Thu, 16 Oct 2003

The War on Drugs

An economist would be irresponsible not to decry the war on drugs. There are a number of economic problems with the war on drugs. I'll go through them paragraph by paragraph.

Economists have known for some time that it's very difficult to stop willing buyers from buying from willing sellers. Whenever you try to do this, you end up with a black market. The trouble with a black market is that they are not efficient. Competition is reduced. Transaction costs increase. Advertising is impossible (one might as reasonably put the handcuffs on oneself).

We are told that illegal drugs are addictive, so that there are no drug users, only drug addicts. If this is true, then the demand for drugs will not be sensitive to price. We are also told that one of the reasons to make drug possession and use illegal is to drive up the price to discourage people from using drugs. Well duh, this conflicts with the very principle of price insensitivity. Either people are addicted and will pay whatever is necessary, or else people will reduce their drug use in the face of higher prices. Somebody's lying to us about drugs.

Prosecuting drug distribution causes the job to have two sources of profit: buying drugs at wholesale prices and selling them at retail prices (same as any other business), and accepting a business risk. The risk, of course, is that one's business will be destroyed by the county prosecutor. People have to be compensated for taking a risk, otherwise they won't take the risk. As a consequence, being a drug dealer is quite a profitable business. When a county prosecutor destroys one drug business, those profits seek other vendors. Jailing a drug dealer doesn't reduce the supply of drugs -- it just creates a job opening.

The courts will use the violence of the state to enforce private property rights. It's illegal to steal, rob, or burgle. If someone commits such a crime against you, you can go to the court and seek recourse. There are also civil offenses. If you have a contract with someone to supply a service, and they break that contract, you can sue them in the public courts. This only works for legal goods. Obviously, if you're selling something which is illegal, the courts will not enforce the law.

Fortunately, the violence of the state is used many more times in theory than in practice. Not so for drug dealers. Because they cannot use the proxy violence of the state to enforce their property rights, they must use actual violence. If they make an agreement with a drug wholesaler, and that agreement is broken, they have no choice but to use their guns to decide the issue.

Illegal drug use is what is called a "victimless crime". That doesn't mean that people are not victimized; merely that they do so to themselves. Society has no specific source of income to address victimless crimes. The victim has no incentive to pay to stop themselves because they chose that harm. Therefore, stopping victimless crimes must be paid for by a tax on the general public. If, on the other hand, drugs were legal, they could be taxed, and those taxes used to pay for those people who were truly addicted and needed help to stop.

For all these reasons, and others, economists won't like the war on drugs.

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Sun, 12 Oct 2003

Anti ad-hominem

Arnold Kling writes An Open Letter to Paul Krugman. Definitely worth reading. He points out that there are two types of argumentation: against the argument, and against the man. He calls them type C (for consequences) and type M (for motivations). He takes Paul Krugman to task for making too many type M arguments. This isn't a new observation. The Latin term "ad-hominem" means: against the man. An honest argumentor (ispell and google insist that it's not a word; if it wasn't before, it is now) will avoid ad-hominem argumentation. Who says something, or why they say it, has nothing to do with the correctness of that said.

His last two paragraphs are especially near and dear to my heart. 50% of what is wrong with economics is not the results of economics, but instead how we *present* the results of economics. When we use type M arguments we give people the idea that economics is not a science; it's just the opinions of people who call themselves economists; that being an economist is just a matter of having studied all the previous opinions; and that therefore nobody's opinions about economics can be wrong (not "are wrong" but "can be wrong") because they're all just opinions.

I knew I didn't like Paul Krugman. Now I know why.

Addendum: I heard Paul being interviewed on by Scott Simon. He used mostly type C arguments until the end where he used a type M argument ("crony capitalism").

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Sat, 11 Oct 2003

Tax cuts for the wealthy

Numerous people are decrying tax cuts for the wealthy. Google points to many of them. They are misled, or seek to mislead, for one primary reason: the wealthy are more likely to invest the money. They would have the tax cuts be uneven: weighted towards the middle-class. The thought is that middle-class people will spend the money immediately. This will result in more economic activity and more jobs. Simple, right? No, simple, wrong. It's not that obvious.

Why do people spend, or not spend money? Simply enough, because they prefer money to the goods that money would buy. Money is just another good, and a person can have a desire for money itself beyond what they can trade for it. Why can this be? Because money is the "universal good" which can be traded for all other goods. A primary reason for preferring money to goods is because of uncertainty over which good to buy. If you're not sure what you'll need money for in the future, you won't spend your money now. The middle-class doesn't automatically spend every dollar it gets its hand on. One thing you can count on is that the people have a better handle on their own interests than the pundits do.

The assumption here is that the wealthy already have "enough", and won't spend their tax cut. Instead they'll spend some and the rest they'll dump in the bank or the stock market or bonds. That's probably true, but it's not true enough (it doesn't elucide, it obscures).

Money that is invested rather than being spent does not disappear. It does not become unavailable to the economy. Even if the money is held as cash in a mattress, the economy will react to its absence and increase the value of the remaining money. Realistically, a LOT of cash would have to be stored in mattresses for this effect to be noticeable. Even though it's hard to measure, pulling cash out of the economy will result in everyone's cash becoming more valuable.

Money that is invested in a bank goes two places. A fraction of it (the fractional reserve) is kept on the chance that the account holder will want his money back. The rest of it becomes available to customers of the bank. The bank takes deposits and loans them out at a profit. That's how the bank pays for its expenses. What do the customers do? Without fail, they spend the money. When a wealthy person deposits their tax cut in their bank account, it gets spent, probably within a day or two.

Money that is invested in the stock market, the bond market, a mutual fund, or privately also results in spending. The reason a company sells stock is to raise capital. They trade a portion of the ownership of their company for money. They spend that money (or put it in a bank account; see previous paragraph). They do so with the full intention of being able to recover that money and more to pay back the investor and make a profit.

So far, these examples are ignoring the effect of new investment dollars. What happens when money becomes available to banks, or companies, or the bond market? You have more supply. Increase the supply of something, and what happens to the price? It falls. Capital becomes cheaper, which serves as a signal. Entrepreneurs see that people are dissatisfied with the current mix of goods they could purchase, and that they want different goods. They use this cheaper capital to create new products and new jobs.

The existing tax cuts just cut taxes evenly. Everyone who objects to tax cuts for the wealthy are really asking for taxes to be lowered for everyone BUT the wealthy. This just serves to force the wealthy to subsidize other people. Historically, that's what they've done (Google for Carnegie library) anyway. What moral benefit is to be had from forcing them to?

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Mon, 06 Oct 2003


Steven Den Beste is applying his microscope to the Tragedy of the Commons. Garrett Hardin points out, in his book of the same name, that the real problem are unmanaged commons. The management can happen in any number of ways: through societal norms; through government action; or through conversion to private property.

Steven disagrees with this last, because he thinks it doesn't work. One of the reasons he refuses to be labelled with the term 'libertarian' is because of libertarians propensity to stick by principles even if doing so has negative effects. Libertarians love to solve commons problems by converting them to private property. He compares that to the government solution, which has been tuned over centuries, and which he admits is only a "good enough for government work" solution. Libertarians solutions haven't been tried and tuned simply because government solutions are thought to work well enough.

In this, Steve is committing a logical error: comparing the best that one system can do against proposed solutions underneath another system. The whole reason why free markets are better than controlled markets is because of better information flows. As the Cluetrain folks keep saying, a market is a conversation. If you could get a bunch of smart people (e.g. libertarians) in one room, and have them design a political system in full (e.g. Libertarianism), then you wouldn't need free markets. You would just design markets to work well. Instead, what is expected to happen is that Libertarian solutions which don't work will be discarded and replaced by ones that do work.

So, specifically, if you give people a property right to the air above their land, how might that work out? Steve anticipates that people who want clean air will sue everybody upwind of him, and prevent them from doing anything. "the entire nation would grind to a halt." he says. This only works if everybody is stupid. Fortunately, this is not the case. We *do* have some smart people who can fix things. For example, the legal system might not accept a lawsuit unless the damages exceeded the cost of adjudicating the lawsuit. What that would mean is that if you were damaged to the tune of $1, and a lawsuit cost $500 (a guess based on the fee that the American Arbitration Association charges), you would have to get 500 people together.

What would likely happen in the case of clean air property rights is that you would sell them to a consolidator. That company would either pay you, if your air was being polluted, or else you would pay it to defend your clean air. We would end up with a solution similar to what we have now, except that instead of having a monopoly enforcer, who enforces one rule for everyone all over the USA, there would be competitive enforcers.

Leftists would no doubt object to this by saying "But! But! It's clear that only poor people would be willing to sell their clean air." They are quite right. Said poor people already have polluted air. The difference between the current system and the libertarian system I propose (which I must reiterate may be nothing like what would actually happen) is that under the current system, government workers are bribed (and I include politicians here; call the bribes "campaign contributions" if you want) to ignore laws which prohibit pollution. It would be an improvement if the poor people were actually paid instead.

The other objection that Steve has to private property solutions is that not every private property owner has an interest in protecting the property. He points out that the present value of destroying a resource may exceed the total future value (as brought into the present). This may result in the resource, otherwise sustainable, being destroyed.


Steve has just discovered an important result of economics, which is that sustainability is not infinitely valuable. Sometimes something is best when used up. On the other hand, the example he gave is one in which the market is not completely free. I'm not an expert on the market for redwood trees; it may be that the market is hardly free. You can't use an example of how a controlled market works to describe how a free market will work. When controlled markets don't work well, you can't use that as evidence that free markets won't work well and conclude that one must control markets.

In a free market, interests are represented by purchases. If you have an interest in protecting redwood stands, you purchase the land. If the land is owned by a company and the company refuses to sell, you buy the company (or a portion thereof). Sometimes there's just no way to have your interest represented. This is not worse than our current system, where someone's interests as a California citizen are not represented by the state of Nevada.

People who have a belief in sustainability as a good unto itself have an interest in protecting redwood stands which might otherwise be harvested into extinction. They can express that belief by purchasing companies whose corporate charter (difficult to change) includes a committment to sustainable harvesting of redwood trees. Maybe there aren't enough of such people to have enough of an effect on the marketplace? If not, then there wouldn't be enough voters to affect the political process, so government is no solution for them.

This issue comes up again and again. People who dislike libertarianism because it's so market-driven don't see that markets express popular interest just as much as politics. Markets express interest better than politics, because political systems are often all-or-nothing. Either every redwood tree is protected, or none of them are.

Steven points out a commons where there is no ownership to concentrate: vaccinations. It may simply be that a libertarian government would not be perfect; that some problems currently solved would go unsolved. Other problems would be solved better, however. The question really is not whether libertarianism would be better in every respect than a coercion-based government. The question is whether it would be better overall. Those of us who count themselves as libertarian believe it will be better overall.

I need to say something about transaction costs, technology, and government, because they are strongly related to what a government can do efficiently. I'll leave that for another day, though.

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