Practice Good Theory

Here's a chart of world GDP, broken down by country share. ( HT: Carpe Diem ). Careful with the x-axis, it is not at all to scale! The basic idea is that India and China had large shares pre-industrial revolution, after which Europe rose. The U.S. shoots up, to over 40% of world GDP by 1950. Then, Japan begins to grow in the 1960s, and China in the 1980s. Suppose countries end up with GDPs proportionate to their populations. What would that picture look like? I've added a bar to the right, showing the break-down of world-population. Look at the U.S. squished down, with less that 400 million out of a world population of over 7,000 million. The biggest change is in the previously un-noticed 'rest of the world". If Africa, the Middle East and so on moved toward freedom, that could be the story of the century.  What if they do not? Here's a chart with a new assumption. Suppose the "rest-of-world" does not increase its relative s...

The French Physiocrats  -- just as much as Adam Smith et al. -- founded modern Economics. They had an odd theory of value, but their major contribution was to argue for individual freedom in economics. Theory of Value:  Most physiocrats thought  that natural-resources were the only fundamental economic value. When fruit grows on a tree, we can see the physical values appear in physical form. Or, we can visit a mine and see the a value like coal. However, u sing a very physical  concept of value, t he physiocrats could not see the value in transformation.    When the farmer picks the fruit off a tree  or when a carpenter assembles a table, they saw a rearrangement of value rather than a creation of new value.   (In contrast, Adam Smith thought labor was the fundamental source of real value, and this too is wrong. It took the Utilitarians to come up with the notion that the valuer must be considered too.) Not "social contrac...

A post at Krazy Economy talks about "austerity" (e.g. in Europe) being a failed program and says that production and freedom are the key. I agree. Do not listen to those who are overly shrill about government money-printing or government deficits. Printing and deficits are bad, but freedom is more fundamentally important to an economy. One way to classify a government's economic intervention is:  structural , fiscal and monetary . Structural policy and laws:  Does the law recognize property rights or is the country communist? Do the courts enforce such rights or are they slow and corrupt? Are owners burdened by regulations on the use of their property: environmental laws, zoning laws, minimum wages, unions, protectionism ? Fiscal policy:  What fraction of GDP is spent by the government? On what is it spent? What is the structure of taxes ? Do taxes pay for spending, or does the government owe debt ? Monetary policy :  Does the government use fiat mone...