CIAO DATE: 08/2011
Volume: 31, Issue: 2
Spring/Summer 2011
The Virtues of Free Markets (PDF)
Mark A. Zupan
Free markets have many virtues. Arguably, the most recognized is the expansion of individual choice—and thus freedom—through mutually beneficial exchange (see Bauer’s definition of economic development in Dorn 2002: 356). This proposition is at the heart of the enduring impact of Adam Smith’s Wealth of Nations ([1776] 1937) which aptly spells out the benefits of the Invisible Hand for citizens and societies. In Capitalism and Freedom (1962), Milton Friedman articulates why the economic freedom at the heart of free markets is also a precondition for political freedom. Freedom of expression is not possible when the means of production are under government con- trol and individuals lack the economic means to sustain themselves and their points of view. This article argues that free markets promote other important virtues that have heretofore received scant attention. Specifically, through fostering an indefinitely-lived series of exchanges, free mar- kets create a future promoting integrity and trust. This is because the more the future matters, the better behaved are individuals in the present.
The Diversity of Debt Crises in Europe (PDF)
Jerome L. Stein
The foreign debts of the European countries are at the core of the current crises. Generally, the crises are attributed to government budget deficits in excess of the values stated in the Stability and Growth Pact (SGP), as part of the Maastricht treaty. Proposals for reform generally involve increasing the powers of the European Union to monitor fiscal policies of the national governments and increasing bank regulation. This article seeks to explain intercountry differences in the debt crises in Europe. Is there a single explanation, cause? Specifically, were the crises due to government budget deficits or to the private sector? The answer will determine the appropriate policies to pre- vent a recurrence. The Stability and Growth Pact, Maastricht Treaty, and the European Union focused on rules concerning government debt ratios and deficit ratios. But they ignored the problem of “excessive” debt ratios in the private sector that led to a crisis in the financial markets. Neither the markets nor the central banks anticipated the crises until it was too late. My basic questions are: What is an “excessive” private sector debt ratio that is likely to lead to a crisis?
Markets, Tort Law, and Regulation to Achieve Safety (PDF)
Paul H. Rubin
Markets, tort law, and regulation are alternative methods of achieving safety. Of these, the market is the most powerful, but it is often ignored in policy discussions. I show that both for the United States over time and for the world as a whole, higher incomes are associated with lower accidental death rates, and I discuss some examples of markets creating safety. Markets may fail if there are third-party effects or if there are information problems. Classic tort law is a reasonable (although expensive) way to handle third-party effects for strangers, as in the case of auto accidents. In theory, regulation could solve information problems, but in practice many regulations overreach because of different information problems—consumers are unaware of unapproved alternatives. A particularly difficult information problem arises in the case of what I call “ambiguous goods”— goods that reduce some risks but increase others (for example, medical care and malpractice.) Product liability focuses on these goods; over half of the litigation groups of the American Association for Justice are for ambiguous goods.
Economic Freedom and Happiness (PDF)
Daniel M. Gropper, Robert A. Lawson, Jere T. Thorne, Jr.
That liberty is necessary for greater happiness and a better life is a notion deeply rooted in the American sensibility. But is there a link between greater freedom and greater happiness across countries? In this article we explore this question by examining the empirical relationship between liberty, as measured by economic freedom, and happiness across more than 100 countries. There is a now a large literature on human happiness and its meas- urement. There is even a journal fully dedicated to the study of hap- piness. Kahneman, Diener, and Schwartz (1999) offer discussions of the many interesting theoretical and methodological issues involved in studying happiness. Kahneman et al. (2004) and Kahneman and Krueger (2006) discuss the current attempts to measure happiness at the individual and societal level. Frey and Stutzer (2000) and Wilkinson (2007) offer interesting reviews and criticisms of the hap- piness literature in economics. Norberg (2010) outlines the motiva- tions behind the development of some of the happiness measures and potential pitfalls in their use.
The Impact of Ohio's EdChoice on Traditional Public School Performance (PDF)
Matthew Carr
Over the course of the last 35 years, traditional public school student achievement in the United States has been stagnant, despite myriad reform efforts and a doubling in total expenditures on K–12 education (Ravitch 2000, Hanushek 1986, Greene 2005). The ramifications of this academic achievement plateau on human capital development and thus the country’s global economic stand- ing are of paramount importance (Heckman and Masterov 2007). Thus, one of the most important public policy questions that gov- ernment and society faces is how to improve the academic per- formance and quality of the nation’s public education system. Prominent among recent reform policies have been the twin pil- lars of accountability and school choice. Although many states were already implementing accountability programs, which required all schools to administer statewide standardized exams and then pro- vided rewards and sanctions based on those results, the passage of the federal No Child Left Behind Act (NCLB) in 2001 made such policies a prerequisite for receiving federal funds. As a result, since the enactment of NCLB, all 50 states have now implemented statewide standardized testing and public reporting of school per- formance (Goertz 2005).
Why Some Cities Are Growing and Others Shrinking (PDF)
Dean Stansel
Over the last three decades, large cities like Pittsburgh, Detroit, Cleveland, Buffalo, and Toledo have seen their populations shrink, while areas like Houston, Atlanta, Dallas, Tampa, and Phoenix have seen their populations grow rapidly. Examining the policy differ- ences between high-growth and low-growth areas can provide evi- dence that may help declining cities reverse their fortunes. In 1980, Austin, Texas, and Syracuse, New York, were roughly the same size. The Austin metro area had a population of about 590,000, and the Syracuse metro area had about 643,000 residents. By 2007, Austin’s population had increased by more than 1 million while Syracuse’s population had been stagnant. That same disparity exists when one examines the growth of employment and real per- sonal income. Another disparity between the two areas is the tax burden. State and local taxes accounted for nearly 13 percent of personal income in Syracuse but only about 9 percent in Austin. Although there are numerous factors that can influence the growth of individual economies, one finds a consistent relationship between low taxes and high economic growth in metropolitan areas, in states, and in nations. This article details that relationship between taxes and growth for the 100 largest U.S. metropolitan areas.
Gustav Cassel: In Defense of Private Property Rights (PDF)
Benny Carlson
In their book on property rights, Terry Anderson and Fred McChesney (2003: 13) make the following statement: The idea that property rights might themselves be a distinct and explicit area of economic inquiry is relatively recent. In classical economics, well-defined and secure property rights were typically assumed to exist, not analyzed or explained.1 That statement may have some element of truth, but it is not difficult to find economists from “the old days,” a century or so back, who emphasized the importance of secure property rights. In Sweden, Gustav Cassel, probably the most famous political economist in the world in the years immediately after World War I, was the most outspoken economist in this respect. He vigorously defended the importance of private property rights for economic growth and progress. In this article, I review his arguments and his evolution from a radical liberal to a conservative liberal (in the European sense of the word).
Property Rights and Environmental Quality: A Cross-Country Study (PDF)
Carrie B. Kerekes
Public policy often regards pollution and other measures of poor environmental quality as public bads that result from market failure and require government intervention through regulatory policies and more stringent environmental standards. In this article, I argue that pollution and environmental quality should instead be regarded from a property rights perspective, in which institutions of clearly defined and enforced property rights create incentives that lead to reduced levels of pollution and an overall improvement in environ- mental quality. Using cross-country data, I examine the relationship between property rights and environmental quality. This article shows that where property rights can be well defined and enforced, as with property rights pertaining to land and water, increases in the security of property rights lead to improvements in environmental quality. For instance, I find that as property rights become more secure, deforestation decreases and access to safe water and sanitation facilities improves. When property rights can- not be well defined, such as property rights over the air, increases in the overall security of property rights may erode environmental quality. For example, I find that more secure property rights are positively related to several indicators of air pollution.
Dollarization: The Case of Zimbabwe (PDF)
Joseph Noko
This article investigates the recent monetary experience of Zimbabwe with dollarization. It shows how dollarization has allowed Zimbabwe to quash hyperinflation, restore stability, increase budgetary discipline, and reestablish monetary credibil- ity. Zimbabwe’s hyperinflationary past and the stabilization meas- ures taken by the government are outlined, and the consequences defined. Problems arising from a lack of financial integration, an error in the choice of currency to dollarize under, and the inability of the government to enter into a formal dollarization agreement are discussed. Choice in Currency In his 1976 classic Choice in Currency, F. A. Hayek argued that “the pressure for more and cheaper money” led governments to monopolize the issuance of money and made inflation inevitable. He asked, “Why should we not let people choose freely what money they want to use?”
Why Do Federal Funds Trade at the FOMC's Target Rate? (PDF)
Jerry H. Tempelman
The role of inflation expectations on the part of economic agents is being increasingly recognized and incorporated into frameworks for the setting of monetary policy (for example, Piger and Rasche 2008, Hetzel 2008). In this article, I describe how expectations are also critical in the implementation of monetary policy. According to the textbook view, the Federal Reserve controls the federal funds rate by varying the supply of reserves available to the banking system. I will argue, however, that fluctuations in the supply of reserves are not the full explanation, thus providing additional support for Taylor (2001), who found that federal funds trade at or around the Federal Open Market Committee’s target rate in part because market partic- ipants expect that if they don’t, the Fed will step in and react. A Textbook View Federal funds are account balances of depository institutions, such as commercial banks, at the Federal Reserve. Such account balances are actively traded between these institutions. If an insti- tution projects an account balance that is short of what it wants that balance to be, it may call on an institution that has a surplus to borrow part or all of that surplus, usually on an overnight basis. The lending institution instructs the Federal Reserve to charge its account and to credit the account of the borrowing institution.
Suckers, Punters, Pathbreakers: When Homo Oeconomicus Is Selflessly Selfish (PDF)
Anthony de Jasay
Rational choice presupposes that people do what they like better than any available alternative. If, however, we mistrust what they declare to like or what psychology is supposed to tell us about it (a pardonable enough mistrust), we can only infer what they like from observing what they do. We must be content with revealed prefer- ence. The theory of choice is locked into the tautology of “they do what they like because they like what they do,” and requiring their preferences to be orderly and consistent is of little practical help. In its elegance, modern choice theory, as represented in neoclassical economics, is too smooth and slippery to be very useful. The resulting frustration seems to me to have two consequences. One is a more or less unconscious backsliding into old-fashioned util- ity theory. We know more than revealed preference tells us; we know what people like, therefore we can predict their choices (more or less) before knowing what they chose. They like “utility,” the motive for choice. More formally, the things a person likes are arguments in his “utility function” that he seeks to maximize if he is rational.
Steven Horwitz
The combination of the recession and financial crisis of the last few years has led to quite the outpouring of books by economists purporting to explain what happened and why, and how to avoid a repeat performance. This very crowded field has seen a range of quality, but a good number of these books have been quite well done. Alchemists of Loss by Great Britain’s Kevin Dowd and Martin Hutchinson is another very good treatment of the issues. The authors bring a wealth of experience to their book. Dowd has had a long career as an academic, with much of his work focusing on the history and theory of “free banking” and other forms of financial deregulation. Hutchinson is a longtime financial journalist and has worked in the merchant and investment banking industries in Britain. They have written a comprehensive, fairly detailed, and sur- prisingly entertaining account of the historical context, theoretical framework, and actual events of the crisis. At over 400 pages, the book is divided into six sections. In section one, the authors examine the history of “pre-modern” finance and prior crises, and in section two they move to a discussion of “modern financial theory.”
Rendezvous with Destiny: Ronald Reagan and the Campaign that Changed America by Craig Shirley (PDF)
Victor Gold
Nearly every presidential election in my lifetime appeared to be the most critical in the nation's history, with America's very survival hanging in the balance-at least according to the candidates involved. In truth, however, only two campaigns for the White House could be described as historically transformative. The first was Franklin D. Roosevelt's election in 1932 that ush- ered in the New Deal, which historians like Arthur Schlesinger Jr. viewed as the "Era of Liberal Enlightenment." The second was Ronald Reagan's election in 1980, which conservative historian Craig Shirley sees as the end of "liberalism's half-century reign of dominance."
The Political Philosophy of George Washington by Jeffry Morrison (PDF)
Joseph Romance
In many ways, George Washington represents the most difficult of the Founders to approach. His importance in the American Revolution and the central role he played in the formation of the Republic is beyond dispute. Yet, as so many have pointed out, he becomes more the marble statue than a real man. Thus, it may not be surprising that the most recent spurt of scholarship and popular history concerning the American Founders tends to focus on reinter- pretations of the agreed-upon intellectual greats (Jefferson, Madison, and Hamilton) and a rediscovery of neglected Founders (Mason, Morris, and Pickney). Alas, what are we to do with Washington beyond revere? In The Political Philosophy of George Washington, Jeffry Morrison provides us with a sympathetic and thoughtful accounting of the thinkers and intellectual traditions that most influenced our greatest Founder. Morrison attempts to show just how Washington absorbed and then reflected back to the world the most important political beliefs of his day. Morrison’s strongest point, and one deserving of praise, is to remind us of the complex intellectual milieu in which Washington operated. Today, much scholarly firepower is devoted to untangling the various strands of political thought that tied our Founders together. In what sense were they republicans? Were they liberals? What was the status of Christianity and religion in general among these men?
Interpreting China's Economy by Gregory C. Chow (PDF)
James A. Dorn
This is a valuable book for anyone who wants to gain an under- standing of the key forces that have made China the world’s second largest economy and opened the door for millions of people to lift themselves out of poverty. The book is divided into four parts, with the first three devoted to economic analysis of China’s peaceful rise and the fourth reflecting on the U.S. economy and its future. The book was first published in China and consists of articles that Gregory Chow, Class of 1913 Professor of Political Economy and Professor of Economics, Emeritus, at Princeton University, wrote for leading Chinese newspapers, as well as some lectures he recently gave to Chinese economists. One comes away from this book with a deeper appreciation of the power and elegance of simple economic principles and how they can be applied to com- plex policy issues. As a pioneer in the field of econometrics and applied economics, as well as an astute observer of and participant in China’s economic reform movement since 1978, Chow has a wealth of knowledge that he masterfully draws upon to interpret the Chinese economy. Although this book is written for a general audience, parts of it are technical and designed to help educate the rapidly growing number of Chinese students specializing in economics. First, some background. Gregory Chow (Zhou Zhizhuang) was born in Canton (now Guangzhou), where his father was a successful entrepreneur and chairman of the Chamber of Commerce. The family moved to Hong Kong in 1937, where Gregory, one of seven children, attended primary school.
The Great Ocean Conveyor: Discovering the Trigger for Abrupt Climate Change by Wallace S. Broecker (PDF)
Patrick J. Michaels
This interesting book is an in-depth guide to workings of the mind of one of history's great environmental scientists, Wallace(Wally) Broecker, of Columbia University. It is strongly recom- mended for anyone interested in climate change policy. However, it is not an easy read. Despite the somewhat turgid text-and myriad, excruciating, and sometimes unexplained con- cepts and details-there are several important lessons. The most important of these is that what modern man would think of as dramatic climate change is the rule, not the exception, and we only partially understand, within broad limits, why our climate is so inherently unstable.
The ostensible purpose of Broecker's book is to describe what he calls "The Great Ocean Conveyor" as a major modulator of earth's climate. The Conveyor is a three dimensional ocean current in which warm, surface water migrates from the Pacific, through the Indian Ocean, and ultimately ends up near Greenland, where the cold cli- mate chills it, making it more dense, and sinking it back all the way to Antarctica, from where it gradually re-emerges in the Pacific. Technically this is known as the "Thermohaline circulation" (hereafter, THC).