age 45 should look up that term) article by Frank H. Knight. The article is titled "The Case for Communism: From the Standpoint of an Ex-Liberal." It's for a blog post I'm thinking of writing. A friend gave me my copy in about 1970. It's a speech he gave to the University of Chicago's Communist Club and National Student League.

Here's a fun passage:

The dictatorship of the [Communist] Party once established, and given a monopoly of propaganda, the problem of controlling the proliferation of romantic myths, of unifying and stabilizing and concentrating on one system at a time should be simple in the extreme. One of the greatest of modern scientific developments is waiting to serve the regime in this regard and save the world from turmoil. I refer, of course, to psychology in its applied aspect. In this connection we may thrill with patriotism as well as hope. No other country has approached our own in the succession of peerless psychologists we have given to the world. To name but a few: P.T. Barnum; Jay Gould; Mrs. Mary B.G. Eddy; Mrs. Aimee S. McPherson (notice the due representation of both sexes); Billy Sunday; Goat-gland Doc Brinkley; and coming to our own home town, our own dear Big Bill Thompson, Balaban, and Katz, and WGN. As a climax to this glorious series I would name Dr. John B. Watson. It is not necessary to prove that he is the world's greatest psychologist; he admits it. And besides, doesn't he draw $40,000 a year [DRH note: this is over $700,000 in 2017 dollars] for his psychologizing? Speaking for myself, I must express chagrin that it is so little. A man who can stand before the cream of the intelligentsia and exhort them to believe that they do not believe, but only react, to think that there is no such thing as thinking, but only muscle-twitching, that the whole idea of struggle and error is an error against which we must struggle until we see that seeing is an illusion, and illusion likewise an illusion--in short, one who repeats that "I am not saying anything, and you are not hearing anything, the gears are in mesh, nothing more," and makes them like it and pay to hear it--I say such a man should be worth at least $1,000,000 in any properly ordered civilization. One of the first acts of justice of the Communist dictatorship will undoubtedly be to give such a man a task which is not an insult to his powers. . . .


Sudan Sanctions and My Neighbor's Cat, by David Henderson

Thu, 20 Jul 2017 21:08:34 -0500

Diplomats here expect Washington to drop sanctions in the fall, as planned during the final days of the Obama administration, not least because they failed to achieve some key goals. "When the sanctions were implemented, the hope was that there would be a popular uprising against Bashir," one Western diplomat said. "Twenty years on, I think we can safely say that didn't work." This is from "Sudan Gets Down to Business in the Face of Sanctions and Strife," by Matina Stevis, Wall Street Journal, July 18, 2017. I posted about it earlier today. But the quote above is about another aspect that I've written about with respect to other sanctions. Here's what I wrote in "Why Economic Sanctions Don't Work," Hoover Digest, October 30, 1998: When I was a kid, the boy next door once played a nasty trick on my brother Paul: our neighbor held his cat in his arms, brought it within a few inches of Paul's face, and pulled its tail. The suddenly angry cat bit Paul's face. My brother and I were upset; the cat, we thought, should have bitten the perpetrator's face. I think of that incident whenever I hear people call for economic sanctions against a whole country. When governments impose sanctions, the officials implementing the policy want to harm the dictator or bad guy heading the other country's government. That's the goal. What they do to achieve it is intentionally harm many innocent people in those countries by cutting them off--if the sanctions are effective--from food, medicine, and other goods that they need or value. The sanctions almost always work in a limited sense: they impose some harm on innocent people in the target country. But that's not the goal. Nor is the goal to cut off the dictator from food, medicine, et cetera. You can be sure that Saddam Hussein and Fidel Castro are not hurting for antibiotics or high-quality food. No. The harm that the advocates of sanctions want to inflict on the bad guys is indirect. They are yanking innocent people's tails so that those people, like our neighbor's cat, will lash out at whoever's face is right in front of them. They want those people to see their own government as the enemy and to try to overthrow it. But people are smarter than cats. When people suddenly find food, clothing, medicine, and other goods in short supply, when they find themselves a lot poorer and focusing desperately on day-to-day survival, they will take the time to find out who is responsible. And guess what? They do find out. Although governments in embargoed countries like Iran, Iraq, and Cuba strictly control what newspapers, radio, and television report, one piece of information that is sure not to be censored is the role of outside governments in the country's economic distress. I went on to say: What do people in embargoed countries do when they find out that foreign governments threaten their survival? They want to do what the cat wouldn't do: bite the hand or face of the perpetrator. In fact, I can think of no case in history where as a result of sanctions imposed by government A on people in country B, country B's people overthrew their own government. It's the stuff of novels, and not very good novels. To understand how people in embargoed countries feel, you will have to use your imagination. Picture yourself back in 1974. President Nixon's popularity has hit bottom. Many Americans want him out, but he holds on. Now imagine that the head of a freer country--say, Switzerland--thinks Nixon is a vicious leader and imposes sanctions on us. Because of these sanctions, we can't get medicine and we can't feed our families adequately. We spend our days scraping for the basics we need to survive. (Of course this is implausible in the United States, which is why I said you would have to use your imagination.) Now ask yourself: Is your first thought that you should organize and try to ove[...]

How Conscious Is Your Robot?, by Bryan Caplan

Thu, 20 Jul 2017 13:45:30 -0500

Now that I've studied the article that inspired Robin's recent bet, I'm completely flabbergasted by his reaction.  Here's the key figure in the original paper, showing how respondents ranked the mentality of thirteen characters.
(image) The Experience factor explains 88% of the variance; Agency comes in a remote second, with 8% of the variance.  And on the Experience factor, the robot is virtually at 0.  Apparently most people (correctly, in my view) don't think he's conscious at all.

Yet here's how Robin reads the results.  He's in blockquotes; my commentary isn't.
I'm also pretty sure that while the "robot" in the study was rated low on experience, that was because it was rated low on capacities like for pain, pleasure, rage, desire, and personality.
He wasn't just rated "low."  He was rated near-zero.
Ems, being more articulate and expressive than most humans, could quickly convince most biological humans that they act very much like creatures with such capacities.
How badly would the robot's mentality scores have to be to make Robin say the opposite?
You might claim that humans will all insist on rating anything not made of biochemicals as all very low on all such capacities, but that is not what we see in the above survey...
Actually, every living character made out of biochemicals scored at the mid-point or higher on Experience.  Respondents rated a dead body higher in Experience than a functioning robot.  A dead body!  The only creature in the robot's league was God himself, who is also generally not supposed to be made out of biochemicals.

P.S. At this point, I would be willing to bet that if the same study were re-done with an "em" character added, the em would score less than .6 on the Experience factor on a 0-1 scale.  Note: .5 is roughly the score of a fetus or someone in a permanent vegetative state.  Per my original reservations, however, I would not bet more than $500 at even odds.  Robin doesn't care for this bet, but so far we haven't been able to work out anything mutually acceptable.