Thoughts on economics and liberty

Category: Economics

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Human Betterment Through Globalization – Vernon Smith

This is from The Morality of Capitalism edited by Tom Palmer. But it is taken also from here.


My message today is an optimistic one. It is about exchange and markets, which allow us to engage in task and knowledge spe­cialization. It is this specialization that is the secret of all wealth creation and the only source of sustainable human betterment. This is the essence of globalization.

The challenge is that we all function simultaneously in two overlapping worlds of exchange. First, we live in a world of per­sonal, social exchange based on reciprocity and shared norms in small groups, families, and communities. The phrase “I owe you one” is a human universal across many languages in which people voluntarily acknowledge indebtedness for a favor. From primitive times, personal exchange allowed specialization of tasks (hunting, gathering, and tool making) and laid the basis for enhanced productivity and welfare. This division of labor made it possible for early men to migrate all over the world. Thus, specialization started globalization long before the emergence of formal markets.

Second, we live in a world of impersonal market exchange where communication and cooperation gradually developed through long-distance trade between strangers. In acts of personal exchange we usually intend to do good for others. In the marketplace this perception is often lost as each of us tends to focus on our own personal gain. However, our controlled laboratory experiments demonstrate that the same individuals who go out of their way to cooperate in personal exchange strive to maximize their own gain in a larger market. Without intending to do so, in their market transactions they also maximize the joint benefit received by the group. Why? Because of property rights. In personal exchange the governing rules emerge by voluntary consent of the parties. In impersonal market exchange, the governing rules—such as prop­erty rights, which prohibit taking without giving in return—are encoded in the institutional framework. Hence the two worlds of exchange function in a similar way: you have to give in order to receive.

The Foundation of Prosperity

Commodity and service markets, which are the foundation of wealth creation, determine the extent of specialization. In orga­nized markets, producers experience relatively predictable costs of production, and consumers rely on a relatively predictable supply of valued goods. These constantly repeated market activities are incredibly efficient, even in very complex market relationships with multiple commodities being traded.

We have also discovered through our market experiments that people generally deny that any kind of model can predict their final trading prices and the volume of goods they will buy and sell. In fact, market efficiency does not require a large number of participants, complete information, economic understanding, or any particular sophistication. After all, people were trading in markets long before there existed any economists to study the market process. All you have to know is when you are making more money or less money and whether you have a chance to modify your actions.

The hallmark of commodity and service markets is diversity— a diversity of tastes, human skills, knowledge, natural resources, soil, and climate. But diversity without freedom to exchange implies poverty. No human being, even if abundantly endowed with a single skill or a single resource, can prosper without trade. Through free markets we depend on others whom we do not know, recognize, or even understand. Without markets we would indeed be poor, miserable, brutish, and ignorant.

Markets require consensual enforcement of the rules of social interaction and economic exchange. No one has said it better than David Hume over 250 years ago—there are just three laws of nature: the right of possession, transference by consent, and the performance of promises. These are the ultimate foundations of order that make possible markets and prosperity.

Hume’s laws of nature derive from the ancient commandments: thou shalt not steal, thou shalt not covet thy neighbor’s posses­sions, and thou shalt not bear false witness. The “stealing” game consumes wealth and discourages its reproduction. Coveting the property of others invites a coercive state to redistribute wealth, thus endangering incentives to produce tomorrow’s harvest. Bearing false witness undermines community, management cred­ibility, investor trust, long-term profitability, and the personal exchanges that are most humanizing.

Only Markets Deliver the Goods

Economic development is linked with free economic and political systems nurtured by the rule of law and private property rights. Strong centrally planned regimes, wherever attempted, have failed to deliver the goods. There are, however, plenty of examples of both big and small countries (from China to New Zealand and Ireland) where governments have removed at least some barriers to economic freedom. These countries have witnessed remarkable economic growth by simply letting people pursue their own economic betterment.

China has moved considerably in the direction of economic freedom. Just over a year ago China revised its constitution to allow people to own, buy, and sell private property. Why? One of the problems the Chinese government encountered was that people were buying and selling property even though those transactions were not recognized by the government. This invited local officials to collect from those who were breaking the law by trading. By recognizing property rights, the central government is trying to undercut the source of power that supports local bureaucratic corruption, which is very hard to centrally monitor and control. This constitutional change, as I see it, is a practical means to limit rampant government corruption and political interference with economic development.

Though this change has not resulted from any political pre­disposition for liberty, it may very well pave the way toward a freer society. The immediate benefits are already there: 276 of the Fortune 500 companies are currently investing in a huge R&D park near Beijing, based on very favorable 50-year lease terms from the Chinese government.

The case of Ireland illustrates the principle that you don’t have to be a big country to grow wealthy through liberalizing government economic policy. In the past, Ireland was a major exporter of people. This worked to the advantage of the United States and Great Britain, who received many bright Irish immi­grants fleeing the stultifying life of their homeland. Only two decades ago Ireland was mired in third-world poverty, but has now surpassed its former colonial master in income per capita, becoming a committed European player. According to World Bank statistics, Ireland’s growth rate of Gross Domestic Product (GDP) jumped from 3.2 percent in the 1980s to 7.8 percent in the 1990s. Ireland recently was the eighth highest in GDP per capita in the world, while the United Kingdom was fifteenth. By fostering direct foreign investment (including venture capital) and promoting financial services and information technology, Ireland has experienced a formidable brain-drain reversal—young people are coming back home.

These young people are returning because of new opportuni­ties made possible by expansion of economic freedom in their homeland. They are examples of “can-do” knowledge-based entrepreneurs who are creating wealth and human betterment not only for their native country, but also for the United States and all other countries around the world. These people’s stories demonstrate how bad government policies can be changed to create new economic opportunities that can dramatically reverse a country’s brain drain.

We Have Nothing to Fear

An essential part of the process of change, growth, and eco­nomic betterment is to allow yesterday’s jobs to follow the path of yesterday’s technology. Preventing domestic companies from outsourcing will not stop their foreign competitors from doing so. Through outsourcing, foreign competitors will be able to lower their costs, use the savings to lower prices and upgrade technol­ogy, and thus gain a big advantage in the market.

One of the best-known examples of outsourcing was the New England textile industry’s move to the South after World War II in response to lower wages in the Southern states. (As was to be expected, this raised wages in the South, and the industry eventu­ally had to move on to lower-cost sources in Asia.)

But the jobs did not vanish in New England. The textile busi­ness was replaced by high-tech industries: electronic information and biotechnology. This resulted in huge net gains to New England even though it lost what had once been an important industry. In 1965 Warren Buffett gained control of Berkshire-Hathaway, one of those fading textile makers in Massachusetts. He used the company’s large but declining cash flow as a launch pad for reinvesting the money in a host of undervalued business ventures. They became famously successful, and 40 years later Buffett’s company has a market capitalization of $113 billion. The same transition is occurring today with K-Mart and Sears Roebuck. Nothing is forever: as old businesses decline, their resources are diverted to new ones.

The National Bureau of Economic Research has just reported a new study of domestic and foreign investment by U.S. multina­tional corporations. The study demonstrated that for every dollar invested in a foreign country, they invest three and a half dollars in the United States. This proves that there is a complementary relationship between foreign and domestic investment: when one increases, the other increases as well. McKinsey and Company estimates that for every dollar U.S. companies outsource to India, $1.14 accrues to the benefit of the United States. About half of this benefit is returned to investors and customers and most of the remainder is spent on new jobs that have been created. By contrast, in Germany every Euro invested abroad only generates an 80 percent benefit to the domestic economy, mainly because the reemployment rate of displaced German workers is so much lower due to the vast number of government regulations.

I believe that as long as the United States remains number one on the world innovation index, we have nothing to fear from out­sourcing and much to fear if our politicians succeed in opposing it. According to the Institute for International Economics, more than one hundred and fifteen thousand higher-paying computer software jobs were created in 1999–2003, while seventy thousand jobs were eliminated due to outsourcing. Similarly in the service sector twelve million new jobs were being created while ten mil­lion old jobs were being replaced. This phenomenon of rapid technological change and the replacement of old jobs with new ones is what economic development is all about.

By outsourcing to foreign countries, American businesses save money that enables them to invest in new technologies and new jobs in order to remain competitive in the world market. Unfortunately, we cannot enjoy the benefits without incurring the pain of transition. Change is certainly painful. It is painful for those who lose their jobs and must seek new careers. It is painful for those who risk investment in new technologies and lose. But the benefits captured by winners generate great new wealth for the economy as a whole. These benefits, in turn, are consolidated across the market through the discovery process and competitive learning experience.

Globalization is not new. It is a modern word describing an ancient human movement, a word for mankind’s search for betterment through exchange and the worldwide expansion of specialization. It is a peaceful word. In the wise pronouncement of the great French economist Frederic Bastiat, if goods don’t cross borders, soldiers will.


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Why Mr Devasahayam’s arguments against farm liberalisation in India are untenable

Mr Devasahayam is a brilliant officer who has unceasingly worked for the poor of India all his life. But he does have a socialist inclination, which prevents him from seeing the defects within the government, and the impossibility of socialist calculation.

He recently pointed out that farmers are still agitating outside Delhi. He then shared his article, “Can triple pricing fix the blunder of the new agrarian laws?“.

Here’s the summary of the farmer’s demand (in Panjabi):

My response:

I have called for the abolition of these farm laws and making them again – with extensive public consultation with better checks and balances. But the arguments made in the article are, in my view, not tenable.

1. High risk due to exposure to natural elements

That risk is the function of crop insurance and social insurance. Our party’s manifesto details both, with particular emphasis on social insurance, so no one is ever faced with deep poverty for causes outside their control. On the other hand, farmers in a free market will gain (and must gain) the benefit of unfettered pricing on the up side when there are shortages created by bad weather. The idea of “intervention price” is draconian communism, and is designed to guarantee that farmers will be enslaved, and kept in poverty for ever. Why can’t they benefit from high prices? Because we think consumers will suffer? But open markets (exports/ imports) will minimise any such risk

2. Adverse terms of trade

Terms of trade are stacked against most agricultural products and this has been going on all over the world ever since the industrial revolution. This won’t change anytime in the future, either. This is the shift to productivity which is leading to a change in economic structure and wealth creation by the more productive sectors. In the end all food in the world might be possible to produce by less than 2% of the world’s population, even as 98% do more productive things with their time. This inevitable consequence of human innovation can’t be made an argument for the government to become a businessman in perpetuity

3. Non-remunerative prices

This requires facilitation of strong futures markets. Farmers can then choose the mix of produce they sell via advance contracting or market sales in the future. Let the market deal with this. Governments are hopeless at everything. Do you expect any bureaucrat to understand anything in any level of detail? That is impossible. Market specialise at a level that no government can even remotely mimic.

Risk of predatory corporates

You refer to the risk of a few companies cornering the market. That’s not happened anywhere in the world where agriculture is genuinely free. It can happen under the Modi dispensation, though, with his crony capitalism. In genuinely free markets, the most productive companies, in competition with each other and with the entire world, have developed more and more efficient means of cold storage/ transportation so there is no wastage of food. India’s socialist system (commanding heights in agriculture) means that a huge portion of the food we produce is wasted. That’s criminal but such large scale crime against the poor is part of the DNA of socialism. Socialists fear corporates irrationally even as they use the product of corporates all the time (computers, mobile phones, cars, almost everything they buy). Socialists do not understand markets and competition because they do not put in the effort to do so, and in the process strangle the poor. That’s always the outcome of their actions. No exception.

MSP: These laws do not remove MSP – that remains an option for farmers. But I believe in the long run MSP must go. There are many superior ways to subsidise farmers if the government wishes to do so (during calamities, etc.). And the idea of working out the cost of production (as your 1990 committee did) is simply impossible. There are efficient farmers and there are inefficient farmers. There are good soils and there are bad soils. Such micromanagement of the price system is not feasible and even the contemplation of that should be stopped.

Most ICS officers were taught Adam Smith at the Academy before being let loose on the people of India. So almost all of them understood basic economics. Since independence, Smith has been consigned to the bin and IAS officers have no clue about the economy. They have therefore, with few exceptions, failed to advise our illiterate politicians sensibly – and, instead, participated in the destruction of India.

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The fundamental problem with monopoly health regulation

Why are monopolies bad?

For one, they displace all competition and alternatives. Second, they are expensive.

These defects are most pronounced in the field of health regulation.

I’ll be explaining this in more detail in a book I’ve been working on for the past few years in my spare time. But some notes I had made recently:

13 September 2020

Economics teaches that the biggest danger to society is a belief in one’s perfect knowledge – or even the capacity to collate and understand all relevant knowledge.
It is this belief in perfect knowledge that creates Oracles like a Chief Health Officer or regulators like TGA or FDA. Doctors occupying these hallowed roles are miraculously supposed to know more than ALL other equally (or more) qualified doctors just because an ignorant politician appoints them to such a role.
Since no brain is privy to perfect knowledge (that’s the socialist calculation problem of Mises for those familiar with it), we must design a FREE society where markets (individuals) decide for themselves based on their own information.
In a free society, private bodies will compete for certification. Some of them might certify ivermectin, others might say it is not good enough. In the end the truth will emerge as doctors and their patients adopt one or other of these certifications – based on their proven success (or failure).
When we centralise information in the brain of a single individual (CHO, TGA) we end up destroying the prospect of the emergence of the truth.
The reason I don’t extoll ivermectin like Kelly does is because I don’t have perfect knowledge of the matter and I know Kelly doesn’t, either.
I believe in creating competition and systems that allow independent actions and debates in the medical system. Unlike Kelly who merely castigates TGA (which implies he would appoint a “better” regulator – an impossibility), I would abolish all health regulators and replace them with multiple self-regulating bodies. And ensure that doctors are at ALL times entirely free to prescribe whatever they think is right.
And I would stop the licensing of doctors. Let there be competition in the provision of health advice and services.
(Guess who would oppose this? The bad doctors whose days to exploit patients and taxpayers for monopoly profits will then be over.)

14 September 2021

There is no doubt that the TGA, a captured regulator, has grossly over-reached its remit. In addition, AusReps is fundamentally opposed to the government “anointing” some doctors (often less qualified and experienced) as superior to others. Every medical professional must have the full right of independent determination to an appropriate medical treatment. We will review the entire health regulatory system through a Royal Commission.

A Sad and Shameful Day for Australian Medicine

Also see:



My email  so someone who’s upset with TGA’s banning the use of ivermectin:

That’s a good letter but the behaviour of governments and health regulators is EMBEDDED into the system – it is the logical inevitability of the incentives embedded into these “regulatory” systems (which are essentially a protection racket for the pharma industry). Ref: public choice theory and the theory of regulatory capture. I’ve made some notes on this recently.

We need to completely change the health regulatory and occupational licensing system. We need competitive and free market methods of regulation, else the deep-seated intellectual and financial corruption in our health system cannot be stopped.

Your letter will be thrown in the waste bin by these people – who care most for their own welfare, not for the welfare of Australians. We reward them for such behaviour. Let’s fix that first.

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