The Angry Economist

John Derbyshire tries to explain why we want unrestricted immigration in his "The Great Syllogism". I think he's mixing together pragmatic and principled arguments.

We should allow unrestricted immigration not because it will result in a more racially-balanced society, but instead because it's the right thing to do. Unrestricted immigration is right because free trade is right. No one should have the right to restrict my trading, or my movement.

If anyone tells you that there should be any restrictions on immigration, ask them why their argument doesn't apply to, say, New Jersey. If we should have the right to keep people from Russia out, why shouldn't we have the right to keep New Jerseyans out? Our country has been very successful by allowing unrestricted immigration between states.

Now to be specific about John's arguments. In his point #2, he says that we have developed an equally strong desire for racial equality. Perhaps we have, and perhaps any kind of successful action will have to take that into account. We should also be clear that the first and second part of #2 contradict each other. Maybe he's right, but if he is, then we have to give up one or the other parts of #2. He makes this point in #7.

John says in #3, "Our very best efforts at creating a meritocratic education". Get real, John. The vast number of K-12 students in America spend their day in the gulag. Stuck there, doing pointless activities, told what to wear, where to go, when to go, and expected to learn? This is not "our very best effort". Our school system is the very model of modern socialism. It is pitiful, and produces pitiful results, as John notices.

John gets to the meat of the problem with immigration: "10) Therefore the manual class is seriously under-staffed." Ironically, the people most likely to be against unrestricted immigration are those who have most recently come here. Expanding the labor pool will reduce the need to pay them more.

There seems to be huge amounts of angst over the way the FCC has been allowing higher levels of media concentration. I'm not even going to begin to link to everybody who's bemoaning it. If you notice, economists are remaining silent on the issue. I'm gonna explain why.

I will go out on an economical limb and say that a corporation never makes a "profit". Everything that comes into a company is owed to someone. Perhaps it's not paid out immediately, but no matter, an identifiable individual owns every bit of money. Employees get their salaries, salesmen get their commissions, suppliers get their accounts payables, banks get their interest, founders get their entrepreneurial income.

Now, this last bit is the part that is often called "profit". It comes from the creation of something new -- from the solution of a sore-felt problem. Unfortunately, consumers are fickle. Just because a company was the first to solve a problem, that doesn't mean that consumers will stick with that company. Consumers have a tendency, in a free market economy, to pursue identical solutions for less money, or a better solution for the same money. This destroys entrepreneurial income, or in more conventional economic terms, competes away all profits. But that's okay! Without anybody designing it to work that way, it forces entrepreneurs to keep inventing.

Even small improvements to reduce cost or gain income, in their own way, generate entrepreneurial income. Over time, though, there are less and less improvements possible for the same thing. Once a thing has gotten to that point, it is called a commodity. Competition to provide commodities is fierce. Entrepreneurial profits can be had through very small improvements, such as making a receipt 1/2" shorter, so that 10% can be saved on a $100,000 bill for receipt printer paper. If you have 238 stores, you might buy that much receipt paper.

In the media market, we are awash in a stream of communications. You can get your news via TV, radio, newspaper, website, and even your cellphone. Does anybody remember pagers? A pager was like a cellphone, only you couldn't talk on it, and you couldn't even send messages out from one. You used to be able to get news through your pager, too.

It's fair to say that communications has become a commodity market. One of the things about a commodity market is that there is an intense push to cut costs. That's why people who work in supermarkets usually earn only the minimum wage. The owner can't afford to pay his workers any more. People are usually the largest cost of any enterprise. A typical medium-sized university will burn through a million dollars a week just on salaries.

A media company like a radio, or TV, has a high personnel cost. Takes a lot of people to man a station 24x7, or even 18x7. For the most part, these people are doing the same thing from one station to another to another. Given the commodity nature of communications, there is going to be intense pressure to cut these costs. A media company that can do that will make a lot of entrepreneurial profits.

In steps the FCC, though. They say "No, you can't own more than X% of the media in a given area." They're concerned about monopolistic control over a market. Their concern is mostly misplaced. Yes, there are a limited number of frequencies which may be used in a single area. However, there is still competition between the companies that own these frequencies. Even if a company was to purchase all the frequency licenses in a given area, they are still subject to competition from other media. There's satellite radio, or Internet radio, or websites, or newspapers, or nothing (one can always hit the off button and prefer silence). In the end, a media company has to produce something worth the attention, even if they own all the TV, radio, and newspapers in a given market.

I think that the real concern is not so much about monopolies, but is instead directed at preserving the jobs of people working in media outlets. They realize that, like the followers of Ned Ludd, commodification of the custom goods they are used to making is threatening their jobs. This commodification helps everyone by making higher quality goods available at a lower price. Rather than accepting that which is best for everyone, they are arguing for special protection under the law.

Special protection is responsible for 90% of the economic nonsense that you see. Decry it whenever you see it, because it's money out of your pocket.

When a government licenses an occupation, they are censuring everyone else. If you're a recurring reader of the Angry Economist, you'll know that economics and politics are frequently at loggerheads with each other. Yet again, this is the case.

New York City's Department of Consumer Affairs is saving us from ever having a bad tour (that would be sarcasm, y'see) by licensing tour guide. Just think about what this means. What if you were to drive around Manhattan and tell people about all the cool things you know about? In and of itself, that wouldn't be illegal. However, try to accept money from people in return for this favor, and you'll be in hot water! You'll be violating the law that says that tour guides must be licensed.

Can you think of anything more ridiculous? What would happen if someone got a tour from an unlicensed tour guide? What would happen if a Greyhound bus driver started talking about what he sees? Yes, nonviolent speech can violate a law, even in a country with a Bill of Rights.

Why has this obviously unconstitutional law been allowed to stand? Why is the right to free speech being infringed? I have no idea. The most likely answer is that the people who cannot pass the hurdle to become a tour guide do not have the resources to challenge the law.

The economic effect of licensure in general is to insert an artificial barrier to competition. Any time you reduce competition, you make the market work more poorly. You create conditions similar to that of a monopoly or a cartel. Everyone who is currently licensed has an interest in keeping anyone else from getting a license. Just as unions don't want too many union members, so, too, do members of a licensed occupation want too many people to get the license. Hence, you see New York City's making the test harder.

Conversely, any time an occupation becomes unlicensed where it had been licensed (can anybody think of this happening?[1]), or the license restrictions are reduced, this allows more people to enter the occupation, and depresses wages. But oh! Depressing wages is bad, right? No. Depressing wages by eliminating interference in the market actually makes your society better-off. Many more people are made a little bit happier than the few who are made sadder. Unfortunately, the few who are made sadder are easily identified, whereas the people made a little bit happier are hard to find. Even if you could, they would probably have nothing to say about their benefit. And yet, the benefit is real even if it's hard to measure and politically hard to carry out.

That, in a nutshell, is the difficulty of a democratic society. The democracy is subject to the concentrated interest of all its citizens. Its tendency is to favor (at the same time!) group A over group B, and group B over group A. On the whole, both these favors make A and B worse off. However, the politician who recognizes this and tries to do something about it will incur the wrath of both A and B.

What do do about it? Well, help people to understand these types of issues. So many people think that economics is obvious because they can go to the store, buy something, and make change. It's not. Economics is subtle. Economics can be used to point to fallacies like rent control or minimum-wage laws. I'll write about both these topics in time. Right now, you can help by linking to the Angry Economist, and mentioning it in polite company when an economics issue comes up.

[1] update: Charles relates this example: for years, in the province of Saskatchewan, you had to have a Chauffeur's License to operate certain kinds of vehicles, including two- and three-axle flatbed haulers used to haul cars. Made no sense, but that was it. They took away that restriction; you can now get (say) a garden shed hauled away by a hundred different operators for thirty bucks where you might not have been able to have it done for a hundred before. The competition is /intense/ now; every tow-truck company has flatbed haulers and will happily haul anything they can drag onto them with a winch. I had a kid's playhouse hauled away last year this way.

How do you make decisions about things when resources are limited? Well, quite clearly you do a cost versus benefit comparison. You decide which thing gives you the most benefit for the least cost. It's not necessarily just dividing and taking the largest number. Sometimes something will cost a very large amount (that you can't afford) and give you a larger unit of benefit per unit of cost than something which costs less that you can afford.

How do you compare the costs of two things? It may seem obvious but the most straightforward method is to compare the prices of them. That doesn't necessarily reflect reality for you, but it comes close. Now, how do you compare the cost of two things which are priceless? It's much, much harder. We normally call something "priceless" when we really mean that there is no price for which we would trade the thing away. Another way people use "priceless" is to mean something whose price is infinite. But that's just another way of saything the same thing.

What you've just done is called "economic calculation". You're using market prices to compare two otherwise incomparable things. Let's say, though, that you're working for a government. You're supposed to purchase some land, to protect it from development. Which land do you purchase, though? Again, you make a cost vs benefit comparison, and you purchase the land which gives you the most benefit.

Now comes the problem. What if the things you're comparing have no prices? If they're literally priceless? Let's say that you're charged with protecting the environment in Massena, NY. Do you dredge the St. Lawrence river to remove PCBs? Or do remediate the soil in the Andrews St. park which is contaminated with oil (actually, I'm just making this one up)? The government already owns the river, and already owns the park. How can it possibly determine the value of the river and compare it to the value of the park, if both are priceless? Nobody is considering selling off the park, nor the river. Both are literally priceless.

Governments cannot make wise economic decisions because they have no basis for comparison. They can ask the voters to create fake prices by polling them, or by asking for a vote. However, people will say one thing, but when they have to expend their own resources, they'll do something else. People will say, not what is best for society, but what is best for them. That's not a prescription for making wise decisions.