Thursday, April 24, 2008

Economic Assumptions

In response to our World Net Daily article Anthony e-mailed the following question.

Sir, I realize that you're probably swamped, but I have a question: I constantly hear Dr. Walter Williams saying the exact opposite of what you do, and yet, when I read your points, I agree with them.

Are you familiar with Dr. Williams, and if so, how do we reconcile the fact that the two of you are both Professors of Economics, and yet have diametrically opposing views???

In other words, I guess, who's right and who's wrong??


I have a great deal of respect for Dr. Walter Williams. On most issues, we would be in agreement. We believe that the free enterprise system is the best of all possible economic systems. It has proven to be the most productive raising living standards for all of its participants, the most efficient, the most creative and innovative, the fairest, and the only one consistent with democratic freedom.

We differ on trade and taxes, evidently. I believe I can convince him that I am right on both. The doctrine of free trade is ideology not economic science. It works when all the participants are free traders and play according to the same rules. Free trade works in the USA because the Constitution forbids states from interfering with the free flow of goods across state lines, we have a single monetary standard, and capital and labor are free to move freely.

Our differences on trade are that I believe that trade is always beneficial when it is balanced. Most economists believe that trade balance is the rule and that free market forces automatically correct large chronic trade imbalances such as we have been experiencing. Market forces have not corrected the trade deficits and in our book, we explain why. Nations pursue policies that perpetuate trade surpluses. For decades Japan's economic ministry imposed trade barriers, subsidized exporters, and controlled the value of its currency to increase and perpetuate its trade surplus. American economists turned a blind eye even though the rules of trade authorized us to take counter measures. It became taboo for any economist to impose any barrier to trade even though other countries were imposing barriers to our exports.

Another difference is our views on taxation. Nearly all economists, including Dr. Williams believe in the Haig-Simons definition of income that income equals consumption plus capital accumulation, including capital gains and losses. I disagree. Income equals consumption plus savings. Rises and falls in the value of capital --stocks, bonds, real estate -- are not income. The only exception is capital gains that are consumed which should be taxed as ordinary income.

All of this is spelled out in our book, Trading Away Our Future. For more, see our website, Thanks for taking the time to ask your excellent question.

Raymond Richman.

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