The Angry Economist

Just got back from my third trip to India. I've been working with Rediff on Rediffmail for going on five years. When I first went there, they had 125K users. When I left ten days later, they had 143K users. Now they're pushing 30M users if they're not there already, with terabytes and terabytes of disks spinning and servers and servers handing out webmail.

On my first visit, we were troubled by two strikes. One was actually not so bad, as it was the taxis and I had a company car and driver (if you can drive in Mumbai, you can drive in Boston; the converse is not a given) at my disposal. Without the badly-tuned diesel taxis on the road, the air cleaned up first-rate. But still, Mumbai basically shut down for the day, and the taxi drivers made their point. Similarly, truck drivers went on strike the same week, and delayed shipment of the servers we needed for the cluster.

The strikes were caused by the government trying to increase the price of diesel fuel to match the market price they had to purchase it at. Clearly, it was the opinion of the strikers that they should not be subject to market discipline. Perhaps if they were, the taxi drivers would have taken their taxis in for a tune-up to increase their fuel efficiency. Pollution is not just trespass, it's waste.

Several of the people I spoke to said that conditions for business were improving in India. This is good. It is VERY good. All the socialist redistribution in the world won't help if there is no capitalist production to redistribute. More than that, a wealthier economy helps everybody by creating surplus. This increased prosperity increases the price pressure on the only truly scarce commodity: human attention.

India is reducing its tariffs, making it easier to start a business, eliminating anti-competitive laws, and privatizing businesses. They still have a long way to go. They gave up about fifty years of development while pursing a socialist fantasy. But they are making progress, and we should cheer them on. Go India! Huzzah! Huzzah! Huzzah!

If I had my choice of perfect worlds, there would be no government in it. People purchase protection from a private company of their choice. This company, in turn, subscribes to a system of laws which is privately written. Independent judges interpret the law fairly, or they don't get the business next time. Some legal systems will come into conflict, which will be resolved by a payment in one direction or another. The price one pays for a legal system determines the amount of conflict one bears. Poor people obviously get a cheap one which doesn't allow for much conflict. But it does cover them against the essentials -- no murder, no theft. In the end they get more justice by buying it in an efficient market than what they're currently getting through government -- arguably less than zero.

There's a lot of reasons to expect that this would result in better laws.

Obviously, in my perfect world, some parents still hurt their own children, so there must be provision in people's laws to protect children against their parents as well as others. And equally obviously, some people will seek to employ inordinate violence against their attackers, so there must be provision in people's laws against that as well. How do I know that these provisions will be there? Because people will purchase a subscription to a legal system without knowing whether it will be used for or against them. So, they will shop carefully. Will they make mistakes even though I'm supposing a perfect world? Sure they will. But the mistakes come from their own choice of legal system, and they have the power to correct that.

None of us has the power to correct our governmental legal system single-handedly. A private legal system, on the other hand, would quickly triangulate on what the majority desire for justice. The legal systems that gave out the justice that most people wanted would be cheapest, which would tend to bring in people from the sidelines to the same majority legal system. In practice most legal systems would be very similar to each other, and would be very close to optimal. This should be contrasted with the current governmental systems, which tend to produce laws optimized for special interests.

If you want an example of how this might work, take an extremely difficult example -- abortion. Clearly many people want the freedom to abort their babies. Many people also think that's murder. They would each choose legal systems that allowed or disallowed abortion. How, then, would these legal systems work? How could you both allow and prohibit abortion?

Let's follow an example. A woman gets pregnant and decides to carry the baby to term. Fine. She's not disobeying anybody's laws. Let's say that she decides to have an abortion. Obviously she hasn't chosen the anti-abortion legal system. She would contract with a doctor for an abortion. However, the pro-choice legal system has been paid to include a term that says that an anti-abortion protection firm will be informed of such a contract. Maybe the woman doesn't like this very much, but she chose that system, and besides it made her legal system cheaper. Now the anti-abortion firm knows that she's serious about getting an abortion. They offer to buy her all the medical care she needs to deliver the baby, and will find parents willing to adopt the baby.

Now here's where it gets tricky. Exactly what happens depends on exactly how many people are in favor of abortion choice and how much they're willing to spend to get their way. Let's say that the anti-abortion people are in the minority. They won't have the resources to help every women, but they'll have it for some, as many as possible. So, even though they're in the minority, they'll get their way more often than they do now.

Let's suppose it's the other way around -- that the pro-choicers are in the minority. It's likely that their legal system will be more expensive, because it includes the choice of abortion. It also requires them to seek counselling before getting an abortion. It also imposes a mandatory 7-day waiting period. Both of these were purchased by the anti-abortion majority, who have large resources at their disposal. A license to have an abortion might cost some serious amount of dollars.

Do poor people get screwed by a private market for law? Yes, absolutely, no question about it. If they weren't screwed, you'd have a hard time calling them "poor", or saying that "poor" was a bad thing to be. The harder question to answer is whether they are screwed more or less under a system of governmental legislated law as under a system of purchased private market law. At least under private law, somebody can purchase a subscription and donate it to them. If you think nobody would do that, you must first take your magic wand and wave away the existance of the Carnegie libraries.

In this manner, through a market for law, you have people purchasing, not voting for, law systems. To the extent that they purchase non-controversial, majority law, it's cheap. If they want to do something most people disagree with, it costs them money, and not many people can afford to do it. Contrast this with the current system where every man has a vote regardless of how strong he feels about the subject, and every decision is decided regardless of how many people feel strongly about it.

New Jersey State Senator Shirley Turner has done it again. Oh, I don't mean that she's ever done it before, although she probably has. She's proposed Yet Another short-sighted law. She's "protecting jobs in this country."

Bullshit. Pure, unmitigated bullshit. Sorry, Shirley, dear, but I gotta call it the way I see it. And you are full of it. You aren't "protecting jobs in this country." You're protecting visible jobs and destroying invisible jobs.

Here's the problem: it's visible when an employer shifts a job performing the same task from one place to another. The people of the first place tend to get resentful of the people of the second place. Don't matter if it's a Potsdam job that moved to Canton (e.g. the County Health Services), or a New England job that moved to the South (e.g. garments -- incidentally the cause of northern support for minimum wage laws), or a New Jersey job that moved to India.

What they fail to see is the new job "taken away" from the people of the second place. Inevitably, when there is free trade, trade balances. It MUST balance. If the state of New Jersey pays Indians dollars to do something for it, those Indians now have dollars. They're going to spend those dollars somewhere. Maybe they'll spend them buying tiny Japanese cars? But now the Japanese have dollars. Eventually, somehow, those dollars that New Jersey spent are going to come back to the US, and create a job for somebody.

Generally speaking, everyone is best off if they do what creates the most value, and trade for everything else. This isn't news. Adam Smith wrote it as our country was being formed. It seems very strange that our elected representatives -- who in theory are wiser than the common rabble and better able to take a wider and longer-term view -- don't know that.

Fortunately, there are a limited number of economic ignoramuses like Sen. Turner in the New Jersey legislator, and the bill hasn't made it out of the committee yet. Let us hope that it never does!

Inflation is a description of an decrease in the price of money; nothing else. Den Beste gets it wrong when he attributes inflation to the price of oil. It doesn't affect the point of his posting, but why not get all the details right?

UPDATE: Joseph writes, saying that Den Beste is correct because the price of so many things is dependent upon oil that when oil gets more expensive, so does everything else, and rising prices is inflation. No, that's not right. Increasing prices are a symptom of inflation, but they are not inflation. Other things can cause prices to rise or fall. See the chapter on Inflation from _Economic Freedom & Interventionism by von Mises.

Earlier, I wrote about Lemon Laws. These laws exist to solve the problem of cars which require "too many" repairs. The problem is not that the seller does not honor a warranty. The assumption is that the existance of problems -- even repaired problems -- is evidence of the existance of more problems. You can see this in the computer software field. Some programs are written securely and never have any security problems. Other programs were written without security as a goal, and trying to bolt on security later proves difficult.

So, the problem exists. The question for an economist is what to do about it. I can answer that question (and I may be right or wrong), but the process of answering it is more interesting than the answer itself. Leo writes to tell me that car dealers often try to cheat their customers. That fact (which, really, surprises nobody) is almost completely besides the point.

First, interesting economic things happen in the middle, not the edges. It's not likely that any businessman is completely honest or completely dishonest. Instead, some businessmen will be more honest than other businessmen. So, saying that car dealers often try to cheat their customers says nothing. The real question is whether more honest car dealers make more money than dishonest car dealers. If they do, then the tendency will be for honest car dealers to out-compete dishonest ones. If they don't, then there's clearly a business opportunity for someone.

Every trade in a free market generates a surplus in value for both parties. You could argue that a "fair trade" is one in which the surplus is equal. Most often the surplus isn't equal. Sometimes it's a seller's market, where the seller sets the price, for example in an emergency. Any time the surplus (on either party's side) is large enough, it will attract more entrants into the market. This results in competition and tends to reduce the surplus.

Markets work best when people buy things often, and when there are multiple suppliers. This isn't the case when you're buying a car, which people may do only five times in their life. Automobile companies try to reduce competition by only establishing a limited number of dealerships in a region. As a general rule, competition works well because experts are competing against experts. You may not know how to bottle up soda, but the experts are coke, pepsi, and many other cola suppliers do. By competing against each other for your business, they keep each other honest. That competition is lacking in the automobile market.

There oughtta be a law!

You've no doubt hear the clarion cry "There oughtta be a law!" uttered in response to some inequity or another. You shouldn't be surprised to hear me question that request. Laws and markets work in very different manners. For any arbitrary problem that a market has trouble solving, it may be that a legal solution works better or worse. Far too many people assume that a law can solve any problem which is not solved to their satisfaction by markets.

For example, you could attempt to solve this problem by passing various laws related to automobile quality representation and guarantees. Or you buy insurance from a company which will buy your car if it needs too many repairs. Since the company doesn't want to lose money, it will charge you more to insure a car from a company which often makes lemons. You could use that as a clue not to buy that company's cars, or if the cars are special, just knuckle down and pay the higher premiums. Such a company doesn't exist right now. That's because the lemon laws have legislated such a company out of existance. Or, at least, they ensure that no such company could make money.

The biggest problem with passing a law is that you lose information. Since everybody has to comply with the law, there is no way to find out if a more or less strict law would work better. With a market solution, you have competition to provide the best solution. People are free to experiment with different solutions.

Dividends and capital gains are now taxed at the same (low) rate. Heretofore, capital gains (an increase in the value of a stock) have been taxed at a lower rate than dividends (corporate earnings distributed to stockholders). This led corporations to prefer capital gains over dividends. Over time, companies have ceased to pay out dividends because they can deliver more value to stockholders by increasing the price of their stock. This has led to some poor practices. Paying dividends is a good thing, for several reasons.

First, because capital -- deferred expenditures -- is the only thing that makes society wealthier. Even if you think we should soak the rich, that doesn't work if there are no rich to soak. If you think that a rising tide lifts all boats (which is a code phrase for "Don't tax the rich; the rich create more jobs by spending their money than the government will.") then you definitely want society to be wealthier. Taxing dividends is a form of capital consumption.

Second, because dividends keep a company honest. Enron got into trouble because they falsified earnings. The value of a company is based on its earnings. By creating book (accounting) earnings, they increased the value of their stock. This encouraged people to invest more money in Enron. If, instead, investors demanded dividends, Enron's duplicity would have been discovered sooner. False earnings cannot be turned into cash and paid out.

Update: Marc points out that false earnings can be turned into debt. He's right. For example, a company committing fraud can sell more stock based on their false earnings. This amounts to a classic Ponzi scheme -- paying off early investors with new investment. Or they could convince a bank, on the strength of their earnings, to give them a line of credit. Let's say, as a weaker form of my point, that having to pay dividends eliminates the ranker forms of fraud, but not all of them.

Third, because the stockholder has chosen wisely by purchasing a stock that produced earnings. Obviously, some stocks do not generate the earnings that people expect. Perhaps the marketplace of the business is declining (think buggy whips), perhaps the company is badly managed, perhaps the company has simply been out-competed by a more efficient company. The fact that the stockholder chose wisely says that the stockholder should be given a chance to do it again. She should be paid a dividend, so that she can use her wisdom to purchase more of the same stock, or another stock even more likely to generate earnings.

Fourth, because corporate managers have a built-in incentive to grow the company in opposition to paying out dividends. A bigger company is expected to pay higher salaries to the top managers because of the increased responsibility. These managers tend, then, to engage in mergers which turn out to be unprofitable. The majority of purchasing companies pay too much for the purchased company. If, on the other hand, the company pays a dividend, that reduces the amount of available cash for frittering-away purposes.

Classic investment advice, such as that in Benjamin Graham's book _The Intelligent Investor_ advises investors to put a premium on stocks that consistently pay a dividend. Hopefully we can return to the days when companies that are pleasing their customers can also please their stockholders by paying them a dividend.

According to Walter Williams, New York State has statutory minimums on gasoline prices. That means that a portion of your gas dollars goes to the state to pay for taxes, and another portion goes to prop up the price of gas to reduce the effects of competition. .... Just so you know where your money is going.