July 29, 2025 • 32 mins
Roger welcomes Dr. Donald J. Boudreaux, professor of economics at George Mason University and longtime TFAS senior scholar who teaches the economics for the citizen course, for a conversation about the enduring value of economic freedom and the importance of correcting common myths that cloud public understanding of capitalism.
They discuss how misconceptions about economic history — the Industrial Revolution, the Great Depression and the New Deal — have shaped misguided policies and narratives; why free markets, not government planning are responsible for the unprecedented rise in global living standards; and why economic literacy is essential for preserving that progress. They also reflect on the power of clear, engaging economics education in helping students see the world more clearly.
Donald J. Boudreaux is a senior fellow at the Mercatus Center at George Mason University. He has authored numerous books, including his new title, “The Triumph of Economic Freedom: Debunking the Seven Great Myths of American Capitalism,” co-authored with Senator Phil Graham. He writes widely on trade, liberty and economic growth, and is the longtime editor of the blog “Café Hayek.”
The Liberty + Leadership Podcast is hosted by TFAS president Roger Ream and produced by Podville Media. If you have a comment or question for the show, please email us at podcast@TFAS.org. To support TFAS and its mission, please visit TFAS.org/support.
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Episode Transcript
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Speaker 1 (00:02):
Welcome to the Liberty and Leadership Podcast,
a conversation with TFAS alumni,faculty and friends who are
making an impact.
Today.
I'm your host, roger Ream.
Well, my guest today on theLiberty and Leadership Podcast
is Professor Don Boudreau.
Don's a longtime friend of mineand of TFAS.
(00:23):
He's taught for us since 2010in our summer programs a course
called Economics for the Citizen.
He's also a fellow at theMercatus Center, which is
aligned with George MasonUniversity.
He's the past president of theFoundation for Economic
Education and is co-author of agreat new book called the
Triumph of Economic FreedomDebunking the Seven Great Myths
(00:45):
of American Capitalism,co-authored with Senator Phil
Graham.
It's a great book, and Don'shere today to talk about this
book and other topics ineconomics that are very timely.
My first question is how do youcome up with seven myths?
I'm sure you probably had alist that was much longer, but
you certainly picked some of themost important ones.
Speaker 2 (01:05):
The idea for the number was Phil Graham's and he
said you know, seven's a famousnumber.
It wasn't a superstitious thing, but the seven myths.
We wanted to keep the book to areadable length and I think
we've managed to do that.
The seven that we tackle areindeed important, and failure to
grasp them plays an importantrole in making public policy.
So we just chose those seven.
(01:26):
I suppose if there was alooming eighth that deserved to
be in there, we would haveincluded it, but it was Phil's
idea to have just seven.
Speaker 1 (01:34):
Well, the myths you've selected are very common
myths, and they're held not justby those who may have a more
progressive or left-leaningorientation, but even many who
are on the right side of thepolitical spectrum, who even
support capitalism, share someof these myths.
Speaker 2 (01:52):
Increasingly so.
Speaker 1 (01:53):
Yeah, I'd like to tackle them.
But first of all, why do youthink that we look back at the
same events that occurred at aparticular time in history and
we reach such differentconclusions so often?
Speaker 2 (02:03):
As we say in the introduction to the book,
everyone interprets thehistorical record and the facts
they encounter through aparticular theoretical lens.
You might not realize you havea particular theoretical lens in
your head, but you do.
How you make sense of this verycomplex reality of which we are
a part has to be filteredthrough some theory that you
have of how the world works, ourtheory, both Phil Graham and I,
(02:26):
are professional economists andso our theoretical lens is
supplied by basic economics, notelaborate economics, but just
basic common sense,straightforward, fundamental
principles of economics.
The second reason is people dohave a surprisingly wide
misunderstanding of the factualrecord.
They just don't know whathappened.
(02:48):
Just basic facts are not known.
Even worse, basic fallaciesabout the past are believed that
simply have no basis in reality.
It was the latter that wereally set out to tackle with
the book.
The fallacies that we tackleare not incredibly nuanced or
complicated ones, they arecommonplace fallacies that we
(03:11):
believe and I think we show itin the book can be debunked just
by going to the historicalrecord, and you don't have to
nuance or massage the data verymuch of the historical record at
all, just present the facts.
And our hope is that justpresenting the facts in the way
that we do will persuade peoplethat a lot of what they believe
about the past is incorrect.
Speaker 1 (03:31):
Let's look at some of these myths that you've
selected and that you discuss inthe book, the first being that
the Industrial Revolution harmedthe conditions of the working
man and made people miserable.
Much of that conveyed throughliterature, charles Dickens, and
not so much through theeconomics.
But you take on that myth, talkabout that one.
Speaker 2 (03:51):
No one doubts the Industrial Revolution was real
and that it certainly increasedoverall prosperity.
The fallacy is that theincrease in prosperity came by
the capitalists crushing theproletariat and so you had these
happy peasants.
They weren't rich by ourstandards but they were doing
okay.
They were frolicking in thecountryside and their lives were
(04:13):
clean and healthy and wholesome.
And then these factories camealong and basically sucked these
people into the bowels of thefactories and the wealth that
was created by the IndustrialRevolution was extracted from
the blood, sweat and tears ofthe peasants who worked in the
factories.
And it's simply wrong.
You can look at the change inreal wages, look at indicia of
(04:34):
living standards, lifeexpectancy, reductions in
maternal mortality, a number ofindicators of standard of living
and ordinary people during theIndustrial Revolution.
So the mid-18th century,through the mid-19th century,
their lives were improving byour standards today, those lives
were still very poor by thestandards of the alternatives.
(04:57):
What these people would havedone had there been no factory
system.
By that standard the workerswere doing pretty well.
Speaker 1 (05:04):
They voluntarily chose to work in the factories
because it was better than whatthey had as an alternative.
Speaker 2 (05:09):
One of the things you mentioned in the book.
There was this wonderful bookwritten about 10 years ago by
English historian Emma Griffin,where she found several diaries
written by ordinary workersduring that era.
The book's called Liberty'sDawn and what these diary
entries show is that theseordinary workers themselves
accounted.
You know they described theirexperience Overwhelmingly.
(05:31):
These diaries show that theseworkers understood that their
lives were being made better offby the opportunity to work in
the towns that wereindustrializing.
Speaker 1 (05:40):
Perhaps the biggest myth that you debunk in your
book is the Great Depression,and there's several myths
surrounding that.
Of course, one is what causedit?
Was it a failure of capitalismthat plunged our economy into a
depression?
And then also what ended it.
Was it New Deal policies thatcame along under FDR that
brought us out?
Or was it the World War II?
Did that end the Depression?
(06:01):
There are a lot ofinterpretations of what caused
it.
Talk about that issue as onemyth that seems to be so
ingrained in the minds ofAmericans.
Speaker 2 (06:10):
Yeah, so let's talk about what caused the Great
Depression first.
The formal recession began inAugust of 1929, so a few months
before the stock market crash.
The basic myth is that, okay,in the 1920s income inequality
grew.
We had this completelaissez-faire, free-for-all
Speculation was running wild.
The growing income inequalityby having more income in the
(06:33):
hands of rich people, and richpeople don't spend as large a
share of their incomes as dopoorer people, so consumption
was too low.
By the end of the 1920s, all ofthis caught up with the
American economy.
The stock market crashed whenthe speculative boom declined.
Herbert Hoover, of course, waspresident then.
I'm continuing with the myth,and the myth is that Herbert
(06:55):
Hoover was a do-nothingpresident.
He just sat around in the WhiteHouse being a devotee of
laissez-faire, hoping thingswould improve.
Well, of course they didn'timprove.
The worst years of theDepression were 32 and 33.
The election of 32 comes alongand of course Hoover gets booted
out, along with the Republicansin Congress.
(07:15):
And Roosevelt comes in and theDemocratic Congress comes in
with a new deal.
The myth continues that itwasn't perfect.
The new deal was a bit ofexperimentation, but eventually
the new deal helped improvethings and the final push to get
us out of the Great Depressioncame with the increased spending
during World War II.
That's the standard story.
First of all, in the 1920sthere was no increased income
inequality.
(07:35):
In fact, working classes got alarger share as shown by the
Nobel Prize-winning economistSimon Kuznets of GDP.
They had a larger share at theend of the 1920s than they had
at the beginning of the 1920s.
Spending on consumer goods wason pace.
There was no additional orextra stock market speculation.
What happened was the FederalReserve was created in 1913 to
(07:59):
be a lender of last resort, andthere were some imperfections in
the US banking system, mostlylegislatively created.
There was this downturn in theeconomy that began in the summer
of 1929.
Some banks began to fail, andthe biggest failure was the Fed.
The Fed failed to do what itwas established to do to serve
as a lender of last resort.
It allowed the money supplyfrom 1929 through early 1933 to
(08:23):
decrease by more than 30%.
This is what Milton Friedmanand Anna Schwartz called the
Great Contraction.
There is no way any industrialeconomy can survive unscathed
when the money supply is allowedto fall that far.
That's what caused the GreatDepression.
What caused the Great Depressionto last, however?
Herbert Hoover's interventionsbecause he was not in fact the
(08:46):
devotee of laissez-faire madeworse by FDR's interventions.
So we spend a lot of time inthe book talking about the work
of the economic historian RobertHiggs, who has this idea of
what he calls regime uncertainty, the interventions of Hoover
and especially of FDR.
These were unprecedented.
The investors were frightenedby the degree to which the
(09:08):
government was becoming involvedin the economy.
And when investors becomefrightened they stay on the
sidelines.
And they continued to stay onthe sidelines until the breakout
of World War II.
Roosevelt needed the businesspeople to be on board to help
fight the war effort.
So when World War II breaks out, roosevelt becomes a bit more
business-friendly.
(09:28):
He has to tone down hisanti-business stuff.
But we're now in a wartimeeconomy.
All the resources are beingdirected by the government into
the war effort and whether youthink that was great or terrible
, that means that livingstandards fell even further in
the private domestic economy.
We did not get out of theDepression by any measurable
metric until the second half ofthe 1940s, after the war.
(09:52):
After the war, in part becauseRoosevelt had died.
After the war, after the war,in part because Roosevelt had
died, truman was nowhere, nearlythe anti-capitalist firebrand
that Roosevelt became toward theend of the 1930s.
The Republicans surprisinglytook control of both houses of
Congress in the November 1946elections, and Republicans, of
course, were morebusiness-friendly than the
Democrats were.
(10:13):
Those developments returnedcalm to the economy, and so
investors came off the sidelinesand began investing again.
Speaker 1 (10:20):
Now, one thing you didn't mention, which may be
part of the story theSmoot-Hawley tariff under Hoover
.
Speaker 2 (10:25):
In June of 1930, it was just a calamitous trade
tariff act.
It made things worse.
No serious economist believesthat Smoot-Hawley tariff caused
the depression.
But it did worsen thedepression for a variety of
reasons, not least because itcaused our trading partners to
retaliate against us.
But it wasn't the cause.
But again, it did make thingsworse.
Speaker 1 (10:47):
One of the things, as I recall from Murray Rothbard's
book America's Great Depression, that Hoover did that was
counterproductive is bringingbusiness leaders to the White
House and pressuring them tokeep wages up at a time when in
order to keep employment widerspread, you needed to lower
wages.
Speaker 2 (11:04):
It was a fabulous fallacy that Hoover believed in,
and so this is an example ofinterpreting the real world
through a bad set of theoreticallenses.
Hoover knew that there was ahigh correlation between
prosperity and high wages.
Hoover believed that high wagescaused the high prosperity.
In fact, it was high prosperitythat caused the high wages.
Hoover was putting the cartbefore the horse.
(11:26):
Well, okay, let's just pushwages up through government
diktat.
And of course that didn't work.
That made things worse,unfortunately.
Franklin Roosevelt had prettymuch the same idea.
If you have to identify thesingle most calamitous of
Roosevelt's policies, it'sprobably the NRA, the National
Recovery Act, which was finallydeclared unconstitutional in
1935.
But the whole idea behind theNRA was to allow American
(11:50):
producers to cartelize in orderto raise prices at least.
High prices, allegedly, weregoing to bring recovery, because
everyone knows when an economyis doing well, prices are buoyed
, they're kept high.
But again, this is an exampleof putting the cart before the
horse.
They had the causality allwrong, and so by restricting
output, which is what cartels doduring a depression, that's the
(12:12):
worst thing you can do.
People in the depression wereliterally going hungry, and then
the government is slaughteringpigs and telling farmers not to
grow, it was just completelycounterproductive.
Speaker 1 (12:24):
Well, you also tackled the question of income
inequality and I know SenatorPhil Graham has co-authored a
book just a few years ago onthat subject as well.
The myth of American inequalityyeah, and there's a lot of bad
information out there aboutincome inequality.
You quote in there, I think,three Nobel Prize winning
economists who expressed deepconcern about American equality
(12:45):
and think it's undermining oureconomic system and our country.
But you tell a different story.
Could you summarize that topicfor us, and especially how
Census Bureau and other officialstatistics misrepresent that
subject?
Speaker 2 (12:57):
The conventional measures today of income
inequality are of pre-tax,pre-transfer incomes, and so if
you look at what people makebefore they pay taxes and you
look at what people take homebefore they receive government
transfers, then you get hugemeasures of inequality.
(13:18):
But that's illegitimate.
In order to measure how theeconomy is doing, you have to
take account of the existinggovernment policies which affect
economic activity.
When you do that, when you lookat post-tax income, so you
don't look at the income thatsome hedge fund manager makes
before he or she pays taxes.
You look at the income thatperson takes home after.
(13:38):
You don't look just at themarket income they earn.
They're receiving a great dealof government transfer, a great
deal of government income fromthe income taken from the richer
people, higher income earners.
When you do that, the measuredincome inequality, the
differences in income, falldramatically.
They're still there, butthey're nowhere nearly as high
as are reported in themainstream media, as reported by
(14:01):
the economist Thomas Piketty inat these pre-tax and
pre-transfer numbers.
But those are just not theright numbers to look at.
You have to look at thepost-tax, post-transfer numbers
(14:22):
and they tell a completelydifferent story.
Speaker 1 (14:24):
Moving on to the issue of trade, which is a sweet
spot of yours.
There's probably no one in thiscountry perhaps internationally
as well who writes more aboutfree trade than you.
You've been a big defender ofthe freedom to exchange, and
particularly internationally,across borders.
Yet this has been a very bumpyyear since President Trump was
inaugurated.
Not that we didn't have a lotof protectionism before that,
(14:47):
but we've heard lots of reasonswhy the president wants tariffs.
You hear contradictory reasons,you know to raise revenue, to
bring back manufacturing jobs,to negotiate with other
countries to lower theirbarriers.
What about the idea of using itas a weapon to try to get other
countries to lower theirbarriers?
Do you think that'll work?
Speaker 2 (15:07):
Look, in principle, it would be good if other
countries lower their tradebarriers.
The main beneficiaries of that,however, would be citizens of
other countries.
Now we would benefit too.
Our manufacturers would, to theextent that they get to export
more, but economically it's abit questionable to make us
poorer by imposing restrictionson how we can spend our money in
order to get other countries totreat their citizens better.
(15:30):
It's ironic that PresidentTrump, who truly believes, I
believe that he's puttingAmerica first when he bargains
with these other countries.
Basically what he's saying tothese other governments look,
I'm going to impoverish mypeople, I'm going to make my
fellow Americans poorer untiland unless you make your
citizens richer.
And so he's putting Canadafirst, he's putting China first,
(15:51):
he's putting Paraguay first, sohe doesn't understand the very
basics of trade, which is a veryfrustrating fact.
Speaker 1 (15:59):
Well, what about this myth that our manufacturing
sector has been decimated bytrade and hollowed out?
Speaker 2 (16:06):
Hollowed out.
It's simply untrue.
There is no data, no credibledata.
There are a lot of claims butno data to suggest that American
manufacturing has been hollowedout, that our industrial base
has been hollowed out, that wedon't make things anymore it's
simply untrue.
The data on the size ofAmerica's industrial capacity,
which is basically our capacityto physically make things, that
(16:30):
industrial capacity is today atits all-time high.
We have data on it, very gooddata on it, going back to just
after World War II.
It has increased steadily, goesup and down a bit, but the
trend line has been upward Again.
Today it's at its all-time high.
So people who make these claimsthat we don't make things
anymore, our industrial base hasbeen hollowed out, they just
don't know what they're talkingabout.
(16:50):
These claims are repeated,roger, so frequently they are
taken as being true.
Everybody says it must be true.
It's not complicated to look atdata on these matters and
discover that they're not true,but because they're repeated so
frequently, everyone assumeswell, it must be the case Is
that because people confusemanufacturing capacity,
(17:11):
manufacturing output, withemployment.
Speaker 1 (17:13):
Yes, in manufacturing , I think that's one reason.
I think that's one reason Ithink that's one reason which
has gone down so manufacturingemployment as a share of total
employment, which is the propermeasure.
Speaker 2 (17:23):
It peaked during World War II, but that's a
special case.
If you look at peacetime, wehave good data going back to the
late 1930s.
Manufacturing employment as ashare of total employment
started to decrease verysteadily in 1954, and it has
decreased steadily ever since.
In fact, if anything, it'sslowed somewhat since China
joined the WTO.
(17:43):
It's still decreasing.
In the mid-1970s, which is thetime that most people regard as
the end of the golden era ofAmerican manufacturing, about
25% of American jobs were in themanufacturing sector
manufacturing.
About 25% of American jobs werein the manufacturing sector.
Today it's less than 8%.
But that decline didn't startwith anything that happened in
the mid-1970s.
It had been going on for 20years prior to that.
(18:04):
It didn't start when NAFTA wasenacted in 1994.
It didn't start when Chinajoined the WTO in 2001.
It has been falling steadilyever since.
You're right.
People think well, we havefewer people working in
manufacturing, so that must meanwe don't make things anymore.
The same thing, though, ishappening in manufacturing now
is what happened to agriculturea century earlier.
We still produce a lot ofagricultural output, but
(18:27):
productivity improvements haveallowed fewer and fewer workers
to produce more and more output.
That happened in agriculture acentury earlier.
It's happening in manufacturingnow.
Speaker 1 (18:37):
And we've shifted over to jobs in services, but
also in high-tech jobs.
Speaker 2 (18:41):
Service sector, on average, pays more than the
manufacturing sector.
I have a trivia question I liketo ask my audiences and
students.
So if you divide the Americaneconomy, which is typical, into
three different sectors service,mining and manufacturing, and
agriculture into three differentsectors service, mining and
manufacturing, and agriculturewhat year did the service sector
become the biggest part of theAmerican economy?
And most people will say, oh,1995, 1975.
(19:04):
It was 1911.
1911.
1911.
We have been a service sectoreconomy for literally the
lifetime of anyone who'slistening to this podcast.
I have two grandparents whoweren't yet born.
Speaker 1 (19:16):
I don't think we have anyone over 110 listening.
Speaker 2 (19:19):
So yeah, literally yeah and so we are a service
sector economy and today about80% of American GDP comes from
the service sector, which iswhat we're in, which is what
we're in College, professors,nonprofit, yeah, all sorts.
My father worked in amanufacturing job.
(19:39):
He was a pipe fitter in ashipyard for most of his career.
He retired.
He was operating a crane inthat shipyard when he retired in
2001.
And if I had told my dad when Iwas 20 years old, I said, dad,
you know, I'm told that themanufacturing sector is the
place to be.
I'm going to quit college and Iwant to get a job in the
shipyard with you.
My dad would have knocked measide my head.
He thought I was mad.
(20:01):
I said what are you talkingabout, boy?
You don't want to be in themanufacturing sector and we
don't.
There are a lot of news reportsout now and I find them to be
quite credible thatmanufacturing firms in the US
are finding it increasinglydifficult to find workers to
work in those jobs.
Most people want to be in theservice sector.
Speaker 1 (20:20):
Well, one other angle to the free trade argument is
this whole idea of the balanceof payments and the trade
deficit that we're running withthe rest of the world.
And how do we address that?
I mean people who just can'tunderstand that the national
debt, the annual budget deficit,the federal government runs
that is bad, that is bad.
(20:40):
But the trade imbalance issomething totally different.
Speaker 2 (20:44):
I don't believe there is a single concept in all of
economics that causes morepolicy mischief than the trade
deficit.
People don't know what it is,and so when they hear the term
deficit, which does sound bad,they say well, America has been
running a trade deficit, whichwe have an annual trade deficit
every year since 1976.
That's the year I graduatedfrom high school, by the way,
and so all of my adult lifethat's been accumulating since
(21:04):
1976.
So there's so many myths thatsurrounds it we don't have time
to cover them all.
But so let me just say thisthat when any country runs a
trade deficit, but certainlywhen the United States runs a
trade deficit, what it meansspecifically is that during that
period, say that year, thatmeans we have imported more
goods than we exported.
Measured in money, that isexactly offset by what's called
a capital account surplus.
(21:24):
America runs trade deficitsbecause foreigners are
especially eager to invest inour economy.
Why we should be upset byforeigners' eagerness to invest
in America has always beenbeyond me.
The reason we run a tradedeficit is because in order to
invest in America, you needdollars.
Well, if you spend all yourdollars buying American exports,
(21:46):
the foreigner doesn't have anyWanting to invest in America has
to reserve some of thosedollars by not buying American
exports in order to have thedollars remaining to buy stock
in the New York Stock Exchange,to set up a new firm in Greer,
south Carolina.
And so when we run tradedeficits, that means capital is
(22:07):
moving into our country.
That is both a sign that, atleast compared to other
countries, the American economycontinues to be attractive to
global investors, and thoseinvestments themselves
strengthen the American economy.
Evidence for this shows up inthe data.
But because people do notunderstand what trade deficits
mean, they sound bad.
They are very easy forprotectionists to demagogue and
(22:29):
say well, we're running a tradedeficit and so that means we
have to interfere with yourfreedom to trade, and it's
simply false.
Speaker 1 (22:36):
As you've pointed out , we all, on an individual level
, run trade deficits and tradesurpluses, depending on with
whom we deal.
We run a trade deficit with ourgrocery store, our barber.
Speaker 2 (22:46):
We run a surplus with our employer, who pays us Just
last week, I finally read theexecutive order that President
Trump issued on April 2nd theLiberation Day tariffs.
In order for those tariffs tohave legal standing, the
president has to declare anational emergency under the
statute that he used to declarethe tariffs.
The national emergency that hedeclared is not just that
(23:08):
America has run trade deficitsfor 50 years now.
It's that America is runninggoods trade deficits, so he's
ignoring services, which is 80%of our economy Goods trade
deficits with individualcountries.
Neither of those concepts atrade deficit with an individual
country or a goods tradedeficit has any economic meaning
(23:30):
whatsoever.
But it's that concept, thisfallacious, bollocked up concept
, that President Trump presentedto the American people as a
reason to interfere with ourfreedom to trade.
In a world of more than twoeconomic entities, there's no
reason to expect any pair ofthem to have balanced trade with
each other.
It could happen, but it wouldbe weird if it did.
(23:53):
And so we have a world now ofabout 200 countries, and so it's
completely normal for there tobe bilateral trade deficits with
any number of those countries.
It's not an emergency, it's nota problem.
It means nothing.
Speaker 1 (24:07):
You've pointed out that what really matters in
terms of economic prosperity isthe human mind and human
creativity.
It's not the resources acountry has necessarily.
It's how the institutions andthe individuals in those
countries and how they utilizetheir creativity to increase
value.
And it's interesting thatcountries like Singapore,
(24:27):
traditionally Hong Kong, theNetherlands, UK all relatively
small countries that have hadgreat prosperity, small
countries that have had greatprosperity, and then you had
large countries like China andIndia that have been relatively
poor for centuries untilrecently, where India and China
have emerged through adoptingmore free market policies.
It seems like if you lookaround the world, you see such
(24:48):
evidence of what makes senseeconomically, the policies that
work.
Countries committed to freetrade have prospered and these
protectionist, isolatedcountries have suffered.
The evidence is overwhelming.
Speaker 2 (25:00):
We have various measures of economic freedom.
Freedom to trade is part ofthat, not the only aspect.
The more free are the people ofa country to engage in economic
activity, the wealthier theyare, the higher their standard
of living, the faster their paceof economic growth.
The evidence is clear,overwhelming, irrefutable in my
view, and the examples you giveare very good.
(25:21):
Milton Friedman famously in his1980 PBS show Free to Choose.
He had many scenes set in HongKong.
Now Hong Kong has virtually nonatural resources.
I think it has feldspar, anduntil the recent troubles of the
past 10 or so years withPresident Xi, hong Kong had
become one of the richest placeson earth.
Why?
Because all value is created bythe human mind, human ingenuity
(25:58):
to figure out how to transformthe molecules and atoms that are
mashed together by nature intothings that are of use to human
beings.
I always imagine NativeAmericans wandering the Western
Pennsylvania forests a thousandyears ago, bending down to get a
drink from a creek, and thatblack, viscous stuff bubbling up
wasn't a resource to them, itwas a nuisance.
(26:19):
It was made a resource becausehuman creativity figured out how
to tap into it and extractvaluable outputs from it.
People do that when they arefree, when they can profit from
doing so and when theirentrepreneurial experiments are
tested in the market against theentrepreneurial experiments of
other peoples.
And that's what made Americarich.
That's what will continue tomake America rich as long as we
(26:42):
remain an economically freecountry.
Speaker 1 (26:44):
Well, don, you've been teaching at TFAS summer
programs for many years, since2010.
You've had 15 years worth ofstudents coming through your
classroom there, and you teachalso a lot of students at George
Mason University.
You're passionate as a teacher.
What drives you?
What inspires you when youteach?
Speaker 2 (27:00):
I think everyone probably has a similar feeling
that they're put on this globeto do something.
I feel if I were put on thisglobe to do something, it's to
teach basic economics.
I never tire of doing it.
So most of my studentsincluding the ones at TFAS
they're very young people.
They're undergraduates, 18, 19,20-year-olds, and most of them
have never had an exposure toeconomics.
(27:22):
The few that have had anexposure to economics, it was an
unfortunate one.
They had bad economics teachers.
It's fun to see the lights goon in these students' eyes.
Economics isn't complicated.
Its stories are very engaging.
You can tell these stories tothese students and you can see
them for the first time realizeoh yeah, petroleum is not a
(27:45):
natural resource.
It was made a resource by humancreativity.
Oh yeah, if the governmentforces prices down, not allowing
them to rise to their marketclearing levels, that's going to
create shortages and actuallymake the people who are supposed
to be made better off worse off.
You tell these stories.
I'm doing my tiny, tiny part,as is TFAS, to make the world
(28:07):
more economically literate,which will hopefully result in
better public policies down theroad.
Speaker 1 (28:13):
I did a panel at Association of Private
Enterprise session once, if not10 years ago maybe with Dwight
Lee and it focused on the ideaof the way economics is taught,
particularly Economics 101.
As Dwight would say, it's oftentaught as if it's the first
course a student's going to takeon his way to get a PhD,
instead of being taught likeit's the only course they'll
(28:34):
ever get on economics.
That's why I love youreconomics for the citizen course
that we offer, because we needto capture these students and my
feeling is like I had threedaughters, you know, and they
went to college and one took asociology course her first year
and fell in love with sociology.
The other took a psychologycourse, fell in love with
psychology, and I think we needto be doing that with economics
(28:56):
teaching it.
So these kids get excited abouteconomics and it's not all
about graphs and curves that aretheoretical, but about the way
people make decisions and applythe economic way and the
thinking in everyday lifedecisions and apply the economic
way and the thinking ineveryday life.
Speaker 2 (29:12):
On many occasions, some students in the TFAS class
have come up to me because a lotof them have had economics
courses in their homeuniversities, and it's not
unusual for more than onestudent a semester to come up to
me and say you know, this iscompletely different from the
economics that I learned at, youknow, I don't know, ohio State
or wherever.
First of all, I do teach it asif it's the only course they're
going to take, but I don't lardit down with math and formulas.
(29:33):
Economics is not about whateconomists do.
Economics is not about whatappears in economics books.
Economics is about the worldthe economy out there.
And so I try to teach economics,as I think all good economics
teachers do.
I try to teach economics as away to open students' eyes, to
let them see things that theywould otherwise be blind to, and
(29:55):
so just having these few basicconcepts in mind helps keep
their eyes open, and my conceitis that, at least for many of
them, they'll go through therest of their lives seeing
things about the real world thatthey would have otherwise
remained blind to, despite thefact that many of them have had
an economics course that wasloaded down with math and dry
formulas.
Speaker 1 (30:16):
Well, this has been great.
I hope that people will sharethis, particularly with young
people out there who can get aflavor for the way you teach and
economics, but also of yourbook, the Triumph of Economic
Freedom.
It's a great book to buy youngpeople, I think, to read about
myths about times in history, inAmerican history, that
unfortunately, in many schoolsare being taught by people who
are not economics professors orhave very little economics.
(30:38):
They teach the history of theGreat Depression, of the
Industrial Revolution, and it'sjust to the rote popular history
which is wrong.
Speaker 2 (30:45):
And let me just quickly add about the book.
You know a lot of people mightthink well, you know, phil
Graham's a famous politician.
This is not a political book atall.
It's not a partisan bookwhatsoever.
Phil Graham is a veryaccomplished professional
economist.
This is the book written by twoprofessional economists and our
goal was indeed to make itaccessible to a lay audience.
(31:05):
It's not written for our felloweconomists, but it's not a
political tract whatsoever.
Speaker 1 (31:10):
And you present the myths so that people can read
the traditional accounts of manyof these things, that then you
present the evidence that showswhy those are myths.
Speaker 2 (31:19):
Each chapter begins with several pages just
documenting the myths quotations, citations to the quotations so
that people can check out, tomake sure that we didn't
misquote someone or quotesomeone out of context.
Speaker 1 (31:30):
Well.
I highly recommend it.
Thank you, don.
Thank you for all you've donefor TFAS and thanks for being my
guest today, thank you.
Thank you for listening to theLiberty and Leadership Podcast.
If you have a comment orquestion, please drop us an
email at podcast at tfasorg, andbe sure to subscribe to the
show on your favorite podcastapp and leave a five-star review
(31:53):
.
Liberty and Leadership isproduced at Podville Media.
I'm your host, roger Ream, anduntil next time, show courage in
things, large and small.
Welcome to the Liberty and Leadership Podcast,
a conversation with TFAS alumni,faculty and friends who are
making an impact.
Today.
I'm your host, roger Ream.
Well, my guest today on theLiberty and Leadership Podcast
is Professor Don Boudreau.
Don's a longtime friend of mineand of TFAS.
(00:23):
He's taught for us since 2010in our summer programs a course
called Economics for the Citizen.
He's also a fellow at theMercatus Center, which is
aligned with George MasonUniversity.
He's the past president of theFoundation for Economic
Education and is co-author of agreat new book called the
Triumph of Economic FreedomDebunking the Seven Great Myths
(00:45):
of American Capitalism,co-authored with Senator Phil
Graham.
It's a great book, and Don'shere today to talk about this
book and other topics ineconomics that are very timely.
My first question is how do youcome up with seven myths?
I'm sure you probably had alist that was much longer, but
you certainly picked some of themost important ones.
Speaker 2 (01:05):
The idea for the number was Phil Graham's and he
said you know, seven's a famousnumber.
It wasn't a superstitious thing, but the seven myths.
We wanted to keep the book to areadable length and I think
we've managed to do that.
The seven that we tackle areindeed important, and failure to
grasp them plays an importantrole in making public policy.
So we just chose those seven.
(01:26):
I suppose if there was alooming eighth that deserved to
be in there, we would haveincluded it, but it was Phil's
idea to have just seven.
Speaker 1 (01:34):
Well, the myths you've selected are very common
myths, and they're held not justby those who may have a more
progressive or left-leaningorientation, but even many who
are on the right side of thepolitical spectrum, who even
support capitalism, share someof these myths.
Speaker 2 (01:52):
Increasingly so.
Speaker 1 (01:53):
Yeah, I'd like to tackle them.
But first of all, why do youthink that we look back at the
same events that occurred at aparticular time in history and
we reach such differentconclusions so often?
Speaker 2 (02:03):
As we say in the introduction to the book,
everyone interprets thehistorical record and the facts
they encounter through aparticular theoretical lens.
You might not realize you havea particular theoretical lens in
your head, but you do.
How you make sense of this verycomplex reality of which we are
a part has to be filteredthrough some theory that you
have of how the world works, ourtheory, both Phil Graham and I,
(02:26):
are professional economists andso our theoretical lens is
supplied by basic economics, notelaborate economics, but just
basic common sense,straightforward, fundamental
principles of economics.
The second reason is people dohave a surprisingly wide
misunderstanding of the factualrecord.
They just don't know whathappened.
(02:48):
Just basic facts are not known.
Even worse, basic fallaciesabout the past are believed that
simply have no basis in reality.
It was the latter that wereally set out to tackle with
the book.
The fallacies that we tackleare not incredibly nuanced or
complicated ones, they arecommonplace fallacies that we
(03:11):
believe and I think we show itin the book can be debunked just
by going to the historicalrecord, and you don't have to
nuance or massage the data verymuch of the historical record at
all, just present the facts.
And our hope is that justpresenting the facts in the way
that we do will persuade peoplethat a lot of what they believe
about the past is incorrect.
Speaker 1 (03:31):
Let's look at some of these myths that you've
selected and that you discuss inthe book, the first being that
the Industrial Revolution harmedthe conditions of the working
man and made people miserable.
Much of that conveyed throughliterature, charles Dickens, and
not so much through theeconomics.
But you take on that myth, talkabout that one.
Speaker 2 (03:51):
No one doubts the Industrial Revolution was real
and that it certainly increasedoverall prosperity.
The fallacy is that theincrease in prosperity came by
the capitalists crushing theproletariat and so you had these
happy peasants.
They weren't rich by ourstandards but they were doing
okay.
They were frolicking in thecountryside and their lives were
(04:13):
clean and healthy and wholesome.
And then these factories camealong and basically sucked these
people into the bowels of thefactories and the wealth that
was created by the IndustrialRevolution was extracted from
the blood, sweat and tears ofthe peasants who worked in the
factories.
And it's simply wrong.
You can look at the change inreal wages, look at indicia of
(04:34):
living standards, lifeexpectancy, reductions in
maternal mortality, a number ofindicators of standard of living
and ordinary people during theIndustrial Revolution.
So the mid-18th century,through the mid-19th century,
their lives were improving byour standards today, those lives
were still very poor by thestandards of the alternatives.
(04:57):
What these people would havedone had there been no factory
system.
By that standard the workerswere doing pretty well.
Speaker 1 (05:04):
They voluntarily chose to work in the factories
because it was better than whatthey had as an alternative.
Speaker 2 (05:09):
One of the things you mentioned in the book.
There was this wonderful bookwritten about 10 years ago by
English historian Emma Griffin,where she found several diaries
written by ordinary workersduring that era.
The book's called Liberty'sDawn and what these diary
entries show is that theseordinary workers themselves
accounted.
You know they described theirexperience Overwhelmingly.
(05:31):
These diaries show that theseworkers understood that their
lives were being made better offby the opportunity to work in
the towns that wereindustrializing.
Speaker 1 (05:40):
Perhaps the biggest myth that you debunk in your
book is the Great Depression,and there's several myths
surrounding that.
Of course, one is what causedit?
Was it a failure of capitalismthat plunged our economy into a
depression?
And then also what ended it.
Was it New Deal policies thatcame along under FDR that
brought us out?
Or was it the World War II?
Did that end the Depression?
(06:01):
There are a lot ofinterpretations of what caused
it.
Talk about that issue as onemyth that seems to be so
ingrained in the minds ofAmericans.
Speaker 2 (06:10):
Yeah, so let's talk about what caused the Great
Depression first.
The formal recession began inAugust of 1929, so a few months
before the stock market crash.
The basic myth is that, okay,in the 1920s income inequality
grew.
We had this completelaissez-faire, free-for-all
Speculation was running wild.
The growing income inequalityby having more income in the
(06:33):
hands of rich people, and richpeople don't spend as large a
share of their incomes as dopoorer people, so consumption
was too low.
By the end of the 1920s, all ofthis caught up with the
American economy.
The stock market crashed whenthe speculative boom declined.
Herbert Hoover, of course, waspresident then.
I'm continuing with the myth,and the myth is that Herbert
(06:55):
Hoover was a do-nothingpresident.
He just sat around in the WhiteHouse being a devotee of
laissez-faire, hoping thingswould improve.
Well, of course they didn'timprove.
The worst years of theDepression were 32 and 33.
The election of 32 comes alongand of course Hoover gets booted
out, along with the Republicansin Congress.
(07:15):
And Roosevelt comes in and theDemocratic Congress comes in
with a new deal.
The myth continues that itwasn't perfect.
The new deal was a bit ofexperimentation, but eventually
the new deal helped improvethings and the final push to get
us out of the Great Depressioncame with the increased spending
during World War II.
That's the standard story.
First of all, in the 1920sthere was no increased income
inequality.
(07:35):
In fact, working classes got alarger share as shown by the
Nobel Prize-winning economistSimon Kuznets of GDP.
They had a larger share at theend of the 1920s than they had
at the beginning of the 1920s.
Spending on consumer goods wason pace.
There was no additional orextra stock market speculation.
What happened was the FederalReserve was created in 1913 to
(07:59):
be a lender of last resort, andthere were some imperfections in
the US banking system, mostlylegislatively created.
There was this downturn in theeconomy that began in the summer
of 1929.
Some banks began to fail, andthe biggest failure was the Fed.
The Fed failed to do what itwas established to do to serve
as a lender of last resort.
It allowed the money supplyfrom 1929 through early 1933 to
(08:23):
decrease by more than 30%.
This is what Milton Friedmanand Anna Schwartz called the
Great Contraction.
There is no way any industrialeconomy can survive unscathed
when the money supply is allowedto fall that far.
That's what caused the GreatDepression.
What caused the Great Depressionto last, however?
Herbert Hoover's interventionsbecause he was not in fact the
(08:46):
devotee of laissez-faire madeworse by FDR's interventions.
So we spend a lot of time inthe book talking about the work
of the economic historian RobertHiggs, who has this idea of
what he calls regime uncertainty, the interventions of Hoover
and especially of FDR.
These were unprecedented.
The investors were frightenedby the degree to which the
(09:08):
government was becoming involvedin the economy.
And when investors becomefrightened they stay on the
sidelines.
And they continued to stay onthe sidelines until the breakout
of World War II.
Roosevelt needed the businesspeople to be on board to help
fight the war effort.
So when World War II breaks out, roosevelt becomes a bit more
business-friendly.
(09:28):
He has to tone down hisanti-business stuff.
But we're now in a wartimeeconomy.
All the resources are beingdirected by the government into
the war effort and whether youthink that was great or terrible
, that means that livingstandards fell even further in
the private domestic economy.
We did not get out of theDepression by any measurable
metric until the second half ofthe 1940s, after the war.
(09:52):
After the war, in part becauseRoosevelt had died.
After the war, after the war,in part because Roosevelt had
died, truman was nowhere, nearlythe anti-capitalist firebrand
that Roosevelt became toward theend of the 1930s.
The Republicans surprisinglytook control of both houses of
Congress in the November 1946elections, and Republicans, of
course, were morebusiness-friendly than the
Democrats were.
(10:13):
Those developments returnedcalm to the economy, and so
investors came off the sidelinesand began investing again.
Speaker 1 (10:20):
Now, one thing you didn't mention, which may be
part of the story theSmoot-Hawley tariff under Hoover
.
Speaker 2 (10:25):
In June of 1930, it was just a calamitous trade
tariff act.
It made things worse.
No serious economist believesthat Smoot-Hawley tariff caused
the depression.
But it did worsen thedepression for a variety of
reasons, not least because itcaused our trading partners to
retaliate against us.
But it wasn't the cause.
But again, it did make thingsworse.
Speaker 1 (10:47):
One of the things, as I recall from Murray Rothbard's
book America's Great Depression, that Hoover did that was
counterproductive is bringingbusiness leaders to the White
House and pressuring them tokeep wages up at a time when in
order to keep employment widerspread, you needed to lower
wages.
Speaker 2 (11:04):
It was a fabulous fallacy that Hoover believed in,
and so this is an example ofinterpreting the real world
through a bad set of theoreticallenses.
Hoover knew that there was ahigh correlation between
prosperity and high wages.
Hoover believed that high wagescaused the high prosperity.
In fact, it was high prosperitythat caused the high wages.
Hoover was putting the cartbefore the horse.
(11:26):
Well, okay, let's just pushwages up through government
diktat.
And of course that didn't work.
That made things worse,unfortunately.
Franklin Roosevelt had prettymuch the same idea.
If you have to identify thesingle most calamitous of
Roosevelt's policies, it'sprobably the NRA, the National
Recovery Act, which was finallydeclared unconstitutional in
1935.
But the whole idea behind theNRA was to allow American
(11:50):
producers to cartelize in orderto raise prices at least.
High prices, allegedly, weregoing to bring recovery, because
everyone knows when an economyis doing well, prices are buoyed
, they're kept high.
But again, this is an exampleof putting the cart before the
horse.
They had the causality allwrong, and so by restricting
output, which is what cartels doduring a depression, that's the
(12:12):
worst thing you can do.
People in the depression wereliterally going hungry, and then
the government is slaughteringpigs and telling farmers not to
grow, it was just completelycounterproductive.
Speaker 1 (12:24):
Well, you also tackled the question of income
inequality and I know SenatorPhil Graham has co-authored a
book just a few years ago onthat subject as well.
The myth of American inequalityyeah, and there's a lot of bad
information out there aboutincome inequality.
You quote in there, I think,three Nobel Prize winning
economists who expressed deepconcern about American equality
(12:45):
and think it's undermining oureconomic system and our country.
But you tell a different story.
Could you summarize that topicfor us, and especially how
Census Bureau and other officialstatistics misrepresent that
subject?
Speaker 2 (12:57):
The conventional measures today of income
inequality are of pre-tax,pre-transfer incomes, and so if
you look at what people makebefore they pay taxes and you
look at what people take homebefore they receive government
transfers, then you get hugemeasures of inequality.
(13:18):
But that's illegitimate.
In order to measure how theeconomy is doing, you have to
take account of the existinggovernment policies which affect
economic activity.
When you do that, when you lookat post-tax income, so you
don't look at the income thatsome hedge fund manager makes
before he or she pays taxes.
You look at the income thatperson takes home after.
(13:38):
You don't look just at themarket income they earn.
They're receiving a great dealof government transfer, a great
deal of government income fromthe income taken from the richer
people, higher income earners.
When you do that, the measuredincome inequality, the
differences in income, falldramatically.
They're still there, butthey're nowhere nearly as high
as are reported in themainstream media, as reported by
(14:01):
the economist Thomas Piketty inat these pre-tax and
pre-transfer numbers.
But those are just not theright numbers to look at.
You have to look at thepost-tax, post-transfer numbers
(14:22):
and they tell a completelydifferent story.
Speaker 1 (14:24):
Moving on to the issue of trade, which is a sweet
spot of yours.
There's probably no one in thiscountry perhaps internationally
as well who writes more aboutfree trade than you.
You've been a big defender ofthe freedom to exchange, and
particularly internationally,across borders.
Yet this has been a very bumpyyear since President Trump was
inaugurated.
Not that we didn't have a lotof protectionism before that,
(14:47):
but we've heard lots of reasonswhy the president wants tariffs.
You hear contradictory reasons,you know to raise revenue, to
bring back manufacturing jobs,to negotiate with other
countries to lower theirbarriers.
What about the idea of using itas a weapon to try to get other
countries to lower theirbarriers?
Do you think that'll work?
Speaker 2 (15:07):
Look, in principle, it would be good if other
countries lower their tradebarriers.
The main beneficiaries of that,however, would be citizens of
other countries.
Now we would benefit too.
Our manufacturers would, to theextent that they get to export
more, but economically it's abit questionable to make us
poorer by imposing restrictionson how we can spend our money in
order to get other countries totreat their citizens better.
(15:30):
It's ironic that PresidentTrump, who truly believes, I
believe that he's puttingAmerica first when he bargains
with these other countries.
Basically what he's saying tothese other governments look,
I'm going to impoverish mypeople, I'm going to make my
fellow Americans poorer untiland unless you make your
citizens richer.
And so he's putting Canadafirst, he's putting China first,
(15:51):
he's putting Paraguay first, sohe doesn't understand the very
basics of trade, which is a veryfrustrating fact.
Speaker 1 (15:59):
Well, what about this myth that our manufacturing
sector has been decimated bytrade and hollowed out?
Speaker 2 (16:06):
Hollowed out.
It's simply untrue.
There is no data, no credibledata.
There are a lot of claims butno data to suggest that American
manufacturing has been hollowedout, that our industrial base
has been hollowed out, that wedon't make things anymore it's
simply untrue.
The data on the size ofAmerica's industrial capacity,
which is basically our capacityto physically make things, that
(16:30):
industrial capacity is today atits all-time high.
We have data on it, very gooddata on it, going back to just
after World War II.
It has increased steadily, goesup and down a bit, but the
trend line has been upward Again.
Today it's at its all-time high.
So people who make these claimsthat we don't make things
anymore, our industrial base hasbeen hollowed out, they just
don't know what they're talkingabout.
(16:50):
These claims are repeated,roger, so frequently they are
taken as being true.
Everybody says it must be true.
It's not complicated to look atdata on these matters and
discover that they're not true,but because they're repeated so
frequently, everyone assumeswell, it must be the case Is
that because people confusemanufacturing capacity,
(17:11):
manufacturing output, withemployment.
Speaker 1 (17:13):
Yes, in manufacturing , I think that's one reason.
I think that's one reason Ithink that's one reason which
has gone down so manufacturingemployment as a share of total
employment, which is the propermeasure.
Speaker 2 (17:23):
It peaked during World War II, but that's a
special case.
If you look at peacetime, wehave good data going back to the
late 1930s.
Manufacturing employment as ashare of total employment
started to decrease verysteadily in 1954, and it has
decreased steadily ever since.
In fact, if anything, it'sslowed somewhat since China
joined the WTO.
(17:43):
It's still decreasing.
In the mid-1970s, which is thetime that most people regard as
the end of the golden era ofAmerican manufacturing, about
25% of American jobs were in themanufacturing sector
manufacturing.
About 25% of American jobs werein the manufacturing sector.
Today it's less than 8%.
But that decline didn't startwith anything that happened in
the mid-1970s.
It had been going on for 20years prior to that.
(18:04):
It didn't start when NAFTA wasenacted in 1994.
It didn't start when Chinajoined the WTO in 2001.
It has been falling steadilyever since.
You're right.
People think well, we havefewer people working in
manufacturing, so that must meanwe don't make things anymore.
The same thing, though, ishappening in manufacturing now
is what happened to agriculturea century earlier.
We still produce a lot ofagricultural output, but
(18:27):
productivity improvements haveallowed fewer and fewer workers
to produce more and more output.
That happened in agriculture acentury earlier.
It's happening in manufacturingnow.
Speaker 1 (18:37):
And we've shifted over to jobs in services, but
also in high-tech jobs.
Speaker 2 (18:41):
Service sector, on average, pays more than the
manufacturing sector.
I have a trivia question I liketo ask my audiences and
students.
So if you divide the Americaneconomy, which is typical, into
three different sectors service,mining and manufacturing, and
agriculture into three differentsectors service, mining and
manufacturing, and agriculturewhat year did the service sector
become the biggest part of theAmerican economy?
And most people will say, oh,1995, 1975.
(19:04):
It was 1911.
1911.
1911.
We have been a service sectoreconomy for literally the
lifetime of anyone who'slistening to this podcast.
I have two grandparents whoweren't yet born.
Speaker 1 (19:16):
I don't think we have anyone over 110 listening.
Speaker 2 (19:19):
So yeah, literally yeah and so we are a service
sector economy and today about80% of American GDP comes from
the service sector, which iswhat we're in, which is what
we're in College, professors,nonprofit, yeah, all sorts.
My father worked in amanufacturing job.
(19:39):
He was a pipe fitter in ashipyard for most of his career.
He retired.
He was operating a crane inthat shipyard when he retired in
2001.
And if I had told my dad when Iwas 20 years old, I said, dad,
you know, I'm told that themanufacturing sector is the
place to be.
I'm going to quit college and Iwant to get a job in the
shipyard with you.
My dad would have knocked measide my head.
He thought I was mad.
(20:01):
I said what are you talkingabout, boy?
You don't want to be in themanufacturing sector and we
don't.
There are a lot of news reportsout now and I find them to be
quite credible thatmanufacturing firms in the US
are finding it increasinglydifficult to find workers to
work in those jobs.
Most people want to be in theservice sector.
Speaker 1 (20:20):
Well, one other angle to the free trade argument is
this whole idea of the balanceof payments and the trade
deficit that we're running withthe rest of the world.
And how do we address that?
I mean people who just can'tunderstand that the national
debt, the annual budget deficit,the federal government runs
that is bad, that is bad.
(20:40):
But the trade imbalance issomething totally different.
Speaker 2 (20:44):
I don't believe there is a single concept in all of
economics that causes morepolicy mischief than the trade
deficit.
People don't know what it is,and so when they hear the term
deficit, which does sound bad,they say well, America has been
running a trade deficit, whichwe have an annual trade deficit
every year since 1976.
That's the year I graduatedfrom high school, by the way,
and so all of my adult lifethat's been accumulating since
(21:04):
1976.
So there's so many myths thatsurrounds it we don't have time
to cover them all.
But so let me just say thisthat when any country runs a
trade deficit, but certainlywhen the United States runs a
trade deficit, what it meansspecifically is that during that
period, say that year, thatmeans we have imported more
goods than we exported.
Measured in money, that isexactly offset by what's called
a capital account surplus.
(21:24):
America runs trade deficitsbecause foreigners are
especially eager to invest inour economy.
Why we should be upset byforeigners' eagerness to invest
in America has always beenbeyond me.
The reason we run a tradedeficit is because in order to
invest in America, you needdollars.
Well, if you spend all yourdollars buying American exports,
(21:46):
the foreigner doesn't have anyWanting to invest in America has
to reserve some of thosedollars by not buying American
exports in order to have thedollars remaining to buy stock
in the New York Stock Exchange,to set up a new firm in Greer,
south Carolina.
And so when we run tradedeficits, that means capital is
(22:07):
moving into our country.
That is both a sign that, atleast compared to other
countries, the American economycontinues to be attractive to
global investors, and thoseinvestments themselves
strengthen the American economy.
Evidence for this shows up inthe data.
But because people do notunderstand what trade deficits
mean, they sound bad.
They are very easy forprotectionists to demagogue and
(22:29):
say well, we're running a tradedeficit and so that means we
have to interfere with yourfreedom to trade, and it's
simply false.
Speaker 1 (22:36):
As you've pointed out , we all, on an individual level
, run trade deficits and tradesurpluses, depending on with
whom we deal.
We run a trade deficit with ourgrocery store, our barber.
Speaker 2 (22:46):
We run a surplus with our employer, who pays us Just
last week, I finally read theexecutive order that President
Trump issued on April 2nd theLiberation Day tariffs.
In order for those tariffs tohave legal standing, the
president has to declare anational emergency under the
statute that he used to declarethe tariffs.
The national emergency that hedeclared is not just that
(23:08):
America has run trade deficitsfor 50 years now.
It's that America is runninggoods trade deficits, so he's
ignoring services, which is 80%of our economy Goods trade
deficits with individualcountries.
Neither of those concepts atrade deficit with an individual
country or a goods tradedeficit has any economic meaning
(23:30):
whatsoever.
But it's that concept, thisfallacious, bollocked up concept
, that President Trump presentedto the American people as a
reason to interfere with ourfreedom to trade.
In a world of more than twoeconomic entities, there's no
reason to expect any pair ofthem to have balanced trade with
each other.
It could happen, but it wouldbe weird if it did.
(23:53):
And so we have a world now ofabout 200 countries, and so it's
completely normal for there tobe bilateral trade deficits with
any number of those countries.
It's not an emergency, it's nota problem.
It means nothing.
Speaker 1 (24:07):
You've pointed out that what really matters in
terms of economic prosperity isthe human mind and human
creativity.
It's not the resources acountry has necessarily.
It's how the institutions andthe individuals in those
countries and how they utilizetheir creativity to increase
value.
And it's interesting thatcountries like Singapore,
(24:27):
traditionally Hong Kong, theNetherlands, UK all relatively
small countries that have hadgreat prosperity, small
countries that have had greatprosperity, and then you had
large countries like China andIndia that have been relatively
poor for centuries untilrecently, where India and China
have emerged through adoptingmore free market policies.
It seems like if you lookaround the world, you see such
(24:48):
evidence of what makes senseeconomically, the policies that
work.
Countries committed to freetrade have prospered and these
protectionist, isolatedcountries have suffered.
The evidence is overwhelming.
Speaker 2 (25:00):
We have various measures of economic freedom.
Freedom to trade is part ofthat, not the only aspect.
The more free are the people ofa country to engage in economic
activity, the wealthier theyare, the higher their standard
of living, the faster their paceof economic growth.
The evidence is clear,overwhelming, irrefutable in my
view, and the examples you giveare very good.
(25:21):
Milton Friedman famously in his1980 PBS show Free to Choose.
He had many scenes set in HongKong.
Now Hong Kong has virtually nonatural resources.
I think it has feldspar, anduntil the recent troubles of the
past 10 or so years withPresident Xi, hong Kong had
become one of the richest placeson earth.
Why?
Because all value is created bythe human mind, human ingenuity
(25:58):
to figure out how to transformthe molecules and atoms that are
mashed together by nature intothings that are of use to human
beings.
I always imagine NativeAmericans wandering the Western
Pennsylvania forests a thousandyears ago, bending down to get a
drink from a creek, and thatblack, viscous stuff bubbling up
wasn't a resource to them, itwas a nuisance.
(26:19):
It was made a resource becausehuman creativity figured out how
to tap into it and extractvaluable outputs from it.
People do that when they arefree, when they can profit from
doing so and when theirentrepreneurial experiments are
tested in the market against theentrepreneurial experiments of
other peoples.
And that's what made Americarich.
That's what will continue tomake America rich as long as we
(26:42):
remain an economically freecountry.
Speaker 1 (26:44):
Well, don, you've been teaching at TFAS summer
programs for many years, since2010.
You've had 15 years worth ofstudents coming through your
classroom there, and you teachalso a lot of students at George
Mason University.
You're passionate as a teacher.
What drives you?
What inspires you when youteach?
Speaker 2 (27:00):
I think everyone probably has a similar feeling
that they're put on this globeto do something.
I feel if I were put on thisglobe to do something, it's to
teach basic economics.
I never tire of doing it.
So most of my studentsincluding the ones at TFAS
they're very young people.
They're undergraduates, 18, 19,20-year-olds, and most of them
have never had an exposure toeconomics.
(27:22):
The few that have had anexposure to economics, it was an
unfortunate one.
They had bad economics teachers.
It's fun to see the lights goon in these students' eyes.
Economics isn't complicated.
Its stories are very engaging.
You can tell these stories tothese students and you can see
them for the first time realizeoh yeah, petroleum is not a
(27:45):
natural resource.
It was made a resource by humancreativity.
Oh yeah, if the governmentforces prices down, not allowing
them to rise to their marketclearing levels, that's going to
create shortages and actuallymake the people who are supposed
to be made better off worse off.
You tell these stories.
I'm doing my tiny, tiny part,as is TFAS, to make the world
(28:07):
more economically literate,which will hopefully result in
better public policies down theroad.
Speaker 1 (28:13):
I did a panel at Association of Private
Enterprise session once, if not10 years ago maybe with Dwight
Lee and it focused on the ideaof the way economics is taught,
particularly Economics 101.
As Dwight would say, it's oftentaught as if it's the first
course a student's going to takeon his way to get a PhD,
instead of being taught likeit's the only course they'll
(28:34):
ever get on economics.
That's why I love youreconomics for the citizen course
that we offer, because we needto capture these students and my
feeling is like I had threedaughters, you know, and they
went to college and one took asociology course her first year
and fell in love with sociology.
The other took a psychologycourse, fell in love with
psychology, and I think we needto be doing that with economics
(28:56):
teaching it.
So these kids get excited abouteconomics and it's not all
about graphs and curves that aretheoretical, but about the way
people make decisions and applythe economic way and the
thinking in everyday lifedecisions and apply the economic
way and the thinking ineveryday life.
Speaker 2 (29:12):
On many occasions, some students in the TFAS class
have come up to me because a lotof them have had economics
courses in their homeuniversities, and it's not
unusual for more than onestudent a semester to come up to
me and say you know, this iscompletely different from the
economics that I learned at, youknow, I don't know, ohio State
or wherever.
First of all, I do teach it asif it's the only course they're
going to take, but I don't lardit down with math and formulas.
(29:33):
Economics is not about whateconomists do.
Economics is not about whatappears in economics books.
Economics is about the worldthe economy out there.
And so I try to teach economics,as I think all good economics
teachers do.
I try to teach economics as away to open students' eyes, to
let them see things that theywould otherwise be blind to, and
(29:55):
so just having these few basicconcepts in mind helps keep
their eyes open, and my conceitis that, at least for many of
them, they'll go through therest of their lives seeing
things about the real world thatthey would have otherwise
remained blind to, despite thefact that many of them have had
an economics course that wasloaded down with math and dry
formulas.
Speaker 1 (30:16):
Well, this has been great.
I hope that people will sharethis, particularly with young
people out there who can get aflavor for the way you teach and
economics, but also of yourbook, the Triumph of Economic
Freedom.
It's a great book to buy youngpeople, I think, to read about
myths about times in history, inAmerican history, that
unfortunately, in many schoolsare being taught by people who
are not economics professors orhave very little economics.
(30:38):
They teach the history of theGreat Depression, of the
Industrial Revolution, and it'sjust to the rote popular history
which is wrong.
Speaker 2 (30:45):
And let me just quickly add about the book.
You know a lot of people mightthink well, you know, phil
Graham's a famous politician.
This is not a political book atall.
It's not a partisan bookwhatsoever.
Phil Graham is a veryaccomplished professional
economist.
This is the book written by twoprofessional economists and our
goal was indeed to make itaccessible to a lay audience.
(31:05):
It's not written for our felloweconomists, but it's not a
political tract whatsoever.
Speaker 1 (31:10):
And you present the myths so that people can read
the traditional accounts of manyof these things, that then you
present the evidence that showswhy those are myths.
Speaker 2 (31:19):
Each chapter begins with several pages just
documenting the myths quotations, citations to the quotations so
that people can check out, tomake sure that we didn't
misquote someone or quotesomeone out of context.
Speaker 1 (31:30):
Well.
I highly recommend it.
Thank you, don.
Thank you for all you've donefor TFAS and thanks for being my
guest today, thank you.
Thank you for listening to theLiberty and Leadership Podcast.
If you have a comment orquestion, please drop us an
email at podcast at tfasorg, andbe sure to subscribe to the
show on your favorite podcastapp and leave a five-star review
(31:53):
.
Liberty and Leadership isproduced at Podville Media.
I'm your host, roger Ream, anduntil next time, show courage in
things, large and small.
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