Sun, 21 Dec 2003

Safety and Profits

Don Norman writes about accidents, and lays them at the feet of a profit-driven culture. I take him to task and he replies. Esther Dyson chimed in via private email to suggest that Don was talking about a short-term focus. Note that Don was not talking specifically about workplace accidents, but I am, just to keep focus.

Workplace safety is a more complicated topic than it first seems. Anyone might say "What could be wrong with increasing safety?" An economist would reply that it might be too expensive. I want to address this in three directions. First, that some safety is free, and some is not. Second, that there are four sources of money to pay for safety. And third, that it should be workers who demand safe workplaces, or not.

The cost of safety

Increasing the safety of the workplace might or might not cost money. For example, locking down a circuit breaker when you're working on the circuit it controls costs almost nothing. You had to touch it to turn it off anyway. Putting safety instructions on a device is the cost of a label. Other types of safety are going to be more expensive. For example, turning off a circuit breaker when you're working on a piece of equipment that has its own power switch is going to be more expensive. You'll have to stop what you're doing, go to the circuit breaker, turn it off, and go back. Or insisting that someone not use the top step of a ladder (the not-a-step) means that they need to locate a taller ladder.

Providing extra safety might be a capital cost (e.g. adding a railing), or it might be an operational cost (e.g. going the long way around, avoiding the place where a railing is needed). These costs are accounted for differently. Capital might not be available for increased safety. The cost of production might not bear the lessened productivity.

Just as safety is rarely free, so will accidents rarely be free. There is always a cost involved in accidents. Perhaps a trained worker is lost, or idled. Perhaps equipment is broken. Perhaps equipment is idled while the worker's corpse is removed from the equipment. Nobody worries about the accidents that are more expensive than the safety needed to prevent them. The profit motive will cause employers to eliminate those types of accidents. The kind that gets peoples panties tied in a knot are the ones where safety is more expensive than the accident.

For the remainder of this article, I will only speak of the latter kind. The former is boring.

Paying for safety

In the short run a company can pay for safety by raising prices, reducing entrepreneurial profits, by reducing dividends, or by reducing wages. A product doesn't change just because it's been made more safely. Entrepreneurs may have a personal desire to not hurt their employees, in which case the safety becomes cheaper than the accident. Boring! Same thing for the capitalists. Boring! Same thing for the workers, particularly since it's them who get hurt in the accident. If they're willing to do this, then the problem again becomes boring, because the cost of the accident exceeds the safety.

The problem with any of these four sources of safety funding is that they're limited. Customers will not put up with unlimited increases in price with no improvement in the product. Once a (not otherwise productive) capital expenditure on safety has been made, no further source of capital is available unless capitalists want even more safety. Once a worker's wages have been cut because they're less productive because they're being safe, further gains are impossible without further cuts. No worker is interested in working at a perfectly safe job for no pay.

I must note here that it's possible to force all employers to adopt safety measures, through the coercive power of government. That doesn't create money from nothing. What it does is force all employers to pay for safety using the same mix of the same four funding sources listed above. Competition will select the most efficient mix. I think that workers have deluded themselves into thinking that only entrepreneurial and capitalist profits are reduced. That's possible, but not likely. Entrepreneurial activity will move to a less regulated (e.g. a more intrinsically safe) business. Capitalists will make further investments in less regulated businesses. Workers who prefer safety will not. And customers are just "workers" the day after payday.

Workers must demand safety

Coercing safety measures on employers is probably not the right idea, for several reasons. A worker might prefer wages to safety. A worker has a direct interest in maintaining a safe workplace, whereas the government's interest is indirect. Workers can detect unsafe practices and eliminate them. Other workers in the same workplace who are not at the same risk will subvert the safety measures, because they don't want their wages to go down.

The best protection of workplace safety is a robust economy with low costs and high wages. Ironically, this may mean less safety...or more safety. Workers will be able to avoid unsafe workplaces unless they pay well enough to cover the risks. Workers who prefer money over safety will seek out those jobs, e.g. explosives deliveryman.

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Sat, 20 Dec 2003

Money

What is money, anyway? Like fish and water, we deal with money every day, but we have so little understanding of its nature. To understand money, let's start without it. Some people don't like money, because they think it's the root of all evil. (Note: that is NOT a quote from the Bible. It's a MISquote. It's actually "the love of money".) Let's say that they got their way, and money was abolished.

No money, so how do we get the things we need for daily life? Food, clothing, shelter, not to mention water and sanitary facilities. We could all be experts at providing all of them -- jack of all trades, master of none. That is the problem with trying to do everything. You don't have the time to become an expert at any one of them, so everyone ends up having to spend a lot of effort learning to do the things that are needed to keep themselves. A world of Robinson Crusoes. Doesn't sound like fun, but that's why people trade.

In tribes, or bands, people tended not to use money, but instead relied on each other. Call it a primitive communism. From each according to their abilities, to each according to their needs. It worked, but only because the tribe was small enough for a person's reputation to be known. In essence, everyone kept a balance sheet in their heads for who owed whom what.

As societies grew, and people started to trade between tribes, they would barter. Barter is a perfectly fine way to trade except for one thing: the transaction cost. Barter markets are terribly inefficient, because for everything you want to sell, you have to find someone who has something you want to buy. This is not easy to do, because you have to find the perfect match. In essence, marriage is a barter market -- you have to find someone you love, and they have to love you back. Every lonely person can attest to the difficulty of making a good match.

Money is a human invention to get around the inefficiency of barter markets. Money is any kind of thing that people agree it is. Money is the universal commodity. Money is that thing which anyone wants, because they know they can barter it for anything else. Money is a half barter. Most often people don't want money because of the qualities of the commodity which serves as money (although it will have its own qualities). They want money because they know they can trade it for other things they *really* want.

Even if we were to abolish money, as those non-economists would have us do, we would eventually reinvent money. It might not be dollars, pounds, or lire, but it would have the same characteristics of money: something that nearly everybody will give or accept in trade. In wartime and in prison, it has often been cigarettes. Money is not a particular thing. It is an idea.

The Value of Money

Everybody wants more money, right? WRONG! People always want more wealth, but they don't necessarily always want more money. Imagine, if you would, that you could hold all of your wealth in something that you could easily sell. That is, you could barter it for money. That would mean that you need never hold any money, because you could always have your wealth in the form of money.

People hold money because they value its characteristic as the universal commodity (or because, in the case of numismatists, they value it for its intrinsic characteristics). They hold money because they fear that they won't be able to trade goods or services for money. It follows, then, that people's desire for money will rise and fall as the circumstances of their lives change.

If people want more or less money in their lives, it follows that there will be a demand for money, and a supply of money. Similarly, there will be a price of money. If people want less money, the price of money will fall. If people want more, the price will rise. If there comes to be more money, the price of money will fall. If there comes to be less, the price of money will rise. The term for the former is inflation, and the latter deflation. Yes, I realize that in popular language, inflation means rising prices, but there's a reason why the Economist is Angry. When the people fail to understand that inflation is directly related to the supply of money, those who have the power to create money have the power to steal from the people.

If you have trouble understanding the previous paragraph, imagine that dollars are not money, but are instead simply collectible presidents' portraits. Money is ... instead, eggs. You can see that if there are more chickens laying more eggs, then the supply of eggs increases. Eggs will be less dear. Greater egg availability means you want more eggs to sell your dollars.

Fungible

One of the desirable characteristics of money is that it should be fungible: Anyone holding a pieces of money will trade it for any other equally-valued piece of money. Most money that people handle these days truly is fungible. It didn't used to be the case. Coinage, being made from a precious metal, might be debased. That is, the coins themselves might be modified so as to reduce their value. The classical method of doing this is to shave them so they are slightly smaller in diameter. That's why the US quarter has milled edges -- to make shaving harder. Of course, they're not currently made of a precious metal, but their predecessors were, and they needed milled edges.

What if money is in fact not fungible, and yet is forced to be so by legal tender laws? Now you see the action of Gresham's Law: bad money drives out good. If not all money is of equal value, people prefer to hold onto the money which is worth more, and spend the money which is worth less. Since it still has the function of money, people will do better by spending the money which has the least value. In this manner, good money gets quickly driven out of circulation.

To see an example of this, consider what happens when you have a group of people, all of whom want to do laundry. Suddenly, quarters (to put into the washers and dryers) become more valuable than bills. People will tend to pull quarters out of circulation, preferring instead to pay with bills or dimes.

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Sun, 07 Dec 2003

Bleeding Heart Libertarianism

Sometimes somebody else writes about something to which I cannot add a thing. Arnold Kling has done it with his Bleeding Heart Libertarianism proposal.

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Fri, 21 Nov 2003

Risk Overflow

Steven den Beste makes reference to the Precautionary Principle that some people espouse. These people prefer coal mining to nuclear power, by inference anyway since they're against nuclear power, and we're currently generating electricity by burning coal.

Note: these numbers are created from whole cloth to make a point. These numbers are not real. Every year there's a 5% chance of a coal mine accident killing twenty people. Annualized, that's a 100% chance of one person dying every year. Every year there's a .000000001% chance of a nuclear accident killing 100,000 people. Annualized, that's a .0001% chance of killing one person every years.

The Precautionary People think that nuclear power is riskier than coal mining. Why? Because they don't trust the size of the numbers. Yes, when you multiply a very small number times a very large number, you get a risk for nuclear power which is much less than that of coal. Add or subtract a zero or two, though, and suddenly the risk is much larger. The problem that I see is that most humans are not well equipped to evaluate very small risks of very bad consequences. People prefer known risks of tolerable consequence. Or, to put it another way, people buy insurance.

I would also add that the relatives of the Precautionary People don't mine coal, so the risks don't affect them, but that would be petty, so I won't.

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Wed, 19 Nov 2003

Anti-capitalist Activists

Heard on NPR this morning, in a report about a peace rally in London at the Euston Quaker Meeting house: "Outside, anti-capitalist activists sold T-shirts for $16."

'nuff said.

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Sun, 16 Nov 2003

Banning Cell Phones

[Before I get into this subject, I want to nod to Chapter 20 of David Friedman's _Hidden Order_, from which this explanation is derived. This was inspired by a report by the Institute for Highway Safety on the NY hand-held phone ban.]

After initial reports that the hand-held phone ban in New York State was working, compliance with the law has dropped off. The report says that's to be expected, simply because motorists don't comply with new laws very well. There's another reason, though: the law is stupid.

Driving is a highly skilled activity. It takes about forty hours of on-the-road training before a driver is considered competent to drive without an experienced driver in the car. Driving is also a fairly dangerous activity. Forty thousand people a year die on American roads. Walking, flying, and riding are all dangerous, too. What makes driving so different is that very often a poor driver kills rather than merely dying. Even if you're careful around roads, you can still get hit by a careless driver.

People want to be at least reasonably safe near roads. Besides required licensure of drivers, automobiles must have yearly safety inspections. These inspections are not designed to keep the driver safe, but instead to keep the public safe. You can see this because they check the lights and the brakes. The lights on a car are mostly there to signal to other people the intended path of a car. The brakes are there not only to stop the driver from getting hurt, but to stop the car from hurting someone else.

There are other constraints on drivers. Besides being licensed, they must be old enough to be responsible behind the wheel. Age is not the only determinant of responsibility. An irresponsible driver can be distracted from his driving. Driving is a skilled activity that requires concentration. If that concentration is broken, the driver can cause a crash. Many accident stories start with "I was doing X..." where X was not a normal part of driving. For example, today's newspaper had a report of a truck driver who had an accident because he was changing his clothes.

People, to be safe from distracted drivers, want laws which discourage distraction. Herein lies the problem with the hand-held phone ban. It bans one particular type of distraction, when the problem is not any one type of distraction, but any type of distraction. A state legislature could try to micro-manage driver's distractions, eliminating them one by one, but in the end, they will fail. People are inherently distractable, but each person is distractable in different amounts by different things.

There is no reasonable set of laws regulating external behavior which will prevent all drivers from being distracted. Each driver has a different set of external behavior which distracts or doesn't distract them. Perhaps they are very good at balancing a laptop on one leg, a mouse on the other, and reading their email while they drive? Perhaps someone else can't chew gum and drive at the same time? What is needed is a law that says "Thou shalt not be a distracted driver."

In essence, the way that accident liability is structured does that. In New York State, the last person who could have stopped the accident is at fault for not having done so. If you have an accident, and you were distracted, you have to pay for it. It all goes through your mandatory automobile insurance, but you can be sure that in the long run, you will pay out of pocket for being distracted.

That is why the hand-held cell phone ban is stupid. There's already an effective ban on driving while distracted. If you get distracted by using a hand-held phone while driving, then you should decide not to do it. If you're not distracted, then holding a cell phone while driving is perfectly acceptable. According to the Institute for Highway Safety's report, most New York drivers have decided that they can make their own decision about whether they are distracted or not. New York drivers, if not New York legislators, have decided to repeal the law.

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Hand-held cell phone use goes back up in New York, despite year-long ban.

Once the publicity dropped off, drivers resumed old dialing habits.

One year after New York became the first state to enact a law that bans the use of handheld cell phones while driving, use rates have returned to the same level as before the law. This is the main finding of a follow-up study by Institute researchers, who previously reported a 50 per cent decline in phone use rates in the months immediately following enactment of the law (see Status Report, Aug. 17, 2002

Before police started warning violators in November 2001, researchers observed a hand-held phone use rate of 2.3 per cent in four areas of the state. Several months after the ban, the rate had dropped to 1.1 per cent, a significant decline. However, by March 2003 the rate was 2.1 per cent, which isn't significantly different from before the law. Meanwhile, hand-held cell phone use among drivers in Connecticut, where no ban exists, showed a small, statistically non-significant increase from 2.9 per cent to 3.3 per cent over the same time period.

"Comparison with the Connecticut experience suggests phone use among New York drivers still may be 20 per cent lower than it would be if the law hadn't been enacted," says Adrian Lund, the Institute's chief operating officer. "Nevertheless, the data show clearly that compliance with the law is eroding."

Senior researcher Anne McCartt adds that "the pattern of initial compliance and then a gradual return to previous behaviors is typical when new traffic laws are introduced. Without enforcement that's well publicized and vigorous, drivers tend to revert to their prior behaviors."

The enactment of the ban in New York drew blanket media attention, which "may have encouraged compliance early on," McCartt says. "But the publicity rapidly dropped off, and so did the compliance."

New York is the only state that bans all motorists from talking on hand-held cell phones while driving. Police can issue $100 tickets to motorists who violate the law . But the study indicates this isn't happening regularly. Only about 2 per cent of traffic citations issued in New York between December 2001 and January 2003 were for cell phone use.

In a survey conducted by the National Highway Traffic Safety Administration, one in three drivers said they use a cell phone during at least some trips -- and one in four said at least half of their trips. The agency reports that on a national basis hand-held phone use while driving is up from 3 per cent in 2000 to 4 percent in 2002.

Data tying cell phone use to crashes are scarce, and studies have yielded varying risk estimates. One 1997 study analyzed phone billing records for a sample of Canadian drivers in minor collisions, finding crash risk four times higher when drivers were using cell phones (see Status Report, March 22, 1997. Difficulty in accessing telephone billing records has prevented such a study in the United States.

The above taken with permission from The Institute for Highway Safety's Status Report August 26, 2003.

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Sun, 09 Nov 2003

Monopoly, Competition, and Antitrust

I've touched on monopolies quite a number of times before (licensure-is-censure, patents-form-monopolies, price-cost-value, the-non-problem-of-public-goods, tragicomedy, unions-are-for-the-unions, and where-is-the-freedom. ) It's interesting that monopolies come up so much, because they aren't the serious problem that so many people make them out to be.

Monopolies

A monopoly isn't necessarily a bad thing. A monopoly might be the result of one efficient firm putting all other firms out of business, because they were all inefficient and wasteful. That's a good thing, without question. The chief problem of a monopoly is when it can charge monopoly prices. A monopoly price is when the monopoly deliberately restricts its production because it sees that it can make more profit by selling less and charging even more.

Even so, this isn't necessarily bad. Consider that I can charge monopoly prices for my time, if it makes sense. Nobody else can sell my time. Similarly for my software. If I choose to sell my software, I can charge monopoly prices for it, because nobody else can sell software exactly like it.

So let's be clear: it's not just the existance of a monopoly; it's not just its ability to charge monopoly prices; it's actually how high those monopoly prices can be. That is affected more than anything else by the ability for other firms to enter the monopoly's market and compete. Consider the case where a monopoly exists in a market which is easily entered. Why is there such a monopoly? Why wouldn't someone enter the market? Simply enough, because there might not be any profit in it. The existing monopoly might not be charging monopoly prices. If it isn't, and it's an efficient firm, there might be no room for another entrant into the marketplace.

To sum up, monopolies are a problem only because of monopoly prices, only because of excessive monopoly prices. They arise only because it's hard to enter the market.

Set that thought aside.

Competition

Now I want to talk about competition. When two companies compete with each other, they're offering products that can substitute for each other. Clearly, unless two products are absolutely identical, the method of delivery is identical, and the reputations of the companies are identical, the companies are not perfectly competing. Given that laundry list, it's safe to say that in the real world, there is no such thing as perfect competition. Any two companies are always offering different products. so whether these products compete is a judgement call rather than an exact comparison. There's no bright line: on this side there is competition; on that side not. For example, within the broad market category of "Audio Entertainment", records, tapes, CDs, and live concerts compete with each other. They're not identical, but you can find the same song by the same artist in each media.

Similarly, you can have products which are wildly different, but all of which substitute for each other. For example, Black and Decker has created a electric jar opener. It competes with the metal wedge jar opener you screw to the underside of a kitchen cabinet, with the little bit of rubber sheet that helps your hands get a grip, and of course your bare hands. All of these will open jars; they are all vastly different.

You can go beyond that level of competition to a higher level of competition. You can buy food in cans, instead. Or dried in a box, or fresh, or go eat in a restaurant. The point here is that there are many ways to get at preserved food; some of them more competitive than others.

Set that thought aside. We'll combine these thoughts in a moment.

Antitrust

Now I want to talk about antitrust laws. They exist to solve a problem. The problem is that monopolies are the inevitable result of competition and consolidation (one firm buying another, or two firms merging), AND that monopolies are always bad. Antitrust laws exist to solve a problem which is quite rare. That means that antitrust laws create a problem.

Antitrust laws have the effect of randomly applying the brakes on a car regardless of whether there is something to stop for or not.

From the monopoly section, recall that monopolies aren't always bad. And yet, if you look at the cases where antitrust law is invoked, you'll see that they make no distinction between a monopoly which can charge excessive monopoly prices, and a monopoly which cannot. They take no note of whether a market is easy or difficult to enter.

From the competition section, recall that competition is not an either/or thing. It is a gradation between products; no hard line exists. Therefore, to say that a market segment is monopolized, is to say that customers are unwilling to choose products from another market which substitute for it. It is also to say that nobody will enter the market once monopoly prices appear.

Perhaps, you might wish to argue, antitrust laws could be used in those market segments which are difficult to enter. No. Even then a public policy is served by allowing some monopoly prices to be charged. Consider that if a market segment is hard to enter, there must be a reason for it. Perhaps much concrete needs to be poured, or many people employed all at once. If the market is hard to enter, it must be that a large investment is needed. If you were planning a society in detail, and had full control over everything, you would reasonably be reluctant to create too many firms in this type of market segment. By allowing some monopoly prices, you give potential competitors an incentive to enter the market ... but not too much of one.

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Wed, 05 Nov 2003

Overpopulation

Rather a large number of people are convinced of two things: that "overpopulation" exists as a concept, and that the earth is, or soon will be, overpopulated. I'll address these points separately.

Earlier, I have argued that there is no such thing as "the environment". I also don't think there is any such thing as "overpopulation". I believe that overpopulation is a confusing name for a bundle of ideas. When you look at the negative attributes of overpopulation, you will see that not a one of them is actually inherent in having a large number of people. The confusion in calling this set of problems overpopulation is that it asks and answers the question. It says "The solution to these problems is to control population growth."

Google found a list of problems that some Carleton College students listed. They seem a reasonable-enough list: More cars (more pollution), direct effect on the water table, overuse of natural resources, deforestation, urban sprawl, clearing land for residential use, increased air pollution, increased garbage, overuse of fossil fuels and global warming.

There's not a one of them that is necessarily corrected by having fewer people. For example, if there are fewer people and hence fewer cars, there would be less congestion on the roads. People would find it easier to drive. With fewer people, you have a smaller "mass" to satisfy your mass transit. So busses and trains would have a smaller market. Fewer people might just as well end up causing more miles to be driven rather than fewer.

People do not necessarily need to clear land for residential use. Look at the Northeast, where the population has grown AND the forests have grown.

I'm not going to say that the problems commonly lumped together as overpopulation are not problems. They are problems. Attempts to make fewer people are not necessarily going to fix those problems. Attempts to fix the problems are more likely to fix the problems. Now, if you define as a problem your opinion that there are "too many" people, then you should be subjected to this test: Pick the people you think shouldn't exist. If you think America is currently doubly overpopulated (and some people do), then you should be happy if I chose at random half of your friends for you to give up. You have to tell these (soon to be former) friends "I wish you didn't exist. The world would be a better place without you. Never speak to me again."

Free-market economies naturally grow. Every trade makes everyone better-off, and since people are free to trade as much as they wish, free-market economies grow in value faster than any other type of economy. Since the economy becomes more and more productive, more and more people are needed to work. Population growth needs to be seen as something that doesn't necessarily make us poorer. Depending on the corresponding growth of the economy, a low population growth rate might actually make us worse off, as businesses have to do less because they can't find workers.

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Tue, 04 Nov 2003

A Moral Obligation

A Friend asked me today "Why must a company always seek out the lowest paid worker worldwide to produce the product of the company? Isn't there some moral obligation other than to the owners or shareholders of the company?"

I'll accept that they *do* have the moral obligation you desire. It is to the customers of the company as much as to the employees. By seeking to reduce the costs, they are able to sell their products for the lowest price. They don't necessarily want to be that moral, but the free market is always watching. (This is a personification, of course. Only people can watch. It is the people who participate in a free market who are watching. But for the sake of keeping the prose moving forward, I say that it is the free market that is watching, thus eliminating bulky parenthesized notes. Um, like this one.)

Why do people of good will concentrate so very much on labor and forget consumers? People are only laborers for 8 hours a day -- they are consumers for the other 16 hours a day. An economist would hold the interests of consumers to be twice as important as those of laborers. If the company has to charge high prices to pay lots of money to its laborers, then they are hurting their customers. From a public policy point of view, that's bad thing.

Haha, fooled you! No, I'm not talking about minimum wage laws yet. Gotta save that for a day when I really want to go off on a rant. Fewer economic interventions are more pernicious than minimum wage laws.
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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

TragiComedy

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.

Right.

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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Mon, 29 Sep 2003

Trust

I got my eyes opened by two young Turks. Well, no, not Turks, actually Indians: Sumit and Srikant. I was consulting for their employer in Mumbai several years ago. They needed an email server with more oomph than their existing one. In ten days, we designed, procured, and set up a replacement cluster of servers.

The evening I was to leave, they spoke to me of trust, and how, after working with me, they trusted me. I was somewhat nonplussed. "Of course I should be trusted -- I am a highly-paid and experienced professional." No, they said, in India it works the other way around: first you do business with someone, then you learn to trust him.

A lack of trust makes it hard to do business. If you don't trust someone, you have to set up some mechanism for resolving the trust. For example, when Sumit was checking me into the Leela (a five+ star hotel), I noticed that he had to pay a deposit in cash in addition to paying with a credit card. I didn't understand it at my arrival, but I understood it at my departure.

By the way, you should know that any credit card charge can be disputed. You simply tell the bank that you refuse to pay that particular charge, and they will take it off your bill. You have three months in which to do this. The company that generated the charge must then provide proof that you authorized the charge, that the items were as represented, that you actually received them, etc.

Transaction cost is the cost of making a business deal. For example, the time spent weighing one deal against another is the transaction cost. Your time spent going to the store, standing in front of the display, considering the value of a purchase, standing in line at the register, and returning home, are all part of the transaction cost of shopping.

A lack of trust adds to the transaction cost. Instead of buying something sight-unseen, you have to verify that you are actually getting what you are paying for. People do this for large purchases, e.g. by walking through a house, and paying for a professional inspection of the house. That's because the value of the transaction greatly outweighs those transaction costs.

A culture, or society, where businessmen cannot be trusted, is an economically-inefficient society.

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Sun, 28 Sep 2003

The Sooner Subsidies Go, the Better

I have to disagree with Steven Den Beste. I got most of the way through his article on farm subsidies, nodding my head, saying "yes"... "yes"... "yes".... Then I got to where he said that it would not be wise to terminate subsidies and quotas immediately. We should immediately abolish subsidies and quotas for the very same reason that you should stop hitting yourself with a hammer. The pain doesn't go away immediately, but the healing starts right away, and you stop doing damage to yourself.

Subsidies always go to the politically powerful, and occur at the expense of everybody else. Does your legislator always do what you want him to do? If not, then you are not politically powerful, and you are one of the victims of subsidies, tariffs, and quotas. Demand that they be ceased immediately.

Ken Markley comments. Whether it's more or less desirable to eliminate subsidies, it just ain't gonna happen quickly.

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Thu, 25 Sep 2003

The WTO in Cancun

Astute observers will have noted that the WTO talks in Cancun led to nothing (it was in all the papers). This is bad, of course. Increases in the freedom of trade are always good. In this case, they should have worked harder to come to an agreement. The issues that both sides want are worthy issues, and both sides should have given to get.

Let's look at what the third-world countries wanted: reduction or elimination of agricultural subsidies. Competing on a level playing field is all very well and good a first-world notion. But when the first-world pays farmers to grow food, that makes it very hard for anyone not paid to grow food to sell into that market. Quite clearly, this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four Singapore issues. These are: freedom to invest (no limits on foreign ownership), transparency of government procurement (no cronyism), free competition (no favoring of local companies over foreign companies), and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing to "give" here. All of these policies hurt consumers in the country that enacts them. They are all distortions of the free market. Agricultural subsidies are bad because they encourage malinvestment. Milk prices are artificially made higher. Farmers are rewarded for having more cows, so they build mega-farms, with 500-1000 cows. Who pays for this? Consumers.

Limits on investment are similarly self-destructive. Some countries limit the amount of capital that can come into their country from abroad. WHY?? Capital from abroad gets spent locally. That's the purpose of capital -- to be spent in the pursuit of returns to capital. Why any country wouldn't want foreigners to spend money in their country, I can't understand.

Transparency of government procurement should seem to be a no-brainer. Unfortunately, there are a lot of corrupt governments out there which prefer to simply hand out contracts for this and for that to their buddies. Government contracts are used to pay back campaign contributions. This really isn't a trade issue, and the citizens of each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic. Favoring one company over another through the force of law is just a hidden subsidy. Subsidies are always bad, because they force one party which is politically less powerful to pay for things desired by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations related to import, and shipping, do not impose an undue burden on countries seeking to do trade. This is the same principle as free competition, only under another name.

All of these issues don't need to be part of world trade pacts. Each of them may be adopted unilaterally to the benefit of each country. The reason they are not is because government allowed to be corrupt by its citizens allowing one kind of favoritism or another. Usually these citizens have been confused into adopting bad economic policies.

Now that you know what is good economics, you're not going to put up with that, are you? I thought not.

Posted [01:24] [Filed in: ] [permalink] [Google for the title] [digg this]

The WTO in Cancun

Astute observers will have noted that the WTO talks in Cancun led to nothing (it was in all the papers). This is bad, of course. Increases in the freedom of trade are always good. In this case, they should have worked harder to come to an agreement. The issues that both sides want are worthy issues, and both sides should have given to get.

Let's look at what the third-world countries wanted: reduction or elimination of agricultural subsidies. Competing on a level playing field is all very well and good a first-world notion. But when the first-world pays farmers to grow food, that makes it very hard for anyone not paid to grow food to sell into that market. Quite clearly, this is neither free nor fair trade.

Let's look at what the first-world countries wanted: the four Singapore issues. These are: freedom to invest (no limits on foreign ownership), transparency of government procurement (no cronyism), free competition (no favoring of local companies over foreign companies), and trade facilitation (not imposing undue barriers to trade).

What makes this whole thing so ridiculous is that there is nothing to "give" here. All of these policies hurt consumers in the country that enacts them. They are all distortions of the free market. Agricultural subsidies are bad because they encourage malinvestment. Milk prices are artificially made higher. Farmers are rewarded for having more cows, so they build mega-farms, with 500-1000 cows. Who pays for this? Consumers.

Limits on investment are similarly self-destructive. Some countries limit the amount of capital that can come into their country from abroad. WHY?? Capital from abroad gets spent locally. That's the purpose of capital -- to be spent in the pursuit of returns to capital. Why any country wouldn't want foreigners to spend money in their country, I can't understand.

Transparency of government procurement should seem to be a no-brainer. Unfortunately, there are a lot of corrupt governments out there which prefer to simply hand out contracts for this and for that to their buddies. Government contracts are used to pay back campaign contributions. This really isn't a trade issue, and the citizens of each country should be fighting for this issue.

Free competition is necessary for the free market to do its magic. Favoring one company over another through the force of law is just a hidden subsidy. Subsidies are always bad, because they force one party which is politically less powerful to pay for things desired by the politically more powerful. This is a fairness issue.

Trade facilitation is simply ensuring that government regulations related to import, and shipping, do not impose an undue burden on countries seeking to do trade. This is the same principle as free competition, only under another name.

All of these issues don't need to be part of world trade pacts. Each of them may be adopted unilaterally to the benefit of each country. The reason they are not is because government allowed to be corrupt by its citizens allowing one kind of favoritism or another. Usually these citizens have been confused into adopting bad economic policies.

Now that you know what is good economics, you're not going to put up with that, are you? I thought not.

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Tue, 09 Sep 2003

The Non-problem of Public Goods

Many economics textbooks will talk about the problem of provisioning public goods. A public good is one which cannot be provided to one without being provided to all. Clean air is considered by many to be a public good. Public parks are also a public good. The thought is that the market cannot supply public goods, because there is no way to charge a price for the provisioning of the good.

Balderdash.

The classic example, used by many to justify government intervention in the economy, are lighthouses. If the light is to be provided to one ship, it must be provided to all. And yet ... in England many lighthouses were constructed and operated using private funds. The owners of harbor properties formed a voluntary association with the purpose of improving the harbor. This group could build jetties, breakwaters, and yes, lighthouses. As a group, they benefit from ship's ability to find and successfully navigate its way into the harbor.

Another example is that of freely copyable software, what we now call Open Source. The thought is that no one would supply open source software because there is no way to monopolize it -- to gain a monopoly price by restricting redistribution. Amazingly, there exist people who still think this is the case, and not just textbook authors who haven't revised their work recently.

So where is the problem? The problem is not strictly in public goods, but instead in a different but overlapping group of goods. I don't know if this group has been named or not. This group has the characteristic that the private gain from its provision is less than the private cost, and yet the public gain is greater than the public cost. Both of these terms have to apply. If the private gain is greater than the private cost, the public need not get involved. If the public cost is greater than the public gain, then public should not get involved.

Open source software, which is technically a public good, does not fall into this category. Private parties produce open source software because they receive or perceive a gain in excess of their costs. The Angry Economist is one of these parties, as a simple web search will show you.

If anybody knows of a name for this category of goods (and services; I get tired of saying "goods and services" all the time), I'd like to hear it.

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Wed, 27 Aug 2003

The Space Shuttle

The Columbia Accident Investigation Board results are in. Predictably there is great gnashing and wailing about how NASA has failed the astronauts and failed the country in providing inadequate safety.

They are wrong

We are in fact providing too much safety -- way too much safety -- to astronauts.

On the face of it, that sounds like a horrific thing to say. "We should be killing more astronauts?????" Can I possibly be serious? Yes, I'm serious. Consider all the other explorations that the human race has engaged in. People died by the boatload. Often there was no corpse, no last words, no black box to let us know what happened. They just disappeared.

Yet people continued to explore. People continue to explore today, and they continue to die today. Fully one quarter of the people who make it to the top of Everest die on the way back down. Everyone who goes up Everest knows this, and yet they go anyway.

We are buying too much safety for our astronauts. With a given space exploration budget, we could run many more flights with a great decrease in safety, or we could run fewer flights with greater safety. The CAIB says that we need greater safety. This translates into, realistically, fewer astronauts. I say that we need less safety. There is considerable unmet market demand for people to go into outer space. Many more people want to be astronauts than NASA's budget can lift. They could pay a huge amount of money and get NASA-like safety from the Russians, as a couple of people have done. Or they could pay with a risk of dying.

There is a way, of course, to get more flights with more safety, by simply increasing NASA's budget. Unfortunately, this isn't likely to happen. Ever since the moon shots in the early 70's, NASA's budget has been shrinking. Expecting taxpayers to pay more is just not going to happen.

So, are we better off with fewer safer flights or more unsafer flights? I think very much the latter, but you can make up your own mind. Would you like to fly to the moon? What's it worth to you? What's it worth to you to get to the top of Everest? Is it worth your life? Can we ask of anything less for the moon?

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Wed, 20 Aug 2003

Fair Trade

I don't know. I just don't think fair trade is very fair. A group of do-gooders picks some set of vendors who they think are being treated unfairly, and set out to treat them preferentially. How can this be fair, when some are treated better than others?

What is "fair", anyway? Let's look at the dictionary definitions. Do the people who want fair trade mean "marked by impartiality and honesty : free from self-interest, prejudice, or favoritism--a very fair person to do business with"? Probably not, since they specifically play favorites. Do they mean "conforming with the established rules : ALLOWED"? Probably not that either, since they seek to change the established rules. I think they mean this one: "consonant with merit or importance : DUE -- a fair share".

Using this definition -- a fair share -- doesn't help us much. Everybody wants the world to be fair, but nobody can particularly agree on exactly what is fair. Earlier, I wrote about price gouging. Everyone might say that price gouging is unfair, but everyone is wrong because they don't understand economics. They don't think, they just react. They notice that prices have gone up, assume the seller is getting an unfair profit, and run with it. Instead, they need to look at the existing situation. The seller is in possession of something suddenly more valuable. Why should "price gouging" be limited? Why should the buyer receive all the benefit of the increased value? Why does the buyer have merit and the seller not?

Fairness, then, is in the eye of the beholder. The more you think about fairness, the more complicated the issue gets. If you only help some, is that fair to the others? If you only help the seller and not the buyer, is that fair? If you favor the buyer over the seller, is that fair?

I don't mean to say that people should only base their decisions on price. You buy things because of their value to you, not their price. Similarly, people sell things because of their value, not the price they can get. A buyer will buy when the value exceeds the price, and a seller will sell when the price exceeds the value. By definition, an unforced transaction benefits both parties. The dancer who wants the pink tutu more than money is happy, and the former who wants the money more than the pink tutu is happy. Both have something they value more. Value has been created out of nothing. That is why unforced trade, peacable trade, free trade, is so powerful a force for improving the world.

What, then, of fair trade? Surely, you would think, if free trade is good, then fair trade is better. Maybe, but only if it's not forced -- that is, if it's still free trade. If you need to use violence to create fair trade, then by definition you have to coerce someone. They have to be coerced because they perceive an absence of the condition in the previous paragraph. They don't want the money more than the thing. Even though Alice is not dancing anymore, she still wants to keep her pink tutu. Or even though Betty wants to dance, she prefers to keep her money rather than get a dorky pink tutu.

Written into our constitution is the concept of fair trade enforced by violence. I refer to eminent domain. The Fifth Amendment says that private property shall not be taken for public use without due compensation. This isn't free trade, because the owner of the private property does not want to sell. It's fair trade because they are paid an amount of money which a judge agrees is fair. There's a ton of problems with eminent domain, which I don't want to get into right now. Suffice it to say that unwilling sellers usually don't agree that the price is fair.

So how would peaceful fair trade look? If you're using the power of government to enforce fair trade, then by definition your trade isn't peaceful. In order for it to be peaceful, it must be completely voluntary. In order for fair trade to be anything other than free trade, somebody must be making a contribution. Somebody must be kiltering the market in a voluntary way. In essence, they must be paying more for something simply because they believe that transaction to be more fair.

So, then, peaceful fair trade is nothing more than a marketing term for free trade. Instead of a direct trade of A and C, you have B intervening in the trade in some manner to make it more lucrative, or to increase the value. B might be acting as a wholesaler, accepting a price lower than their cost because they perceive their loss as increasing the fairness. B might be acting as a certification body, saying that the wood comes from plantations, thereby increasing the value of the wood in C's eye, and passing on those increased profits to A.

Voluntary and peaceful fair trade can only exist by offering extra value in a free market. That kind of fair trade is, well, fair. Any other kind of "fair trade" is as evil as the violence needed to make it happen.

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Mon, 04 Aug 2003

What makes an economist?

What makes an economist? How can I say that I am an economist? I might have a certification mark that proudly proclaims me to be a certified economist. That's not likely to happen. Economist is too widely used to be a certification mark. You'd have to invent a new name, like Realtor, or Windows.

Nobody has an Economist™ certification mark right now, so just as anyone can call themselves a Christian, or a vegetarian, or a pacifist, or a mathematician, so may anyone call themselves an economist.

In some states, you can't call yourself an engineer unless you are a professional engineer. You can only become one if you pass the professional engineer exam. Once you have, and you are, you're qualified to put your name on various official documents, such as the plans for a bridge. This rather surprises people who have gotten a degree in software engineering from a three- or four-letter university. Without their PE, they can't call themselves engineers. Once they've gotten their PE, they can build bridges.

Many colleges hand out various degrees in economics. No doubt some of these degrees are actually worth something. The economics graduates of my acquaintance seem remarkably ignorant of economics, however. Maybe my sample size is too small? If not, I have to conclude that what economists do, and what colleges teach by way of economics are two completely different things.

Private certification marks, state certification and college degrees are all, so I claim, useless for determining the economist-ness of someone. How then, to decide, if someone is really "an economist" or not?

I rely on Henry Hazlitt's definition of economics taken from his book Economics in One Lesson:

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group, but for all groups. Once you understand and grasp this lesson in its fullness, you will never hear the news the same way again. So very often you hear people talk about economics in non-economist terms. That is to say, they ignore the shorter or longer term or ignore the effect on all groups.

More than anything else, economics is a way, a method, a path, or a system of thought. If you want to have the economics nature, you must train yourself to think like an economist. You can study economics, and learn how other people have thought of things. Until you learn to think those same types of thoughts, however, you cannot call yourself an economist. Without understanding, there is only parroting.

This entire blog is filled with examples of bad economics. Read on to see how bad economics hurts everyone.

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Thu, 31 Jul 2003

Thanks to USS Clueless

Thanks are due to Steven Den Beste blogrolling the Angry Economist. He doesn't hand out blogrolls on a whim. Thanks, Mr. Den Beste!

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Wed, 30 Jul 2003

Why is he angry?

I've been publishing this for a few months now, and it's probably appropriate to talk about myself at this point. Why, oh why is the economist angry? Being angry, and publicly so, is a bit of a self-indulgence. Everybody and everything sucks to a certain degree, so why sustain anger about any one thing? Why go on and on for months about a single topic?

Answering my own question (Yes, I do ask a lot of rhetorical questions; bad habit I suppose), economics is important because it affects nearly everything we do. Humans are social animals. We do almost nothing on our own. Economics is the study of how people cooperate, collaborate, and trade. Lots of people think economics is about money, and that economists want to reduce everything to dollars and cents. That's wrong, wrong, wrong, and incorrect, too. Economists study the way in which people exchange resources, whether they be money, time, prestige, real estate, or ownership. A consequence of this definition is that everything falls under the purview of economists.

Marriage is an economic act. People enter into a marriage to trade love for love, sex for housing, children for protection. Marriage can be analyzed on economic terms. Takes all the romance out of it, no? Yes, no: the romance is still there, and it, too, is part of the analysis.

Economics is in some sense the imperial science. It claims to have all Human Action as its realm. There isn't much, well, human activity, that cannot be analyzed as a trade or exchange. People generally don't like to be analyzed, certainly don't want to be put under a microscope, and never want to be predictable. That is, though, exactly what economists do. They start from a set of assumptions about human behavior. From that they derive, a priori, what the implications of those assumptions are.

For example, one assumption that economists make is that people always prefer money now to money later. It's a reasonable assumption, but given human cussedness it's only an assumption. From this assumption you can derive the rate of originary interest. That is the name of the rate at which people discount money they don't yet have. Or, as Wimpey put it "I will gladly pay you Tuesday for a hamburger today.".

People have an intuitive sense of economics, which they should not apply to larger issues, because it doesn't apply. For example, it surely appears that the world is flat. It surely appears that the sun revolves around the earth. It surely appears as if a feather and a cannonball fall at different rates. It surely appears as if someone should be in charge of the economy.

This intuitive sense is mostly right. Every family has to have a single leader. I propose that a family with more than one leader has in fact no leader at all. Somebody makes the economic decisions for the family. This works for a family because by definition, everyone in the family is intimately familiar with everyone's circumstances. Prices, within a family, introduce a formalism which interferes with the smooth functioning.

In essence, every family is a centrally controlled marketless communist state. You can even paste together a group of families into a tribe or band, or cohousing group, and they can make economic decisions without markets or prices. Communism works, and works well within extremely small groups of <100 people. The trouble with communism is that people understand it intuitively and they like it. They want to share its benefits with everyone by forming a larger communism. That doesn't work.

Every science has to deal with the issue where the intuitive sense produces wrong results. Physicists have run experiments, e.g. dropping equally-shaped objects off the Leaning Tower of Pisa, that conclusively demonstrate that objects of different weight fall at the same rate. Multiple sciences have demonstrated that the world is not flat. There used to be a set of 7.5' topographic maps (twenty of them) over at Potsdam State. They were pasted together on a flat surface and at the edges, the maps could not be made to meet. They really should have made the surface slightly curved.

Here is where the economist gets angry. Economists have not been able to decisively and effectively communicate their results to the public. There are many economist jokes of the form "Lay a hundred economists on the ground end to end, and you'll have a hundred and one opinions." Economics is not about opinions. Opinions are what you have before you have results. Economics has lots of results, but people don't understand them even though they're quite simple results.

Take the example from above, about originary interest. People don't understand that a non-zero interest rate is natural. They think that all interest is profit, and so seek laws to interfere with the interest rate. If a law tries to set the interest rate below the originary interest, nobody will loan money. Nobody.

I want people to understand the basic results of economics. Anybody who doesn't, isn't fit to participate in the setting of public policy. Unfortunately, more often than not, lawmakers are lawyers and not economists. They pass laws which don't have the effect they desire. The only solution I see to that is to help everybody understand economics as best they can.

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Sun, 27 Jul 2003

Government "investments"

It's nearly impossible for a government to invest money. Quite a bald, bland statement. I hope to show you that it's true. What does it mean to invest money? Well, one reasonable definition is to spend money now with the hope and expectation of getting more money back later. It's not sufficient to get back the same money later (aka a zero-interest loan). Life is uncertain. Any reasonable person (and a few unreasonable such) prefers money now to money later. This preference is expressed in the interest rate you have to pay for even the most secure loan (with no risk of loss of capital).

Let me argue against myself. Let's say that a government is going to invest money in something. The Village of Potsdam recently considered putting in another water tower to the north of town. Various developers want to put stores on land out there. They were hoping that the village would annex the land and put in water and sewer services. The assumption is that it would be cheaper for the developers and the village since the village already has a source of clean water and has a water treatment plant. In order to do that, though, the village would have to put in a water tower, at a cost of millions of dollars.

The village made a reasonable profit and loss calculation, weighing the increased property taxes plus the price paid for water. They ended up deciding against putting in the water tower. Just not a profitable investment. Isn't that evidence against my thesis that a government cannot invest? (Hint to the unwary: I'm right, of course, so that even your best argument isn't going to work)

My thesis doesn't depend on that kind of evidence, even though you think it might. Let's say that the water tower would have been profitable. Isn't that now evidence that a government can invest? Nope, still not. The missing context is: where does the money come from to invest?

Where is the government going to get the money for this theoretically profitable investment?

It could borrow the money. It could get a commercial loan if the investment is short-term, or it could issue bonds. Either way, the money for both of those is consuming capital. In the first, the capital has already been invested in a bank for it to loan out. In the second, these new bonds are competing for the existing capital base. No new capital has been created, so when the government invests in this manner, they're causing something else to be devested. They're consuming capital -- to create capital?!? Perpetual motion machines don't exist, even if you use rotating magnets.

Some governments have the ability to print money. There's a bunch of different ways to print money apart from actually cranking up the printing press. It could change the rules on how much float on check payments are allowed, or how much reserve a bank needs to keep on hand. It could reduce interest on the money it loans to banks. Regardless of the details, these governments can cause the amount of money in circulation to change in such a manner that they spend the new money first.

Increasing the amount of money doesn't increase the amount of liquid wealth. It just scribbles out one number on the paper money and writes in a different number. Not all at once, though, so that the economy is irrevocably distorted by spending this new money. It's not real capital, it's just doing a negative-sum transfer from those who already own capital.

Finally, the government could just take the capital from someone. From the point of view of the investor, paying taxes is the same thing as consumption. How does an investor fund consumption? You got it -- by liquidating some of his capital. It's possible that an investor will curb consumption, and that the government will invest those taxes. Only in this rare circumstance can a government invest.

I want to mention that the presumption here is that the government is investing wisely. Look at the things your government spends money on. Are any of them investments or are they consumption? The vast majority of them are consumption. Some are investments. Only some are wise investments. The others, the foolish ones, must be treated as consumption, from an economics point of view.

Why is capital so important? Only one thing enables employers to pay employees more: when the employees produce more. Only one thing enables employees to be more productive: the use of capital. Anything that reduces the amount of capital in a society makes the society poorer in the long run. To a large extent, government spending is capital consumption.

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Fri, 25 Jul 2003

The 1998 ice storm

In 1998, Northern New York had an appreciable ice storm. Nearly everyone lost power, some for as much as a month. The power grid was lying on the ground, for the most part. We were lucky, as my wife insisted that I buy a generator before the power went out. We bought the last generator that Leberge and Curtis had in stock.

In any situation like this, where demand greatly exceeds supply, the price is going to rise. This is "duh" economics. But legislators (generally the villain in these writings) don't like this price rise. They call it "price gouging", as if the supplier were intentionally raising prices.

The reason the supplier raises the price is not to profit from anyone's distress. They raise the price for two reasons: because the thing they currently own is more valuable (so why shouldn't the price reflect the value?) and because the thing they currently own is more valuable (so why shouldn't it go to the person who values it the most?).

Given a limited supply of generators and too many people wanting them, how should Leberge and Curtis allocate them? Should they hold onto them, and only sell them to valued customers? Should they sell them at the usual price? Should they allow the price to rise to the market-clearing value? There must be some allocation system. Some people who want generators are going to have to go without. No allocation system is completely fair; welcome to reality.

I argue that the price should be allowed to rise. There are several sublime advantages to letting the free market do its thing.

Some people argue that it's not fair for one person to gain from another person's suffering. This is a ridiculous idea, of course. If you starved yourself all day long, so that you were suffering from extreme hunger when you went into a restaurant, should that entitle you to a discount? I don't see how it's any different just because you didn't choose to suffer. Life is full of vicissitudes.

Still, a lot of people accept that argument, and they insist that prices be controlled in a disaster situation. They say that naturally, helpful people will bring generators to the North Country. Sure. No question of that. Except that helpful people are probably already helping someone else. It's not like they're sitting around saying "Hmmmm.... there are no disasters right now, I think I won't be helpful to anyone." They need to be persuaded to drop what they're doing and go help someone else. The profit from the higher prices is the persuader. Only ... when the prices aren't allowed to rise, fewer helpful people help. This is the effect of marginal value.

Still, they're making unconsionable profits, aren't they? Well, maybe not. If the price shoots up very quickly, perhaps too many people will be spurred to action? In that case, there will be many generators, and generators will be real cheap. There's always risk in seeking profits. Sometimes you lose money, instead.

Still, let's say they are making these profits. Is there anything too terrible in allowing helpful people to have some extra money? Probably not, but what about the people who feel only greed? Shouldn't evil be punished? Only in cartoons is anybody wholly evil. Anybody who busts their butt driving a truckload of generators is going to be doing it for multiple reasons. One of them is profit, sure. The other is pride in helping stricken people. Profit, pride, profit, pride go the thoughts, round and round.

The faster the demand goes away, the better, from a public policy point of view. This isn't going to happen unless everybody who wants a generator gets one. The best way to make that happen is to allow prices to rise.

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Robotic Nation?

Sigh. Marshall Brain has no sense of historical perspective. We have been installing robots in our society for many, many decades now. Have we seen any systematic reduction in employment? No, of course not.

Let's take a very simple example: rugs. Used to be that rugs got dirty, and everybody accepted that. The rugs would be taken outdoors and beaten with sticks to get the worst of the dirt and sand out of them. Who would do this extremely unpleasant job? The children of the family, usually female children.

Some number of years ago, somebody invented a carpet sweeper. It had a pair of brushes attached to the wheels. When you pushed it back and forth, it would pick up the dirt. It was quick and easy to use, and allowed a homeowner to remove dirt before it became ground into the carpet. Did anybody become unemployed? Well, the children did, but everybody counts that as a benefit, including and especially the children.

In more time, somebody invented the electric vacuum cleaner. It was able to actually suck the particles out of the bottom of the rug. Did anybody become unemployed by this? No, instead what happened was that rugs got cleaner. People's standards increased as the cost of achieving that standard fell.

Nowadays, you can buy an actual robot to clean your carpets. It's not a very smart robot, doesn't have arms and legs, and is in no way humanoid. It's 4" tall, and because of that does something no humanoid robot can do: it can easily clean underneath things. It's also very cheap: $200.

People who predict the rise of humanoid robots simultaneously causing massive unemployment mistake the evidence of their eyes, and ignore economics. First, because nobody has created a humanoid robot which can do a job better than a specialized robot. Second, because a specialized robot will always be cheaper than a humanoid robot. Third because increases in the ability of tools to expand human effort has always resulted in just that: an expansion of human effort, not the elimination of it.

For the last five hundred years, one and only one thing has consistently become more valuable: human time. Anybody who wants to argue that that trend is going to reverse direction has to put forth an exemplary case. All the more so in the case of Robotic Nation since previous such arguments have all proven to be wrong.

For further reading: Jack Powelson's _Centuries of Economic Endeavour_.

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Tue, 15 Jul 2003

Space Exploration

Has anybody else noticed that the US is now running a state-owned socialistic space exploration program, and the Russians are running a free-market capitalistic, "You pay, you fly" space exploration program?

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Where is the Freedom?

A Friend points me to an article in Tikkun by Charles Derber. In this article he basically decries the way that the Bush administration is interfering in the economy. He's right, of course, but he doesn't understand why he's right.

He doesn't understand the problem. If you don't understand the problem, nothing you do is likely to solve it. It's like looking for something if you don't know what it is. You're just as likely to walk right past it as stop on it. The problem is not what Bush does to interfere in the economy. The problem is that Bush is interfering at all.

Charles thinks the problem is that Bush is interfering the wrong way. A lot of people feel the same way. Many people want Bush to interfere in different ways. Of course, other people agree with Bush, and like the way he interferes. They're wrong, all of them.

Religion was forever the cause of warfare between citizens. The citizens thought that the government of a country *had* to choose a religion and force it upon the citizens. When the government changed, so would the religion. We have proven, in the US, that that idea is wrong.

Similarly, people have the idea that a government must control the economic behavior of its citizens. This principle, which Charles clearly supports, is the direct cause of everything he decries. As long as he tries to solve the wrong problem (what the government does) he will never fix the right problem (how much the government does).

I don't want to go into all the details here, but for anything a government does, you can find a combination of private property and free markets which provides the same service at the same level of quality. Sometimes, alas, the service is poor. That's not a condemnation of free markets, but instead a recognition that the problem is hard to solve.

Realistically, free markets will solve some problems better, and some worse, than monopoly economies. Unfortunately, you have the perverse effect of people not noticing the improvement, but only the problems. People are naturally conservative (in the sense of wanting to continue with solutions which have worked before). It's hard to improve society by making changes.

I sometimes get depressed by how many people still think economic intervention is necessary, and not just a power play on the part of the influence-makers. Hopefully, as more people understand economics, they will tell their government "No, don't do that for me -- I can do it better for myself."

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Wed, 11 Jun 2003

Immigration, just because

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.

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Sun, 08 Jun 2003

Media Concentration

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.

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Tue, 03 Jun 2003

Government licensure is counter-market

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.

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Mon, 02 Jun 2003

The Impossibility of Economic Calculation

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.

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Mon, 26 May 2003

Make Sense, Christopher!

Sigh. Christopher Lansdown asks me to comment on his opinion piece. Okay, well, I will, but I'm not too sure he'll like what-all I have to say. It's not good, Chris, it's not good at all. At least he is not satisfied with what is taught as economics in the universities, I'll say that much in his favor.

Backing up one moment, the problem is relatively simple. You can't spend what you don't have, and so if you take in money slower than you spend it, you build up a deficit.

No. If you take in money slower than you spend it, that is a deficit. When you run out of savings, a deficit has to be covered by borrowing money to create debt.

If this doesn't change, you will eventually build up so much debt that no one will lend to you any more and everything will fall apart. Tax cuts without reducing spending is doing exactly this: decreasing income relative to expenses and thus creating a deficit which spirals out of control.

No. The problem is not that no one will lend to you any more. The problem is that they want so much in debt service that you cannot afford the debt. It is not that the deficit spirals out of control. It is that the debt service becomes an increasingly larger and larger proportion of your budget. It's not that Chris is wrong, it's that Chris is not writing clearly and carefully. I'm not always careful either, so no pejorative intended.

To get it out of the way quickly: fear of debt aside, debt is a useful tool for producing wealth. The times when you want to borrow are precisely the times when you don't have: bad economies and wars.

No, debt is not necessarily useful. Public debt is usually a sign of bad debt. When money becomes public, it is often spent more foolishly than if it remains in the pockets of taxpayers. If you're spending money because you have a "bad economy", you need to look in a mirror. Free markets are naturally resilient. It is not normal for businesses to all run into trouble at the same time. When they do, it is because a single powerful entity (aka a central government) has made a mistake. So, for the government to try to fix the economy is a misnomer: the problem was created by government action, so why does anybody expect that government action can fix it?

update: Christopher comments: "The tech bubble of the late 90s was not regulated into existence by the government, it was caused by a general excitement as well as a dutch tulip trade effect." Greenspan admits that the fed was concerned about receipt hoarding because of Y2K concerns, and that the fed printed up many new dollars and put them into circulation. Where did those dollars go? Into the stock market.

Wars are typically paid for by inflating the currency. The War of Iraq Regime Change will be no exception.

The important thing which is so often forgotten is that money is not static. If you hold spending constant over years, you are actually cutting it. Money becomes progressively worth less, and the economy continually grows.

Christopher is again half right. Money is definitely not static in value. A constant amount of money actually progressively becomes worth *more* as the economy grows. The reason Christopher has this exactly backwards is simply because governments with a central bank cannot resist the temptation to raise money by printing money. Oh, the theory is that the central bank adjusts the rate of inflation so it is equal to the rate of growth of the economy, so that the number of receipts is kept equal to the amount of the value. Great theory, but it never really pans out.

we borrow money to stimulate the economy,

No. It's not possible to stimulate the economy by taking money from people. What were they going to do with it? Keep it in their mattress? Of course, if they were going to do that, then you wouldn't be able to tell that they had it, and you couldn't tax it away from them. No, the only money you can tax is money that the owner isn't spending because nobody has persuaded him to spend it.

If you have a government populated solely with wise people, who can take money from foolish people and spend it better, then you can stimulate the economy. With the simple addition of wings, pigs can fly. Rather, there is a reason why pigs do not fly, and there is a reason why governments are not populated solely with wise people.

update: Christopher comments "What government can do in this case is force people to borrow the money and do work to create wealth. The nice thing about steel mattresses is that you do know where the money is, and can force people to spend it." Unfortunately, this requires a government wiser than the people that make it up. Where are you going to get these people when by your own accounting, the people are behaving foolishly? You can't make a silk purse from a sow's ear. Forcing people to waste money is not productive; it's just wasteful. Note: Christopher seems to be talking about what is politically possible. I acknowledge that the level of economic education is very poor (in fact that is why I write) and that people want the government to spend all sorts of money on their behalf. That is wrong, and we must be clear on that. If economists are to speak truth to power, we must say what is best for everyone, not just what is best for tax recipients.

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Fri, 23 May 2003

Taxes spent badly are wasted

Andrew Sullivan takes a potshot at deficit spending, and deservedly so. A lot of people think that government spending can somehow improve an economy. "Economic development", it's called. No, no, and no. When a government takes money from people in the form of taxes or inflation, it is destroying one kind of spending and replacing it by another.

Now, it may be that the current owners of the money (or more properly, liquid value) don't want to spend it. Maybe they want to keep it as capital. And yet, capital does nobody any good (earns no interest) unless somebody spends it. It's a completely wrong idea to think that government spending does anything other than replace private spending.

So when talking about government spending, the first and foremost question is "is it wise spending"? Is the money going towards capital or consumption? If you educate someone in something useless (e.g. underwater basket-weaving), that is consumption. If you educate them in something useful (and I'm not smart enough to give any examples of what will be useful; only what might be useful, but heck, you can do that as well as I), that is a capital investment.

If a government builds a road, is that capital investment? Not necessarily. If the road goes nowhere anybody wants to go, it's consumption. If the road replaces a congested road, it's capital (maybe; there are better ways of dealing with congestion; public roads are subject to commons tragedies).

Consumption isn't necessarily bad. People consume all the time. Entertainment is consumption. Consuming something which is currently capital is wasteful. Coercing someone's capital away from them, and consuming it is very, very bad. It makes society in general worse off. Unfortunately, most government spending is consumption, simply because governments aren't wise enough to spend other people's money as well as the person would.

Now, of course people consume their own capital, and of course people spend their own money foolishly. No one thinks otherwise. The real concern is whether governments waste money more often and to a larger degree than private spenders. There is plenty of evidence that they do.

A society with a large private sector is more resiliant than a society with a large governmental sector simply because the number of decisions that are being made is larger, and the amount of resources they are made over is smaller. People make mistakes, and the more powerful a person the more significant their mistakes. Oh, if you could get power to wise people, you could address this problem. Unfortunately, wise people don't seek power, being wise after all, you see.

Hrm. I see that I haven't said a word about deficits, have I? That's probably because the real problem with deficits is that they are just another form of government spending. Deficits are bad simply because all government spending is bad (or at least, not as good as the private spending it replaces). Doesn't matter how you get the money, whether by borrowing it (deficits), by coercing it (taxation), or by printing it (inflation).

Please understand that I am completely unswayed by any amount of anecdotal evidence. Sure, you can point to a lot of government spending that has improved people's lives. That's not the point. The point is that people would have been even better off if the money had been spent by its owner.

All of that said: the only problem that a government can solve is transaction costs, and it does so at a cost of its own. Only by comparing those two costs can you properly decide if the government spending makes sense or not. Far too many people look at the end product, value it, ignore the cost of government spending, and skip over the comparison. This is an ineconomic idea. The science of economics exists to answer these questions. Skipping over the question doesn't answer it.

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Tue, 13 May 2003

The cost of fiber optic cable

If you read this in North Country This Week, skip down to the part you haven't already seen. What follows is the letter to the editor:

I'm glad that a journalist has finally addressed the DANC fiber scam. I told Tom Sauter (head of the project at DANC) over a year ago that his misrepresentations were going to catch up to him. He said that what he was saying was technically accurate because DANC was going to only sell dark fiber and that Verizon and Time-Warner wouldn't sell dark fiber. He felt it was fair to say that there was no [dark] fiber in the North Country. Now that DANC is going to light the fiber I wonder if that's still true?

DANC should understand that people don't care about fiber optic cable when it comes right down to it. They only care about the services you can get from fiber. Data communication services are expensive up here, but that's because it's expensive to install and maintain so many miles of fiber at union rates.

Now, one thing that the Verizon camp isn't telling you is that there are actually TWO sets of fiber optic cables in the North Country: Verizon's, and Time-Warner's. Every road going out of Potsdam has Time-Warner fiber optic cable, and has for a half-dozen years. You can see it for yourself -- it's the black cable lashed to the silver cable above the telephone cable and below the power cable. At the poles it has an 4" long orange sleeve that says "Fiber Optic" on it.

Everything Verizon says about their investment has been true. If you want to take a drive, you can see for yourself. In West Stockholm just south of the village market is a brand-new remote telephone switch served by a fiber optic cable. There's an excellent place north of Potsdam to see the two sets of fiber. Right where the road to Unionville meets Rt. 56, on the west side of the road, to the south of the pole nearest the intersection, are two fiber splice cans: the lower one belongs to Verizon, and the upper one to Time-Warner.

Looking at the both of them makes it clear that we probably already have more than enough fiber optic cable in the North Country. Fiber optic cable is a lot like a railroad. Once you've got one, you don't really need another. Once you've got one, you can't really afford another. All over America, many railroads put in competing lines. Nearly all of them are gone now.

You can make a case for publicly-owned fiber optic cable, but not an overbuilt (built alongside existing facilities) publicly-owned fiber optic cable. The characteristics of fiber optic cable make it such that installation is more expensive than the fiber itself. Invariably several times as many fiber strands are installed as are ever expected to be needed. If you think you need two, you install six or eight, and so on.

Telecommunications in the North Country would be much better if DANC were to consult with Verizon and Time-Warner, find out where they would *like* to have fiber, install it there, and trade, route-mile for route-mile, with existing V and T-W (I got tired of typing them out) fiber strands. Obviously, V and T-W would not be incredibly excited about doing this, but DANC could threaten them with an overbuild.

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Mon, 12 May 2003

Creating Jobs by Firing Workers

Steven den Beste writes about Hiring and Firing, defending the American practice of actually firing workers when there is no longer a business requirement for their labor. Bing! Right on, Steve! He didn't say so very much about it (in contrast to some of his other writings which go on for pages and pages) probably because he doesn't think much of himself as an economist.

I, on the other hand, have no such modesty, and plenty of reason to write about economics (I am The Angry One after all). Everything Steve said is true, and I'll assume that you've gone off and read it, and have come (back) here. His main point is true. American businessmen do not suffer the risk of being forced to employ when the reason for the hiring has lapsed. Ironically, this results in less unemployment because of a coincident effect: the ease of growing or starting a business. If that was not present, then a company's ease of firing workers would be difficult to justify. I don't know enough about the difficulty of growing or starting a business in Europe. I suspect that it's hard: A customer in Norway told me that a business was required to supply every employee with a view of sunlight.

Steve didn't answer John's question fully: "I'm curious what your views are on corporations rush to save money by laying off or letting go (a nice term for firing), employees. I think its somewhat foolish to go that route first. If every company were to do this then how could anyone purchase their products or services?" One implication of free markets is that a company not only can, but should fire every worker possible. There are two reasons why

The first reason to "fire a worker if possible" is that everyone in a market is better off if the same output can be produced from the same input with less labor. It doesn't matter if the employee is purposefully or accidentally being unproductive. In either case, if their labor doesn't eventually contribute to the bottom line, their employment should be terminated. This comes from having a free market.

Now, some people would read this and say "Well, obviously this is a problem with free markets." Not so. It is what causes free markets to create and share such wealth. In the short term, yes, the corporation gains all the benefit from the worker's loss of their job. In the longer term, though, that benefit is competed away. If Company A can fire a worker, so can Company B. They'll want to sell more of their output, so they'll cut their prices relative to Company A. Their sales will go up. Company B will either have to cut their prices as well, or live with reduced profit. Either way, the value of the fired employee's job gets returned to society in the form of lower prices for the product he (wasn't helping to) produce.

The compassionate person would say "fine, but that doesn't help the fired person". Ahhh, but yes, it does. That person also lives in the market, and gains his fair share of the increased productivity from his lost job. Not only does he gain it from his lost job, but also from everybody's lost job.

This brings us to the second benefit from firing workers: unemployment. Ahhhh, but how can unemployment be a benefit? It is a benefit if you're starting a company, or trying to add workers. When a worker gets fired, you increase the availability of workers. Workers become cheaper. When a business finds that a resource (and labor is a resource) becomes cheaper, it will try to restructure its business so that it uses more of that resource. So, when one business fires a worker who is not being productive, another business will go looking for that worker to be productive in their business.

Of course, some wags would point to persistent levels of unemployment and say "Okay, if you're so smart, why aren't all these people being employed?" This question is relatively straightforward to answer. Any particular level of unemployment has two parts to it: the natural level of unemployment, and the unnatural, or created level. Natural level first.

There really is a natural level of unemployment. Zero unemployment is unnatural. It is caused by interference in the free market, such as that by the USSR which forced all workers to either find a job, or be employed by the state doing menial labor. In a free market, where people make their own decisions, people need time to find a new job. Gainful employment is *always* available to everyone, at some low wage. Nearly everyone refuses to take the first job available to them, seeking instead to find a job which pays them better, or uses a skill for which they are trained. This is the natural level of unemployment. Exactly what it amounts to is a matter of the nature of the mix of people who are unemployed.

Unnatural unemployment is unemployment created by government edict. Yes, the government claims credit for creating jobs at the same time it destroys them. Anything that interferes with the natural functioning of the free market will create unemployment. For example, if you force employers to pay a minimum wage, not everyone will be able to find employment at that price. If employers are forced to supply health care, or unemployment insurance, or time off, or anything else, that will result in less employment.

One more note to answer John's concern: labor costs form the bulk of the cost of all but the most unusual businesses. If a business gets into trouble and needs to cut costs, the very first thing it's going to do is try to reduce employees. This is a natural consequence of the (relative) wealth of the ordinary laborer, and not something to be decried. For over five hundred years the lot of the ordinary laborer (those people formerly called peasants) has been improving. There is no reason why it should stop improving.

I know that all of this sounds cold and cruel-hearted. "Think about the workers!" no doubt some will cry. I do think about the workers. I want them to live in a vital and growing society where there are well-paying jobs enough for everyone. Such a society must be a free-market society, over the long term.

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Fri, 09 May 2003

Going Loco

Honestly, folks, some economists write books just so they can show their parents how successful they've become. They know their parents are never going to read the book, so it doesn't matter if the book is complete balderdash. Michael H. Shuman's book, Going Local, is one of them. Here's a quote from the local newspaper: "St. Lawrence County must think about the holes in its economy and become self reliant." Quite obviously this means not importing self-impressed pundits.

Okay, so Shuman goes on a book tour (want to bet you could buy his book in the lobby? And that he would graciously sign it after his sales pitchtalk?) and misleads innocents. Is this forgivable? I don't think so. If you call yourself an economist, and he surely does, then you've got to be aware of the principle of comparative advantage. It's not new. If it was a new idea and he was an old guy, he might be forgiven. There are a fair number of things which an economist trained fifty years ago might not have learned. Michael isn't 75. He has no excuse, even if comparative advantage was a new idea, which it isn't.

Adam Smith was a popularizer of ideas, not necessarily an innovator. Still, it's fair to give credit to the person who got the idea to you, not just the person who came up with it. Adam Smith taught us (at least, those of us who are listening) that it's always in your best interest to do the thing you're best at, and trade that for what you're not. I can hear Homer Simpson now: D'Oh! There are a lot of things that science has discovered which isn't obvious. Comparative advantage is not one of them.

Shuman is quoted as saying "When you are import dependent you are doing an enormous disservice to your economy." No man is an island. Everybody -- all of us -- even you -- are dependent on imports. You can see how confused Shuman is by thinking, not about "economies" (too abstract), but about yourself. Are you dependent upon imports? Not just yes, but heck yes, darn it! You need to import food into your body. How do you get this food? By spending effort. Why do plants and animals feed us? Because we protect and nourish them.

Shuman's suggestion that communities should be self-reliant makes about as much sense as suggesting that people keep chlorophyll pods underneath their skin and stay out in the sunshine all day. I've got better things to do than that. Rather than calling his book "Going Local", he should have called it "Going Loco", because that's what his ideas are: just plain crazy.

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Tue, 06 May 2003

I'm not defending vouchers, no way

Kim commented on an earlier posting of mine about vouchers. Well, actually, it wasn't about vouchers per se except to diss somebody who was attacking vouchers. I had much more to say about her motivation for attacking vouchers than the actual attack itself. But Kim isn't sure vouchers would be so wonderful. Rather than praising the reasonable things to say (how outré), I'll just attack the economically-ignorant things he says. Um, at least I think it's a he. Kim is one of those sexless names, you know.

Many poor parents realize this, and pour a higher percentage of their resources into education. Some don't. Remember that poverty is not a disease of the stupid, yet some people who are poor will be stupid. The existance of some young people who are badly educated by their parents does not mean that all young people should be badly educated!

"Well, there's only so many jobs" is a damfool thing to say. Sorry, but it's just plain silly. Think about all the jobs that exist right now: grass blade straightener (think of all the blades of grass that get bent over in parks), garbage washer (don't you think it's horrible that garbagemen have to endure smelly garbage?), glass picker-upper (every minute, another glass bottle is broken in America). Okay, enough abuse. The problem clearly is not jobs. There are plenty of jobs out there, most of which suck. The problem is not JOBS (yo, politicans, read this sentence again!) the problem is capital.

Capital formation is the #1 primary problem facing people. If not for the presence and utility of capital, we would each and every one of us still be scratching in the dirt for our living. Not that I wish to demean anybody who makes the choice to scratch in the dirt! It's just not a job that I'd choose to do for my sole source of income.

I really ought to be linking to Human Action by Ludwig von Mises (pronounced like pieces). He points out that there are generally three commercial roles (and it must be noted that these are roles, not people): the laborer, the entrepreneur, and the capitalist. Here is generally how commerce works:

  1. The entrepreneur conceives of an unease in people.
  2. The entrepreneur thinks of a way to fulfill that unease.
  3. The entrepreneur locates a capitalist to get capital.
  4. The entrepreneur pays capital to the laborers to create the product, buys them the equipment they need, rents the building, etc. All of these are a capital expense, because there are no sales yet.
  5. The entrepreneur sells the product to customers.
  6. The entrepreneur pays the capitalist for the use of his capital.
  7. (Note that the laborers have already been paid out of the capital).
  8. The entrepreneur rebuilds the pool of capital to pay the laborers for the next production run.
  9. If anything is left over, the entrepreneur keeps it.
  10. If the entrepreneur makes a lot of money, other entrepreneurs are attracted like flies to garbage.
  11. If the entrepreneurs doesn't make any money, he leaves the business to succeed or fail on its own.
  12. Over time, the competition reduces the entrepreneurial profit. In order to make more money, the entrepreneur must create new businesses, new products, or new cost savings. An entrepreneur must keep innovating to make money.

There is no shortage of jobs. There is only a shortage of capital. Capital comes from savings. Who generally saves the most? The wealthy. That is why taxing the wealthy is a regressive tax. Over the long time, taking most of your tax dollars from the rich leaves the poorest worse off. It's called "eating your seed corn" and everybody knows that you only do that when you're most desperate, right?

Vouchers are definitely a second-best solution. They create a market, but it's not a terribly free market. Vouchers will inevitably come with strings; whether tests or certifications or minimums, vouchers substitute one really bad bureaucracy (the public school system) for a better bureaucracy (the voucher system). You still have population A spending population B's money; never a good idea, and the root cause of a low-quality educational system.

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Fri, 02 May 2003

Vouchers drain money

Barbara Miner recently complained in a Knight-Ridder op-ed column, that vouchers drain money from public schools, and that a priori this is a bad thing. Well, I'm sorry, Barbara, but tough titty. The whole point behind a voucher system is to let money flow to those who provide service. If people chose private schooling for their children over public schooling, it is because the public schooling is inferior.

One aspect of a free market that leftists (and you don't get much more leftist than government-paid schooling) don't like is the fact that it creates winners and losers. They don't like competition, preferring instead, cooperation. Cooperation is so much better, they say, because it doesn't make for winners and losers.

What these idiots completely fail to see is that competition is not a replacement for cooperation, but is instead the precursor to cooperation. Once the sale has been made, the competition stops and the cooperation begins. Without cooperation, there is no sale, no trade, and no profits.

Here's how you can put these people in their place (the trashbin of history, one hopes): ask them what their plan is for optimizing cooperation. Ask them how they would create the largest amount of cooperation. After all, not every offer of cooperation is equal. If I offer to cooperate with you by paying you $3 for a blinky light, that's different than if I can pay $1 for a dozen blinky lights from someone else.

Which is better? Which causes more cooperation? Not obvious. Only way to find out is to let everyone make their offers, and allow the participants to decide whose cooperation they prefer.

So when vouchers take money away from public schools, and Barbara Miner whines "For the sake of our nation's children and our future, we must save our public school system", spit in her eye and say "I want more cooperation than I'm getting from the public school system."

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Sun, 27 Apr 2003

What if school were like a really bad job?

Update: Sarah Fitz-Claridge agrees with me.
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Wed, 23 Apr 2003

After Email Dies

The existing email system will not survive. Too many people are receiving too much unwanted email. Too many people are making lots of money sending email to too many people. Let's assume that the current system is going to die. What will replace it?

Instead of writing email, people will publish web pages. Instead of the recipient paying for the resources to hold the email, the sender will pay for the resources to publish the web page. There's basically two types of email: mailing lists, and email addressed to one or more individuals. Let's address the latter first.

Right now, when you send email to someone, you send a message from your client machine to their server. The email is stored on the recipient's machine until they read the email. Under the new system, you would create a web page, and store it on a server. The URL would be something unguessable like http://example.com/~nelson/827134282173614682732.html. If I wanted to send that email to someone, I would point them to that URL. If I wanted to send it to many someones, I would point a program to that URL, and it would create an index of available messages.

I'm glossing over some details. In particular, the notification mechanism. At first, the notification mechanism would be ordinary email. When you published a message (in essence, like hitting the 'send' button), your publishing software would send a notification to the recipient(s) using the new protocol. If their computer didn't understand the notification, then your publishing software would email a URL to them.

I'm also glossing over privacy. Some people would want to send encrypted emails. In order to do that, you would have to have a copy of the recipient's public key signed by yourself. It would work in a similar method to PGP's web of trust, except that everybody would have a published public key. Casual encryption is built-in.

Why is this going to help with spam? Because it shifts the cost of receiving email from the recipient to the sender. Let's say that somebody tries to notify the entire Internet of their message. Some people would keep track of how many people are notified. If too many people are notified about the same message, or about the same server, then it gets marked as a possible source of unwanted messages. In order for their spam to be successful, they would have to remain as a sitting duck the whole time, accessible to blocking.

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Sat, 19 Apr 2003

Air Pollution is bad, and it isn't.

Is air pollution bad, or isn't it? If you were to walk up to any person of average economic learning (the average is pretty low, remember), they would say "Well, of COURSE air pollution is bad." That's a natural consequence of the question. Now ask the question this way: "Is polluting your air bad?" and you will get a different answer from a thoughtful person.

This latter question presumes that air can be owned. Does it make sense to talk about ownership of air? Nobody seriously thinks about ownership of air because there is no way to control the flow of air. Air is ordinarily fungible -- one bit of air is just like another. If the wind is blowing one way one day, and you give me a certain quality of air, then when then wind blows the other day, it only seems fair that I should return your air in the same condition I got it, right? Otherwise you should have a private right of action for redress.

Certainly the current system, wherein "We all own the air", produces sub-optimal uses of air. In an effort to control abuse of air, "we" have set rules that allow for controlled amounts of pollution. This bothers some people, because they put a higher value on clean air than do others of "us". This is a problem in a democracy, of course, because whenever you vote, some win, and some lose. Anybody who doesn't like the current levels of pollution has obviously lost. Anybody who is polluting underneath those levels is not doing anything wrong, in *any* sense of the word.

Private property rights lead to a different system for regulating air pollution. Therein, you would expect that the quality of the air flowing over your property's borders was identical no matter the direction of the wind. If it differed, then you would expect to be compensated by the upwind property owner.

Exactly how that would turn into a system of payments would depend largely upon the businesses that people create and the available technology. For example, it's very likely that you would rent the air pollution rights to your property to a local holding company. That company would monitor the air quality as needed around the neighborhood, and send out bills to transgressors. If there weren't many transgressors, then you would probably end up having to pay the local holding company.

Now, you might say "But that's horrible! Why should I have to pay for clean air?" You pay taxes now, right? And those taxes pay for the EPA, right? You're paying for clean air now. Do you feel like you're getting your money's worth? Would you pay more taxes if you knew that would actually result in cleaner air? Some would, and some wouldn't. That's how free markets work. You pays your money and you makes your choice. Freedom results in more people getting exactly what they want, and everybody getting more of what they want more than our current fiat system of air pollution control.

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Fri, 11 Apr 2003

BOCES -- A Bad Idea

BOCES (Board Of Cooperative Educational Services) is a New York State educational institution. It's a part of the system of publicly-funded schooling that New York residents pay for. BOCES provides various services to public schools. For example, they provide special education aids and teachers. They also provide vocational training not available in the schools themselves. They also provide payoll services and Internet access.

The spirit behind BOCES is a good idea, of course. "Hey, let's help the public schools by providing services for them that they can't reasonably provide for themselves, like distance learning." Oh, and while we're at it, let's help schools pay for this by giving them state taxpayer money. This will even-out the educational system so that the level of schooling you get is not dependent upon the wealth of your school district.

Unfortunately, like all well-intentioned ideas whose implementation is not critically-examined, BOCES has turned out to be a bad idea. Not only has it turned out to be a bad idea, any economist could predict that it was a bad idea beforehand. Why establish a bureaucracy to provide services which are available on the open market? There are any number of companies which are happy to provide payroll services, or Internet access.

Anything that BOCES provides could be simply purchased by schools that want it. Or not. That's how free markets work. Instead, the market for services that BOCES provides is very much tilted in BOCES favor. You don't get state aid if you purchase payroll services from the cheapest vendor. You only get it if you purchase it from the "company store".

By interfering in the market, New York State is providing BOCES with artificial demand. The best thing that New York State could do is stop providing BOCES with state aid. Let BOCES compete with the private sector. Fortunately, that is exactly what Gov. Pataki is doing. He has proposed a 25 percent cut in BOCES aid for the 2003-04 school year, and elimination of aid for many services in the following year. Thank you, George!

A big raspberry to the Nassau County BOCES. They're spending your tax dollars to lobby for more tax dollars. They're also seeking to deceive you in the process. They're implying that state aid dollars come from some magic pot of gold up in Albany. Not true, Nassau County taxpayers! State aid comes from your pocket, goes up to Albany, and then comes back down to your BOCES, diminished by everyone who has their hands in the till. That would be, um, me, because your taxes pay more for my county's BOCES than my taxes pay for your county's BOCES.

BOCES must die, to be replaced by companies that perform those services in exchange for real money, not funny-money state aid.

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Mon, 07 Apr 2003

Medical Insurance

Do you have health insurance?

We have an institution in the USA that we call "medical insurance." It is nothing like insurance, but instead more like socialized medicine for employees. If you have a full-time job working for someone, you very likely have medical insurance. There's a small deductible, and beyond that most costs are covered by the insurance.

Insurance is subject to a problem called the "moral hazard". Very simply it is that the person being insured knows more about their need for insurance than the insurer. For example, if you smoke, or if your ancestors died at an early age due to a genetically-associated disease, you need insurance more than the next guy. Paradoxically, insurers want to sell to people who never need it, and yet the people who want to buy it are the people who are confident that they'll need it.

This conflict is resolved by selling insurance to a large category of people at the same time, for example everyone who works at the college, or is a member of the union, or who attends the same church. Membership in those groups is only weakly predicated upon one's need for insurance. That's good, and it's fine as far as it goes.

It doesn't go far enough. At some point in time; I haven't done the research to find out exactly when it was, the tax code was modified so that individuals and corporations paying for medical insurance were treatedly differently. Corporations paying for medical insurance found their payments to be an expense of the business. Individual's medical insurance payments were like any other expense -- non-deductible.

Corporate deductibility of medical insurance payments has had a perverse effect on medicine. With the system was arranged such that pre-tax dollars paid for medical insurance, a corporation is able to purchase more insurance than the employee. To make this work, though, insurance has to pay for ordinary expenses. That's not how insurance is supposed to work. Insurance is for uncommon expenses.

In a well-designed system, individuals would choose a doctor and pay for most health care out of their pocket. This would have the pleasant effect of causing bad and expensive doctors to go out of business. It would also encourage a thrifty health care system. Even so, there would be medical expenses beyond the ability of most people to pay in a reasonable amount of time. That is what medical insurance is for -- to cover unforseen expenses. Such insurance has a high deductible, in the realm of thousands of dollars.

The current system of health care is broken. Because most medical expenses are paid through insurance companies, the purported beneficiary, the patient, has no say in the treatment. Patients are told which doctors they can visit. Doctors are told which treatments they can prescribe. Hospitals are told how much a treatment will cost.

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Mon, 31 Mar 2003

Tax exempt bonds

A Toronto company wants tax-exempt financing from the St. Lawrence County Industrial Development Agency to help reopen the former Zinc Corporation of America mines.

So goes the news report. It's unfortunate, of course, that the supply of zinc has gotten so much larger than the demand for it that the mines in St. Lawrence County are no longer profitable. Sad for the workers. Good, though, for anybody who makes anything that has zinc in it.

Should St. Lawrence County make the bonds tax exempt? Probably not, although they probably will. As the Watertown Daily Times article points out, the county incurs no financial liability from approving tax-exempt status, and would not have to pay anything if the company defaults on its debt or goes bankrupt. From the view of the legislature, the only visible cost is their time spent approving the tax-free status. You bet they'll approve it

Unfortunately, whenever a government meddles in the formerly-free market to give one company an advantage over another company, they are engaging in central planning. They are saying that that company's jobs are more important than other company's jobs. By reducing one company's taxes, they are forcing those taxes to be made up by everyone else. It's as if they took a few cents from every tax-payer and put it in the new company's pocket.

You see this all the time, in all sorts of flavors. Legislatures give tax breaks many more times than they would get away with direct subsidies. Taxpayers understand when money they paid flows to a private company. They don't understand that the very same thing happens when a company's cost is reduced by fiddling with taxes. Well, you read it here, so now you have no more excuses.

No welfare for the rich!

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Sun, 30 Mar 2003

When you buy me, you buy my mistakes

Back when I was a freshman at Clarkson University (nee Thomas S. Clarkson Memorial College of Technology), I was paid to write programs on the PDP-8. Yeah, I was a smarty-pants. End of the two-week pay period, I would have to fill in my time card, telling Dr. Willmert how many hours I had worked that week.

Computers then were just like computers now; hit the wrong command and you can destroy hours of work. No, we can't blame everything computer that works poorly on Microsoft, since Microsoft didn't exist at the time. Well, while I was working, I can recall two instances where I destroyed several hours worth of work. Oops. I made the professional judgement that, when you buy my time, you buy my mistakes as well.

How can this be acceptable? Shouldn't there be some sort of mechanism for correcting for my mistakes? Shouldn't I split the loss between employer and employee?

No.

Let's say that I had mistake insurance, where my mistakes were covered by insurance. If I made a mistake, I would not bill my customer for the lost time, but instead would file an insurance claim. Wouldn't that seem to be a better solution? All my customers would pay the insurance, and none of them would have to pay if I made a mistake.

Well, that's a silly idea! Of course my customers are paying for the mistake -- in my mistake insurance premiums. I don't get to keep the money that they pay me which has to go to the insurance company, so as far as I'm concerned, I'm not making that money in the first place. So in order to get the same amount of money as without, I'd want to increase my rates to cover it.

Same thing if I didn't have insurance. Let's say that mistakes didn't cost me all that much. Instead of purchasing insurance, I simply self-insured. There's no real change in my situation. Instead of me paying that small amount per month to an insurance company, I'm paying it into a bank account. I withdraw money from the bank account whenever I don't charge a customer because I screwed up.

Now, take that money, and instead of me putting it into the bank account, I give it back to my customers. I charge all my customers a little bit less because I sometimes make mistakes for one or two of them. It's the same. Modulo overhead, the amount of money being flipped around is the same, and the effects on the customer and myself remain the same.

There remains two minor differences: when I make a mistake, I know that I made it. My customer doesn't necessarily recognize that I made a mistake. In an insurance regime, that might affect who asks for insurance. Also, when the customer pays for my mistakes, their payment is proportional to the difficulty of the job. If it's a hard job, then I might make more mistakes. On the other hand, it'll be worth more to them.

Anybody see any parallels to medical malpractice? You should, because that's what I was actually writing about, not programming.

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Tue, 18 Mar 2003

Democracy is not always representative

Dave Farber runs a mailing list called Interesting-People. He mostly publishes things that interest him (even things he disagrees with), and which he thinks will be interesting to people he finds interesting. With over 10K readers, you could say that he runs the grand-daddy of all blogs. I'm going to spare the contributor who opined the following from any direct embarrassment, but if you really want to know who said it, you can examine Dave's archives.

At this point, all the economists in the audience start to twitter. It's well-known at least among the economically savant that in fact democracies do NOT necessarily represent the 'will of the people'. Let's take an issue and call it X (hoary, I know, but run with it). With any issue put before a legislature, people will not be affected equally. Some will benefit greatly, some perhaps little. With some issues, some benefit greatly, and others are harmed little.

Transfer payments, always a popular action among the representative set, are like that. Take a circle of a hundred people, each with a handful of nuts. Go around the circle and take a nut from everybody. Throw away fifty nuts. Pick someone at random and give them fifty nuts. They will be happy. Everyone else won't care much. This is the problem in a nutshell (buh-dum-dum).

Economists have noticed that a democratic government often does not accurately express the 'will of its people'. The problem is that the incentives to improve society are perverse. There exists a type of friction in the marketplace called transaction costs. Every time you make any kind of trade, there is always some waste. It's precisely analogous to friction in physics. A part of what you want is lost in the transfer.

When the value of a transaction is exceeded by the cost of the transaction, the transaction doesn't occur. More is destroyed by pursuing that transaction than is gained. When 99 people lost a single nut, they didn't care enough to stop that particular transaction. The cost of doing so was worth more than the value of the nut. On the other hand, the person who got the fifty nuts was very happy. They had a concentrated interest in the nut deal.

There are many cases in a democratic government where the cost to the multitude is small enough that they just don't care. The effort needed to stop X (remember X? This story is about X) is below the pain caused by X. On the other hand, the party who benefits from X is very interested in ensuring that X happens. They'll be willing to spend money to cause X to happen (those are the fifty nuts that got destroyed).

There are many, many examples of this effect. After reading this, I'm sure that you can name some. It's completely bogus to say that a democratic government follows the will of its people. That activity is observed more in the theory than the practice.

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