I thought I would like to do a little work on the theme of the Magic Formula, which is: Low Taxes and Stable Money. We saw that this theme goes back at least as far as Adam Smith. But, it didn’t appear in Applied Mainline Economics (2017), supposedly an updating of Smith’s original concerns for today.
Greg Mankiw, in his popular textbook Principles of Economics, listed Ten Principles that supposedly represent the heart of economic wisdom today. Here they are:
- People face trade-offs
- The cost of something is what you give up to get it
- Rational people think at the margin
- People respond to incentives
- Trade can make everyone better off
- Markets are usually a good way to organize economic activity
- Governments can sometimes improve market outcomes
- A country’s standard of living depends on its ability to produce goods and services
- Prices rise when the government prints too much money
- Society faces a short-run tradeoff between Inflation and unemployment.
No Magic Formula there either. (Again, one is tempted to assume that Low Taxes are buried in “People respond to incentives,” but, as was the case for Mitchell and Boettke, this is not the case.)
Yoram Bauman, a professor of economics at the University of Washington, translated Mankiw’s Ten Principles for laymen:
- Choices are bad
- Choices are really bad
- People are stupid
- People aren’t that stupid
- Trade can make everyone worse off
- Governments are stupid
- Governments aren’t that stupid
- Blah blah blah
- Blah blah blah
- Blah blah blah
It’s not just me.
The Foundation of Economic Education, which offers an alternative viewpoint to this meager academic mainstream offering, listed their own twelve principles:
- Gains from trade: In any economic exchange, freely chosen, both parties benefit–at least in their own minds.
- Subjective value: The value of any good or service is determined by the individual human mind.
- Opportunity cost: Nothing is free, and the cost of anything is what you give up to get it.
- Spontaneous order: Society emerges not from top-down intention or planning but from individuals’ actions that result in unplanned outcomes for the whole.
- Incentives: Individuals act to maximize their own reward.
- Comparative advantage: Cooperation between individuals creates value when a seller can produce a given item or service at a lower cost than the buyer would spend to produce it himself.
- Knowledge problem: No one person or group knows enough to plan (and force) social outcomes, because information necessary for social order is distributed among its members and revealed only in human choice.
- Seen and Unseen: In addition to the tangible and quantifiable effects, there are quite often invisible costs and unmet opportunities to any action or policy.
- Rules matter: Institutions influence the decisions individuals make. For example, property rights extend from the reality of scarcity which demands that ownership must be vested in individuals and not a collective.
- Action is purposeful: Each person makes choices with the intention of improving his or her condition.
- Civil society: Voluntary association permits people of all backgrounds to interact peaceably, create value, cultivate personal character, and build mutual trust.
- Entrepreneurship: Acting on an opportunity to gather underused, misused, or undiscovered resources and ideas to create value for others.
All worthy ideas, but the Magic Formula again makes no appearance. (You can click on the discussion about #5, Incentives Matter, and find that it actually does not contain the word “tax”.) As for Mitchell and Boettke, Stable Money is hardly mentioned at all. This was maybe not so strange in the days of Adam Smith, when the British pound had been unchanged for centuries (and Smith did talk about it nevertheless), but it is certainly a big omission in our floating-fiat world, where currency blowups are a regular fact of life, and especially from “conservative alternative” commentators. Does the name “Paul Volcker” ring a bell? After all, the creation of the Eurozone in 1999 was explicitly to produce a form of Stable Money among eurozone members.
And yet, if we investigate history, we find that countries prosper when their policy is aligned with the Magic Formula. The same countries stagnate and decline when policy goes the other way. This has been true of the U.S., Britain, Germany, France, Japan, China, and others. There is a third element that I think is important, which is basically domestic capital creation. (This principle, which also dates back to the very beginnings of economic thought, also makes no appearance in the lists above.)
And so, it appears that focusing a bit on the Magic Formula might be quite worthwhile. Nobody else seems to be doing it.
Ideally, after some time, everyone else will also be insisting on the Magic Formula, and will claim that it is something that “everybody knows and has always known, going back to Adam Smith.” Because, how could they claim otherwise? And then, this item today will serve as a record that, in 2017, it was not actually so.