Truth

[kirisutogomen]

As I mentioned in firstfrost's livejournal:

I was actually planning to use my livejournal to practice writing more coherently, moving away from Bitter Rants to Persuasive Tirades. Even if I don't convince people, I would at least like to communicate more effectively, without requiring the rephrasing and clarification my writing usuaully needs these days.

In addition, I'm so sick of politics that I can't take it anymore. I feel nauseous if I think about voting for Bush or Kerry, and the Libertarian candidate is an insane person who's pledged to wear a sidearm to the State of the Union address.

Thus, I resolve to limit my Persuasive Tirades to economic issues. A lot of those are highly politically relevant, so I'm not really forswearing politics, but I just don't want to get pointlessly infuriated about the Patriot Act or homosexual marriage or Swift Boat Veterans for Scuzziness.

So, in the new spirit, and with apologies to Greg Mankiw, from whom I shamelessly stole them, here are Ten Truths. If you don't believe every one of these Truths, you will never understand the reality in which we live.

1. People Face Tradeoffs


2. The Cost of Something is What You Give Up to Get it


3. Rational People Think at the Margin


4. People Respond to Incentives


5. Trade Can Make Everyone Better Off


6. Markets are Usually a Good Way to Organize Economic Activity


7. Governments Can Sometimes Improve Market Outcomes


8. A Country's Standard of Living Depends on its Ability to Produce Goods and Services


9. Prices Rise When the Government Prints Too Much Money


10. Society Faces a Short-Run Tradeoff between Inflation and Unemployment

We Hold These Truths to be Self-Evident. Despite this, lots of otherwise intelligent people seem to deny one or more of these Truths.

Comments

meta-meta

[treptoplax.livejournal.com]

I've been thinking a lot about politics lately, and have not fully-formed my conclusions, though what I do have would be depressing if I weren't pretty cynical to begin with (well, perhaps 'post-cynical' is what I'm aiming for, but that's a whole 'nother discussion).

Oh, right, I had a point:

I'm all for economic sanity becoming common; that can only be a good thing. I wonder, though to what extent the problem is economic illiteracy, and to what extent the issue is one of structural dynamics. I'm concerned that "Trade can make everyone better off; therefore, governments should not discourage trade" is politically naive in exactly the same way that "High-paying jobs are better than low-paying jobs; therefore, all jobs must be high-paying" is economically naive.

Not that I have a solution to this problem, or even a clearer formulation of it, mind you.

Re: meta-meta

[kirisutogomen.livejournal.com]

Well, "all jobs must be high-paying" isn't just naive, it's completely illogical, given that we usually define high-paying to be above the median.

Re: political naivite:

Even in theory, removal of trade barriers causes losses to specific parties. For a good whose price increases (decreases) due to higher exports (imports), consumer (producer) surplus decreases. Of course, total social surplus always improves with free trade.

This leads to the usual special interest problem, where the producers' welfare is more specifically impacted by the costs and benefits than the consumers' is, so they lobby for import restrictions and export subsidies, and consumers just vote for the guy with the best hair. Of course, all the other countries in the world end up with mercantilist policies for the same reason.

But as long as total societal welfare increases, the winners ought to be willing to compensate the losers enough to more than cover their loss, and now everyone wins. That's the solution you're looking for, and it would be cool if it were readily implemented. I like to think that all that would be required would be economic literacy on the part of both producers and consumers.

Of course, even if that were true, the prospect of people in general becoming sensible is pretty remote. (I toyed with adding Truth 11: People are Idiots.)

Re: meta-meta

[treptoplax.livejournal.com]

11 is key.

But as to:

But as long as total societal welfare increases, the winners ought to be willing to compensate the losers enough to more than cover their loss, and now everyone wins. That's the solution you're looking for, and it would be cool if it were readily implemented. I like to think that all that would be required would be economic literacy on the part of both producers and consumers.

See, that's where I'm worried. I think it's entirely possible that, for example, once you establish 'The government should cut a check for $Y from the treasury to citizen X because he got screwed by event Z that was a net win', you're sure to see increasingly insane values for X, Y, and Z.

Of course, that particular debate was settled against my argument in the early (mid?) 19th century, though it was a big battle at the time.

Compensation

[kirisutogomen.livejournal.com]

The problem with putting the government in charge of compensating the losers is that they have no incentive to get it right, and every reason to take bribes.

But in the case of dismantling trade barriers, the government may not need to get involved. The winners and losers are producers and consumers. For something like steel it should be easy; producers and consumers are both large organizations that can sign contracts. E.G., the automakers pay the steelmakers to stop whining.

When the consumers are households, it halfway breaks down. (Or if the producers are households, in the case of the labor market.) If the appropriate compensation would be from corporations to households, that can be worked. If it would be the other direction, that's exceedingly unlikely. That's where the government can sort of help, by representing the households and compensating the corporations. But then we're back to the problem you're talking about.

The theoretical argument for cutting a check to compensate the loser is that that creates a win for everyone, which is what we call improving Pareto efficiency, which is the only circumstance in which real economists will endorse policy prescriptions.