The Economics of Violence: A Short Introduction

The simplistic declarations about violence heard after the “insurrection” of January 6 at the Capitol invite a reflection on the economics of violence. The economist’s starting point is that an individual uses violence when it is in his personal interest to do so—when, given his circumstances and constraints (including subjective moral constraints or the lack thereof), he finds the net expected benefit of violence greater than the net expected benefit of peaceful exchange for him. This is a positive observation about what is, not a normative statement about what ought to be, an important distinction to always keep in mind.

As the late UCLA professor Jack Hirshleifer argued, we must not overlook “the dark side of the force” (of the force of self-interest), which includes “crime, war, and politics.” (I am quoting from the mimeographed July 28, 1993 version of his article “The Dark Side of the Force.”) Cooperation (such as trade) happens but “with a few obvious exceptions, occurs in the shadow of conflict.” Hirshleifer wrote. In positive economics, violence is important:

All aspects of human life are responses not to conflict alone, but to the interaction of the two great life-strategy options: on the one hand production and exchange, on the other hand appropriation and defense against appropriation.

Which strategy one individual chooses depends on his preferences, his abilities in voluntary cooperation, the defensive or offensive production technologies available to him and to others, and his evaluation of the future. But how should we think about political violence?

Open violence—“the war of all against all”—has dire consequences for prosperity. Virtually all individuals have good reasons to want it minimized. Thomas Hobbes formalized the idea that such minimization is what gives legitimacy to the state. Populations accepted the burden of the Roman Empire or the medieval lords or the king or the modern democratic state because these governments were deemed not as bad as attacks from the “roving bandits,” private or governmental, who would have otherwise proliferated and attacked them. The “roving bandit” concept belongs to the theory of economist Mancur Olson, notably in his article “Dictatorship, Democracy, and Development” (American Political Science Review 87:3 [September 1993], 567-576).

Governments do not abolish violence as its threat underlies their injunctions and bans. But the most useful governments prevent violence from degenerating into open violence. They replace the latter with a more subdued, formal, and at least partly constrained form of violence.

This does not mean that revolution is never in the interest of some or many or even—under the worst governments—a majority of the ruled. The collective action necessary to organize a revolution, however, faces daunting problems. Which individuals will start the revolution and pay the necessary personal costs, often with their lives? (On the theory of collective action, a milestone in economics, see Olson’s book The Logic of Collective Action: Public Goods and the Theory of Groups, 1966].)

Revolutions do occasionally happen, though. At some tipping point, the National Guard or other praetorians do not shoot on demonstrators or on the mob attacking the “City of Command,” as political theorist Bertrand de Jouvenel called the center of government power (in his book On Power [1945 for the original French edition]). Bodyguards decamp where the signs become unmistakable that the regime is crumbling, because it is in the private interest of each of them to not be on the losing side. In Romania, Nicolae Ceausescu had no more praetorians when he was arrested by revolutionaries and executed with his wife. In different circumstances, Saddam Hussein was found in a rabbit hole, alone. Syrian ruler Bashar al-Assad did crush the revolution by shooting on the crowds but, perhaps most importantly, by becoming a vassal of the Russian government.

The threat of revolution or revolt can lead some governments to rule by terror, but it can also exert a restraint on state power. The factors at play include the technology (guns and such), the propensity to violence on both sides, and the existing political institutions. Olson provides a historical example of how the threat of revolution can be useful:

In Venice, after a doge who attempted to make himself autocrat was beheaded for his offense, subsequent doges were followed in official processions by a sword-bearing symbolic executioner as a reminder of the punishment intended for any leader who attempted to assume dictatorial power.

Thomas Jefferson would have agreed. He famously wrote:

I hold it that a little rebellion now and then is a good thing.

Interestingly, once he was president, he did not even support ordinary smugglers.

One problem with revolutions, illustrated by the 1789 French revolution and the 1917 revolution in Russia, is that they can strengthen power instead of limiting it. In America, the jury may still be deliberating. Many thinkers, including most economists of the public choice school as well as Anthony de Jasay, have argued that the state as an institution has a logic that leads to growing power.

Even a liberal social contract as Nobel economist James Buchanan theorized it is ultimately based on threats of violence. When some individuals think that the contract is not in their best individual interests and that they would fare better in anarchy, they will want to renegotiate the deal or walk out of it. Only new rules and/or some bribes can prevent a civil war or a revolution. As Hirshleifer said, the option of violence is always lurking in the background.

Classical liberalism claims that individual liberty under the rule law and the prosperity that follows are the best set of institutions to minimize violence—a potent argument. However, Anthony de Jasay, a liberal anarchist (or perhaps a conservative anarchist), has dampened the liberal enthusiasm by emphasizing the need for an effective balance of power between the ruler and the ruled:

Self-imposed limits on sovereign power can disarm mistrust, but provide no guarantee of liberty and property beyond those afforded by the balance between state and private force.

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What the Continued Global Uncertainty Means for You

By Hites Ahir, Nicholas Bloom, and Davide Furceri Global uncertainty reached unprecedented levels at the beginning of the COVID-19 outbreak and remains elevated. The World Uncertainty Index—a quarterly measure of global economic and policy uncertainty covering 143 countries—shows that although uncertainty has come down by about 60 percent from the peak observed at the onset of […]

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U.S. Tariffs Are Not “More Punishing to China”

The world would be a different place, more rational and convivial, if all politicians, journalists, and editors had some clear notions of supply and demand as well as of the history of economic thought—if, for example, they had read David Hume, Adam Smith, Jean-Baptiste Say, James Mill, and John Stuart Mill. As an illustration, consider a sentence in yesterday’s Wall Street Journal (“Trump’s Trade War Will Be Left for Biden to Win,” January 3, 2021—my emphasis):

[Mr. Biden] has already said he wouldn’t immediately lift the tariffs, which should prove more punishing to China than the U.S., as its economy generally depends more on exports.

It is not clear whether the explanation I have emphasized is the journalist’s paraphrase of Mr. Biden’s thinking or the journalist’s own opinion. It could well be both. My guess is that, as the sentence is written, it expresses the journalist’s belief. On the other hand, it is quite obvious that Mr. Biden is as ignorant of trade as Mr. Trump, although the ignorance of the former is not as militant as the ignorance of the latter.  But whoever’s thinking it represents, the clause ignores two centuries and a half of economic understanding, to which only some extreme left and some extreme right have been completely immune.

Increasing the tariffs “against China” would increase them against American consumers, who, as was again demonstrated by President Trump’s trade war, end up paying the tariffs in increased prices, which reimburse the tariffs paid by American importers. The only sense in which Chinese exporters pay is that higher tariffs and prices translate into a lower quantity demanded for their wares, assuming they cannot sell them elsewhere in world markets. Thus, increasing the tariffs on Chinese goods would prove more punishing to American consumers. (See my Econlog posts “The Poverty of Protectionism and the Impact of Tariffs,” June 17, 2019; and “Anecdotes and Data in the Trade War,” July 9, 2019.)

The last clause of the quote above, “as [China’s] economy depends more on exports” is also (at the very least) misleading. As such, exports do not increase domestic prosperity: they divert to the benefit of foreign consumers (Chinese consumers, in this case) domestic (American) resources that would otherwise be used to produce goods or services for domestic (American) consumers. American exports benefit Americans only in the sense that they allow them to produce more of what they have a comparative advantage in and thus import more goods which are produced relatively more cheaply in China or in other countries. The only benefit of exports for the domestic economy is that they allow more imports. Otherwise, exports would be just a gift from “the Americans” to “the Chinese.” (For an elaboration of this point, see my “Logic, Economics, and Protectionist Nationalists,” Regulation 43:3 (Fall 2020), pp. 9-11.)

 

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Glaciers of Global Finance: The Currency Composition of Central Banks’ Reserve Holdings

By Alina Iancu, Neil Meads, Martin Mühleisen, Yiqun Wu The currencies that are being held by central banks as foreign exchange reserves have remained largely steady over decades. Changes in the composition of these holdings can, at best, be described as glacial in pace. But geopolitical shifts and technological revolutions are reshaping the global economy […]

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COVID Reality: From POTUS to NOTUS

There is such a thing as external reality, of which any moral ideal, political goal, or action must take due notice. The revelation today that POTUS has been infected by the coronavirus provides an example. One should want to preserve individual liberty during a pandemic or another natural or man-made catastrophe, but reality must still be acknowledged in a logically consistent way.

Restraints to trade are like pandemics: it is important to understand how they work and what are the trade-offs involved. Trade wars are not “good, and easy to win,” as POTUS tweeted on March 2, 2018. An exception would be if “good” means good for special interests (such as domestic steel or washing machines manufacturers) and for the politicians’ interest. And they are not “easy to win,” as Adam Smith knew two and a half centuries ago, except if “winning” means exploiting the consumers of your own country and reducing prosperity.

A ruler wants to reduce the trade deficit? He may try to restrain his subjects who want to import or he may try to subsidize those who want to exports, but economic realities, including the reactions of those bossed around, must be taken into account. Ignoring them leads to other results than those expected. In the Summer issue of Regulation, I analyzed the “Trump economy” up to December 31, 2019—that is, before the pandemic. The results of ignoring the economics of international trade were visible:

Figure 7 above shows that the U.S. trade deficit on goods and services did not decrease between the last year of Obama’s presidency and 2019; in fact, it increased by 23%. If we consider only the trade deficit on goods, Trump’s preferred metric, that deficit increased by 16%. Moreover, the trade deficit in goods with China, which was his main target, decreased by a mere 0.5%. He has attacked the world trade system, regulated American exporters, and imposed tariffs on American consumers, all for a measly 0.5% reduction in a meaningless number.

Of course, it is not because POTUS and FLOTUS have not been prudent enough that NOTUS (the Nth Lady of the United States or anybody else in America) must be coerced into doing or not doing something. Note also that, if the federal and state governments in the US did not interfere with the prices and the allocation of testing equipment and materials, there would be no shortage and NOTUS could get her test results within 24 hours just like people in the White House apparently do: like them, she, the humble NOTUS, would just have to pay the market-clearing price.

In the current White House infection, let’s wish the best to POTUS, FLOTUS, and the others, but the pedagogical lessons of this event (as Rahm Emmanuel might say) must not go to waste.

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Chart of the WeekTrade as a Tool for an Efficient Recovery

By Jesus Gonzalez-Garcia and Yuanchen Yang As economies now look for paths to recovery from the COVID-19 crisis, new evidence reaffirms that policies for more open and trade-integrated economies could significantly benefit domestic competition and ultimately may help lower costs for consumers in emerging and developing economies. A recent Working Paper, building on the Regional […]

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Henderson and Horton on Whether China is an Economic Threat

Scott Horton is a well-informed foreign policy analyst who interviews people mainly about foreign policy. Because of the potential foreign-policy implications of my recent Defining Ideas article on China, Scott interviewed me last week. His interview is titled, “David Henderson on the Supposed Economic Threat from China.” It goes about 42 minutes.

There are two things I like consistently about being interviewed by Scott: (1) his energy and (2) the fact that I always learn something from him.

Here are the highlights with approximate times:

2:47: Gains from trade don’t stop at the border.

4:00: The asymmetry in the gains and losses from trade and what that means for the discussion on economic policy.

9:45: Tariffs fell gradually after the war.

10:15: The Box bought down costs of international trade across oceans more than small reductions in tariffs did.

11:30: The role of improvements in technology in losses of U.S. manufacturing jobs.

14:45: Obama economist Jason Furman’s comment about the gains for the average U.S. family from Walmart.

16:50: The role (or not) of regulation in moving jobs to China.

17:40: The Economic Report of the President under Trump and its analysis of where the U.S. stands in degree of regulation relative to Western Europe and other advanced economies.

19:50: China’s economy and why it has done so well. [HINT: It’s not mainly slave or prison labor.]

21:15: TikTok.

22:40: “You didn’t dance well?”

23:30: How the U.S. feds made it easier for the Chinese government to blackmail federal employees.

24:40: Much of intellectual property is handed over to Chinese firms contractually.

26:25: Are “we” in competition with “them?”

27:40: One thing that Trump is most sincere about and most wrong about.

28:30: Increase in size of Chinese military.

31:30: The Blob: They make a good living by stirring the pot.

32:30: Scott teaches me something about Colin Powell and his role in getting George W. Bush to respond moderately to China after the Chinese government forced a U.S. Navy EP-3 airplane to land on Hainan Island.

34:00: The report of one of my students who was on that airplane.

About 4 or 5 minutes in which we discuss nuclear war.

41:00: Are there interest groups in U.S. business that want the U.S. government to restrain its hawkish actions toward China?

 

 

 

 

 

 

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The Next Phase of the Crisis: Further Action Needed for a Resilient Recovery

By Kristalina Georgieva When the Group of Twenty industrialized and emerging market economies (G-20) finance ministers and central bank governors last met in April, the world was in the midst of the Great Lockdown forced by the outbreak of COVID-19. As they meet virtually this week, many countries are gradually reopening, even as the pandemic […]

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