Economist and professor Don Boudreaux joins the podcast to discuss his recent book, The Triumph of Economic Freedom. Boudreaux debunks common myths about the Great Depression and American trade deficits and offers an optimistic perspective on the rise of artificial intelligence, arguing that despite tradeoffs like job loss and uncertainty, free markets are the key to a resilient economy.
TRANSCRIPT
Introduction
BEN KLUTSEY: My guest today is Professor Don Boudreaux. Don Boudreaux is a colleague at Mercatus and a professor of economics at George Mason University. He’s one of America’s most prolific and accessible advocates for free markets and open trade. For nearly two decades, he has written the widely read blog Cafe Hayek, where he applies economic reasoning to policy, culture, and everyday life. His work sits squarely in the tradition of Hayek, Friedman, and the great classical liberals, and he brings to that tradition both scholarly rigor and a gift for plain-spoken argument. He is the author of Globalization and Hypocrites & Half-Wits, and coauthor with former US Senator Phil Gramm of The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism, which is the subject of our conversation today. Thank you for joining me, Don.
DON BOUDREAUX: Thank you, Ben. But one small correction—Cafe Hayek is more than two decades old. We’re recording this on the 27th of April, and in two days it will celebrate its 22nd birthday.
KLUTSEY: Amazing, amazing. Well, congratulations. That’s a major feat.
BOUDREAUX: Thanks, and Russ Roberts still deserves credit for being the entrepreneur behind that venture.
KLUTSEY: Fantastic.
Love Letter or Warning Letter?
KLUTSEY: Now, first question: The book is dedicated to America. Is this a love letter or a warning letter? And what moved you and Senator Phil Gramm to open with that gesture?
BOUDREAUX: It’s both a love letter and a warning letter. Neither I nor Phil Gramm is naive about America’s past. Like all countries, it has its flaws, its faults. We don’t want to over-romanticize it. But it remains the case that of all the countries that have ever existed, the scope for human freedom, entrepreneurial creativity, economic openness, free markets, was greatest in America, and that is something to celebrate. That’s something that we Americans, whether native born or naturalized, rightly should applaud and be proud of.
At the same time, as throughout our history—and certainly it’s on the rise today—there are forces that are ignorant, in the sense of being unaware of this history. When you’re unaware of history, obviously you get the facts wrong. When you get the facts wrong, proposed policies for the current period tend to be mistaken, and mistaken in a way that threatens all that was good and productive about America’s past. And so it’s both a love letter and a warning.
By exposing these fallacies, our hope is to cause open-minded people to stand back and say, “Oh, it wasn’t perfect, but my gosh! Economic freedom in the past did achieve lots of wonderful things. The things we learn in high school and college in many classes about the alleged benefits of government intervention proved to be mistaken. So, maybe we want to rethink our enthusiasm for statism and interventionism today.”
Free Markets on Trial
KLUTSEY: I want to note that in addition to being an economist, you’re a lawyer, and it shows in how you marshal evidence throughout this book. It feels more like a legal brief sometimes, building a case. So let me ask it directly: Do you believe the free market is on trial right now and that its defenders have largely been absent from the courtroom?
BOUDREAUX: Not all defenders, of course, but certainly free markets are more in the docket now, more on trial now, than was the case from roughly when I first became an adult in the mid- to late ’70s, through the Great Recession of 2007 through 2009. During those years, markets were ascendant—not unchallenged, but since the Great Recession—so for the past fifteen years now—markets have been on the defensive.
I went to law school. I’m not really a lawyer, but I did go to law school. But the credit for what you identify in the book goes to Senator Gramm. And he was insistent when we decided to write the book. He said, “Look, we’re going to do these seven chapters.” We decided what the seven chapters would be. And he said, “We want to lay out, at the beginning of the chapters, the strongest case for each of the fallacies. We don’t want to slay a straw man. That doesn’t impress anyone. We want to challenge a steel man.” And so I spent a lot of time in the GMU library looking at college history books, high school history books, and a lot of the publications from the different eras to find the most competent and most respected spokespeople for the various positions that we challenge in the book.
And so this is what I think a good lawyer does. You make the case as strong as possible, because if you can challenge a strong case, then any weaker case, of course, becomes even easier to challenge and expose.
KLUTSEY: Yes. Now, the book has seven myths about capitalism and free markets. I’m curious why seven, though? Why not eight or nine, or maybe three? I mean, you picked seven.
BOUDREAUX: So, this is a funny story. There is a story behind it. I asked Phil Gramm the same question.
The book is his idea. He called me. We knew each other a little bit, by the way, because my dissertation director at Auburn, the late Bob Ekelund, was one of his best friends. They had been on the Texas A&M faculty together back in the ’60s, and they had written academic articles together and books together. I’m happy to say that when Phil Gramm had this idea to write a book about fallacies, and before he died, Bob Ekelund, my dissertation director, recommended to Senator Gramm that he ask me to join him in writing the book. And so, Phil called me in the summer of 2023. He explained the book, and I immediately said, “Yes, I’m happy to do it. It’s a great project.”
And I did say, Ben, I said, “But you’re talking about seven myths. How did you come up with that number? Why not 10? Why not 13? Why not three?” And he said, “Seven is a lucky number.” He was saying it tongue-in-cheek. He viewed it as the right number. And I think it’s right. The book is not overly long. It’s not overly short. And I do think that if we wanted to extend it to 10 fallacies, we could have done so, obviously, because there are more than just seven fallacies and myths that have plagued American economic history from the beginning. But seven is a number that people glom onto us. It’s a lucky number, so we chose the seven.
Myths from the Great Depression
KLUTSEY: Now, one of the major fallacies is related to the Great Depression. It is often cited as the moment capitalism supposedly failed and government rode to the rescue. But your book tells a very different story, one of government failure compounding a crisis rather than resolving it. One of the quotes that I liked in this book is by Treasury Secretary Henry Morgenthau, FDR’s own man, admitting that after eight years of trying everything, unemployment was essentially where it started. He said they were just “sitting here and fiddling.” The economy didn’t really recover until the interventions began to recede, it seems.
So, two questions on this one: Which one of the specific interventions do you think—Smoot-Hawley, or the NIRA (that’s the National Industry Recovery Act), or the 1937 tax increases—which one of these do you think most prolonged the Depression? And perhaps more importantly, if the New Deal largely failed, by its own architect’s admission, why does virtually every mainstream historian still say it succeeded?
BOUDREAUX: Let’s deal with the first question first. You mentioned three interventions, but let’s dispense the easiest one. Smoot-Hawley was bad. There’s no doubt Smoot-Hawley made things worse. Smoot-Hawley did not cause the Great Depression. Maybe to a certain extent it contributed a bit to its [longevity], but Doug Irwin, the master historian on this topic, makes pretty clear that as bad as Smoot-Hawley was—and again, it was—it was not the main cause or even the secondary cause of the Great Depression. Made things worse, but the Depression would have happened without Smoot-Hawley, had Smoot-Hawley existed or not.
You mentioned two others, neither of which was good.
I think probably the single worst intervention during the Great Depression is one that you mentioned—the National Industrial Recovery Act, creating the National Recovery Association, the NRA with the Blue Eagle. This was an attempt to cartelize the economy—a completely misguided attempt, as you and the listeners will no doubt know. It was declared unconstitutional, this act, in1935. But it was part of a larger effort: the New Deal.
So I think what really contributed to the depth of the Depression and its length—and let me pause for a moment—at no time in the 1930s was the unemployment rate lower, it didn’t even reach as low as 10 percent. It hit as high as 25 percent, and it stayed above 10 percent for the duration. Now, economists will debate—there’s something called the Darby series, where he measures unemployment differently—but by most conventional measures, unemployment remained very high and above 10 percent for the entire period.
That comes from the same place where the NIRA came from—this notion that the market economy had become senile and suspect. So we’re going to replace the market economy with a great deal more central direction from the central government. Roosevelt and his “New Dealers” became increasingly hostile in action and in words—which are important—to the market, to investors, to the earning of wealth, and that caused investors to become increasingly frightened. Net private investment for most of the 1930s was negative. An economy cannot recover if net investment is negative. And so the investors are staying on the sidelines, and they’re staying on the sidelines because of the fear that they had about the security of their property and contract rights.
We rely in the book a lot on the research by the great economic historian Robert Higgs, in which he shows pretty convincingly that it was what he calls “regime uncertainty,” created by these unprecedented interventions, that scared investors away.
By the way, that uncertainty began under Hoover. There are so many fallacies that surround the Great Depression and the New Deal. One of them is that Herbert Hoover was a laissez-faire president, he did nothing. That’s not true. Herbert Hoover, when the downturn began in the 1930s, he began intervening in unprecedented ways. His attempt, too, was to keep prices up by restricting output. Well, when people aren’t eating, you don’t restrict output. But that’s what both Hoover and, to an even greater extent, the Roosevelt administration did. Roosevelt took these unprecedented interventions to a new level that scared away investors.
Here comes another fallacy: People will say, “Oh, the Great Depression was ended by World War II.” It wasn’t. Unemployment fell when America entered the war in the early 1940s, but that’s easy to do when you conscript as many as—what was it? I think it was initially three million—young men into the military, and you create all these munition plants to build weapons for the war. Regardless of your opinion of the war, that’s not a recovery of the market economy. And so Higgs argues, and we accept his argument, that the Great Depression really didn’t end—or we can’t say it ended—until after World War II.
In 1946, the Republicans surprisingly won both houses of Congress. And for all their faults, they were more friendly, less hostile, to private business and investors than were the Democrats. Roosevelt had died. Harry Truman was not the firebrand against capitalism that Roosevelt had become throughout the 1930s. That calmed investors’ fears. And so it was only after we returned to normalcy, to pick an older term, that we really got a recovery from the Great Depression.
The Great Depression, let me just add, was not caused by greed. It was not caused by speculation. It was not caused by overproduction. It was not caused by inequality. It was sparked by a failure of an institution that was designed to prevent these downturns—that was the Federal Reserve. The Federal Reserve was created in 1913 to be a lender of last resort. And when there was this big downturn that began in August of 1929, the Federal Reserve fell down on the job. It allowed the US money supply to shrink by 30 percent over the course of three or so years. And no economy can withstand basically the withdrawal of that much money out of its system. And so that caused a destructive deflation, and then people panicked, and then we got these interventions by Hoover and Roosevelt on top of that. It was just a dumpster fire of government failures from start to finish.
KLUTSEY: Thanks for that context. So why is it that still a lot of people think that the Great Depression was caused by greed and, “Hey, the New Deal! It fixed it! It solved the problem! This is government intervention at its best”?
BOUDREAUX: It’s a convenient story. I mean, if you don’t know any economics, any economics history, it’s a convenient story. We all know about the Roaring Twenties, the flappers, and people having a great time. We all know about the Wall Street crash in October of 1929. People from that time continue to tell the stories—this is in history books published today—there was all this unprecedented speculation, unprecedented inequality, unprecedented overproduction. You look at the facts, none of it is true.
The amount of “margin buying” of stocks, for example, on the New York Stock Exchange was not at any unprecedented level by the late 1920s. Economic inequality in the 1920s had actually declined. And this is a finding by a Nobel Prize–winning economist, Simon Kuznets. Overproduction was not a problem. Economic historians, several of them, have documented that that was not a problem.
But if you don’t know any economics and you want to tell a morality tale, we have all these pictures from the Great Depression—bread lines, people gaunt and starving. So capitalism running roughshod in the 1920s under the laissez-faire presidencies of Harding, Coolidge—they were pretty laissez-faire except for tariffs and immigration—then allegedly Hoover, who was not laissez-faire. Then we get the Depression. It seems like a failure of capitalism. All the historians—well, not all, but very many of the popular historians—immediately glommed onto this downturn as evidence that capitalism had finally failed.
And it’s a story that’s just too convenient. If you don’t know history, if you don’t know economics, and if your instincts are all that free markets are bad and government is good, it’s too convenient and neat a tale not to tell, and so people continue to tell that tale. Again, economic theory can tell us why it is suspect. But the data, the empirical facts, are overwhelming that that tale is false.
KLUTSEY: As they say, don’t let the facts get in the way of a good story, right?
BOUDREAUX: And that is a very good story if you’re a leftist.
Free Trade on Trial
KLUTSEY: Now, on trade, you know, the political consensus on trade—and this is one of the rare issues that unites, I think, populist left and populist right—is that trade destroyed American manufacturing and the jobs that went with it. But one of the most important empirical contributions of your book is separating two things that are constantly conflated: manufacturing output and manufacturing jobs. Output and productivity have actually increased dramatically, as your book talks about. The jobs declined, yes, largely because of technology and mechanization, not necessarily trade.
I want to push on the politics of this a little bit, of why this myth persists. Is it partly because automation doesn’t necessarily have a lobby and no villain? A politician can point to China or to NAFTA and give people someone to blame, but it’s hard to run against mechanization and that kind of thing.
BOUDREAUX: I believe it’s a mix of things, Ben. There is a bias against foreigners. It’s maybe deeply instinctive in us humans. We like our in-group. We’re suspicious of the out-group. And so it’s easy to demonize foreigners. So, if there are any problems, real or imaginary, and you point a finger at a foreigner, there’s a natural inclination to believe that.
That instinct, that anti-foreign bias, mixes with raw, venal, self-interested rent seeking here at home. If you own a steel mill and you don’t like the competition that you’re getting from a steel mill in Brazil or in Germany or China, you want to—for your own personal interest—eliminate that competition, or certainly dim it. What better way than to say, “Oh look, those foreigners, they’re playing unfair! Our industrial base is being destroyed. We wonderful Americans are being taken advantage of by those crafty and conniving foreigners. So, protect us from those crafty and conniving foreigners.”
There is now—I will give Donald Trump this much. In a way, Donald Trump has changed the game for us economists in the following way. Until Trump, until 10 years ago, when we talked about protectionism, it was largely driven by our understanding that protectionism is driven by self-interested, special-interest-group politics. But in the case of Trump—the man, I believe, genuinely believes that free trade is bad, protectionism is good. And so I think for him, it’s not so much a venal playing-along with special interest groups. I think he really thinks this is good for America. That’s not good for America, but I don’t think it is—I believe it to be sincere on his part. Obviously, if you’re a protected industry here in the US, you like President Trump’s ideological devotion to mercantilism, protectionism, and you’re willing to go along with it.
And as with the story of the Great Depression, it’s an easy story to tell: “Things aren’t as ideal as we’d like them to be here in the US. It can’t be our fault. My gosh, we have democratically elected people, and we’re not perfect, but it’s those conniving foreigners who are hurting us.” And as with the story with the Great Depression, there are so many allegedly factual claims that are made—made as if they are as well established as the law of gravity, the law of thermodynamics—that are simply false.
You mentioned one a moment ago—manufacturing. People will say all the time—I guarantee, literally every day, if you look for it, you can go online, listen to the news on the radio or TV, and you will find more than one pundit stating, again, as if it’s an established fact, that America’s industrial base has been hollowed out. Okay, well, let’s look at the data. You look at industrial capacity in the United States. It’s today as high as it’s ever been. You look at industrial output. It is practically as high as it’s ever been. Industrial output hit its peak in September of 2018, just after Trump’s first round of tariffs began. And it’s been holding kind of steady—declined during COVID but went back up—ever since. So, you compare industrial capacity, industrial output today to when China joined the WTO in 2001—much higher today in both measures. When NAFTA went into effect in January of 1994—much, much higher today than it was back then. Compared to when America last ran an annual trade surplus in 1975—much, much higher.
As you note, what has fallen is manufacturing employment, both absolutely and as a share of total employment. Manufacturing employment as a share of total employment has been falling rather steadily since before I was born. And if your listeners look at me really carefully, they can tell that I am probably several months older than most of them. I was born in 1958, and manufacturing employment, as a share of total employment, began its steady fall just after the Korean War in 1953, 1954.
And this is happening not only in the US, it’s happening in almost all countries. The only place today where manufacturing employment as a share of total employment is rising is in the poorest of the developing countries. So even in China, even in Latin America, the share of employment manufacturing jobs are falling because of what you mentioned—increased productivity. Manufacturing productivity has skyrocketed in the US over the past 50 or 60 years. One manufacturing worker today can produce in a week what it took eight or nine manufacturing workers to produce just after World War II. And this is how it’s supposed to be.
What’s happening in manufacturing over these past several decades is what happened a century earlier in agriculture. Go back to when the Declaration of Independence was signed 250 years ago—and I have to add, when The Wealth of Nations was first published 250 years ago—in the United States, we had between 80 to 90 percent of the workforce in agriculture. Today, we have just over one percent of the workforce [in agriculture]. Now, no one thinks, “Well, therefore, we must be starving. We can’t eat. We don’t produce food.” We produce a heck of a lot more food than we produced back then. That’s because agricultural technology has improved, and so it is with manufacturing technology. And that allows us to get all these manufacturing goods, all these industrial outputs. And as workers are released, they go into the service sector, where you and I are, by the way.
Here’s another fallacy that plays into these fears that America has about the alleged decline of manufacturing. The fear is that manufacturing jobs were somehow better than service-sector jobs. This is not true. Obviously, the service sector does have the lowest-paying jobs—hotel maids, hamburger flippers. It also has the highest-paying jobs—surgeons, hedge fund managers, college professors, doctors, lawyers, architects, think tank heads, web designers. If you look at the average overall wage in the service sector it’s higher than the average overall wage in the manufacturing sector.
There’s nothing wrong with manufacturing work, by the way. My dad was a manufacturing worker. He worked in a shipyard for most of his career. He was a pipe fitter for most of that time in a shipyard in New Orleans. My dad would have thought me mad if in 1978 or ’79, I said, “Dad, I’m going to drop out of college because I want to be a manufacturing worker like you.” He would have just thought me nuts. “Stay in college so you don’t have to be a manufacturing worker like me.” I get paid a lot more than my dad did. The job’s a lot more pleasant—and, by the way, a lot safer than those manufacturing jobs.
And so you have all these fallacies about—people do mistake, as you said, they mistake the decline in manufacturing employment as being the decline in manufacturing or industrial output. Manufacturing output, industrial output continue to rise because of rising productivity. That’s a good thing.
And this has always been the case, but President Trump has raised it to a new level of awareness, unfortunately, this fear of the so-called trade deficit. It sounds bad. Most people don’t know what the trade deficit is. Who wants to be in deficit? We all want to be in surplus. There is no term, I am convinced, in all of public policy—no economic term—that is responsible for more misunderstanding and more bad policy than the term trade deficit. It simply doesn’t mean what most people think it means. Most people think it means we Americans are losing our trade. It doesn’t mean that.
The trade deficit, let me say—as you know, but many listeners might not—the correct term for it is current account deficit. We don’t want to get into those details, so let’s call it trade deficit—when we import in dollar terms more than we export. And what do foreigners do with those excess dollars that they earn by selling us their stuff? They could buy our exports. They choose not to. They choose instead to invest in America. So the US trade deficits are exactly offset by inflows of global capital to our country. Why should we be upset by that?
I ask my students, “Just suppose you’re walking down the street and you bump into Jeff Bezos, and Jeff Bezos talks to you for 10 or 15 minutes. And then Jeff Bezos says, ‘You know, I’m really impressed with you. I’d like to invest in your future.’ Would you be upset? Or would you be happy? Obviously you’d be happy. You’re not going to call your parents [and say], ‘Something must be wrong. One of the world’s richest men wants to invest in me.’”
When we run a trade deficit, that means foreigners want to invest in our economy. That speaks well of our economy. And when those investment dollars come here, that helps our economy in exactly the same way as investment dollars help our economy when we increase our savings to expand factories, create factories, start new businesses, fund research and development, fund worker training.
And so [when] people hear about the trade deficit, whenever the trade deficit is reported, when it goes up, people report it as if it’s bad news. When I hear an increase in US trade deficit, I go, “Great! More foreign investment in America.” And yet all the core foundation of President Trump’s protectionism—he’s open about it—is, well, we have this national emergency because we’ve been running trade deficits since 1976. And that means we have to stop this.
Again, I’ll point to my age. I graduated from high school in 1976, the first year America began running annual trade deficits. I turned 65 in 2023, at the typical retirement age. My entire working life, America has run annual trade deficits. And what has happened in that interim? America has become richer.
Mark Perry and I have a piece in today’s Washington Post about these 50 years of trade deficits. What we show is that over those 50 years, trade deficits have gone down. Trade deficits have pretty steadily swelled, measured in real dollars, inflation-adjusted dollars. And what has happened to the average net worth of the American households in inflation-adjusted dollars? Gone up. I think the figures are—Mark figured this out—I forget the exact numbers. You can read the piece in The Washington Post. But as this trade deficit has gone up, so too has our net worth, real net worth as Americans. But people don’t know these facts, and so they get scared when they hear talk of trade deficits.
Job Loss and Economic Change
KLUTSEY: Right. Now, I want to take it out of the empirical evidence category a bit and move it into the personal, because none of this is any comfort to the person whose factory closed, for instance. And as a son of a shipyard worker—who may have had some stints at the shipyard yourself—imagine you’re in the room with someone from, say, Youngstown or Dayton whose plant shut down, whose skills feel obsolete, whose community hollowed out. What do you say to them? Not as an economist, but as someone who knows this territory.
BOUDREAUX: Yes. By the way, I did work in a shipyard for six summers when I was in college, and I’m glad I’m not working there permanently. Obviously, if someone loses their job, whether it’s a manufacturing job, agricultural job, white collar job, it’s not pleasant. No one thinks it. I wouldn’t want to be a counselor trying to calm someone’s spirits. But what I say as an economist—and I’m not sure how much comfort this would be to anyone—international trade is only one source of job loss. And in America, it’s a fairly insignificant source of job loss.
I like to point to the famous so-called China shock. This got a lot of attention. One of the few things that Hillary Clinton and Donald Trump agreed on during the 2016 presidential campaign was that American trade with China was bad. In 2016, the China shock paper came out—the most famous version of the China shock paper. And what it showed is that over the course of 13 years, January 1999 through December of 2011, that 2.4 million American workers lost their jobs. And Trump and Clinton [said], “It’s terrible—2.4 million workers.”
Put it in context. It’s easy to do. You look at stuff from the Bureau of Labor Statistics. On average today, and during that time, about 1.7 million American workers every month lose their jobs because of changes in consumer taste, because of technology, changing demographics. 2.4 million workers over 13 years is nothing. It’s about one percent of total job losses. So people can take these numbers out of context.
Now, you asked to get it out of the empirical realm. Again, I would just say, “I understand that you don’t like having lost your job to imports from China, or Brazil, or Canada. But all around you today in America, there are literally millions of people—or at least 1.7 million people on average—who lost their jobs this month, mostly due to innovation, to changes in technology, changes in tastes. There’s nothing special about you and your job loss. I get it. It’s bad. But we in the US are lucky to live in an economy with lots of job churn, because it’s creative destruction.”
Only by allowing economic change can we get economic growth. Economic growth implies change. Change implies destroying older, less efficient ways of doing things in order to release the resources to make it possible to produce new and better things.
Imagine if, in the early 20th century, the people who made automobiles by hand—they were very bespoke. Then Henry Ford comes along with the assembly line, basically putting these bespoke automakers out of business. Some of them lost jobs. And we would say, “It’s terrible. We should stop this man, Henry Ford, from his assembly-line manufacturing of automobiles. It’s putting these poor craftsmen who make automobiles out of jobs.” We could have done that. Then we could have stopped the advance in agricultural technology in the past. And we could have stopped the advancement of electrification and saved all the jobs that were prominent in the 1830s, 1850s, 1900s. We could have done it, but do any of us today think America would be a better place for it?
We care about our children, right? We want our children to have better lives. Any decent parent wants their child to have a better life than he or she has. I want my child to have a better life than I have. I have a pretty good life. It’s much better than my parents had. Their life is better than their parents’. I want my child to have a life better than mine. Ben, I’m sure you feel the same way about your children. The only way to do that is to allow economic change to occur. If you save my job, and my job may be under threat—artificial intelligence—I’m just a lowly college professor. Maybe two years from now, Claude will make it unnecessary for George Mason to hire me. I’ll lose my job. I won’t like it, but I’ll understand it. And I won’t feel any right to stop technology or any other source from challenging my job. I don’t have a right to my job, because I want future generations to live even better than we live today. The only way to do that is to allow economic change, and economic change inevitably destroys particular jobs as it creates others.
KLUTSEY: And of course, your student Liya Palagashvili has done a lot of work on the gig economy and the rise of independent work. You can think of America as a place that allows people to make these transitions maybe a little bit smoother—not entirely smooth, but a little bit smoother—along the way, as people transition into new and different opportunities.
BOUDREAUX: So, you bring up a good point. There are things that government can do if government wants to do things. That is, basically, stand down.
Over the past 50–60 years, we’ve had a dramatic increase in occupational licensing restrictions, which makes it more difficult for people to find new jobs than it would otherwise be. I think the interference in the housing market makes it more difficult for people to move from one locale to another, which was the common way in the past that Americans dealt with job losses. Jobs disappeared in some Rust Belt town, people moved west or they moved south. As government housing restrictions—and we at Mercatus, of course, do a lot of good work on this—Emily [Hamilton] and Salim [Furth]—freeing up the housing market, getting rid of occupational licensing restrictions. Reducing taxes on capital investment—that makes it easier for companies to start anew and expand to hire new workers. So there are a lot of things the government can do. None of those things involve or should involve restricting trade or trying to cement—trying to capture in amber, in policy amber—the current ways that things are done. That’s a recipe for failure. The thing government can do is to stand back and let the dynamic entrepreneurial market economy work even better than it’s working now.
I’m glad you brought up Liya’s work. This is a way that markets are responding, as you point out. You lose your job—it’s fairly easy to pick up some extra cash being an Uber or Lyft driver. And we’ve seen a lot of government hostility to that. Obviously, if you’re a cab driver in New York City, you don’t like it—or a cab driver anywhere, you don’t like it. But fortunately, in that case, that technology came along so quickly that the rent-seeking forces didn’t have time to organize, to kill it in its crib. Those forces are always out there, and we have to be constantly vigilant against them.
The Biggest Civilizational Threat to a Free Society
KLUTSEY: Now, of all the seven myths and fallacies—we couldn’t get into all of them—from inequality, “the rich is getting richer, the poor is getting poorer.” You talked about trade, the Great Depression, in the book you talk about the Industrial Revolution and all the myths there. But if you had to identify the one that poses the greatest, one might say, civilizational threat—not just an economic cost, but a genuine threat to the foundations of a free society, which one would you pick?
BOUDREAUX: Well, I’m tempted to say trade, because trade now is on the ropes across the ideological spectrum. We have in the US today—and I think probably a similar thing can be said for foreign countries, but I’m much more familiar with the US context—we’re unique now. We no longer have a major party that even pretends to speak in favor of free trade. For most of US history, the free-traders were the Democrats, and the Republicans were openly protectionists. And then starting in the mid-20th century, that flipped. The Republicans became the free-traders, and the Democrats became the protectionists. Starting 10 years ago, we have both the Democrats and the Republicans as protectionists. And so you have people in the far left—Bernie Sanders, Elizabeth Warren—who don’t like trade, don’t like open economies. People ascendent in the current Republican party—Donald Trump, Josh Hawley–-they, too, are opposed to free trade.
And I think this is frightening, not just because of trade itself. If it was just trade, the US economy would survive. We’re a gigantic economy—transcontinental, 340-odd million people. We’re not going to be poverty stricken. Even if we became a target, we’d become poorer, but we wouldn’t be poverty stricken. But it’s the attitude that brings it—this notion that an economy should be closed, the notion that the government should have the power to superintend how people spend the incomes that they earn. So, the same interventionist impulse and suspicion of markets that today is manifest so abundantly in the hostility to free trade—left and right and center—is combined with a larger and more general hostility to open markets and liberalism. That’s frightening to me.
National Security Exception
KLUTSEY: Now, on trade, what about the national security exception? You deal with that in your book, and I think that’s one area where a lot of people are saying, “Well, perhaps we need to produce certain things, and manufacture certain things, and restrict trade on certain things, because it’s very critical to our national security. Hey, Adam Smith even talked about it.” What do we do there?
BOUDREAUX: So look, I admit there is a national security exception to the case for free trade. I wouldn’t rule out that [for] a particular product, particular industry, particular firm, a case can be made to protect it on national security grounds. I think the burden should be not on the free-traders. It should be on the protectionists to make the case. But a couple of things: Number one—this won’t be controversial—that’s a very easy exception to abuse. Once the national security exception is on the table, then every producer thinks its products are essential to the national security. And when you say national security, of course, people become then more inclined to say, “We can’t allow free trade.”
But let me jump now to the other end of the argument. Ultimately, the greatest asset for national security is a rich, dynamic, entrepreneurial, innovative economy. And the more we restrict trade, the less open, rich and dynamic and entrepreneurial we become. Corporate executives become less adept at seeking efficiencies and innovating and creating new and better products, and more adept at seeking privileges from government. That doesn’t help us on the national security front. That makes us, over time, weaker.
I do also think there is something to the doux commerce thesis. There is a lot of evidence. A paper just came out earlier this month—Chris Meissner was one of the coauthors—showing a strong empirical correlation between the economic integration of countries and the likelihood of peaceable relations between those countries. Trade doesn’t guarantee, of course, that there will be no hot, shooting war, but it does reduce the prospects of a hot, shooting war.
One final thing—I get this from my old, late, great teacher, Leland Yeager, who was one of the great trade theorists of the mid- and late 20th century. In a lot of his work, Leland Yeager would point out—I’m paraphrasing now, of course—“We identify industry X as essential to the national security. And let’s just say it’s an appropriate identification. We protect industry X. When you protect an industry from competition, you make that industry less innovative. So here’s the irony: We’re protecting this industry, because it’s so essential to national security, from competition. And then because it’s protected, it becomes a little bit lazier, a little bit less innovative, so that in the future, this essential industry has fallen behind.”
We understand this in our personal lives. I tell my students, “Suppose no matter what you do in the class, I guarantee you’ll get at least a B plus—can’t get anything lower than that. What’s going to happen to the effort you put into the class?” Eighteen-year-olds understand it’s going to fall. And so when you protect a company from competition, an industry from competition on national security grounds—and again, there may be a case for doing it. But understand the tradeoff. You are making that very industry less innovative, less entrepreneurial, and over time, that very protection may harm your efforts to promote national security. You’ve got to be very careful with that exception.
Resilience and AI
KLUTSEY: Now, I want to wrap up with a question about resilience, which happens to be a key theme of this podcast. We have to look at history and see what lessons it can teach us about the future. We are living through what many believe is a technological disruption as significant as anything in modern history: artificial intelligence. Some suggest it’s likely to displace jobs or augment others and transform whole industries, and so on and so forth. Which period in history most correlates or mirrors the current period of disruption that we’re facing, and what lessons can we learn from that, as we think about how to move forward? Because by resilience, I mean how do we adapt, how do we innovate, how do we bounce back even stronger than before in the midst of challenges? So, what are your thoughts on that?
DON BOUDREAUX: If you’re looking for a period of history that created the single biggest change—maybe 10,000 years ago with the agricultural revolution, when we stopped becoming hunters and gatherers. We don’t have a whole lot of empirical data back then, but in relatively modern history, there’s no doubt it’s the Industrial Revolution. It dramatically changed human existence—everything we take for granted now. Most of the things in our lives that we take for granted are the product of that Industrial Revolution. Made us richer, dramatically changed the way we work, the way we live, the way we interact with each other.
But you’re obviously referring to AI. I remember, Ben—I’m sure you do, and a lot of people who are listening to this podcast or watching this podcast will remember—30 years ago, when the internet was becoming a thing, [people were saying,] “The internet’s going to change things dramatically.” It did change things. Of course, you can point to downsides. Yes, 16-year-olds can get pornography on their phones. Nothing is without its downsides. Life is a series of tradeoffs, of course. Living longer, yes, but that means we got to pay more Social Security, but living longer is clearly a good thing.
I don’t know exactly what is in store with artificial intelligence. If I did, I’d suddenly stop talking to you and go off and invest and become a trillionaire next year and make big contributions to Mercatus. I don’t know, nor does anyone else really know, but if history is any guide, you will have this creative destruction. There will of course be some jobs that are destroyed. There will be people complaining about that, saying we should stop it, we should regulate it, we should slow it down. There will also be jobs that are created. There will be things that you and I today—maybe even later this year, next year, 10 years from now, certainly—we can’t imagine; wonders that we cannot begin today to imagine, that 10 years from now we’ll take for granted. How did we ever live without this thing? As long as markets are free and entrepreneurial, that’s how things happen.
I see no reason to believe that AI presents more of a challenge than any of the technological advances the past presented to us. One sure way, however, to create the impression that AI presents a uniquely dangerous challenge is to try to prevent it, to try to regulate it, to try to stop it. Then ironically what that will do is cause the economy to become moribund. And when you cause an economy to be more moribund, you get rid of its essential life source. That’s modern economy. That’s entrepreneurial innovation with the freedom of consumers to spend their money, to vote on which of those innovations the consumers approve of, and which they don’t approve of.
So I am an AI optimist. I see no reason not to be, because that’s what history tells us. And of course, yes, someone can always say, “Yes, this time it’s different.” Yes, maybe. Nothing is certain. But history and my economic theory tell me that there is every reason to be optimistic about the future that AI will bring us and no reason to be pessimistic about it.
BEN KLUTSEY: Well, Don, it’s been a pleasure talking to you, and thank you for that dose of optimism. The book is called The Triumph of Economic Freedom.
DON BOUDREAUX: It’s a great book. Buy it.
BEN KLUTSEY: It’s a great book. I’d certainly encourage folks to get it. Thank you, Don.
DON BOUDREAUX: Thank you, Ben.
