Unorthodox Economics: 4. A Parable of Political Economy

This is the fourth entry in what I hope will become a book-length series of posts. That result, if it comes to pass, will amount to an unorthodox economics textbook. This first chapter gives a hint of things to come. Here are the chapters that have been posted to date:

1. What Is Economics?
2. Pitfalls
3. What Is Scientific about Economics?
4. A Parable of Political Economy

Imagine a simple society in which Jack and Jill own neighboring farms that are equally endowed in natural resources, tools, and equipment. Jack makes bread and Jill makes butter. Jack also could make butter and Jill also could make bread, but both of them have learned that they are better off if they specialize. Thus:

  • Jack can make 1 loaf of bread or 0.5 pound of butter a day. (The rate of transformation is linear; e.g. Jack could make 0.5 loaf of bread and 0.25 pound of butter daily.)
  • Jill can make 1 loaf of bread or 1 pound of butter a day. (Again, the rate of transformation is linear; Jill could make 0.5 loaf of bread and 0.5 pound of butter daily.)
  • If both Jack and Jill make bread and butter their total daily output might be 1 loaf and 0.75 pounds.
  • Alternatively, if Jack specializes in bread and Jill specializes in butter their total daily output could be 1 loaf and 1 pound.

Jill is more intelligent than Jack, and thus more innovative. That’s why she is able to reap as much wheat and make as much bread as Jack, even though he’s stronger. That’s also why she’s able to produce twice as much butter as Jack.

Jill has an absolute advantage over Jack, in that she can make as much bread as he can, and more butter than he can. But Jack has a comparative advantage in the production of bread; if he specializes in bread and Jill specializes in butter, he and Jill will be better off than if they both produce bread and butter for themselves.

Jack and Jill negotiate the exchange rate between bread and butter. Each ends up with 0.5 loaf of bread; but Jill gets 0.6 pound of butter to Jack’s 0.4 pound. Jill ends up with more butter than Jack because her greater productivity puts in her in superior bargaining position. In sum, she earns more because she produces more.

Jack and Jill have another neighbor, June, who makes clothing. Jack and Jill are more productive when they’re properly clothed during the colder months of the year. So they’re willing to trade some of their output to June, in return for heavy clothing.

Jerry, another neighbor, is a laborer who used to work for Jack and Jill, but has been unemployed for a long time because of Jill’s technological innovations. Jerry barely subsists on the fruit and game that he’s able to find and catch. Jack and Jill would hire Jerry but he insists on a wage that they can’t afford to pay unless they spends less to maintain their equipment, which would eventually result in a lower rate of output.

Along comes Juan, a wanderer from another region, who has nothing to offer but his labor. Juan is willing to work for a lower wage than Jerry, but has to be fed and clothed so that he becomes strong enough to deliver the requisite amount of labor to be worthy of hire.

Jack, Jill, and June meet to discuss Jerry and Juan. They are worried about Jerry because he’s a neighbor whom they’ve known for a long time. They also empathize with Juan’s plight, though they’re not attached to him because he’s a stranger and doesn’t speak their language well.

Jake — the gunslinger hired by Jack, Jill, and June to protect them from marauders — invites himself the meeting and brings Jerry with him. Jake likes to offset his stern image by feigning compassion. He tells Jack and Jill that they have a duty to pay Jerry the wage that he demands. He also requires Jack and Jill to feed and clothe Juan until he’s ready to work, and then they must hire him and pay him the same wage as Jerry. Jack and Jill demur because they can’t afford to do what Jake demands and make enough bread and butter to sustain their families and put something aside for retirement. June, who reacts with great sympathy to every misfortune around her — perceived and real — sides with Jake. Jerry argues that he should be helped, but Juan shouldn’t be helped because he’s just a stranger with a strange accent who’s looking for a handout.

Jake the gunslinger, disregarding Jerry’s reservation about Juan, announces that Jack and Jill must abide by his decision, inasmuch as there are 3 votes for it and only 2 votes against it — and he has the gun.

What happens next? Several things:

Jack and Jill quite properly accuse Jake of breach of contract. He has assumed a power that wasn’t given to him by Jack, Jill, and June when they hired him. Jake merely laughs at them.

Jack, Jill, and June (though she doesn’t understand it) have lost control of their businesses. They can no longer produce their goods efficiently. This means less output, that is less to trade with each other. Less output also means that they won’t be able to invest as much as before in the improvement and expansion of their operations.

June is happy, for the moment, because Jake sided with her. But she will be unhappy when Jake abuses his authority in a way that she disapproves, and when she finally understands what Jake has done to her business.

Jack and Jill have good reason to resent Juan and Jerry for using Jake to coerce them, and June for siding with Jerry and Juan. There is now a rift that will hinder cooperation for mutual benefit (e.g., willingness to help each other in times of illness).

Juan and Jerry have become dependent on Jake, thus undermining their ability to develop marketable skills and good work habits. Their dependency will keep them mired in near-poverty.

In a sane world, Jack and Jill would get rid of Jake, and the others would applaud them for doing it.

*     *     *

Related posts:
The Sentinel: A Tragic Parable of Economic Reality
Liberty, General Welfare, and the State
Monopoly and the General Welfare
Gains from Trade
A Conversation with Uncle Sam

Gains from Trade

I’ve been pondering a bunch of recent posts about international trade by Keith Burgess-Jackson. The posts (dated from March 11, 2009, to June 8, 2009) are at KBJ’s eponymous blog. In the posts, KBJ attacks international trade (or some of it), because (in his view) it affects certain aspects of life in the United States.

I’ve read and re-read the various posts, trying to make sense of them. But I have been unable to do so so because, at every turn, I am confronted by flawed logic and unfounded assertions. I’m left in awe at the chutzpah of a tenured associate professor of philosophy (with a law degree, to boot) who commits the kinds of errors for which (I hope) he would chastise his students.

Anyway, to begin at the beginning, there’s this (March 11):

Free trade has been, and will continue to be, a disaster for this country.

A “disaster for this country” would be an event (or a related set or sequence of events) that inflicts unmitigated harm on great masses of Americans. The Great Depression was a “disaster for this country,” as was 9/11. How is “free trade” a “disaster for this country” when, thanks to the lowering of barriers to trade, but not their abandonment (thus “free trade”), millions of Americans now own better automobiles, electronic gadgets, and other goodies than they had access to before “free trade.” Not only that, but they have been able to purchase those goodies to which they had access before “free trade” at lower real prices than in the days before “free trade.” On top of that, millions of Americans make a better living than than they did before “free trade” because of their employment in industries that became stronger or rose up because of “free trade.”

Okay, so KBJ issues a qualified version on March 12:

Dr John J. Ray, my polymathic friend Down Under, replies to my post about free trade. I should clarify my stance. I’m not saying there should be no trade. That would be crazy. I’m saying that we Americans should protect certain of our industries, such as steel and automobiles. Yes, there is a price to be paid for these protectionist measures, but I, like Pat Buchanan, deem it a price worth paying.

Having recognized that “free trade” may be good for many Americans, KBJ now wants to protect certain industries. But why? KBJ doesn’t say. And I’m at a loss to guess the answer. After all, if we protect an industry we are, in effect, subsidizing those who earn a living in that industry, from the loftiest chairman of the board to the lowliest floor sweeper. Why should Americans be forced, for example, to subsidize people who work for GM and Chrysler when “Japanese” auto makers employ Americans who also make cars?  Even if GM and Chrysler were to go out of business, there would still be an American auto industry — one whose “Big Three” would be Ford, Toyota, and Honda. I’m not so sure about Ford, but Toyota, Honda, and other “Japanese” makes have proved more than adequate to the task of delivering well-made autos at reasonable prices.

I would make the same argument even if “Japanese” cars truly were Japanese, from topsail to keel and stem to stern. Even then, it would not be entirely a question of favoring certain Japanese at the expense of certain Americans. It would also be a question of favoring certain Americans (those employed by auto companies of any stripe) over other Americans (those who would prefer Japanese autos for various reasons, not least of which is value for the dollar). KBJ seems to acknowledge as much in a post of March 16, where he gives a bit more ground:

Free trade is efficient, in the sense that it increases (or even maximizes) aggregate material welfare. The key words are “aggregate” and “material.” As for the first of these words, free trade produces losers as well as gainers. The gainers could compensate the losers, but they are not made to do so. I’m concerned about the losers. In other words, I care about justice (how the pie is distributed) as well as efficiency (how big the pie is). As for the second word, there is more to life than material welfare. Free trade has bad effects on valuable nonmaterial things, such as community, culture, tradition, and family. As a conservative, I care very much about these things.

There’s more of the same on March 17:

Here is a video that explains how free trade increases (or even maximizes) aggregate material welfare. Notice that there is no mention of two things that matter to conservatives: (1) how the increase is distributed; and (2) how free trade affects nonmaterial welfare.

KBJ focuses on American losers, but there are many, many American gainers from free trade, as discussed above. Are their communities, cultures, traditions, and families of no import to KBJ? It would seem so. On what basis does he prefer some Americans to others? Or, to put it more crudely, who died and left KBJ, Pat Buchanan, and their ilk in charge of defending the Rust Belt?

And why should we care whether autos and steel are made in the U.S.? Is it a matter of national pride? What price pride? Whatever the price, it seems that KBJ, Pat Buchanan, and their ilk are willing for millions of Americans to pay it.

Maybe it’s a question of national defense — the bogeyman that is so often conjured in relation to our supposed dependence on foreign oil. Just as those “Arabs” might cut off our oil (though to do so would be to risk our wrath and their wealth), perhaps the Russians, Chinese, or Hottentots will someday amass so much military power that they can cut off all our imports, leaving us poor and powerless — inasmuch as we would no longer possess an industrial base to mobilize for war.

So, maybe their reasoning goes like this: America would be (has been?) deprived of significant chunks of its industrial base by the migration of manufacturing overseas (ignoring the fact that auto-making has migrated mainly from one part of the U.S to other parts of the U.S., while the U.S. remains the number 3 steel-making country in the world). And if our industrial base disappears, we won’t be able to mobilize for a prolonged war — one that would require more military stuff than our puny (hah!) industrial base would be capable of emitting. But our industrial base isn’t disappearing, it’s just becoming smaller in relation to our service sector and far less labor-intensive (i.e., more labor-productive) than it used to be (thus the “loss” of manufacturing jobs over time). See, for example, these Federal Reserve graphs of U.S. industrial capacity and production from the mid-1960s to the present. (The main page is here.) In spite of dips related to recessions, the trends are upward.

Getting back to the question of defense, we already have much larger conventional forces and stockpiles of parts and munitions in relation to the forces and stockpiles of our potential enemies than was the case before we entered WWII. If that demanding war is the benchmark for preparedness, then we have plenty of time to convert existing industrial facilities to war production, and to build new war-production facilities. In any event, you would think that the prospect of a major conventional war would become evident in ample time for mobilization, despite the periodic decimation of our intelligence services.

If unpreparedness for a major conventional war is the bogeyman that haunts the dreams of KBJ and company, their real fear can’t be the loss of our industrial base because of “free trade,” inasmuch as we haven’t lost our industrial base and show no signs of doing so. No, their real fear must be the caliber of our political leaders. Sell-outs will sell us out even when we have strong defenses and the wherewithal to build and maintain those defenses, as we have learned in the decades since the Vietnam War, which devastated our resolve to deal with military problems militarily. Those decades were punctuated only briefly by Reagan’s defense buildup, Bush I’s mistakenly truncated Gulf War, and Bush II’s hamstrung war in Iraq. We are now preparing for future wars (not!) and fighting current ones (while retreating) on terms dictated by an obstructive Congress (one of whose members was our new, Chamberlainesque president), an over-reaching Supreme Court, and other Leftists (to call them American Leftists would be an insult to America). But none of that has anything to do with “free trade.”

Returning to the issue at hand, KBJ seems to ignore the fundamental fact of life that human beings try to better their lot in ways that often, and inescapably, result in change. Human beings do want economic progress, and they have proved that they are willing, at times, to pay for in in “nonmaterial ways,” that is, by allowing it do affect “community, culture, tradition, and family.”

But that fact has never kept sentimentalists from decrying the loss of the “good old days.” KBJ’s tune is an old one, a version of which goes “How ya gonna keep ’em down on the farm after they seen Paree?”

Perhaps (in KBJ’s view) it was a mistake for early man to have discovered fire-making, which undoubtedly led to new communal alignments, cultural totems, traditions, and even familial relationships. Methinks, in short, that KBJ has been swept away by a kind of self-indulgent romanticism for a past that was not as good as we remember it. (I’ve been there and done that, too.)

If “nonmaterial things” are so important, one wonders why KBJ ever left Michigan. And if he left Michigan for good reasons, as I’m sure he did, why is it bad for others to leave Michigan for the promise of warmth and employment? If “nonmaterial things” are so important, college attendance between ages 18 and 22 ought to be outlawed, for that is where (college) and when (18 to 22 years of age) large portions of the populace lose their attachment to “community, culture, tradition, and family.”

Anyway, how is it that economic dislocation — gradual as it is when an industry shifts its locus from one region to another — devastates “community, culture, tradition, and family”? If there has been any devastation of “community, culture, tradition, and family” in the Rust Belt — where auto- and steel-making once were dominant industries — it has been going on for decades, due to the combined influences of higher education; mobility (as the young seek greener pastures and the old seek warmer climes); the rise of impersonal entertainment and forms of communication (in lieu of family togetherness); and the natural breakdown of old-country cultures and traditions, as generation succeeds generation.

Shifting gears: On March 19, KBJ says this:

Those of you who consider yourselves conservative but support free trade might want to reconsider. The editorial board of the New York Times supports free trade. So does Barack Obama. So do the Clintons. So does Paul Krugman.

KBJ’s (risible) implication seems to be this: Something can’t be good if your political enemies think it’s good; or, you can’t really be a conservative if you agree with certain scurrilous liberals on a particular issue. By such reasoning, I wonder that KBJ can be against “free trade” when its opponents include Leftists:

I’m with Dennis Kucinich on free trade. (March 24)

On March 25, KBJ merely rehashes earlier posts:

There is no mention in this New York Times story of why people are losing their jobs. Can you say “free trade”? Jobs are being outsourced to China and other parts of the world, where labor is cheap. What good are cheap goods if you don’t have a job? Free trade will be the death of the West. A hundred years from now, if the West survives that long, people will look back at this time as the time of idiocy.

There’s more of the same old stuff on March 26, along with a couple of new assertions:

The editorial board of the New York Times is adamantly opposed to “protectionism.” In other words, it adamantly supports free trade. Note the reason given. The board—which is composed of cosmopolitans—is concerned about poor people in other countries. Free trade raises the standard of living for nonAmericans at the expense of Americans, many of whom are suffering terribly as a result of lost jobs, which adversely affects not just them but their families and communities. Free trade is a worldwide leveler of wealth. This is why conservatives (as opposed to libertarians) oppose free trade. In their view, Americans come first. Cosmopolitan progressives and libertarians support free trade, albeit for different reasons. The former support it because it redistributes wealth from rich nations to poor nations. The latter support it because they worship individual liberty. Free trade has been a boon to wealthy American entrepreneurs, who now have a worldwide pool of cheap labor. It has devastated working-class and middle-class Americans.

The notion that “[‘free trade’] redistributes wealth from rich nations to poor nations” is completely devoid of logical and empirical content. “Free trade” works because there are gains to all participants. If that weren’t the case, Americans wouldn’t buy foreign goods and foreigners wouldn’t buy American goods. Moreover, “free trade” has been a boon to American consumers and workers (though not always the workers KBJ seems to be worried about). To the extent that “wealthy American entrepreneurs” have gained from “free trade,” it’s because they’ve risked their capital to create jobs (in the U.S. and overseas) that have helped people (in the U.S. and overseas) attain higher standards of living. The “worldwide pool of cheap labor” is, in fact, a worldwide pool of willing labor, which earns what it does in accordance with the willingness of Americans (and others) to buy its products.

Finally, on June 8, KBJ says:

Europeans are starting to see the folly of free trade.

Actually, if you read the article, you’ll find that it portrays Europeans as wrong-headedly provincial — just like KBJ and company.

I may have left out a post or two, but I hope that, by now, you get the idea. “Free trade” helps Americans — perhaps not always the Rust-Belt Americans KBJ seems to be fixated on.

It might surprise KBJ to know that everyone’s income can grow, and grow faster, because of trade — not in spite of it. Foreigners earn more now than they used to, in part, because they are employed in more productive pursuits than they were before “globalization.”  The more foreigners earn, the more American-produced products they buy. Many of those same foreigners also help to underwrite our government’s deficits, thus reducing Americans’ taxes.

If “free trade” is such a bad thing, I wonder if KBJ buys anything that’s not made in Texas, where he lives. Trade between the States, after all, is about as “free” as it gets (except when government bans something, of course). Suppose Texas were to be annexed suddenly by Mexico. Would KBJ immediately boycott everything that’s made in the remaining 49 States? Would it have suddently become unclean?

Opposition to “free trade” — of the kind voiced by KBJ and company — is pure, unadulterated, mindless yahooism. It has no more validity than rooting for, say, the University of Texas Longhorns just because you live in Austin (as I do). People who have not the slightest connection with UT can be seen wearing burnt orange (UT’s colors for those of you who are blissfully unaware) and celebrating drunkenly after UT victories. It just makes me want to puke. And so does anti-international trade yahooism, which is like rooting for union-dominated firms like GM and Chrysler, which we are now subsidizing to the nth degree. (I’ll bet that makes KBJ puke.)

Putting an end to “free trade” would make Americans poorer, not richer. And I doubt that it would do anything to halt the natural evolution of “community, culture, tradition, and family” away from the forms sentimentalized by KBJ and toward entirely new but not necessarily inferior forms.

The biggest threat to “community, culture, tradition, and family” lies in the non-evolutionary imposition of new social norms bythe Left. That’s where the ire of KBJ and company should be directed.

A Short Course in Economics

In which I begin with pithy statements of principles and work my way toward more complex (but brief) explorations of selected economic issues.

1. Self-interest drives us to do good things for others while striving to do well for ourselves.

2. Profit is good because it entices invention, innovation, and investments that yield new and better products and services.

3. Incentives matter: Just as self-interest and profit drive progress, taxation and regulation stifle it.

4. Only slaves and dupes can be exploited. (Wal-Mart employees are not exploited; they are not forced to work at Wal-Mart. Anti-Wal-Mart activists are exploited; they’re dupes of the anti-business Left.)

5. There is no free lunch, all costs (including taxes) must be covered by someone, somewhere, at some time.

6. The appearance of a free lunch (e.g., Social Security, tax-subsidized health insurance) leads individuals to make bad decisions (e.g., not saving enough for old age, overspending on health care).

7. Paternalism is for children: When adults aren’t allowed to make economic decisions for themselves they don’t learn from mistakes and can’t pass that learning on to their children.

8. All costs matter; one cannot make good economic decisions by focusing on one type of cost, such as the cost of energy.

9. The best way to deal with pollution and the “depletion” of natural resources is to assign property rights in resources now held in common. The owners of a resource have a vested interest (a) in caring for it so that it remains profitable, and (b) in raising its price as it becomes harder to obtain, thus encouraging the development of alternatives.

10. Discrimination is inevitable in a free society; to choose is to discriminate. In free and competitive markets — unfettered by Jim Crow, affirmative action, or other intrusions by the state — discrimination is most likely to be based on the value of one’s contributions.

11. Voluntary exchange is a win-win game for workers, consumers, and businesses. When exchange is distorted by taxation and constrained by regulation, the losers are workers (fewer jobs and lower wages) and consumers (higher prices and fewer choices).

12. Absent force or fraud, we earn what we deserve, and we deserve what we earn.

13. The economy isn’t a zero-sum game; for example:

Bill Gates is immensely wealthy because he took a risk to start a company that has created things that are of value to others. His creations (criticized as they may be) have led to increases in productivity. As a result, many people earn more than they would have otherwise earned; Microsoft has made profits; Microsoft’s share price rose considerably for a long time; Bill Gates became the wealthiest American (someone has to be). That’s win-win.

14. Externalities are everywhere.

Like the butterfly effect, everything we do affects everyone else. But with property rights those externalities (e.g., pollution) are compensated instead of being legislated against or fought over in courts. Relatedly . . .

15 . There is no such thing as a “public good.”






16. There is no such thing as “market failure.

The concept of market failure is closely related to the notion of a public good. When the market “fails” to do or prevent something that someone thinks should be done or prevented, the “failure” is invoked as an excuse for government action.

Except where there is crime (which should be treated as crime), there is no such thing as market failure. Rather, there is only the failure of the market to provide what some persons think it should provide.

Those who invoke market failure are asserting that certain social and economic outcomes should be “fixed” (as in a “fixed” boxing match) to correct the “mistakes” and “oversights” of the market. Those who seek certain outcomes then use the political process to compel those outcomes, regardless of whether those outcomes are, on the whole, beneficial. The proponents of compulsion succeed (most of the time) because the benefits of government intervention are focused and therefore garner support from organized constituencies (i.e. interest groups and voting blocs), whereas the costs of government intervention are spread among taxpayers and/or buyers of government debt.

There are so many examples of so-called public goods that arise from putative market failures that I won’t essay anything like a comprehensive list. There are, of course, protective services and environmental “protection,” both of which I mentioned in No. 15. Then there is public education, Social Security, Medicare, Medicaid, Affirmative Action, among the myriad federal, State, and local programs that perversely make most people worse off, including their intended beneficiaries. Arnold Kling explains:

[T]he Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.

The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers’ unions, know who they are. The losers — the working poor, children stuck in low-quality school districts — have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.

As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.

17. Borders are irrelevant, except for defense.

It is not “bad” or un-American to “send jobs overseas” or to buy goods and services that happen to originate in other countries. In fact, it is good to do such things because it means that available resources can be more fully employed and put to their best uses. Opponents of outsourcing and those who decry trade deficits want less to be produced; that is, they want to shelter the jobs of some Americans at the expense of making many more Americans worse off through higher prices.

For example, when Indian computer geeks operate call centers for lower salaries than the going rate for American computer geeks, it makes both Indians and Americans better off. Few Americans are computer geeks, but many Americans are computer users who benefit when they pay less for geek services (or the products with which geek services are bundled). Those who want to save the jobs of American computer geeks assume that (a) American computer geeks “deserve” their jobs (but Indians don’t) and (b) American computer geeks “deserve” their jobs at the expense of American consumers.

See also this, and this, and this.

18. Government budget deficits aren’t bad for the reason you think they’re bad.

Government spending is mostly bad (see No. 15) because it results in the misallocation of resources (and it’s inherently inflationary). Government spending — whether it is financed by taxes or borrowing — takes resources from productive uses and applies them to mostly unproductive and counterproductive uses. Government budget deficits are bad in that they reflect that misallocation — though they reflect only a portion of it. Getting hysterical about the government’s budget deficit (and the resulting pile of government debt) is like getting hysterical about a hangnail on an arm that has been amputated.

There’s no particular reason the federal government can’t keep on making the pile of debt bigger — it has been doing so continuously since 1839. As long as there are willing lenders out there, the amount the amount of debt the government can accumulate is virtually unlimited, as long as government spending does not grow to the point that its counterproductive effects bring the economy to its knees.

For more, see this, this, this, and this.

19. Monopoly (absent force, fraud, or government franchise) beats regulation, every time.

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists,” even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe (see No. 13), in which “winners” must be balanced by “losers.” Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

What about those “immense” monopoly profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. I must expand on some of the points I made in the original portion of this commandment:

  • Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.
  • Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.
  • Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.

20. Stay tuned to this blog.