In an article that will no doubt annoy orthodox leftists who cannot stand when a member of the creative class defects from their camp, Mamet describes how he came to break with ‘brain dead liberalism.’
“Aha,” you will say, and you are right. I began reading not only the economics of Thomas Sowell (our greatest contemporary philosopher) but Milton Friedman, Paul Johnson, and Shelby Steele, and a host of conservative writers, and found that I agreed with them: a free-market understanding of the world meshes more perfectly with my experience than that idealistic vision I called liberalism.
We decided to write about the Chocolate Wars yesterday because it nicely illustrated a recurrent economic dynamic—the way companies attempt to use government regulation to gain competitive advantage. Alexandra Wolfe’s article in Portfolio touched on an important aspect of this dynamic when she described the efforts of the Chocolate Manufacturers Association, a trade group dominated by the biggest names in chocolate, to get the government to lift restrictions on the recipe for anything called chocolate. Big Chocolate, really from competition from artisanal chocolate makers and increases in the price of cocoa butter, wants to use cheaper ingredients to cut the costs of manufacturing the stuff.
We wanted to emphasize the other side of this regulatory battle—the economic motives of the artisanal chocolate makers who are lobbying against the Big Chocolate reforms. The artisanal crowd makes lots of unsustainable arguments against the proposed reforms that serve to cover up what’s really going on. And what’s really going on is what’s always going on, businesses seeking advantage over competitors.
The artisanal chocolate makers advance some extremely unsound arguments. The first is that chocolate made with substitutes for cocoa butter—a smoothing ingredient that adds texture to chocolate—are vastly inferior. But if this were true, they’d welcome Big Chocolate’s move. Customers would turn away from New Chocolate the way they turned against New Coke, opening up a huge market for the artisanals.
What the artisinals seem to fear is that New Chocolate won’t be bad enough to drive away customers from Big Chocolate. To put it differently, they suspect that chocolate consumers may decide that they’d rather eat cheaper stuff made without cocoa butter than pay a premium for the old-fashioned product. And they want to make sure that consumers are given the opportunity to make this choice. And what they really want is to prevent Big Chocolate from engaging in price competition with their more expensive products by finding cheaper ways to make chocolate.
[More on the Chocolate Wars after the jump.]
“The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all group.”–Henry Hazlitt, Economics in One Lesson.
You know what would be totally amazing? If the destruction by fire of more than 1,600 homes and buildings, massive evacuations and widespread business closures turned out to actually be an economic boon. Sure money is a small consolation to those who have suffered losses from the fires. No-one want to sound too happy about this thing. But an upside is an upside, right?
You can tell a lot of people wish the world worked like this because they keep pretending it does.
“Economists have noted the perverse reality that in the wake of disasters, re-construction spending helps the economy, even as people are still struggling to recover from their personal losses,” Tom Beemis wrote on Market Watch on Tuesday. And here’s more of the same from the Los Angeles Times. And more from the usually whip-smart Mark Lacter at LA Biz Observed. Some even took issue with our very own Joe Weisenthal’s skepticism about wildfires as an economic boon.
One indication that this isn’t quite how things work is the fact that we jail arsonists. If burning down buildings and shutting down businesses was an economic boon, we’d treat arsonists like investment bankers. Or at least philanthropists.
Unfortunately, for arsonists and the rest of us, this isn’t how it works. While some California home builders and other’s who will help clean up the mess after the fires may gain, this gain is merely the loss of business and investment that would have gone elsewhere. Even money paid out by insurance companies is money that is now going to rebuild what we already had instead of getting invested in wealth increasing activities.
It’s easy to overlook this because we’re dealing with a counter-factual, with investments and purchases that won’t happen because the money is now being used to pay to repair the damage from the fire. But one thing that is certain is that the activities being described as helping the economy, and the money used to undertake those activities, are being done at the expense of what would have been done had the losses from the fire not occurred. There’s no stimulus here that isn’t being replicated as a loss in other parts of the economy.
The losses from the fire are terrible. One reader estimates they might add up to as much as $2.8 billion. It’s like California was run by Stan O’Neal for six months. There’s no upside, unless you happen to root for California home builders to gain at the expense of others. There’s no economic blessing rising from the ashes.
But it’s pretty to think so. Could Calif. fires draw a line under housing crash? [Market Watch] Fires won’t hurt long term, economists say [LA Times] Fires and broken windows [LA Biz Observed]
If the Economist’s “Free Exchange” blog didn’t exist, Michael Lewis would have to invent it. And, in a sense, he did. In this morning’s Bloomberg column, Lewis—tongue planted firmly in cheek—explains that the main lesson from the subprime fallout is that “finance is one thing you should never engage in with the poor.”
“Our society is really, really hostile to success,” Lewis writes. “At the same time it’s shockingly indulgent of poor people.”
It’s written so straight forwardly that you almost believe that Lewis is transcribing his column straight from the reactionary brain of a right-wing elitist, except that elitists long ago learned to stop thinking and talking in such shocking ways. But someone didn’t get that memo at Free Exchange, which this morning began a column by announcing that “America’s so-called poor live like kings.”
More after the jump.
When it comes to making strange bedfellows, modern finance makes politics look like an old-fashioned match-maker. The most famous words on the current financial turmoil came not in the form of a political speech from a major presidential candidate, but from Jim Cramer, a former hedge fund manager turned popular CNBC stockpicker and market prognosticator. His five-and-half minute call for the Federal Reserve to cut interest rates, however, strangely recalls the most famous political speech of an earlier era—William Jennings Bryan’s 1896 “Cross of Gold” speech before the Democratic National Convention in Chicago.
The emotional desire of the nineteenth-century populist movement Bryan led was to smash the power of Plymouth Rock, which stood for old New England and Wall Street. The emotional desire of what Dan Gross has called “the Punch Bowl Caucus” is to cut interest rates—return the punch bowl—to jazz up the Wall Street party again. But they share an emotional tone—and, more importantly, an economic goal: the loosening of a monetary policy they claim is so tight it is ruining ‘their people.’
Gross’s essay nicely describes the membership of the Punch Bowl Caucus: Wall Street investment banks, hedge fund traders, private equity managers, the chief executives of heavily indebted automakers, the heads of home loan businesses, supply-siders who believe “the government should never intervene in the economy, unless it is to bail out hedge funds and investment banks,” and internationalists who worry about what would happen to the developing world if Americans suddenly quit spending their earnings on foreign goods.
Since they share an emotional tone and the goal of loose money that inspired the old Populism, but differ in their background, let us adopt “Wall Street Populism” as the proper term for the Punch Bowl Caucus. It is, after all, something of a Free Silver movement with gilted edges.
There are, of course, crucial differences. The old populist were openly egalitarian radicals while the Wall Street Populists are openly elitist radicals—concerned about the jobs and firms of people who have been in the financial industry for, as Cramer put it, “twenty-five years.” The old populists viewed Wall Street and the railroads as their enemy. The Wall Street Populists are, well, closely tied to Wall Street. The old populists spoke in the eloquent and evocative images built from the Christian tradition. The language of the Wall Street Populists is less burdened by syntax, tradition or allusion.
That the cause of looser money gone from those who wished to smash Plymouth Rock on the Grand Canyon to those who want to keep Wall Street afloat on free credit shows how different twenty-first century finance is from nineteenth century finance. You know that Wall Street long ago stepped through the looking glass when a hedge fund manager adopts the cause of William Jennings Bryan. We’d call it “unreal” except that it is all too real. The Punch Bowl Caucus [Slate]
For much of history, the rich really were different. They had more descendants, for one thing. And they tended to prize thrift, prudence, negotiation and hard work over more fun things like being spendthrift, impulsive, violent and leisure loving. And their children were downwardly mobile, poorer than they were.
Those differences may explain why the surge in economic growth that historians call the Industrial Revolution occurred, economic historian Gregory Clark argues in his forthcoming book, A Farewell To Alms. According to Clark, it was the spread of people descended from British nobility that hatched the Industrial Revolution.
Today Nicholas Wade of the New York Times’ Science Section describes Clark’s thesis.
Generation after generation, the rich had more surviving children than the poor, his research showed. That meant there must have been constant downward social mobility as the poor failed to reproduce themselves and the progeny of the rich took over their occupations. “The modern population of the English is largely descended from the economic upper classes of the Middle Ages,” he concluded.
As the progeny of the rich pervaded all levels of society, Dr. Clark considered, the behaviors that made for wealth could have spread with them. He has documented that several aspects of what might now be called middle-class values changed significantly from the days of hunter gatherer societies to 1800. Work hours increased, literacy and numeracy rose, and the level of interpersonal violence dropped.
Another significant change in behavior, Dr. Clark argues, was an increase in people’s preference for saving over instant consumption, which he sees reflected in the steady decline in interest rates from 1200 to 1800.
In short, the downward mobility of British upper classes gave rise to the Industrial Revolution that resulted in a dramatic upward mobility for much of the world. To put it slightly differently, just because money can’t buy you love doesn’t mean loving can’t make you richer. In Dusty Archives, a Theory of Affluence [New York Times]
The “stand-up economist” translates Harvard professor N. Gregory Mankiw’s introductory economics textbook “The Principles of Economics” into more useful, shorter and funnier restatements. (And, yes, we do realize that the words useful, shorter and funnier are more or less synonymous.)
There’s a full transcript and explanation here.
[Hat tip goes to the Big Picture for bringing this to our attention.]