Blackboard Economics: On the Root of Public Interest Evil

by Terry L. Anderson*

Anyone who has taken an economics course has been dazzled by the graphs that professors like to draw on the blackboard (or whiteboard in more modern times). There is no more dazzling example of these graphs than an article published in the American Economic Review (March 1957) by Francis Bator titled “Simple Analytics of Social Welfare Maximization” (thought it did not seem “simple” to me when I was a graduate student). In it he provides a “rigorous” graphical rendition of how neo-classical principles could lead to maximizing social welfare and justifies his analytics saying, “It appears, curiously enough, that there is nowhere in the literature a complete and concise nonmathematical treatment of the problem of welfare maximization in its ‘new welfare economics’ aspects. It is the purpose of this exposition to fill this gap for the simplest statistical and stationary situation.” Bator describes the analysis as “a rigorous diagrammatic determination of the ‘best’ configuration of inputs, outputs, and commodity distribution for a two- input, two-output, two-person situation, where furthermore all functions are of smooth curvature and where neoclassical generalized diminishing returns obtain in all but one dimension-returns to scale are assumed constant” (p. 22).

The article begins with the “efficiency locus” of isoquants (seem simple?), transits to a “production possibility frontier,” then to a “grand utility possibility frontier,” which assumes knowledge of individual preferences, then to a “welfare function,” for which “ultimate ethical valuations are involved,” and finally to “Ω,” the “constrained bliss point.” What could be more enticing than understanding how to take society to its bliss point, and what could lead more to public interest evil?

The “root” of public interest evil, however, goes back much farther than Bator to A.C. Pigou’s The Economics of Welfare in 1920. Therein he leads economics down the pernicious road of externalities by distinguishing between “two varieties of marginal net product” which he named respectively social and private. The marginal social net product is the total net product of physical things or objective services due to the marginal increment of resources in any given use or place, no matter to whom any part of this product may accrue. It might happen, for example, , , , that costs are thrown upon people not directly concerned, through, say, uncompensated damage done to surrounding woods by sparks from railway engines. All such effects must be included – some of them will be positive, others negative elements – in reckoning up the social net product of the marginal increment of any volume of resources turned into any use or place. (134)

The upshot of his argument is that individuals acting on the private costs and private benefits they face will over-produce products with negative externalities and under produce those with positive externalities …

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Blackboard Economics (PDF)

* Terry L. Anderson has been a senior fellow at the Hoover Institution since 1998 and is currently the John and Jean De Nault Senior Fellow. He is the past president of the Property and Environment Research Center in Bozeman, MT, and a Professor Emeritus at Montana State University where he won many teaching awards during his 25 year career. Anderson is one of the founders of “Free Market Environmentalism,” the idea of using markets and property rights to solve environmental problems, and in 2015 published the third edition of his co-authored book by that title.

Inflation, High Debt and the Public Interest

Essay by Veronique de Rugy*

Veronique de RugyA growing number of economists hold the view that the U.S. government’s growing debt should not worry us. Real interest rates are not only much lower than in the past but are also forecast to stay at current low levels for a long time. As such, the government can carry much higher debt levels without worrying about debt sustainability. In addition, some economists argue that in countries where real interest rates and the interest rate-minus-growth differential is sustained over time, the government can increase primary deficits without worrying about future costs.

While this new fiscal paradigm is interesting, it rests on assumptions that don’t apply to the fiscal issues facing the US. It also requires immense faith in the willingness of legislators to spend money in ways that produce high and consistent economic growth. Yet a review of the literature on the impact of government spending on growth reveals that, generally, such spending crowds out private-sector spending. The same is true of the relationship of debt to growth. In other words, even if interest rates stay low forever, growth could slow so much as to make the starting assumption moot. Finally, it is simply imprudent to count on low interest rates lasting forever.

However, there is a deeper fact that should worry economists more than it now does – namely, it is hard to have good policies when government swells to be so large that it has little practical choice but to depend on annual deficit financing. In particular, if inflation ever gets out of control, it’s more difficult to deal with in a high rather than low debt environment. Furthermore, most of the discussion about the risk of inflation focuses on the risk posed by the Federal …

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Inflation, High Debt and the Public Interest

*Veronique de Rugy is George Gibbs Chair in Political Economy and a senior research fellow with the Mercatus Center at George Mason University. Her essay ‘Superstitions, Conjectures and Refutations: Inflation, High Debt and the Public Interest’ she gave as a speech at the 2021 CEPROM/ECAEF Conference in Monaco.

On Zeitgeist and Public Interest

Speech by Johan Norberg, held at the 5th CEPROM/ECAEF Conference in Monaco, 9. Dec 2021

“The public good is not to be considered if it is to be purchased at the expense of the individual.”
Lord Acton (1834-1902)

The idea of some sort of common good or public interest as the goal of and guide for practical politics is as old as statehood itself. In various guises it is used by politicians and administrators as a source of legitimacy. But there is no clear definition of public interest, and its meaning keeps shifting with the intellectual winds, with the Zeitgeist. Therefore, a term that once had a restrictive function now has taken on a permissive function. A conceptual shield against what Aristotle and Locke saw as tyrannical government, is now wielded as a weapon, to authorise any kind of government intervention.
What is in the public interest?

“The public interest”, wrote David Hume, “becomes the source of great dissentions, by reason of the different opinions of particular persons concerning it”. F. A. Hayek concluded that “common welfare or the public good has to the present time remained a concept most recalcitrant to any precise definition and therefore capable of being given almost any content suggested by the interest of the ruling group.”

And not just classical liberal thinkers worry about its vagueness. As a modern guide to the concept for public administrators puts it …

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On the Zeitgeist and the Public Interest


Die neue Anmassung von Wissen

Essay von Robert Nef*

Die Fondation Beyeler in Basel widmet Francisco de Goya (1746–1828) eine der bisher bedeutendsten Ausstellungen. Ich benütze die Gelegenheit, um auf die noch nicht abgeschlossene Kontroverse hinzuweisen, die eines seiner bekanntesten «Cappricios» mit dem Titel “El sueño de la razón produce monstruos“ ausgelöst hat.
Ich knüpfe dabei an einen Vortrag an, den ich 2004 an einem Meeting der Mont Pèlerin Society in Hamburg gehalten habe. Ich befasste mich damals unter anderem mit dem Verhältnis von Rationalität und Politik, das gegenwärtig viele Menschen, vor allem in Zeiten der Corona-Massnahmen, zu Recht intensiv beschäftigt.

Francisco de Goya (1746 – 1828)
‘Der Schlaf (Traum) der Vernunft bringt Ungeheuer hervor’ Aus: Los capriccios, Blatt 43, Radierung und Aquatinta

Es gibt heute Bestrebungen, die gesamte Politik auf wissenschaftlich nachweisbare Fakten abzustützen, um damit als Politiker mit Hilfe der elektronischen Medien den Status des Wahrheitsverkünders zu erreichen, der die einzig mögliche Wahrheit in die Tat umsetzt. Politik wird so zum Anliegen der fortgeschrittenen Vernunft einer aufgeklärten Elite, welche «die Wissenschaft» (welche?) auf ihrer Seite hat und die die Führung beansprucht, um der Wahrheit mit Macht zum Durchbruch zu verhelfen. Die Vorstellung, es gehe bei der Politik um einen gemeinsamen Lernprozess, bei dem sich Menschen mit unterschiedlichen Auffassungen über des Gemeinwohl immer wieder neu gegenseitig anpassen und einigen müssen, geht dabei verloren. Gegner der Regierung werden aus dieser Sicht automatisch zu Abtrünnigen, die man – wohlwollend – als Irrende und «Zurückgebliebene» bezeichnet und übelwollend als Leugner.

Der Ökonom und Sozialphilosoph Friedrich August von Hayek hat das Goya-Zitat aus den «Cappricios» samt Illustration seinem 1975 publizierten Essay “Die Anmassung von Wissen” vorangestellt. Im Internet findet man inzwischen über 700 Hinweise, die sich auf die Widersprüchlichkeiten dieser umstrittenen Aussage beziehen. Ihr «Aufhänger» ist der im Spanischen zweideutige Begriff «sueño», der sowohl Schlaf als auch Traum bedeuten kann. Die Deutschen unterscheiden die beiden Bedeutungen und verwenden zwei verschiedene Begriffe. “Träume sind Schäume”, heisst ein deutsches Sprichwort, mit dem sich Deutsche vor sich selbst warnen. “Ein Gott ist der Mensch, wenn er träumt, ein Bettler, wenn er nachdenkt”, liest man bei Hölderlin, dem deutschesten aller deutschen Dichter, und da Menschen lieber Götter sind als Bettler, ist das Träumen auch beliebter als das Nachdenken. Von Hölderlin stammt auch die hoch aktuelle Warnung: «Das hat den Staat zur Hölle gemacht, dass ihn der Mensch zu seinem Himmel machen wollte». Der Spanier Calderon hat in seinem berühmten Gedicht über den Traum, auf das Goya wohl angespielt hat, das ganze Leben einen Traum genannt und gleichzeitig die Undefinierbarkeit unzweideutig zum Ausdruck gebracht. “¿Qué es la vida? Una ilusión, una sombra, una ficción, y el mayor bien es pequeño:que toda la vida es sueño, y los sueños, sueños son.”

Hayek selbst sieht im Aphorismus von Goya eine Warnung vor einem blinden Glauben an den Menschheitstraum, die Vernunft könne alle Probleme lösen. Diese Warnung ist eine zentrale Botschaft von Hayeks Gesamtwerk. The sleep of reason produces (or: brings forth) monsters. Er räumt aber ein, dass Goya ursprünglich das Gegenteil gemeint haben könnte. Auch der deutsche Politologe Wilhelm Hennis hebt die romantische, aufklärungskritische Komponente hervor und kommt zu folgendem Fazit: Die Vernunft, die sich etwas “ausdenkt”, produziert Monster: “Der Traum einer universellen, projekteschmiedenden Vernunft gebiert Ungeheuer.”

Bei Goya selbst findet sich in seinem Kommentar zum Blatt 43 ein Hinweis, dass er sich der Doppelbödigkeit seiner Aussage durchaus bewusst war. “Die Phantasie, verlassen von der Vernunft, erzeugt unmögliche Ungeheuer; vereint mit ihr, ist sie die Mutter der Künste und Ursprung der Wunder.” Oder mit anderen Worten: Gebt der Vernunft, was der Vernunft gehört und überlasst der Phantasie den Glauben an die Kreativität und an die Wunder der Spontaneität. Mit dieser Aussage kann ich mich restlos identifizieren. Einmal mehr ist der Autor allen seinen Interpreten überlegen. Es ging Goya also weder um eine Diffamierung noch um eine Verherrlichung der Vernunft, sondern um einen Appell, der Vernunft jenen Stellenwert zu geben, der ihr vernünftigerweise zukommt.

Mit Hayek bin ich der Auffassung, dass kein Individuum den Anspruch erheben kann, die ganze Vernunft zu besitzen und schon gar nicht die Fachleute, die sich das anmassen. Jeder trägt seine persönliche Mischung von Vernunft, Emotion und Illusion mit sich herum, und eine spontane Ordnung zeichnet sich dadurch aus, dass sie den Versuch unterlässt, diese Vernunftinseln konstruktivistisch zu ordnen und mit dem Risiko des grossen Irrtums und der fatalen kollektiven Täuschung hierarchisch zu vernetzen.

*Robert Nef (geb. 1942 in St. Gallen) ist ein Schweizer Publizist und Autor. Er hat Rechtswissenschaften in Zürich und Wien studiert. Zwischen 1961 und 1991 war er wissenschaftlicher Mitarbeiter am Lehrstuhl für Rechtswissenschaft an der ETH Zürich. Zwischen 1979 und 2007 leitete er das Liberale Institut, dem er später präsidierte. Gegenwärtig (2018) ist er Mitglied des Stiftungsrats des Instituts. Von 1994 bis 2008 war er Mitherausgeber der Schweizer Monatshefte. Er ist Mitglied der Mont Pèlerin Society sowie der Friedrich-August-von-Hayek-Gesellschaft, Präsident des Vereins Gesellschaft und Kirche wohin?, Vizepräsident der Stiftung Freiheit und Verantwortung und war bis 2016 Präsident der Stiftung für Abendländische Ethik und Kultur. 2008 wurde er mit der Friedrich A. von Hayek-Medaille ausgezeichnet und 2016 mit der Roland-Baader-Auszeichnung.

Nef vertritt betont wirtschaftsliberale und staatskritische Positionen in der Tradition der Österreichischen Schule. Für die Zeitschrift eigentümlich frei ist er als Autor tätig und Mitglied des Redaktionsbeirats. Nef ist einer der Gründer der reformkritischen Schweizer Orthographischen Konferenz.

Will Chile Really be ‘the Tomb of Neoliberalism’?

A Comment on Chile’s Election Results by Axel Kaiser Barents von Hohenhagen*

Gabriel Boric’s 56% to 44% victory over conservative José Antonio Kast in Sunday’s election gives him a chance to fulfil what he has promised after being chosen as the far left’s presidential candidate in July 2021: “Chile will be the tomb of neoliberalism”.
The election was a referendum on Chile’s past four decades. While Mr. Kast backed the principles and institutions that brought unprecedented levels of prosperity, his rival pledged a new order based on left-wing populism and identity politics.

In his first speech as president-elect, Mr. Boric announced plans to end Chile’s private pension system. He wants the country to return to a pay-as-you-go model, in which government would tax active workers to pay for retirees. In its past iteration, the system was riddled with corruption and ultimately went bankrupt. If implemented, this program would become an unsustainable burden for Chilean taxpayers. It would also gradually destroy the country’s capital markets, which are heavily dependent on the individual savings accumulated in private pension funds. Mr. Boric also plans to try to increase the size of government by almost a third over eight years. He seeks to raise tax revenue by 8% of gross domestic product. Economists across the ideological spectrum say this would destroy Chile’s growth potential.

Mr. Boric has questioned the free-trade pacts that have been a pillar of Chile’s economic success. He wants to raise the minimum wage by more than 60% while reducing the work week by five hours to 40. In addition, he plans to increase the social security payments required of employers by 60%. These measures could decimate the small and medium-sized businesses that create 65% of on-the-books jobs in the country.
The president-elect, who has openly supported left-wing terrorist organizations such as the Frente Patriotico Manuel Rodriguez
and terrorist groups that operate in southern Chile, has assailed the moderate left as traitors to the Chilean people for subscribing to the “neoliberal model.” Mr. Boric is aligned with Chile’s Communist Party, which supports the dictatorships in Cuba, North Korea, Venezuela and Nicaragua.

The Boric campaign’s antimarket narrative was spread by the media and institutions of higher education that are largely controlled by the left. Mr. Boric and the Communists secured their mandate in part because Chile’s economy has been lackluster recently.
Support from Hollywood celebrities such as Viggo Mortensen and Pedro Pascal, as well as endorsements by left-wing economists like Thomas Piketty, Joseph Stiglitz and Mariana Mazzucato, added momentum to Mr. Boric’s campaign. But his economic agenda would be disastrous and the costs borne by the poorest Chileans.

According to Mr. Boric, in recent decades the Chilean people have been exploited by—and elites have benefited from—neoliberal policies. Inequality, poverty and a lack of inclusion are part of the malaise that the radical left aims to eradicate. The facts, however, show a very different story.

After Marxist President Salvador Allende was overthrown by a military coup in 1973, a group of economists, called the Chicago Boys for their University of Chicago training, transformed Chile’s economy, making it a model for the developing world. They established pro-market institutions and policies such as privatizing social security and opening the economy to free trade.
Once democracy was restored in 1990, the coalition of center-left political parties known as Concertación threw more resources behind the economists’ efforts. The results were stark: Chronic inflation, which had peaked at over 500% in 1973, fell to below 10% by the 1990s and to under 5% by the 2000s. Between 1975 and 2015, per capita income in Chile quadrupled to $23,000, the highest in Latin America.

His wish list, which includes ending private pensions, would wreck the country’s capital markets.
From the early 1980s to 2014 poverty fell from 45% of the population to 8%, while life expectancy rose from 69 to 79. The middle class as defined by the World Bank grew from 23.7% of the population in 1990 to 64.3% in 2015, and extreme poverty fell from 34.5% to 2.5%. Between 1990 and 2015 the income of the richest 10% grew a total of 30% while the income of the poorest 10% increased 145%.
Some analysts expect Congress to prevent Mr. Boric from implementing his radical agenda. But populism has been rampant even among the center left and the right in recent years. There is no guarantee that this will change now that Congress is split, particularly when the newly elected president enjoys massive popular support.

Yet the most dangerous effects of Mr. Boric’s victory may well be seen in the new constitution. The election results may embolden the radical left that holds sway over Chile’s constitutional convention, which is expected to wrap up next July. The left may come up with a more aggressively populist draft than would have been the case if Mr. Kast had won. If Chileans approve such a constitution in next year’s plebiscite, their country’s fate as another failed Latin American nation will be sealed.

**Axel Kaiser Barents von Hohenhagen is a native of Chile and holds a Master Degree in Investment, Commerce and Arbitration, a Master Degree in American Studies as well as a Ph.D. in Philosophy which he earned at the University of Heidelberg (D). He is currently the executive director and co-founder of the ‘Foundation for Progress’, one of the most influential classical liberal Think Tanks in Latin America and also serves as a Senior Fellow at the Atlas Center for Latin America. In 2016 he was also appointed to the Friedrich A. v. Hayek Chair at the Adolfo Ibáñez University in Santiago de Chile. Prof. Kaiser is the author of several books, including The Misery of Interventionism: 1929-2008, The Fatal Ignorance, The Pope and Capitalism and the Latin American best sellers The Tyranny of Equality and The Populist Deception. His most recent publication is From Illiberalism to Populism: The Ideological Causes of the Latin American Failure published in Democracy Under Threat by Oxford University Press. Prof. Kaiser lectures at CEPROM Conference (Monaco) as well as at the ‘Gottfried von Haberler Conference’ in Vaduz (Liechtenstein). His columns are published in the Santiago based newspapers El Mercurio and Diario Financiero de Chile.
His speech “Will Chile Really be ‘the Tomb of Neoliberalism’?” was held at this year’s Annual ECAEF/CEPROM Conference in Monaco.