Free trade is good. A reminder. [updated]

Getting a free-trade agreement with India over the line has been harder work than getting oil out of the Straits of Hormuz. But over the weekend it finally happened, and the agreement was signed.

It's true, as Murray Rothbard used to say, that genuine free trade doesn’t require a treaty or its deformed cousin, a “trade agreement” -- all it needs is repealing our numerous tariffs, import quotas, anti-'dumping' laws, and other restrictions on trade. Which, to be fair, is most of what this agreement seems to offer.

A relaxation of rules, not any new ones.

Over the centuries, getting it understood that trade is good -- a win-win -- has been even harder work. It's been 250 years since Scotsman Adam Smith wrote 700 pages to explain that very point. Yet as Daniel J. Smith, Gabriel F. Benzecry point out, "Returning to The Wealth of Nations, one is struck by how little progress has been made in educating the public about sound principles, a task that must be renewed with every generation."

The Enlightenment ideals of individual liberty and voluntary exchange that inspired America’s founders also laid the foundation of modern economics. Yet two and a half centuries later, persistent policy blunders — protectionist trade barriers, ballooning national debt, and stubborn inflation — reveal how far we have strayed from the Scotsman’s insights, endangering the principles upon which our republic was founded.

Protectionism is becoming so endemic once again, so normalised, that it requires a major effort to implement its opposite. It's big news when shackles come off. freedom free-trade 

The problem isn’t a lack of knowledge — it’s a failure to teach and apply enduring principles. ...

Yet even as those principles are applied we can see and applaud the results. Even as the world's population has increased rapidly, we see that the most important growth with more population is not more stomachs to feed, but more minds able to produce -- and (in Adam Smith's words) more people ready to truck, barter and trade. The very simple fact, as Marian Tupy reminds us, is that "for every 1 percent increase in global population, population-level resource abundance grew by about 6.3 percent."

For every 1% increase in global population, population-level resource abundance grew by about 6.3% — according to @HumanProgress's new Simon Abundance Index.

In other words, when people are left even moderately free to produce, resources grow at a faster pace than the population.

It was Malthus, writing after Adam Smith, who ignored so many of his lessons and saw only the stomachs to be fed. 

The Malthusian mind never [saw] the human capacity to cooperate, trade, discover, invent, and adapt.

The record is clear. Smith explained how it works 250 years ago. Let's applaud when more of it is allowed to happen.

UPDATE: Another reminder: 

It's not nations that trade. People trade.

And they will if you just get out of their way. 

Thank you Adam Smith

It's a busy week. This week also marks the 250th anniversary of Adam Smith's Wealth of Nations, the first in-depth exploration and explanation of (in PJ O'Rourke's words) why some nations are prosperous and wealthy and other places just suck.In honour of the anniversary, here are several of Adam Smith’s most insightful observations:

It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our necessities but of their advantages. [The Wealth Of Nations, Book I, Chapter II]

It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. [The Wealth Of Nations, Book I, Chapter I]

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things. [Lecture in 1755, quoted in Dugald Stewart, Account Of The Life And Writings Of Adam Smith LLD, Section IV, 25]

It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. [The Wealth Of Nations, Book IV Chapter I]

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland? [The Wealth Of Nations, Book IV, Chapter II]

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. [The Wealth Of Nations, Book IV Chapter VIII]

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices…. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary. [The Wealth Of Nations, Book IV Chapter VIII]

To widen the market and to narrow the competition, is always the interest of the dealers…The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution... It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it. [The Wealth Of Nations, Book I, Chapter XI]

It is the highest impertinence and presumption… in kings and ministers, to pretend to watch over the economy of private people, and to restrain their expense... They are themselves always, and without any exception, the greatest spendthrifts in the society. [The Wealth Of Nations, Book II, Chapter III]

There is no art which one government sooner learns of another than that of draining money from the pockets of the people. [The Wealth Of Nations, Book V Chapter II Part II] 

Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
    Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. [The Wealth Of Nations, Book IV, Chapter II]

What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. [The Wealth Of Nations, Book I Chapter VIII]

Mercy to the guilty is cruelty to the innocent. [From his 1759 work, The Theory of Moral Sentiments]

The man of system…is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it… He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it. [The Theory Of Moral Sentiments, Part VI, Section II, Chapter II]

The Chart of the Century, in context

"Imagine a horse race between Smith, Schumpeter, and Stupidity," begins economist Peter Boettke. Who wins?

The horse "Smith" is Adam Smith. He represents the gains from trade and division of labour about which Adam Smith spoke so well.

"Schumpeter" is the horse representing gains from invention, from new technology, from all the gains that innovation brings.

Together they drive the race forwards.

But "Stupidity" is the horse sponsored by the government, and trained by big-government worshipping economists. He bumps into the others, bites at their heels, and generally gets in their fucking way. 'Stupidity' represents every stupid idea, every stupid regulation—and all that insane tinkering with counterfeit credit as if it were the way to economic nirvana. 

He takes it all backwards.

We can see Leg One of that race below: Mark Perry's famous “Chart of the Century,” tracking the price of 14 items over the last quarter-century. 

It's pretty clear that when 'Smith' and 'Schumpeter' can run largely unhindered, then nearly everyone gets better off. Even if the change in average hourly wages is taken into account, all but five of the items tracked above give those two horses (and every wage-earner) a win.

It's only when 'Stupidity' is allowed a free rein that he starts to come out ahead. (And I'm fairly sure that an analysis using NZ data would show something very similar.)

Let's hope the lesson is clear?

What's humanity's greatest ever invention?

What's humanity's greatest invention? Probably voluntary exchange between free people ...

Cities As Centres Of Innovation: Lessons From Edinburgh And Paris

Examining the places where major advances happened is one way to learn about the conditions that foster societal flourishing, human achievement, and prosperity.

Amidst the turmoil of modern times, evidence reveals significant progress across various metrics, from rising life expectancy to declining global poverty. Throughout history, cities have emerged as epicentres of innovation and progress, fostering collaboration, competition, and freedom of thought.

By exploring the unique environments of cities like Edinburgh and Paris, where intellectual liberty thrived, Chelsea Follett uncovers in this guest post the vital role of peace, freedom, and population density in driving human achievement and societal advancement.

Cities As Centres Of Innovation: Lessons From Edinburgh And Paris

by Chelsea Follett

HAS HUMANITY MADE PROGRESS? WITH so many serious problems, it is easy to get the impression that our species is hopeless. Many people view history as one long tale of decay and degeneration since some lost, idealised golden age.

But there has been much remarkable, measurable improvement—from rising life expectancy and literacy rates to declining global poverty. (Explore the evidence for yourself). Today, material abundance is more widespread than our ancestors could have dreamed. And there has been moral progress too. Slavery and torture, once widely accepted, are today almost universally reviled.

Where did all this progress come from? Certain places, at certain times in history, have contributed disproportionately to progress and innovation. Change is a constant, but progress is not. Studying the past may hold the secret to fostering innovation in the present. To that end, I wrote a book titled Centers of Progress: 40 Cities that Changed the World, exploring the places that shaped modern life.

The origin-points of the ideas, discoveries, and inventions that built the modern world were far from evenly or randomly dispersed throughout the globe. Instead, they tended to emerge from cities, even in time periods when most of the human population lived in rural areas. In fact, even before anything that could be called a city by modern standards existed, progress originated from the closest equivalents that did exist at the time. 

Why is that?

“Cities, the dense agglomerations that dot the globe, have been engines of innovation since Plato and Socrates bickered in an Athenian marketplace,” urban economist Edward Glaeser opined in his book The Triumph of the City. Of course, he was hardly the first to observe that positive change often emanates from cities. As Adam Smith noted in 1776, “the commerce and manufactures of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country.”

One of the reasons that progress tends to emerge from cities is, simply, people. Wherever more people gather together to “truck, barter, and exchange,” in Smith’s words, that increases their potential to engage in productive exchange, discussion, debate, collaboration, and competition with each other. Cities’ higher populations allow for a finer division of labour, more specialisation, and greater efficiencies in production. Not to mention, a multiplication of knowledge — more minds working together to solve problems. As the writer Matt Ridley notes in the foreword he kindly wrote for Centers of Progress, “Progress is a team sport, not an individual pursuit. It is a collaborative, collective thing, done between brains more than inside them.”

A higher population is sufficient to explain why progress often emerges from cities, but, of course, not all cities become major innovation centres. Progress may be a team sport, but why do certain cities seem to provide ideal playing conditions, and not others?

That brings us to the next thing that most centres of progress share, besides being relatively populous: peace. That makes sense, because if a place is plagued by violence and discord then it is hard for the people there to focus on anything other than survival, and there is little incentive to be productive since any wealth is likely to be looted or destroyed. Smith recognised this truth, and noted that cities, historically, sometimes offered more security from violence than the countryside:

Order and good government, and along with them the liberty and security of individuals, were in this manner established in cities, at a time when the occupiers of land in the country, were exposed to every sort of violence. But men in this defenceless state naturally content themselves with their necessary subsistence; because, to acquire more, might only tempt the injustice of their oppressors. On the contrary, when they are secure of enjoying the fruits of their industry, they naturally exert it to better their condition, and to acquire not only the necessaries, but the conveniencies and elegancies of life. That industry, therefore, which aims at something more than necessary subsistence, was established in cities long before it was commonly practised by the occupiers of land in the country. […] Whatever stock, therefore, accumulated in the hands of the industrious part of the inhabitants of the country, naturally took refuge in cities, as the only sanctuaries in which it could be secure to the person that acquired it.

OF COURSE, NOT ALL CITIES WERE are peaceful. Consider Smith’s own city: Edinburgh. At times, the city was far from stable. But the relatively unkempt and inhospitable locale emerged from a century of instability to take the world by storm. Scotland in the 18th century had just undergone decades of political and economic turmoil. Disruption was caused by the House of Orange’s ousting of the House of Stuart, the Jacobite Rebellions, the failed and costly colonial Darien Scheme, famine, and the 1707 Union of Scotland and England. It was only after things settled down and the city came to enjoy a period of relative peace and stability that Edinburgh rose to reach its potential. Edinburgh was an improbable centre of progress. But Edinburgh proves what people can accomplish, given the right conditions.

During the Scottish Enlightenment centred in Edinburgh, Adam Smith was far from the only innovative thinker in the city. Edinburgh’s ability to cultivate innovators in every arena of human achievement, from the arts to the sciences, seemed almost magical.

Edinburgh gave the world so many groundbreaking artists that the French writer Voltaire opined in 1762 that “today it is from Scotland that we get rules of taste in all the arts, from epic poetry to gardening.” Edinburgh gave humanity artistic pioneers from the novelist Sir Walter Scott, often called the father of the historical novel, to the architect Robert Adam who, together with his brother James, developed the “Adam style,” which evolved into the so‐​called “Federal style” in the United States after Independence.

And then there were the scientists. Thomas Jefferson, in 1789, wrote, “So far as science is concerned, no place in the world can pretend to competition with Edinburgh.” The Edinburger geologist James Hutton developed many of the fundamental principles of his discipline. The chemist and physicist Joseph Black, who studied at the University of Edinburgh, discovered carbon dioxide, magnesium, and the important thermodynamic concepts of latent heat and specific heat. The anatomist Alexander Monro Secondus became the first person to detail the human lymphatic system. Sir James Young Simpson, admitted to the University of Edinburgh at the young age of fourteen, went on to develop chloroform anesthesia.

Two of the greatest gifts that Edinburgh gave humanity were empiricism and economics. The influential philosopher David Hume was among the early advocates of empiricism and is sometimes called the father of philosophical skepticism. [Not such an unalloyed boon - Ed.] And by creating the field of economics, Smith helped humanity to think about policies that enhance prosperity. Those policies, including free trade and economic freedom that Smith advocated, have since helped to raise living standards to heights that would be unimaginable to Smith and his contemporaries.

That brings us to the last but by no means least secret ingredient of progress. Freedom. Centres of progress during their creative peak tend to be relatively free and open for their era. That makes sense because simply having a large population is not going to lead to progress if that population lacks the freedom to experiment, to debate new propositions, and to work together for their mutual benefit. Perhaps the biggest reason why cities produce so much progress is that city dwellers have often enjoyed more freedom than their rural counterparts. Medieval serfs fleeing feudal lands to gain freedom in cities inspired the German saying “stadtluft macht frei” (city air makes you free).

That adage referred to laws granting serfs liberty after a year and a day of urban residency. But the phrase arguably has a wider application. Cities have often served as havens of freedom for innovators and anyone stifled by the stricter norms and more limited choices common in smaller communities. Edinburgh was notable for its atmosphere of intellectual freedom, allowing thinkers to debate a wide diversity of controversial ideas in its many reading societies and pubs.

Of course, cities are not always free. Authoritarian states sometimes see laxer enforcement of their draconian laws in remote areas, and Smith himself viewed rural life as in some ways less encumbered by constraining rules and regulations than city life. But as philosophy professor Kyle Swan previously noted for Adam Smith Works:

Without denying the charms and attractions Smith highlights in country living, let’s not forget what’s on offer in our cities: a significantly broader range of choices! Diverse restaurants and untold many other services and recreations, groups of people who like the same peculiar things that you like, and those with similar backgrounds and interests and activities to pursue with them — cities are (positive) freedom enhancing.

The same secret ingredients of progress—people, peace, and freedom—that helped Edinburgh to flourish during Smith’s day can be observed again and again throughout history in the places that became key centres of innovation. Consider Paris.

AS THE CAPITAL OF FRANCE, Paris attracted a large population and became an important economic and cultural hub. But it was an unusual spirit of freedom that allowed the city to make its greatest contributions to human progress. Much like the reading societies and pubs of Smith’s Edinburgh, the salons and coffeehouses of 18th‐​century Paris provided a place for intellectual discourse where the philosophes birthed the so‐​called Age of Enlightenment.

The Enlightenment was a movement that promoted the values of reason, evidence‐​based knowledge, free inquiry, individual liberty, humanism, limited government, and the separation of church and state. In Parisian salons, nobles and other wealthy financiers intermingled with artists, writers, and philosophers seeking financial patronage and opportunities to discuss and disseminate their work. The gatherings gave controversial philosophers, who would have been denied the intellectual freedom to explore their ideas elsewhere, the liberty to develop their thoughts.

Influential Parisian and Paris‐ based thinkers of the period included the Baron de Montesquieu, who advocated the then‐​groundbreaking idea of the separation of government powers and the writer Denis Diderot, the creator of the first general‐​purpose encyclopaedia, as well the Genevan expat Jean‐​Jacques Rousseau. While sometimes [rightly - Ed.] considered a counter‐​Enlightenment figure because of his skepticism of modern commercial society and romanticised view of primitive existence, Rousseau also helped to spread skepticism toward monarchy and the idea that kings had a “divine right” to rule over others.

The salons were famous for sophisticated conversations and intense debates; however, it was letter‐​writing that gave the philosophes’ ideas a wide reach. A community of intellectuals that spanned much of the Western world—known as the Republic of Letters—increasingly engaged in the exchanges of ideas that began in Parisian salons. Thus, the Enlightenment movement based in Paris helped spur similar radical experiments in thought elsewhere, including the Scottish Enlightenment in Edinburgh. Smith’s many exchanges of ideas with the people of Paris, including during his 1766 visit to the city when he dined with Diderot and other luminaries, proved pivotal to his own intellectual development.

And then there was Voltaire, sometimes called the single most influential figure of the Enlightenment. Although Parisian by birth, Voltaire spent relatively little time in Paris because of frequent exiles occasioned by the ire of French authorities. Voltaire’s time hiding out in London, for example, enabled him to translate the works of the political philosopher and “father of liberalism” John Locke, as well as the English mathematician and physicist Isaac Newton. While Voltaire’s critiques of existing institutions and norms pushed the boundaries of acceptable discourse beyond even what would be tolerated in Paris, his Parisian upbringing and education likely helped to cultivate the devotion to freethinking that would come to define his life.

By allowing for an unusual degree of intellectual liberty and providing a home base for the Enlightenment and the far‐​ranging Republic of Letters, Paris helped spread new ideas that would ultimately give rise to new forms of government—including modern liberal democracy.

Surveying the cities, such as Edinburgh and Paris, that built the modern world reveals that when people live in peace and freedom, their potential to bring about positive change increases. Examining the places where major advances happened is one way to learn about the conditions that foster societal flourishing, human achievement, and prosperity. I hope that you will consider joining me on a journey through the book’s pages to some of history’s greatest centres of progress, and that doing so sparks many intelligent discussions, debates, and inquiries in the Smithian tradition about the causes of progress and wealth.

* * * *

Chelsea Follett is the managing editor of HumanProgress.org, a policy analyst in the Cato Institute’s Center for Global Liberty and Prosperity, and author of the book Centers of Progress: 40 Cities That Changed the World (2023).
Find her on Twitter at @Chellivia.
Her article previously appeared at Adam Smith Works, and the Cato at Liberty blog.

'The Moral Case for Globalisation'

"THE TERM TYPICALLY USED to denote advocates of globalisation is 'globalists,' which has emerged primarily as a term of abuse, especially on the far right. 'There is no more left and right [says one]. The real cleavage is between the patriots and the globalists.' ...

"[T]his essay’s definition of globalisation is the relatively free movement of people, things, money, and ideas across natural or political borders. .... A consequence of increasing globalisation is an increasingly integrated and complex global system of production and exchange. ...

"There is a vast amount of evidence that documents the impact of reducing barriers to trade, travel, and other forms of exchange across borders. Much of it is presented in other essays in this series, such as Johan Norberg’s 'Globalisation: A Race to the Bottom—or to the Top?' Contrary to some critics of globalisation, the results have been spectacularly positive for the world’s poor, as wages have increased, jobs have become safer, and the use of children for labor has plummeted. Increasing wealth, in turn, is strongly connected to improving health, and the global spread of improvements in medicines and technologies has improved health outcomes even in regions that have not participated as much in the exchange of goods. ...

"People agree to exchange because they expect to be better off by exchanging than by not exchanging. Making it possible to exchange with more people is beneficial to those whose range of potential exchange partners has increased. Adam Smith titled the third chapter of his 'An Inquiry into the Nature and Causes of the Wealth of Nations' “That the Division of Labour is Limited by the Extent of the Market,” a thesis that he illustrated by demonstrating the greater prosperity and progress in the ancient world for those nations with proximity to the sea and to navigable rivers. Due to the lower friction of transportation over water compared to land, that proximity facilitated exchange with much larger areas and with many, many more people. To the extent that policies of governments erect barriers to exchange, it is analogous to making transportation deliberately more difficult, which would generally be understood to be harmful to the vast majority of people. ...

"Globalisation is not limited to the exchange of goods and services across borders; it also encompasses the exchange of ideas, as well as scientific, economic, artistic, and other forms of cooperation. ...

"Ever since Plato’s assault on the open society, critics of globalisation have tended to view cultural innovation and exchange as a pure loss rather than as the emergence of new forms of human life that increase the available store of possible human understandings and experiences. ...

"PEACE AND HARMONY ARE consequences of trade.

Cultural exchange is foundational to living cultures. Pasta, for which Italian cuisine is famous, has origins in Asia, whether it was brought to Italy by Marco Polo, as folklore tells, or earlier, and the tomatoes that form the base of many Italian sauces are cultivated from plants brought from Meso-America by Spaniards. Food has been globalised for millennia, but somehow that has not stopped it from developing an amazing diversity of identifiable cuisines, styles, and dishes with many distinctive characteristics. The same can be said of architecture, traditions, mores, religions, and every other element of human culture. ...

"The key to such peace is not merely the movement of goods and services across borders but voluntary exchange. ... Freedom to trade refers to the voluntary transfers of goods and services and not to state trafficking in tanks and missiles, the sale of products of forced labour (such as the products of Uyghur labourers imprisoned by the Chinese Communist Party), or the sale of nationalised products (such as the oil and gas resources that were confiscated by Putin). Exchange and transfers organised by conquest are mutually impoverishing, as Adam Smith demonstrated of the British Empire ...

"SINCE PLATO'S TIME, OPPONENTS of globalisation have sought to protect established orders from the voluntary choices of those who live in them. Increasing the opportunities for exchange, cooperation, communication, and travel is enriching for the majority, although it may threaten the hold on power of the rulers. Some prefer war over peace, because 'making bigger profits in peace' is worse than war. Reasonable people should think before embracing such attacks on globalisation ...

"Rigorous thinking and empirical research refute, one by one, attacks on globalisation in the name of morality. The world is better when barriers to free and voluntary cooperation are reduced. The world is better because of globalisation."

~ Tom Palmer from his article 'The Moral Case for Globalisation'

'China's Trade Surpluses are Not a Source of Strength'

“'China believes it has a mandate to rule the world,' and that it is using trade balances to accomplish this. ... But, ultimately, Chinese trade surpluses [don’t] help ... '[Right up to] 1839 ... trade favoured the Chinese.' Little good it did them: China [eventually] experienced military humiliation, political and social disintegration, and an eventual descent into communism. ...
   "China’s 'strategy of generating massive trade surpluses [would] not have worked [when money was] backed by bullion ... the trade surpluses incurred by exporting more than its imports [would] have caused China’s currency to appreciate ... [making] Chinese manufactures more expensive and less attractive for outsourcing…'
   "'That never happened' ... because [without a gold standard] China [could devalue] its currency, harming its own people...' .... China’s currency manipulations have imposed costs on its citizens in terms of reduced real incomes. 

   "That isn’t all. The currency creation necessary to keep the yuan’s exchange rate with the dollar somewhat stable when new dollars are being produced at an impressive rate has helped fuel one of the biggest property bubbles in history [in both China and the US] .... [A] US deficit on the trade account must be offset with a surplus on the capital account ... [so] to maintain its export advantage was devious: it invested in the United States, 'buying US assets with US dollars ...The CCP today sits atop a $3 trillion hoard of assets, many of them American.' 

    "And, again, little good it did them. Holding significant stocks of depreciating US government debt isn’t, in fact, a source of strength. China cannot dump them to drive Federal borrowing costs up without tanking their value, which the Federal government is doing itself. As for those US assets, like farmland, it isn’t going anywhere, just like the buildings bought to much distress by the Japanese in the 1980s.
   "China’s government might well be running a trade surplus as a matter of policy. It may even be doing so with the aim of strengthening itself relative to geopolitical rivals like the United States. But ... it has tried this before [and] that same history indicates that the prospects for the government in Beijing are not good. Little good it did the Qing dynasty and little good will it do the Communist Party....

   "As Adam Smith observed in 'The Wealth of Nations,' mercantilism can enrich a few individuals but not entire countries – it detracts from, rather than adding to, the general welfare."

~ Composite quote from John Phelan, Kevin Roberts and Richard Fulmer from the post 'China's Trade Surpluses are Not a Source of Strength'

"Consequently, there is no incentive for the politicians to change their behaviour. It is for this reason we see tariffs consistently fail as a negotiation tool."

"To listen to protectionists, one would think tariffs are something of a miracle drug. Anything and everything can be solved by tariffs. Prices too low? Tariffs will raise ‘em. Prices too high? Tariffs will lower ‘em. Sprained knee? Just take two tariffs and call me in the morning. ...

"Take, for example, the argument that tariffs can be used as negotiation tools. The argument goes that you can threaten another nation with tariffs, impose the costs of the tariffs on them, and force them to bend to your will (whatever that will may be). ...

"[Yet] politicians face a different set of incentives. The major issue with many tariff supporters’ models is that they improperly model these incentives. This is a side effect of collectivist thinking; we must always remember that a 'nation' is a useful abstraction, but ultimately is made up of individuals who choose. A 'nation' never, ever chooses. And a government is not synonymous with the nation or the people located therein. ...

"Consequently, there is no incentive for the politicians to change their behaviour. It is for this reason we see tariffs consistently fail as a negotiation tool.

"Indeed, so-called trade sanctions and tariffs end up having the opposite effect. The American embargo of Cuba entrenched the Castro regime. Tariffs and embargoes on Iran failed to halt their nuclear program or weaken the regime. Putin still wages war in Ukraine despite (or because of?) trade sanctions. Perhaps most damningly, the Chinese government developed DeepSeek as a direct response to Trump’s original 'economic statecraft' against the Communist Party (continued by Biden).

"Adam Smith recognised this problem. In the 'Wealth of Nations' ... he notes that tariffs could be a potential tool to negotiate lower barriers in other nations. ...   Such negotiations could work, he states, but could also lead to war ...."

~ Jon Murphy from his post 'The Political Problem of Tariffs'

'Does National Security Justify Trade Restrictions?'

"In a recent article, 'Why Trade Should Be Free,' I made the case for free trade. ... [T]he case for free trade is one that many economists, including Adam Smith, have made. Free trade causes people in the free trade country to produce the goods and services for which they are the least-cost producer and to import goods and services for which people in other countries are the least-cost producers. The case for free trade is no more complicated than the case for hiring someone to mow your lawn.

    "The conclusion that free trade is good for a country’s government to adopt does not depend on other countries adopting free trade. Even if other countries’ governments impose tariffs, we are better off, on average (there could be some losers), if our government refrains from restricting trade.
    "Are there any exceptions to the case for free trade? There’s one main one. Adam Smith himself laid out this exception in 'The Wealth of Nations': restricting trade when the traded item is crucial for national security. But the case for restricting trade even in such cases is not airtight and, indeed, other ways to assure a supply of such items may be better than restrictions on trade. One such way is by stockpiling the crucial items and that may well involve more trade, not less. 

    "Whatever the measures taken to assure availability of crucial inputs to defence, we, unfortunately, depend on government officials with information and competence, two characteristics that are typically in short supply in government."

~ David R. Henderson from his article 'Does National Security Justify Trade Restrictions?'

Ludwig von Mises: Capitalism's great defender

When Ludwig von Mises appeared on the economic scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly — there was virtually no systematic intellectual opposition to socialism or defence of capitalism. Quite literally, the intellectual ramparts of civilization were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.

On the 100th anniversary of his birth in 1881, his student George Reisman penned this tribute to one of capitalism's greatest defenders. . .

A Tribute to Ludwig von Mises on the Anniversary of his Birth

by George Reisman

September 29, 2024, is the one-hundred-and-forty-third anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Von Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields of what enables me to understand the events shaping the world in which we live. I want to take this opportunity to pay tribute to him, because I believe that he deserves to occupy a major place in the intellectual history of the twentieth century.

Von Mises is important because his teachings are necessary to the preservation of material civilization. As he showed, the base of material civilisation is the division of labour. Without the higher productivity of labour made possible by the division of labour, the great majority of mankind would simply die of starvation. The existence and successful functioning of the division of labour, however, vitally depends on the institutions of a capitalist society — that is, on limited government and economic freedom; on private ownership of land and all other property; on exchange and money; on saving and investment; on economic inequality and economic competition; and on the profit motive that institutions everywhere under attack for several generations.

When von Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. Major flaws and inconsistencies in the writings of Adam Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the earlier Austrian economists Menger and Böhm-Bawerk were insufficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case.

Thus, when von Mises appeared, there was virtually no systematic intellectual opposition to socialism or defense of capitalism. Quite literally, the intellectual ramparts of civilisation were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.

Capitalism operates to the material self-interests of all

THE LEADING ARGUMENT OF the socialists was that the institutions of capitalism served the interests merely of a handful of rugged exploiters and monopolists, and operated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to devise plans to take away somewhat less of the capitalists’ wealth than the socialists were demanding, or to urge that property rights nevertheless be respected despite their incompatibility with most people’s well-being, von Mises challenged everyone’s basic assumption. He showed that capitalism operates to the material self-interests of all, including the non-capitalists the so-called proletarians. In a capitalist society, von Mises showed, privately-owned means of production serve the market. The physical beneficiaries of the factories and mills therefore are all who buy their products. And, together with the incentive of profit and loss, and the freedom of competition that it implies, the existence of private ownership ensures an ever-growing supply of products for all.

Thus, von Mises showed to be absolute nonsense such clichés as poverty causes communism. Not poverty, but poverty plus the mistaken belief that communism is the cure for poverty, causes communism. If the misguided revolutionaries of the backward countries and of impoverished slums understood economics, any desire they might have to fight poverty would make them advocates of capitalism.

Socialism means chaos

Socialism, von Mises showed, in his greatest original contribution to economic thought, not only abolishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, but makes economic calculation, economic coordination, and economic planning impossible, and therefore results in chaos — because socialism means the abolition of the price system and the intellectual division of labour; it means the concentration and centralisation of all decision-making in the hands of one agency: the Central Planning Board or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, variety and locations of the different factors of production, the various technological possibilities that are open to them, and the different possible permutations and combinations of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, von Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under capitalism, where, every day, businessmen plan on the basis of calculations of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of consumers’ goods.

Von Mises’s contributions to the debate between capitalism and socialism the leading issue of modern times are overwhelming. Before he wrote, people did not realise that capitalism has economic planning. They uncritically accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic planning. People were (and most still are) in the position of Moliere’s M. Jourdan, who never realized that what he was speaking all his life was prose. For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realise that it exists. Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of production or continue with their present methods, planning to hire additional workers or let some of their present ones go. And every day, there are countless workers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have for example, to drive to work or to take the train, instead.

Yet people deny the name planning to all this activity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions. Von Mises identified the existence of planning under capitalism, the fact that it is based on prices ( economic calculations ), and the fact that the prices serve to coordinate and harmonise the activities of all the millions of separate, independent planners.

He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his particular plans to the plans of all others. For example, the worker who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of others to purchase accounting services rather than paintings. The individual who decides that a house in a particular neighborhood is too expensive and who therefore gives up his plan to live in that neighborhood, is similarly engaged in a process of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, von Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, von Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of socialism, he showed, results from the fact that it represents not economic planning, but the destruction of economic planning, which exists only under capitalism and the price system.

Competition under capitalism is of an entirely different character than competition in the animal kingdom

VON MISES WAS NOT primarily anti-socialist. He was pro-capitalist. His opposition to socialism, and to all forms of government intervention, stemmed from his support for capitalism and from his underlying love of individual freedom, and his conviction that the self-interests of free men are harmonious indeed, that one man’s gain under capitalism is not only not another’s loss, but is actually others’ gain. Von Mises was a consistent champion of the self-made man, of the intellectual and business pioneer, whose activities are the source of progress for all mankind and who, he showed, can flourish only under capitalism.

Von Mises demonstrated that competition under capitalism is of an entirely different character than competition in the animal kingdom. It is not a competition for scarce, nature-given means of subsistence, but a competition in the positive creation of new and additional wealth, from which all gain. For example, the effect of the competition between farmers using horses and those using tractors was not that the former group died of starvation, but that everyone had more food and the income available to purchase additional quantities of other goods as well. This was true even of the farmers who lost the competition, as soon as they relocated in other areas of the economic system, which were enabled to expand precisely by virtue of the improvements in agriculture. Similarly, the effect of the automobile’s supplanting the horse and buggy was to benefit even the former horse breeders and blacksmiths, once they made the necessary relocations.

In a major elaboration of Ricardo’s Law of Comparative Advantage, von Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concentrate on the areas in which their relative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their competition. He, in fact, outcompetes them for the job of janitor by being willing to accept a lower income than they. Von Mises showed that a harmony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.

He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally

ON THE BASIS OF such facts, von Mises argued against the possibility of inherent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of productive ability, mutual cooperation in the division of labour would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of economics.

He argued with unanswerable logic that the economic causes of war are the result of government interference, in the form of trade and migration barriers, and that such interference restricting foreign economic relations is the product of other government interference, restricting domestic economic activity. For example, tariffs become necessary as a means of preventing unemployment only because of the existence of minimum wage laws and pro-union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally.

In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all the above, that Nazism was actually a form of socialism. Any system characterised by price and wage controls, and thus by shortages and government controls over production and distribution, as was Nazism, is a system in which the government is the de-facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamental prerogatives of ownership. This identification of socialism on the German pattern, as he called it, is of immense value in understanding the nature of present demands for price controls.

Von Mises showed that all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention

VON MISES SHOWED THAT all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention, which destroys the workings of capitalism. He was among the first to point out that the poverty of the early years of the Industrial Revolution was the heritage of all previous history that it existed because the productivity of labour was still pitifully low; because scientists, inventors, businessmen, savers and investors could only step by step create the advances and accumulate the capital necessary to raise it. He showed that all the policies of so-called labour and social legislation were actually contrary to the interests of the masses of workers they were designed to help — that their effect was to cause unemployment, retard capital accumulation, and thus hold down the productivity of labour and the standard of living of all. 

In yet another major original contribution to economic thought, he showed that depressions were the result of government-sponsored policies of credit expansion designed to lower the market rate of interest. Such policies, he showed, created large-scale malinvestments, which deprived the economic system of liquid capital and brought on credit contractions and thus depressions. Von Mises was a leading supporter of the gold standard and of laissez-faire in banking, which, he believed, would virtually achieve a 100% reserve gold standard and thus make impossible both inflation and deflation.

I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works

WHAT I HAVE WRITTEN of von Mises provides only the barest indication of the intellectual content that is to be found in his writings. He authored over a dozen volumes. And I venture to say that I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or observations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capitalism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works.

Von Mises’s two most important books are Human Action and Socialism, which best represents the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of von Mises’s popular writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems of Economics, and The Ultimate Foundations of Economic Science are more specialised works that should probably be read only after Human Action. Von Mises’s other popular writings in English include Omnipotent Government, The Anti-Capitalistic Mentality, Liberalism, Critique of Interventionism, Economic Policy, and The Historical Setting of the Austrian School of Economics. For anyone seriously interested in economics, social philosophy, or modern history, the entire list should be considered required reading. [All titles of von Mises currently in print can be ordered on this web site, or downloaded free here.]

Courage

VON MISES MUST BE JUDGED not only as a remarkably brilliant thinker but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their defence. He cared nothing for personal fame, position, or financial gain, if it meant having to purchase them at the sacrifice of principle. In his lifetime, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tissues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known von Mises personally over a period of twenty years. I met him for the first time when I was sixteen years old. Because he recognised the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance.

His seminar, like his writings, was characterised by the highest level of scholarship and erudition, and always by the most profound respect for ideas. Von Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man’s ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement. He constantly strove to bring out the best in his students. This, combined with his stress on the importance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemological Problems of Economics, something that has always been one of my proudest accomplishments.

Today, von Mises’s ideas at long last appear to be gaining in influence. His teachings about the nature of socialism have been confirmed in the first-hand observations of honest news reporters with extensive experience in Soviet Russia, such as Robert Kaiser, Hedrick Smith, John Dornberg, and Henry Kamm. They are being confirmed at this very moment by the actions of millions of angry workers in Poland.

Some of von Mises’s ideas are being propounded by the Nobel prizewinners F.A. Hayek (himself a former student of von Mises) and Milton Friedman. They exert a major influence on the writings of Henry Hazlitt and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz. Von Mises’s monetary theories permeate the pages of recent best-selling books on personal investments, such as those by Harry Browne and Jerome Smith. And last, but certainly not least, they appear to be exerting an important influence on the present President of the United States [Ronald Reagan], who has acknowledged reading Human Action and has expressed his admiration for it.

Von Mises’s books deserve to be required reading in every college and university curriculum not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, business, journalism, education, and the humanities. He himself should be awarded an immediate posthumous Nobel Prize indeed, more than one. He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he laboured to preserve it. If he is widely enough read, his labours may actually succeed in helping to save it.

* * * * 

Economist George Reisman was a student of Ludwig Von Mises, Pepperdine University Professor Emeritus of Economics, and the author of Government Against the Economy and Capitalism: An Economic Treatise [free download here, or buy it here or here]. His blog is here, his website here, and all his publications here. This essay originally appeared in 1981, on the occasion of Mises’s one-hundredth birthday, and appeared recently at the Mises Institute blog.

"There are basic insights of economics that are (still) largely unknown or ignored by the general public."

"[T]here are basic insights of economics ... that are largely unknown or ignored by the general public. W]e have to deal with ideas centuries old, on which the thought of professional economists has never made any permanent impression. ... [O]ur public thought, our legislation, and even our popular economic nomenclature are what they would have been if Smith, Ricardo, and Mill had never lived, and if such a term as political economy had never been known. ...
    "Before such a thing as economic science was known arose the [erroneous] theory of the 'balance of trade.' ... that trade between two nations could not be advantageous to both. ... And yet the combined arguments of economists for a hundred years [that there can be no trade between two nations which is not advantageous to both] have not sufficed to change the nomenclature or modify the ideas of commercial nations upon the subject. … The terms 'favourable' and 'unfavourable,' as applied to the supposed balance of trade, still mean what they did before Adam Smith was born. ...
    "From the economic point of view, the value of an industry is measured by the utility and cheapness of its product. From the popular point of view, utility is nearly lost sight of, and cheapness is apt to be considered as much an evil on one side as it is a good on the other. The benefit is supposed to be measured by the number of labourers and the sum total of wages which can be gained by pursuing the industry. ...
    "[There is a] general belief throughout the community that the rate of interest can practically be regulated by law. Not dissimilar from this is the wide general belief that laws making it difficult to collect rents and enforce the payment of debts are for the benefit of the poorer classes. They are undoubtedly for the benefit of those classes who do not expect to pay. But the fact, so obvious to the business economist, that everything gained in this way comes out of the pockets of the poor … is something which the law-making public have not yet apprehended.
    "That you cannot eat your cake and have it, too, is a maxim taught the school-boy from earliest infancy. But, when the economist applies the same maxim to the nation, he is met with objections and arguments, not only on the part of the thoughtless masses, but of influential and intelligent men."

~ Simon Newcomb from his 1893 article 'The Problem of Economic Education.' Hat tip Timothy Taylor (The Coversable Economist) who observes that " the outcome of economic policies is not determined by their announced intentions of politicians or by their popularity, but by the underlying realities of how firms and consumers will react."

 

When libertarian economist Javier Milei was elected as Argentine president to fix the results of decades of mismanagement, he proposed a series of economic reforms dubbed by his critics as “shock therapy" – including slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession. But as Jon Miltimore explains in this guest post, a year on and it's becoming clear that the reverse has happened ...

Did Javier Milei Just Lift Argentina Out of Recession? 

by Jon Miltimore

During his first year as president, Javier Milei has been waging a bitter but largely successful campaign against inflation.

Now, Argentines received more welcome news: their economy is growing again.

“Economic activity rose 1.3 percent from April, above the 0.1 percent median estimate from analysts in a Bloomberg survey and the first month of growth since Milei’s term began in December,” Bloomberg reported on July 18. “From a year ago, the proxy for gross domestic product grew 2.3 percent.”

The positive economic report, based on data from the Argentine government, is a surprise to many.

The 2.3 percent year-over-year increase defied expectations of a decline of similar magnitude, Bloomberg reported. As Semafor notes, the Argentine economy was projected to have the least economic growth of any country in the world in 2024, according to the International Monetary Fund.

A ‘Wrecking Ball’?

Argentine economists I spoke to said that the numbers are encouraging, but the country’s economy is far from being out of the woods.

As most people know, Milei inherited an economic mess decades in the making. When the self-described anarcho-capitalist assumed office in December, Argentina was suffering from the third highest inflation rate in the world—211 percent year over year. The poverty rate was north of 40 percent, and Argentina’s economy was declining.

With his country’s economy in a full tailspin from decades of Peronism, Milei proposed a series of economic reforms dubbed “shock therapy” that consisted primarily of three components: slashing government spending, cutting bureaucracy, and devaluing the peso.

Critics warned that these measures would be disastrous, and many took it for granted that the remedies would deepen Argentina’s recession.

The former head of the International Monetary Fund’s Western Hemisphere Department, Alejandro Werner, said Milei’s strategy could tame inflation, but at great cost.

“A deep recession will also take place,” Werner wrote, “as the fiscal consolidation kicks in and as the decline in household income depresses consumption and uncertainty weighs on investment.”

Felix Salmon, the chief financial correspondent at Axios, concurred, comparing Milei’s policies to “a wrecking ball.”

“Milei’s budget cuts will cause a plunge in household income, as well as a deep recession,” wrote Salmon.

Despite these warnings, Milei delivered his “shock therapy” plan in the first few months of his presidency. Tens of thousands of state workers were cut as were more than half of government ministries, including the Ministry of Culture, as well as the Ministries of Labor, Social Development, Health, and Education (which Milei dubbed “the Ministry of Indoctrination”). Numerous government subsidies were eliminated, and the value of the peso was cut in half.

Even before Milei’s policies were given a chance to succeed, many continued to attack them.

“Shock therapy is pushing more people into poverty,” journalist Lautaro Grinspan wrote in Foreign Policy in early March. “Food prices have risen by roughly 50 percent, according to official government data.”

Yet the official government data Grinspan cited was a report from December 2023, before Milei had even assumed the presidency.

Contrary to the dire predictions, the results of Milei’s policies have been better than even many of his supporters had dared hope.

During the first half of 2024, inflation cooled for five straight months in Argentina, the Associated Press reported in July. Though consumer prices were up 4.6 percent in June from the previous month, that’s down from a 25 percent month-over-month increase in December, when monthly inflation peaked in Argentina. Meanwhile, in February the government saw its first budget surplus in more than a decade. And just days ago, an economic report was published showing a massive decline in poverty in Argentina.

Many doubted that these successes were possible, and the conventional wisdom said that wringing inflation out of the economy and slashing government spending could only be achieved at great cost: a deepening recession.

Escaping Recession?

The data suggest that, contrary to what so many people predicted, Argentina may not be slipping deeper into recession following Milei’s shock therapy. Instead, its economy is healing.

“Argentina is officially out of recession after 7 months of Javier Milei’s economic reforms,” Daniel Di Martino, a University of Columbia student pursuing his PhD, tweeted. “Remember, the economy was in recession since mid-2023, half a year before he got into office.”

Others, however, warn that it’s premature to say that Argentina is out of its recession.

“I will be careful of claiming ‘out of the recession,’” Nicolás Cachanosky, a native of Argentina and Associate Professor of Economics at the University of Texas at El Paso, told me. “Maybe the Argentine economy is getting out of a recession. Maybe not. All I’m saying is that it is too early to confirm, given these numbers.”

Cachanosky notes that interannual figures can be misleading, and that the data in question are relative values and not technically growth rates. While it’s still unclear where Argentina’s economy will go from here, it bears exploring why so many people, including many economists, doubted that its economy could be growing again already. There are two primary reasons, one of which is legitimate.

The first reason is a legitimate concern that sharp reductions in government spending will likely result in short term pain, even though it’s a necessary step toward economic healing.

“The government spends a bunch of money and keeps people employed,” one economist I spoke with told me. “When that slows down, you’re going to be able to measure the impact of that.”

This is why some free-market economists I spoke with expressed doubts that Argentina had already escaped recession. Cutting tens of thousands of jobs, even unproductive ones, and slashing hundreds of millions in subsidies is bound to have an impact on economic activity. Long term that impact will be positive because it will result in a more efficient allocation of resources, but it’s not unreasonable to assume it will first result in economic pain.

A second reason is a poor understanding of economics.

In the Keynesian school of economics, it’s taken as gospel that government spending fuels economic growth. This is why you’ll find so many Keynesians who argue that even destructive phenomena like war and hurricanes are actually good for the economy, because they stimulate government spending.

This was the argument economist Paul Krugman made several years ago when he said that an alien invasion, real or fake, would be good for the economy, since it would mobilise a massive amount of military spending, similar to World War II.

The idea is simple: government spending is good even if it’s producing goods that are unnecessary, such as weapons created for an alien invasion that is not even real.

The idea that Argentina would be slashing government spending during a recession runs counter to Keynesian orthodoxy, which teaches that recessions are precisely when “fiscal stimulus” is needed the most, since negative economic conditions often result in a predictable market failure: a decline in spending.

Broken Windows and Economic Growth

In other words, Argentina is flipping the macroeconomic script. In a world in which government spending hikes are deemed “a perfect solution in battling recessions,” Milei is providing the opposite: he’s slashing government outlays.

Yet a Mercatus Center study conducted by Tony Caporale and Marc Poitras, titled “The Trouble with Keynesian Stimulus Spending,” points out the obvious problem with such stimulus schemes:

[The Keynesian] approach fails to account for several significant sources of cost. Besides the cost of waste inherent in government spending, financing the spending requires taxation, which entails an excess burden, the reduction in output resulting from workers’ reduced incentive to work. Furthermore, the employment of even previously idle resources involves lost opportunities to invest in alternative uses of these resources.

Caporale and Poitras are talking about an elementary economic concept: opportunity costs. These costs refer to what one foregoes or gives up to purchase a good or service, an idea the economist Frédéric Bastiat explored in his famous “broken window” parable. Economist Jonathan Newman offers a tidy summary of the story, which appeared in Bastiat’s 1850 essay 'That Which Is Seen, and That Which Is Not Seen.'

It goes like this: a boy throws a brick at a baker’s window and a crowd gathers to discuss the economic consequences. They console the baker by pointing out that glass-repair companies need business, too, so it isn’t all bad news. After further reflection, they conclude that total employment and spending in the community has increased because of the broken window, and that this little spark of spending by the baker to repair the window sets off a chain reaction of spending. Now the glazier has extra cash to spend on various items, and the people who sold him those things now have extra income, and so on.

The crowd draws the conclusion that destruction is beneficial for the economy because it stimulates spending and employment.

Does this sound absurd and too good to be true? Well, it is. Bastiat’s parable revealed the absurdity of Keynesian economics before Keynesian economics existed.

Bastiat was challenging readers to see the unseen. Economists shouldn’t focus solely on the glazier’s profits that resulted from the rock thrown at the baker’s window, any more than they should focus solely on the jobs created by military spending. They must also focus on the costs of these actions, too.

This is the flaw that has long plagued Keynesians, and it helps explain why so many took it as gospel that slashing government spending in Argentina would deepen its recession.

When it came to Milei’s reforms, critics and prognosticators were focusing on the seen: tens of thousands of lost jobs, and billions in reduced spending. On one hand, this is perfectly rational. These cuts will come with easily measurable costs, and are likely to reduce economic activity in the short term. On the other hand, whether they are seen immediately or not, there are countless opportunities created by Milei’s reforms, which are dismantling the least productive parts of Argentina’s economy: its bureaucracy.

Whether Argentina’s burst in economic activity in May was a blip or the beginning of a long-term trend of economic recovery is something only time will tell. (Data indicate there was a sharp increase in agricultural production, which could be explained by favourable seasonal conditions or some other factor.)

It’s certainly possible that, after decades of economic pain from Peronism and mass money-printing, Argentina has more work to do before its economic recovery arrives. Yet Adam Smith once noted that the formula for prosperity is surprisingly simple, and it doesn’t contain government “stimulus”: just “peace, easy taxes, and a tolerable administration of justice.”

Milei knows this, fortunately. And he is showing no signs of relenting in his campaign to crush inflation and government spending to return Argentina to prosperity.

“What [is] the alternative?” he told the BBC. “To continue to print money like the previous administration that generates inflation and ends up affecting the most vulnerable?”

* * * * 

Jonathan Miltimore is the Managing Editor of FEE.org and a Senior Writer at AIER. His writing/reporting has been the subject of articles in TIME magazine, The Wall Street Journal, CNN, Forbes, Fox News, and the Star Tribune.

His article first appeared at the FEE blog.