Words of wisdom, man the rooftops

While the prediction that rising market toughness could generate an increase in concentration and the profit share may seem counterintuitive, the ambiguous relationship between concentration, profit shares, and the stringency of competition often arises in industrial organization.

That is from Autor, Dorn, Katz, Patterson and Van Reenen.  In essence, rising market toughness reallocates a greater share of output toward highly productive superstar firms, which are more productive but also have higher fixed costs and mark-ups over marginal cost.

Have you ever wondered how “rising Chinese competition devastated parts of the American working class” and “market power is up” both could be true?  Well, this paper is the best available attempt to square that circle.  Market power is up as measured by price to marginal cost ratios, or concentration ratios, but in fact competition is much tougher than it used to be and the antitrust authorities should not (at least in this regard) be blamed for their laxness.

Very few people have put in the time to understand this point, which I should add comes from some of the top IO economists in the field.

Have I mentioned that changes in concentration are correlated with the most dynamic economic sectors?

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"Have you ever wondered how “rising Chinese competition devastated parts of the American working class” "

That's overstated and too specific. The American working class was hurt by a combination of:
1) Low skilled immigration
2) Rising global trade with low wage countries
3) Industrial automation

What I wonder is what Tyler Cowen thinks we should do about it?

The stock answer for economists has been job re-training, but that has a decades long track record of marginal success. The stock political answer seems to be ignore it, marginalize the effected people or demand a much higher minimum wage. None of those have been effective either.

In terms of size of effect, it's 3 then 2 then 1 on your list.

There's not much to be 'done' really, there are winners and losers in capitalism and low-skill blue collar workers simply can no longer expect to have a nice middle class life like in the 1950s and 1960s.

That's what redistribution is for, to allow the unproductive to at least survive.

That's a perfectly good libertarian response. The only "problem" is that "losers" can vote.

Perhaps you haven't been paying attention for the last few years.

Hasn't helped them a lick though. What's your point?

They do not vote proportionally, our legislature is not proportionate. So we expect to squeek through but get a sudden stop instead. The frequency of sudden stops and continuing resolutions is going up, not down. We might get a shutdown that exceeds our patience.

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"That's what redistribution is for, to allow the unproductive to at least survive."

That was the classic Libertarian response. The policy "enough to at least survive" is over. It's gone and unlikely to reappear in our life time time.

Either Trump will win again and he will be pushing back on 1 & 2. Or a Democrat will win and push for a much higher minimum wage, Medicare for all, Free college, Federal job guarantees, etc. A level of redistribution far beyond what has prevailed in the US previously.

Also, at least in Sander's case, he agrees with Trump about 1 & 2.

Clearly redistribution is the greatest threat in the world today, and let's delete any comment that suggests otherwise.

Redistribution is necessary but not sufficient.

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Low skilled labor will never be a ticket to middle class prosperity again, and that's not even a partisan comment.

If you are smart, you will try to find a solution to that problem.

Are you smart, or do you not have a solution? In other words, let's hear it. I'm not even trolling, I don't think anyone knows what to do about it.

Andrew Yang says a UBI. I guess that's redistribution. You say that's not sufficient. OK, what else?

A UBI won't work. Some level of work gives people focus in life. A UBI is just going to end up with a lot of unhappy people playing video games and upset that they don't have the skills to get ahead in life. Something like a Federal credit per hour worked would probably be a better approach.

Capped at 40 hours per week and at half the wage rate. With the level being constant for every income level, so there wouldn't be any marginal rate issues.

Maybe $4 per hour worked, funded with a 12% payroll (and earned income investment) tax? (Just a rough guess on the numbers.)

I don't know if that's the best approach, but it's better than a UBI.

You are on the right track and you are trying.

That is good.

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Most people would probably be happier playing video games all day then doing the kind of low-skill make-work we’re talking about. Many video games simulate the psychological benefits of work (such as mastering a skill and making a difference, plus many have a social dimension too) better than most real jobs. In fact, surveys show that young men who’ve dropped out of the labor force to play video games are a decently happy lot.

Not when they finally realized their DNA is under selection pressure and is losing.

Masturbation gets old I hear.

I have kids. I never play video games - it's childplay.

When’s the last time you played video games then? Video games have gotten a lot better over the last decade or two.

As for “selection pressure,” it seems that poorer and less educated folks in the US have more kids. Sexual frustration seems most common among nerdy economically successful men. And is working in a low-wage make-work job really going to make someone more attractive to women than playing video games all day?

Who said "make work"?

Strawman.

If you’re making people do work that could have been done better and cheaper by a machine or a Mexican, that is make work. It’s work that exists for the sake of work rather than actual production.

There's man, there's machine, and there's Mexican? That puts me in mind of the NYT's piece the other day on rising wages for poultry processing in Mississippi post-ICE. The Times concluded several things: poultry processing was valuable work that had once been denied to African-Americans and was correctly a frontier in the civil rights struggle; that post-recent ICE raid on Central Americans, African-Americans correctly felt guilty about returning in greater numbers to poultry processing; that the newly-hired African-Americans were probably too lazy to cut it; that nobody down in Mississippi needs or deserves $11/hr when $7 will do; that workplace conditions are what they are and should never change; and that this was all somehow as it should be.

It contrasted strikingly with a piece I read in the Times 5 or six years ago, "The Boys in the Bunkhouse", about some mentally-challenged men, once Boys Town boys abandoned by their parents, who had lived their whole adult lives in the shadows of an Iowa town, pulling apart a significant fraction of the turkeys Americans bought as cheaply as possible around the holidays during those decades. Very different in its concerns.

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"Most people would probably be happier playing video games all day then doing the kind of low-skill make-work we’re talking about. "

I know people that effectively dropped out of the work force to play video games. They aren't happy people.

"In fact, surveys show that young men who’ve dropped out of the labor force to play video games are a decently happy lot."

Source please?

https://scholar.princeton.edu/sites/default/files/maguiar/files/leisure-luxuries-labor-june-2017.pdf

See the chart on Page 46. The self-reported happiness of young men increased significantly from 2001 to 2015, with the largest gains among those with the lowest levels of education who would also be most likely to drop out of the labor force to play video games.

Turns out an activity that is cheap, fun, and feels meaningful makes people happier.

That's a stretch. A huge stretch. "Self-reported happiness of young men with less than 16 year of education" is not a reasonable proxy for " young men who’ve dropped out of the labor force to play video games ".

I would reasonably expect that employed young men to be happier with better video games. I would also reasonably expect that un-employed young men to be happier with better video games. But that doesn't imply that employed young men becoming un-employed would be happier. In fact the data points out that unemployed young men are less happy than employed young men.

It's possible that a UBI will change that. But every test so far of a UBI has been either inconclusive or negative.

The survey cited found that happiness increased for non-college young men both employed and unemployed. At the same time, happiness did not increase for college educated young men, women, or non-college older men. The availability of video games and greater leisure time seems to be the most plausible explanation for why the demographic that has seen the most reduction in work hours in favor of video games is the demographic that also experienced the greatest increase in happiness in the 2000s. It’s hard to consider the loss of entry level low skill male dominated employment a huge disaster when the demographic most exposed to that trend showed the greatest increase in happiness while the trend was happening.

What other explanations could there be?

The data from the survey doesn't support your conclusions.

"At the same time, happiness did not increase for college educated young men "

Actually it did. It went from 84% to 89%. Versus 81% to 88% for non-college educated men. Table 12

"the most reduction in work hours in favor of video games is the demographic"

Leisure activities for young men:
Total 63 hours:
Eating\sleeping\personal = 25
TV\movies = 17
Other = 9
Socializing = 8
Computer time (Video games) = 5 (3)
Table 3

How on Earth would anybody conclude from that breakdown that Video Games are the cause of young men's happiness?

Sorry, but this paper is a pretty terrible piece of social science.

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Give up on the "free trade" and "comparative advantage dogma" and negotiate trade deals that don't sell out the working class.

That's the best I can do for now - I don't pretend to be an economics expert.

Best not to give up the comparative advantage dogma. Had I raised my child in its early years, I would have broken her. My wife, who is more efficient than I am at everything, including earning an income, in fact refrained from market labor and raised her and did not break her.

Free trade lets the winners win more than the losers lose, and there are losers! Political question left unanswered by the Democrats, the party of workers, is how some of those gains could be transferred to the losers from freer trade. Hence, Mr. Trump, who may or may not be going about this in the right way.

Transferring gains isn't sufficient it doesn't replace purpose, belonging, and dignity.

It's a wicked problem.

And has little to do with economics, or even voting.

You are a smart person obviously, but you type a lot about evil elites and how they are somehow hurting the deplorables with their disdain and how you are going to take democracy back with guns or some nonsense.

What are you actually saying? What is there to be done? Are you saying that a bunch of deplorables are going to grab some guns and start killing people? Who? Why?

It's all just tribal baby games when you write that stuff. Trump was voted in over 3 years ago. Is anything really different for your tribe? When he gets re-elected, does that do anything? Is it enough to get some good feelings when your guy wins at the ballot box? If not, then what are you going on about with guns and elites and all that?

I don't have a tribe - I am an outsider everywhere.

I should back off the gun references - the gun is symbolic and represents chaos. I certainly don't want gun violence. I have children and I want them to live in a relatively safe and orderly world.

The elites are not evil, just subject to the same blindness that affects us all. The elites are responsible for the trade agreements, the tax system, and the fiscal and monetary policies, which work really well for them but are a disaster for the working class. This is not news - everyone but the idealogues know this.

Beware of normalcy bias. Things can get really bad. Remember that Chavez was elected.

The Trump election was cathartic for the deplorables, but they have had to watch a slow motion coup by the mandarins in the deep state. How do you think they will respond if Trump was actually removed from office. Fortunately, it doesn't look like that is going to happen.

Life has to improve for the deplorables. That's the bottom line.

This problem is not unique to the USA.

"Life has to improve for the deplorables."

What the heck do you mean, man? And also, how?

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It's a 'wicked problem' because there's no easy solution. The problem itself is pretty amorphous. Like you said it's not about money, so a few more tariffs or border patrols ain't gonna change it.

So seriously, not trolling, what exactly do you want? If it's just electing Republican presidents, ok sure, but that ain't gonna fix it either.

Again, the time when a low skilled blue collar guy could have a decent middle class lifestyle is mostly gone, and it's not Hillary Clinton's fault.

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Transferring money may not be sufficient, but it helps! :-)

True. Don't the mullahs in GB live off welfare?

How's that working?

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It's not about the money, it's about dignity, purpose, and social capital.

Sadly, economists and libertarians thinks everything is about money.

Culture, purpose, belonging, and love are all important.

What's that got to do with automation and trade hollowing out low skilled 'good' jobs? You can't go back to 1955.

I guess voting is indeed first and foremost about "belonging" to your tribe. So the dwindling white working class voters will keep voting Republican for that reason. Won't help change their lives but they will have their tribe. Just like the socialists voting for AOC won't be seeing any actual socialism changing their lives.

You are free to believe that if you want - delusions aren't illegal.

There will always be people who are poor, marginalized, or on the wrong side of normal on the IQ curve. Currently, they all get a big eff you from the elites.

It ain't working.

Many see it isn't working, including some elites, who are now rethinking democracy. That won't work either. Democracy was "won" via the gym. We don't want to do that again. I don't.

"... via the gun ..."

Autocorrect! Grrrr ... !

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I agree with the reordering. Low skilled immigrants cut up chickens. They don't build Fords.

On that,

https://www.cnn.com/2019/12/30/health/opioid-overdose-deaths-automotive-plant-closures-study/index.html

The Angus Deaton and Anne Case hypothesis confirmed.

The ordering should be 2, 1, 3. Low skilled immigrants clean buildings and cook food. Mexicans and Canadians build Fords and the Japanese build Toyotas, which may be more relevant to the discussion.

3 is not an issue. Industries that have been able to leverage industrial automation to a high degree have stayed domestic.

...those jobs are still lost whether they are domestic producers automating them away or going overseas. The literature is pretty clear that automation has cost more 'good' jobs than trade and certainly more than low-skilled immigration.

The laid off Ohio Trump voter doesn't want to take over the toilet cleaning job the Guatemalan immigrant is doing, he wants to go back to work in the Ford factory that's almost all robots now.

"...he wants to go back to work in the Ford factory that's almost all robots now."

That could only be spoken by someone who's never been in a Ford plant. Or a GM, Chrysler, Nissan or Toyota plant for that matter.

"A Ball State University study found that 87% of the job losses in manufacturing from 2000 to 2010 were due to automation, while 13% were due to globalization and trade."

https://www.ncci.com/Articles/Pages/II_Insights_QEB_Impact-Automation-Employment-Q2-2017-Part1.aspx

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I am saying the jobs needed and wanted are lost to automation, not Honduran toilet cleaners and dishwashers. What are you saying?

A Ford factory or really any factory for that matter isn't "almost all robots now".

It's the combination of all 3 factors that is hammering the working class. Indeed, in the case of many factories, the janitors are Temps and a large percentage of them are low skilled immigrants. Furthermore, automobile plants in the US today are largely assembly plants and a good portion of the parts are sourced outside the US.

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Well, the thing about automation is that you get rid of 10 lathe operators (skilled) and replace them with 1 CNC operator (higher skilled).

No, again, this is someone who doesn't understand the process.

Industrial automation in the US has resulted in relatively few real job losses. The traditional effect going back decades is for the plant to expand it's capacity while keeping the work force roughly the same.

IE the old line took 10 workers, the plant adds a new line that requires 5 workers. The existing workers get more overtime and a 3 Temps are hired to help out. The existing line is retrofitted to the new standard. The workers go back to normal hours and the Temps go back to the agency.

Manufacturing employment in the US has been relatively level in the US (around 20 million) since the 1960's.

What really happens is that automation generates as you describe a larger market and more jobs. But not everything can be automated. What can't be automated gets moved to Mexico or asia somewhere. And since most of the production is there, the automated ones go as well.

There hasn't been any dramatic productivity gains for at least a decade. Automation is not the factor.

"There hasn't been any dramatic productivity gains for at least a decade. Automation is not the factor."

Do you have a source for that?

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"Low skilled immigration"

Like the immigrants to Jamestown and other early settlements which suffered high death rates due to the low skill of the immigrants relative to the people already here and that the low skill immigrants were trying to replace?

It wasn't like the British and Europeans were sending their best people to America, but instead the religious radicals, criminals, the poor, the rejects, who then stole, raped, murdered, spread disease.

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In the period 2002-2012, 50% of the US factories employing > 1,000 workers were offshored.

You don't know what you're talking about.

Overall manufacturing output in the US increased during that time. The only decline in manufacturing output came in 2008 as a result of the Great Recession, while manufacturing output was expanding in the earlier 2000s during the years of the rapidly expanding trade deficit. More output with fewer jobs suggests automation is a bigger factor than offshoring, which would reduce output along with jobs.

"More output with fewer jobs suggests automation is a bigger factor than offshoring, which would reduce output along with jobs."

I'm not sure what your point is here nor do I think that more output "suggests" automation is a bigger factor. Automation and global trade are directly linked. If a given product is X dollars and the US has a higher wage rate than another country to produce the given product, then the US most have a lower labor input (higher automation) to economically produce the product. If the US can't manage to produce it economically, then the product is outsourced.....

Global trade enforces a higher level of automation. Higher levels of automation lead to more global trade. The two are in a direct feedback loop.

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Isn't rising competition and rising concentration pretty normal in maturing industries? There's a literature on population ecology or organizations, right? Doesn't it basically say that new industries have increasing numbers of entrants while profit is still to be found, until it reaches a tipping point and firms start to exit with rising competition?

Population ecology "of" organizations. Not "or".

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Yes, let's read and memorize that dogma. Reality is overrated.

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Might be worth it to try to tie in reduced startup formation to the toughness as well? In a competitive environment there is much less scope to start random business without actual good new ideas just coz someone wants to be their own boss. And thanks to fast spread of innovations either by existing big guys or by lavishly financed startups less scope for starting "the same thing, but in jersey" as well.

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This is a very good point, how can there be high concentration ratios and competitive markets?

There are 2 answers, one is related to government regulation, we're becoming more like Europe, where consumer prices are really high, in part due to lots of regulation.

The second is fear of starting new (traditional) businesses due to the Marxist overtones floating around, i.e. wealth tax, empty condo tax, medicare surcharge for capital gains of high earners. Essentially the existing businesses are operating as cash cows, this goes far in the direction of explaining excess hotel rates, that created the opportunity for businesses like air B&B. Normally you would expect a tiny hotel room in a competitive market would be cheep enough, that it is not worth the risk of a flaky Air B&B host reneging. Reality is that hotels are so pricey that 100s of thousands accept that risk daily.

In my city, Portland, OR, I see this in terms of Costco and Home Depot being overfilled, they are even recreating the joy of narrow isles that Europeans and Asians grew up with, by stuffing in extra shelves of crap that the warehouse was not designed for.

In the 1990s America I immigrated to, these conditions would have resulted in new stores being opened.

As an anecdote, I will quote some very basic auto maintenance prices:

1990: Replace front brake pads, parts+labor = $45.
Oil change = $20
2020: Replace front brake pads, parts+labor = $380.
Oil change = $23

The oil change is a loss leader, obviously.

Prices above are for traditional auto shops, quoted a few days ago. I needed brake pads, and ended up finding a mobile mechanic at Craigslist, and the cost for brake-pad replacement became $50 for parts, plus $100 for labor, and he came to my driveway January 1, 10:30am.

I dunno. As stated above, easy profits cause entry. So new industries get lots of entrants. Competition rises. Eventually, profits aren't easy and rising competition starts to cause exists. So the two states with high concentration are brand new industries few firms have entered yet, and mature, highly-competitive industries where the only ones left are the last-firms-standing.

This seems almost tautological if you expect firms to do any learning at all.

@LA - yes, something like that. Capital deepening means the "last two firms standing" will be Boeing and Airbus, locked in a fierce, competitive duopoly (hence TC's point about "Have I mentioned that changes in concentration are correlated with the most dynamic economic sectors?").

Capital deepening also means that labor becomes less relevant than capital (machines), so the "average Joe" loses out, even as there's a welfare gain to society (faster, cheaper airplanes that carry more people for less money).

So who cares, as long as GDP rises? Well traditional economics cares about the 'working class' since most models, being Keynesian, assume that AD comes from this group of working class people, rather than the elites living well and the rest of the population living poorly (even if overall welfare is increasing as inequality increases). Keynesian economics thus hates unemployment, whereas "Austrian" economics doesn't really mind unemployment since they don't believe in AD anyway. Keynesian economics wants 'fairness' (Gini coefficient = 0) so as to stimulate AD via the masses (who are ignorant and believe in money illusion as well as sticky prices, being wage slaves, unlike the savvy 1% 'bosses' like myself, who know better) while Austrian economics (which I am a fan of, except for the monetarist views, since I think money is largely short-term and long-term neutral) doesn't mind Gini = 1 as long as GDP rises ('trickle down economics').

Bonus trivia: I thought Viking was for northern Europe rather than Portland OR. Viking's status has gone down in my mind. lol

I am more Norwegian than you are Greek!

Were the two cars comparable? I had a headlight changed recently in my 2015 Subaru Outback. In 1990 that would have been a 5 minute labor job to swap it out. This time it took the mechanic an hour to do it, because so many things had to be removed to get to the bulb. Stuff is really crammed in like a can of sardines now.

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The degree of competition, and hence the ration of price to marginal cost, depends on firms' strategies and entry conditions, not concentration ratios.

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What characterizes these superstar firms? There doesn't seem to be any massive increases in productivity.

The ability and finances to build and maintain global supply chains.

The ability and finances to buy up competitors.

The ability and finances to recruit and maintain software developers capable of building systems that can run these complex operations.

The ability and finances to build and maintain a market for their products.

The ability and finances to attract and maintain exceptionally good managers to keep the whole thing running.

I don't see monopolies on the sell side, but market power on their ability to shave costs to maintain their margins. If Chinese labor gets too expensive, move the whole thing to Vietnam. Slag off downside risk to suppliers or contractors. Dump profitable but not stellar product lines.

If this is done well, it generates growth and prosperity and positive second order effects. If done poorly it is profoundly destructive and destabilising.

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Tyler has said in the past that he yearns for good old-fashioned state on state warfare, so I imagine he's quite pleased by this assassination.

In all seriousness, what do you want Tyler to say, exactly, apart from war bad, Orange Man bad?

Isn't war bad?

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The census of manufacturers data is by establishment, as is labor data. The problem is that some of the establishments may outsource components of the production process, and import them, to finish the product at the establishment.

To the extent there is outsourcing, that makes the plant look like it is more efficient because it uses less labor.

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"...may seem counterintuitive.."

Every single economics paper is based upon the results being counterintuitive or not what was expected or contrary to common belief. I can't take economics as practiced in the academy seriously. I realize that makes me something negative, but I calls them as I sees them.

The solution is to follow Hayek, Henry Simons, and Oakeshott on the issue of monopoly and concentration...

"With property we have already begun to consider the economic organisation of society. An institution of property is, in part, a device for organising the productive and distributive activity of the society.For the libertarian of our tradition the main question will be how to regulate the enterprise of making a living in such a way that it does not destroy the freedom he prizes. He will, of course, recognise in our institution of private property a means of organising this enterprise wholly friendly to liberty. All monopolies, or near monopolies, he knows as impediments to that liberty,and the greatest single institution which stands between us and monopoly is private property. Concerning monopolies he will have no illusions; he will not consider them optimistically, hoping that they will not abuse their power. He will know that no individual, no group, association or union can be entrusted with much power, and that it is mere foolishness to complain when absolute power is abused. It exists to be abused. And consequently he will put his faith only in arrangements which discourage its existence. In other words, he will recognise that the only way of organising the enterprise of getting a living so that it does not curtail the freedom he loves is by the establishment and maintenance of effective competition. He will know that effective competition is not something that springs up of its own accord, that both it and any alternative to it are creatures of law; but since he has observed the creation (often inadvertently) by law of monopolies and other impediments to freedom, he will not think it beyond the capacity of his society to build upon its already substantial tradition of creating and maintaining effective competition by law. But he will recognise that any confusion between the task of making competition effective and the task (to be performed by effective competition itself) of organising the enterprise of getting a living and satisfying wants will at once be fatal to liberty as he knows it. For to replace by political control the integration of activity which competition (the market) provides is at once to create a monopoly and to destroy the diffusion of power inseparable from freedom. No doubt the libertarian, in this matter, will have to listen to the complaint that he has neglected to consider the efficiency with which his economic system produces the goods; how shall we reconcile the conflicting claims of freedom and efficiency?But he will have his answer ready. The only efficiency to be considered is the most economical way of supplying the things men desire to purchase. The formal circumstances in which this may be at its maximum is where enterprise is effectively competitive, for here the entrepreneur is merely the intermediary between consumers of goods and sellers of services. And below this ideal arrangement, the relevant comparison is not between the level of efficiency attainable in an improved (but not perfected) competitive economy and the efficiency of a perfectly planned economy, but between an improved competitive economy and the sort of planned economy (with all its wastefulness, frustration and corruption) which is the only practical alternative. Everything, in short, that is inimical to freedom - monopoly, near monopoly and all great concentrations of power- at the same time impedes the only efficiency worth considering"

Michael Oakeshott "The Political Economy of Freedom"

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In his column today David Brooks imagined a "ridiculously optimistic history of the next decade". Optimistic in what way? One way, in which the "decline of the Chinese economy delegitimized the authoritarian model". Lots of Americans have gotten rich as the result of the "Chinese economy" - if you have gotten rich on Apple stock (among others), then thank the "Chinese economy". Then why would the decline of the Chinese economy be a forecast of an optimistic future for Americans? Of course, the China miracle resulted from the Chinese economy being more like the American economy. Cowen seems to believe that the American economy can improve by being more like the Chinese economy, with a few firms dominating. The Chinese learn from us, and we learn from the Chinese. Or something.

Brooks’ article is symptomatic of the problems with US elites. They think their pet political dreams are more important than a bigger economy for 1.4 billion people. It’s also telling that his “ridiculously optimistic history” features the Chinese economy declining rather than liberalizing. If he was really against Chinese authoritarianism, he’d want China to liberalize and grow, not decline. Like many US elites, Brooks seems to be innumerate and anti-utilitarian, and people in other countries might achieve even a small fraction of American wealth.

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