The Angry Economist

I received the following email in response to a previous posting about why a MOGOW would vote Republican. I have to agree with the author. George H. W. Bush is not an exemplary Republican. Two notes: first is that I am an autodidact economist; that is, I am self-taught. If I see far it is because I am standing on the feet of giants. Second is that a Goldwater Republican can and should stand up for liberty by voting not for Tweedledum, but instead for Michael Badnarik, Libertarian candidate for President. He won't get elected, not in America's winner-take-all two party system. But voting for him will send a clear message that the Republican party needs to move closer to the Libertarian party, just as the people who voted for Nader caused the Democrats to move farther to the anti-corporate, anti-market, anti-prosperity, pro-justice, pro-equality, pro-poverty position. They didn't waste their votes, and you won't be wasting yours by voting for Badnarik. The only way to waste your vote is to vote for someone because his opponent is worse.

I have no trouble seeing why MOGOWs would vote Republican. I do, however, have trouble seeing why anybody economically literate would vote Republican in this election (as opposed to past ones, which were understandable).

As the Economist magazine has said, George W. has invented a new classification of politician: "Big Government Conservative".

Even subtracting military & homeland security spending, George W. has increased government intervention in the economy by more than any president since LBJ. He has thrown over the "small government" Reaganism in favor of expansive intervention on the economic level - against free trade (remember Steel tariffs?), for expansion of government (notice the government spending levels?), for increased transfer & social payments (remember prescription drugs?).

I can completely understand if you wish to vote for him because of his international policies; I am consistently shocked when people let that or their past voting patterns blind them to Bush's surprise reversal on economic matters.

As one schooled in economics, you should be the first to be educating your readers that the real "tax" is government spending since it removes productive resources from other uses; the level of "tax" you pay only determines how much you pay now and how much gets added to your national debt tab. Bush has been the instigator behind many "deferred tax increases" while trying to persuade us they are tax cuts.

I'm forced to vote for the Democrats this year, not because Bush is too conservative, but surprisingly, because he's too liberal.

Steven E. Landsburg maintains "It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers." Far from it. I maintain that old argument, because the old argument is still true. To the extent that minimum wages actually raise wages above the market-clearing level, they create unemployment. I really don't care about the statistical studies of actual minimum wage changes, because legislators carefully ignore the moronic requests to double the minimum wage. Instead, they wait until nearly everyone is being paid more than the minimum wage, and raise it just a little. The effects of these kinds of changes are not discoverable by statistical studies because they are lost in the noise.

Steven also shows that he is indifferent to the fate of the people who become permanently unemployable. He claims that they don't care about having their job destroyed. He says "... so what? Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place.". How in the world can he speak about, much less *for*, someone he has never spoken to? That is, you see, the gist of the problem. The minimum wage destroys the jobs of people who are not known to be willing to have their job destroyed. This seems to me to be completely immoral.

Steven makes the point that published statistical surveys are not representative. He's probably right that we should ignore them. We should ignore them not for the reason he gives, but instead because it's simply bad statistics to measure the results of ongoing production. Instead you should run an experiment at the ends of the parameters you wish to study. The trouble is that we've done that experiment already, and whole industries got destroyed.

Morosoph fails to get the minimum wage argument correct. He makes three glaring errors. First he says "Well, everybody will just raise their prices", ignoring the fact that some will compete by cutting costs. Second, he admits that some poor shmuck is going to lose his job because of the minimum wage. How can that ever be moral? And yet people support the minimum wage because it's just. Third, he thinks that "Decent statistical analysis would clear the air..." It won't, and not for a lack of trying. There are many reasons why a person might lose their job. The effect of a minmum wage increase happens over time, not immediately. This information is lost in the noise. There's no way to pull it out of the noise except by raising the minimum wage by a lot. That's been done before, and yes, many people lost their jobs, so no, we don't need to run that experiment again.

The theory predicts it, the evidence supports it, the only question is "how many people lose their jobs vs. how many people's income goes up." But how can any moral person ask that question? How can it be right to hurt some innocent person just so you can help other people?

Morosoph's kind of economics is the kind that just pisses me right off, because he Just Doesn't Understand how economics works in the real world. He thinks that legislated laws can break natural laws. He would probably vote in favor of changing the speed of light.

I received email from a reader, asking me to resolve a dispute between her and a friend:

I hope you don't mind if I ask you a question: I am having a little argument with a friend about if capitalism requires winners or losers. He says no, and in fact, that losers hurt the market because they have less money to spend.

I, on the other hand, think that capitalism requires, at least, the opportunity to fail. From there it doesn't seem like much of a leap to say that it requires losers. My questions is, what would a capitalist economy look like if every transaction was a win-win transaction? Would that be an ideal economy? Would it be sustainable? What would happen?

I think that they are having trouble resolving this question because it's a wrong question ("Ask the wrong question, you'll get a wrong answer.") It can be answered trivially, so let me propose a better question, and then answer that.

By definition, every transaction in a free market economy is a win-win transaction. Both parties see more value in what the other party has than in what they have, so they trade. In any other circumstance, one or both value their current circumstances better, and refuse to trade. The only kind of trade you can have in a free market economy which leaves one of the parties immediately worse off is when they are forced to trade against their will.

Leaning heavily on Ludwig von Mises' tome Human Action, remember that the future is uncertain. People's opinions about the future differ. People take actions based on those opinions. All actions involve an element of risk. It's simply not possible in this world for all actions to succeed. Some will pan out, some will come up dry (very deliberately choosing to use those two cliches).

Every transaction is undertaken because the individual perceives a benefit at the time. Therefore, her question is trivially answered "every transaction in a free market (capitalist) economy already is a win-win transaction." I don't think she'll be satisfied with that answer, however, because I don't think the question is right. I think a better question, following from the dispute between her and her friend, is "Does the proper operation of capitalism rely on some people making mistakes?"

The answer to that question is "No". It's more a matter of mistakes being inevitable, and capitalism surviving them. If people didn't make mistakes, then capitalism would work much better ... but then again, so would socialism. Capitalism has a lot of flaws, whereas socialism is perfect in its design and has no flaws. The trouble is that imperfect people have to carry out both systems. Capitalism trades off the constant presence of small mistakes and thereby avoids the big mistakes that a socialist economy will make.

Poor Gregory Mankiw. He points out a fundamental theorem of modern economic science, and gets excoriated for it. I refer of course to his statement that outsourcing American jobs was good for the country in the long run.

He's right.

You can practically use people's reaction to his statement as a litmus test of economic understanding. Does somebody understand the least bit of economics? If so, then they agree with Gregory. If not, then they disagree with him, often vocally and vehemently. Economic flat-earthers, I call them.

America's strength is its willingness to lose jobs. Look at all the buggy-whip jobs which don't exist anymore. Or whaling jobs. Whole careers have been eliminated. Not just some jobs, but all of them. Gone. Not overseas, but gone from the face of the earth. Now, if we're willing to destroy jobs, why is it such a Big deal if somebody else in some other country gets that job? This whole outsourcing flap is like throwing something out, and then finding that somebody has garbage-picked it.

Okay, you can make the point that we weren't really done with those jobs. That people were still willing to do them. But here's the catch: for what wages? There is no such thing as "unemployment", and there is no such thing as "unemployment insurance". Something exists that has that name, but it is not insurance. You cannot insure against something over which you have full control. Insurance doesn't work that way. Insurance covers you against things that you cannot control.

The alternative to losing jobs is to keep jobs doing things that people don't want. Besides the morale problems with doing something that nobody wants, you also have a serious economic problem. You can't have everyone doing useless work. Somebody has to be productive to pay for those jobs that are no longer needed. What happens when people in the former group move into the latter group? There's no such thing as a perpetual motion machine.

You may question my assertion that "unemployment" does not exist, particularly since you hear unemployment figures quoted weekly. Very simply, yes, there are people who choose not to work for a particular wage. They are not simply unemployed; they cannot find work for a wage of their choosing. So, it doesn't make sense to talk about "unemployment" without knowing more about the jobs that aren't being taken. If a Wall Street stockbroker cannot find a job paying $200,000/year, is he unemployed? According to the Bureau of Labor Statistics, yes, he is.

Let's take a case which might be more obvious. Let's say that a laborer earning the minimum wage becomes unemployed. The stockbroker can probably find a job by offering to work for less money. The laborer doesn't have that option. He is not unemployed by choice, but instead by fiat (and no, I don't mean that the Italian car manufacturer refuses to hire him!). The source of minimum wage unemployment is the minimum wage.

Now any non-economists must be livid. "Ask people to work for less money!!! How can you do that?? You are cruel and heartless!!" Um, no. Consider the plight of the poor unfortunate Indian worker who gets paid far less to work in one of those Indian call centers we've heard so much about. Instead of answering the phone as Suskana, she has to answer the phone as Susan. Instead of working during the day, she has to work when most of her countrymen are asleep (IST == +1030, as opposed to an EST of -0500. Do the math). For this onerous duty, she gets paid $2 an hour, for which no American would work, could work. The thing is that her expenses are much lower. She can eat out every day for those wages, and afford a nice three-bedroom apartment in downtown Mumbai. Wages have no meaning unless you consider what they'll buy.

An efficient economy is constantly driving down prices and profits. This seems counterintuitive to anybody who lived through the inflation of the 70's. Inflation, though, is a monetary phenomenon. While it doesn't affect every price identically or immediately, it affects all prices because it's a change in the supply of money. What matters is the amount of time that you have to work to exchange for something of value to you. That amount of work has been dropping more or less steadily for the past five centuries. It may be that this year or this decade is one in which that trend shows a temporary reversal. As Mankiw said, in the long run, it's good for US jobs to be exported overseas. What he didn't say, but which is equally true, is that it may be painful in the short term when US jobs are exported overseas.

The good sense of "You do what you do best, I'll do what I do best, and we'll trade" cannot be denied ... except by people without a good sense of economics.

TM Lutas comments, making the point that social relations create pressure to assist transitions into new fields. Indeed yes, but if you try to restrict job loss or tie training to the ability to eliminate jobs, then that becomes an economic issue and worthy of criticism. Separately he points out that sometimes other countries make a gift of their wealth to us, and he claims that's a problem. Personally I think "Hey, thanks for the wealth" is an adequate response, and the louder we say it, the better.

TM Lutas comments again, saying that I just don't get it. I think I do get it.

It's surprising how many people don't understand the nature of profit. They think that people who are wealthy must have become so at the expense of other people. They think that if you have more than other people, it must be that you profited at the expense of another. I don't mean to dismiss their objections or their outrage. But surely it can't be "profit" that they object to. Look at this:

• What if I have something you want more than I want?
• What if you have something I want more than you want?
• What if we trade?
• We're both better off.
• We've both profited from the trade.
• That profit wasn't at the expense of either of us.
• No third party was involved in this trade.
• Not all profit can be said to be "at the expense of another".
• So, they must actually be objecting to something other than profiting.
• For the sake of conversation and clarity, let's call that "orange".

Orange and profit, as attributes of human action, may be related. That is, there may be actions which result in neither orange nor profit, and actions which result in both orange and profit. If that's the case, then they are related to each other, or said to be co-related, correlated, or positively correlated. On the other hand, it may also be that you have actions that result in orange but not profit, and actions which result in profit but not orange. If that's always the case, then they are negatively correlated. They're still correlated because if profit is present, then orange is not, and if orange, then not profit. It's just that the relationship is negative.

When profit is created by some actions, and other actions create profit and orange, then there is no correlation between profit and orange, because the presence of orange has nothing to do with the presence of profit. Profit is always present, and only orange depends on which action is chosen.

My point here being that you have profit without orange. Presumably, since people are objecting to orange and calling it profit, then you can have orange and profit at the same time. Profit and orange are not correlated with each other, and yet people criticize profit for being orange. I think they do this because most actions are neither profitable nor orangable, and then lump the remainder into just one category: profit or orange. The critics miss the cases where profit is present but not orange.

Why don't they see those cases? Because, surely, not seeing those cases is a symptom of bad economicing. Perhaps we can come closer to identifying the nature of orange if we can discover why the case of profit without orange is invisible to them or otherwise not a part of their experience? I need to ruminate more on this, so I'll pick this topic up later and link forward to it, and back to here. Comments and guesses welcomed.

Earlier I mused about some people's reaction to profit. I noted that profit didn't have the qualities that they imputed to it. I guessed that they were actually objecting to something else, which I called "orange" (so as not to prejudice myself or anyone else as to its nature). Bob Johnson suggested that orange==passivity, noting that the harder someone sweats for their money, the more acceptable are their profits.

I think Bob is quite right here. The quintessential honest job is that of a farmer, and you know that farmers put their backs into their jobs. The next most honest job is a steelworker, another sweaty job. A more "orange", or passive, job is secretary. Secretaries rarely get sweaty; if they do, they're probably doing their job wrong. Still, the pay isn't very good, so the lack of sweat can be forgiven. Still more "orange" is the job of college professor. The perception is that they only have to come in to the office a few hours a week, teach a class or two or three, and rake in the bucks. All those perceptions are wrong, but the perception of passivity is there.

Even more passive is an insurance company. Their profits are assumed to come with no work. More passive yet is the job of landlord, particularly a landlord who doesn't reinvest money in repairs (but if those repairs won't result in more or retained income, why spend money on repairs?) The most passive is someone who merely invests in a company. Of course, if you invest passively, you get some pretty passive profits. While there's condemnation of investors when they're making money, there's little sympathy when an investor loses money.

Andy McAdoo, General Manager of Nicholville Telephone Company, writes, in part, about my earlier essay on DANC:

The central issue of the DANC project should be cream skimming. DANC discounts prices to large anchor users while ignoring the needs of smaller, less attractive users. DANC's cream skimming approach is widely viewed as anti-competitive by most knowledgeable regulators. By removing the large "anchor" customers from market, DANC creates a disincentive for service providers to invest in infrastructure and is actually limiting choices for the small business community and consumers in SLC.

Sorry, no, Andy, but free markets don't quite work that way (then again, with a government agency under discussion, who's talking about a free market, but I get ahead of myself). It's a serious problem, but not for the reason you state. Cream skimming is a natural effect in a free market, and one to be expected and enjoyed in its way.

Rich people have yachts. Everybody expects this to be the case. Only the people who worry that some rich person, somewhere, might be having fun oppose this (they are, by the way, the people responsible for killing the yacht industry by taxing it out of existance). Most people really don't care for yachting, so the price of yachts has remained high.

Rich people also buy Cadillacs, or at least they used to. The Cadillac still has the imprinteur of style, class, and just plain wealth, even if there are other expensive cars competing with them. A childhood friend of mine, Peter Goldring, had a father who worked on Madison Avenue. They had a Cadillac (this was back in the 60's). It was an amazingly plush and well-equipped automobile. It had automatic windshield washers and electric windows.

I always wanted to own a car with windshield washers and electric windows. I thought they were the neatest gadgets. I dreamed of being wealthy enough to own a Cadillac with those features. Of course, now I own a fairly pedestrian Subaru Outback with windshield washers and electric windows. You can't buy the car without them. It also has -- get this -- electric seat heaters. Not even Cadillacs had them back in the 60's.

Was Cadillac cream skimming? Yup. Was there anything wrong with that? Nope. They were specifically targetting a wealthy minority with advanced features and benefits, with no intention of ever providing them to the rest of us.

Why, then, do we have them now? The answer, simply enough, is free markets. In a free market, new things are always provided to wealthy people first. In time, entrepreneurs find a way to reduce the cost of those things, and sell them to everyone else.

What is wrong with the DANC proposed cream skimming? It is that it intends to operate outside free markets. First of all, they plan to sell to BOCES, which are about as socialist, centrally-planned institution as you can find in America (where is McCarthy when you really need a hearing?) apart from Congress itself. I'm not going to get into BOCES right now, since I've already ripped them up and down, and back up again.

But second of all, DANC is not a profit-seeking institution. They could, quite reasonably, stop at providing Internet access to the schools, hospitals and local governments. They don't have stockholders clamoring for the last bit of profit in a market. Andy is upset, and reasonably so, because DANC is planning on monopolizing the marketplace with subsidized (paid-for by grants) Internet. It would be too bad for Andy if DANC was a private company and was able to out-compete him. But they're not. DANC has their hand in the public till.

After all, once you've provisioned Internet access to the schools, hospitals, and local governments, what's left? Fibermark? Resnick Mattress Outlets? Kinney's? Wisebuys? Potters? In a competitive marketplace, a private DANC would end up taking only part of the market, leaving some for Nicholville Telephone, and Verizon, and Time-Warner. Everyone would skim off whatever cream they could, and in order to gain continued growth in profits, they would have to sell to the little customers who are less profitable to begin with.

So no, Andy should attack DANC for having their fingers in the public till (and that includes accepting money from BOCES) rather than attacking the idea of cream skimming. Given the chance, he'd do it himself. Or try, but so would everyone else who owned a right-of-way on the utility poles of St. Lawrence County.

Steve den Beste talks about economics. He does a pretty good job, but falls down on the parts he's not really talking about.

In a free market, over the long run, price == cost == marginal value. Everything that den Beste says about prices is true only in the short term. In the short term, the price is going to be higher than the cost in order to pay the entrepreneur who set up the business. However, that profit gets competed out, so that in time, the price of something equals the sum of the costs of it. Gotta remember that the cost must include everything: cost of goods sold, rent, power, light, salaries, interest and dividends. Interest is rent on money lent, and dividends are rent on capital ownership. Neither are profits to a business; the business pays them out.

The marginal value of something equals the price of it. If you valued the next one of something more than the price, you'd buy another one. There are obviously quantizing problems here (for most people, the first car is the only one whose marginal value exceeds its price), but if you average out the purchasing decision, it will close in on the price. For bulk-purchased commodities like loose candy, the value (to you!) of the last candy you slipped into the jar is equal to the price of it.

den Beste said that people have to value something more than its price or they won't buy. That's just a specific case of the marginal value being the value of the very first one.

So, all that said, is den Beste wrong about the inverse network value? Not at all. He is specifically not talking about a completely free market. He's talking about a market where the Rolls-Royce company has a monopoly on producing Rolls-Royce cars. The whole point behind trademark law is to allow producers to charge monopoly prices. In a completely free market, when Rolls-Royce tried to restrict production to keep prices up, other people would step in and create more Rolls-Royces. Not clear that anybody wants markets to be that free.

Update: Ron writes in with some confusion over marginal value: "The marginal value equalling the price depends on den Beste being right. It's the last customer that has value equalling price. If the price rises, he drops off and there's a new last customer at the higher price. If the price falls, another customer comes on and the former last customer makes a profit. All the customers but the last make a profit."

Ron, marginal value refers to the value to *you* of buying yet another one of the things. In the case that Steve is talking about (cars), very very few people buy more than one at a time. Therefore the marginal value in this case is going to be the same as the value. Quite clearly the value must be equal to or exceed the price for someone to purchase something. My point being that the marginal value might only equal the price. In the long term, in a free market, with something that doesn't suffer too badly from quantizing effects, it makes sense for somebody to keep adding items to their cart until the marginal value *equals* the price. This is true even if the first one purchased is the last one purchased.

Since I'm on the topic, what happens if the seller is deliberately quanitizing the price so as to "steal" profit from the consumer by arranging things so that the last one purchased always ends up with marginal value equal to the price? This is where the beauty of competition shines. Another less greedy seller could rearrange his sales so that he takes only half of the profit from that sale, and shares the other half of the profit with the customer (e.g. by offering a discounted price for buying that larger quantity).

I should note that transaction costs interfere with causing the price to exactly equal the cost, and the marginal value to exactly equal the price. Transaction costs suck, but then so does friction.

We live in an age when legislatures create laws from scratch. Laws were not always created de novo. Earlier, laws were discovered rather than created. A conflict between two parties was seen as a problem to be solved. A solution was discovered by wise people working on the problem, just as are solutions to most other problems. Once a good solution was discovered, it would be applied to all further instances of that problem. Thus was the law born.

Legislatures, on the other hand, make up laws even when no problem is to be seen. This has a well-known corrupting influence on legislatures, what with people convincing a legislature that a personal or corporate problem is actually a public problem. Beyond that, though, a legislature, in my experience, will create more laws than it is willing to pay to enforce.

By corrupt, I mean that they take money for a service with no intention of supplying that service.

Having a surfit of laws and a deficit of funding puts the executive body into a quandry. Since it cannot enforce all the laws, it must pick and choose. Once it has this discretion, it has the ability to grant favors. With freedom comes responsibility, or irresponsibility in this case.

Now, I don't want anybody to take this as a blanket condemnation of all executive bodies. I'm merely pointing out the economics of the situation. The legislature (itself an easily corrupted organization) has created an incentive for the executive body to be corrupted as well.

What is the cost of a man? Poets and philosophers have tried to answer that question for centuries. Give an economist space to try.

The cost of a person's death is the loss of their productive output. Some people are very much more productive than other people. A Hemingway, a Mozart, a Monet, or an Einstein, all have had a greater impact on society than a Smith, a Baker, or a Barber. Can we then say that some people's death would have cost society more than others? Only weakly. Once someone is dead, they're dead. The future is closed to us; their future is closed to us.

We cannot value a person by looking at their death. We can only value a person by looking, not at their life, but what they would trade for their life. People do dangerous things all the time. Driving down the road is dangerous enough. People are trading (a risk to) their life all the time. That means that we can conclude that people do not value their lives infinitely.

How to determine how much someone values their own life? You can look at it by how much life insurance they buy. That's not a very good metric, though, because people are not often in such a risk of their lives that they purchase all the insurance they need. A better metric is to look at the actions of people with hazardous jobs, for example an explosives truck driver. They're much more likely to look at the risk, and decide how much risk they're willing to bear for how long. That risk, carried out, is how much they value their lives.

I won't hold you in suspense any longer. The figure comes out to about $1.2 million. It's not an unreasonable number. It's about $26K per year over a 45 year productive lifetime.

Thanks to David D. Friedman for doing the actual research behind this, and publishing it in his excellent book Hidden Order.

There is no such thing as "the environment" from an economics point of view. People use that word, but it's poorly defined. There is only property. Some property is land, some is air, and some is water. Some owners of property are careful to prevent others from damaging their property, some are not.

Economists study markets. Markets only trade in property. If you want to examine something from an economics point of view, you have to consider that thing to be property. The defining characteristic of property is that it has a single owner. The owner gets to decide who does what with the property. These are called property rights. Some owners are of course not individuals, e.g. partnerships, or corporations, or governments. Still, the owner of property acts with a single voice when it comes to trading that property.

If you listen to some people, you would hear them talk about "the environment". They want to protect "the environment." Specifically, what do they mean by that? It usually means that they are against pollution (it means other things as well, but let's ignore those other things). What is pollution, though? Pollution is anything that they think shouldn't be there; for example noxious gasses or liquids or solids. Pollution is illegal when it is trespass. Sometimes pollution is not trespass because the property owner has a reason to accept the pollution. The difficulty is that not every property owner chooses to prosecute the trespass.

Why should these people care about "the environment?" After all, it's not their property -- it's the property owner's problem. Sometimes they care because they are a part-owner of the property. It's owned by a government that's under their control (or vice-versa), and the government is failing to take good care of the property. Sometimes they care because they are subjected to externalities of the pollution. Every use of property has externalities; the existance of externalities is not sufficient reason to discontinue that use of the property. The most interesting reason is due to the way in which we have split up ownership of land.

Ownership of land

Property rights may not be completely unique in the same volume of space. That is, you may have the right to do one thing with a piece of property, while I may have the right to do a different thing. For example, you may own the surface rights to land, and I may own the mineral rights. The US government owns the right to fly an airplane over that land. The same land has multiple owners of the property rights.

As every land-owner knows, one of the things you have to do with your land is pay taxes on it. You can reasonably view that right as "the right to collect property taxes". Some states are willing to sell you that right, e.g. Nevada. You can, when you purchase the set of rights we commonly call "ownership of land", you can pay extra (a lot extra) to purchase the right to collect property taxes.

The existance of this right to collect property taxes causes a problem. What if the property taxes are not paid? What happens then is that the property tax owner can get a lein on the rest of the owners. If the taxes become large enough, they can take possession of the land and sell it. Aye, here's the rub. What if the owner of the surface rights has extinguished the value of his right by allowing pollution? The owner of the property rights does not wish to see his value destroyed by another, and so he will take legal action to prevent the extinguishing.

This interferes in the market by preventing some worthwhile uses of land. What if someone could concentrate pollution on just one bit of land in exchange for money? That would be worthwhile because it would keep the pollution away from others. It would concentrate the pollution so that if the pollution becomes valuable it is available for easy recovery. After all, Pennsylvania farmers thought that oil springs were a nasty nuisance.

Government Pollution

Except in western states where water is scarce, both the air and water have long been considered to be owned "by the public." Before governments were forced to take notice by their constituents, they were poor shepherds of their property. Air and water pollution by industrial processes are well-known problems. Note, though, that when water is privately owned, it is taken care of. This is the same effect you see when pollution of privately-owned land is not tolerated.

Still, calling air and water "the environment" confuses and conceals the issue. It's not an "environment", it's property, and the owner of that property is the only party that should be stopping pollution.

I got frisked by the Portland airport TSA folks. Somebody forgot to tell them that modern batteries and explosives are mostly the same thing. They saw my four-NiMH-D-Cell battery box on the x-ray, and thought it was Semtex, a plastic explosive. I think their chemical detector also id'ed it as Semtex, but nobody ever explicitly said that to me.

While they were gingerly pawing through my possessions as if they might explode, I noted aloud how disconcerting it was to see them pawing through my possessions as if they might explode. Somehow they turned that into some kind of bomb threat, because they called down their manager, the airport administration, the Portland police, and a Delta representative on me. While I'm not stupid enough to bring up the subject of bombs at airport security, watching somebody act as if my stuff might explode weakened my resistance to said stupidity.

It was only about a half-hour delay, however, it was a half-hour during which seven members of the security infrastructure paid sole and exclusive attention to me. It's obvious to me that I was a false positive. It was less obvious to them that I was a false positive; nonetheless I was a false positive for their tests.

One thing that economics teaches us is that you can't do everything at any one moment. At any one moment, the resources available to you are limited, and you must choose how you wish to allocate those resources. If you do one thing, you cannot do another. If you chase down a false positive, that leaves less resources to deal with other positives. Computer security folks are well aware of denial of service attacks. I think that the Transportation Security Administration folks are less aware.

Let's say that I wanted to get something through security. The best way to do it is to try sending pristine folks through security in a way that will trigger a false positive. While security is dealing with them, they go through security themselves, to find out what level of false positives are needed to overwhelm security. At some level, the security folks are likely to start sending people through with decreased scrutiny.

Of course, the whole increased airport security thing is a moronic waste of time. No hijacker would dream of hijacking a US airplane. Everyone would assume the worst, and fight the hijacker for their lives. There was a reason why there were four sets of simultaneous hijackings, and why Flight 93 ended up on the ground in Shanksville, PA instead of Washington DC. Airports were secure enough before; what was not secure was the instructions given to flight crews to cooperate with hijackers. Bombs on airplanes are still a risk, but for killing people, you can't beat a crop duster flying over any outdoor festival.

We have built a Maginot Line in our airports. You can be sure that the next terrorist attack will come in through the Ardennes Forest or the Low Countries. The economics virtually guarantees it.

"My" (I certainly didn't vote for her; just because lots of other people did, that doesn't create any ownership for me over her) State Senator Hillary Rodham Clinton writes:

While the bill focuses on transportation, Mrs. Clinton is selling it as economic stimulation. Every $1 billion in highway construction creates 46,500 jobs, she said. "This is a jobs bill."

Her statement is true and false. She is correct in saying that it's a jobs bill. She is incorrect in saying that when the government spends money, that creates jobs. In fact, it's likely that it destroys jobs. The money that the government spends didn't come from nowhere. It came from taxpayers, who now have less to spend on whatever they wanted to buy. Those purchases would have created jobs as well, and everyone would have gotten what they wanted most. Instead, if a highway is constructed, some people will get what they want, and some people will not.

If you want to have a high Economist Intelligence Quotient (EIQ), you have to avoid these pedestrian errors. When you get really basic things like this wrong, as Hillary did, then you're starting from zero, as she is.

Andy Oram, who ought to know better, since he isn't a fool or loon, posits that Universal Service is a good thing. After all, he says, many other things are subsidized to good effect -- why shouldn't telecommunications be subsidized? As a perfect example of why subsidies are wrong from the start, look at the subsidized bus service between Plattsburg and Watertown (NY). Riders pay $10.30 to ride from Canton to Watertown, and $15.90 from Canton to Plattsburg, but the ride costs $115.

I think that, as penance, Andy should have to ride the bus himself, and whenever somebody tries to get on it, offers them a check for $115 if they'll find another way to get there. Anybody think he won't get any takers? Think anybody will refuse?

That's not his only mistake. He praises the E-Rate program (in spite of its flaws) saying "Tens of thousands of institutions have received Internet access thanks to the fund." He is making the classic non-economist mistake of only seeing what exists, what has happened, what has occurred. Give yourself ten points if you immediately saw the flaw in his reasoning. Economists realize that everything is a trade-off. If you do one thing, you don't get to do another thing. So, no action can be evaluated by itself. It must be evaluated in the light of what else could have happened. "What would have happened with those E-Rate dollars?" is the question Andy failed to ask.

Orson Scott Card is nominally a writer of Science Fiction. In his recent essay covering Optimism, Pessimism, War, and Oil, he gets the economics wrong. He insists that government has a magic wand which it can wave to create the next source of energy beyond oil. He wants government to wave that magic wand.

Orson needs to get a clue. Every time the government waves its magic wand, it's a swing-and-a-miss. Look at canals. Not a one of 'em made money except for the Erie, and it only made money if you assume that the capital that went into it had no better use. Look at railroads. The ones that the government subsidized didn't make money, and the ones that it didn't need to subsidize did.

Orson has several suggestions for what people should do. The major point that he's missing is the time value of oil. He suggests that we should preserve it for the future, because it will be more valuable then. If he was right, then people who have oil in the ground would be happy to leave it there in anticipation of a higher price later. They don't do that, though. Instead, they sell it. They sell it because they expect that oil, like every other commodity, will be cheaper and more available in the future.

Orson might be right. The people who stand to make a lot of money if he's right are doing the exact opposite of what he suggests. I think, therefore, that it's most likely that he's mostly wrong.

Update: Oleg Dulin comments, wondering how future value can be brought into the present. Ordinarily the way that is done is through property rights and futures contracts. If you own something, and you think it will be worth more tomorrow, you won't sell it today. But what if you need money today? If your property rights are secure, then you can sell a futures contract. You agree to sell something in the future for a price greater than the current price, but less than what you actually think it will sell for then. You accept the payment today, and transfer ownership tomorrow.

The problem that Oleg doesn't anticipate is: what if your property rights are not secure? What if you are the corrupt ruler of an oil sheikdom, and are shaking your country down for the oil? You can still sell a futures contract. It currently discounts the price as described above. The discount is increased by the unlikelihood that your country will actually transfer the oil after you have transferred the profits to your Swiss bank account.

Before you get too smug about those corrupt oil sheikdoms, consider that the same mechanism applies in an elective democracy, in spades. When a politician is elected for only four years, he has no guarantee that he will continue to have the same power beyond the election. Elected politicians cannot afford to waste time taking advantage of their power. An oil sheik can reasonably rip off his country for the rest of his natural life, and so can afford to take the long-term view.

Both Brad DeLong and Steven Landesburg get the minimum wage argument wrong (thanks to Tyler Cowen for pointing me to them. Don Bordreaux has also blogged on it recently.). The theory predicts that a minimum wage will destroy jobs. You sell the most of something when you're free to set your own price. If somebody forces you to set it higher or lower, you'll sell less or more than you would like. If somebody forces you to sell your labor for a higher price than you'd like, you'll sell less of your labor. This isn't Economics 101, it's Economics 001. If it's not true, all economists go home and cry into our beer because our work is all completely wrong. In order to arrive at a conclusion that goes against the theory, you need very good empirical data. If you want to prove that light can travel faster than the speed of light, you need very good evidence. That data doesn't exist.

The data is in fact crummy given the size of the increases in the minimum wage. First, the minimum wage intentionally affects very few workers. Second, the minimum wage is only increased after it isn't really necessary. Third, you can count the people who got more money, but you can't count the people who lost their jobs.

I took a course in statistics when I worked in production engineering at Hewlett-Packard. They emphasized several points. In order to get good data, you can't just monitor your processes. You have to run experiments at the limits of your processes. You have to replicate to reduce experimental error. You have to randomize to eliminate changes over time.

So, in order to answer the minimum wage question, you can't just increase the minimum wage by a few cents and then go measure everything you possibly can measure. You have to both completely eliminate it, and double it. You have to do it for two randomly-selected populations. Nobody wants to run that experiment. Everybody knows what would happen if the minimum wage was doubled: Huge numbers of people would lose their jobs. That's exactly what happened in Haiti in the 1930's when a continental US minimum wage law accidentally applied to Haiti. So, really, everybody who refuses to run the experiment has the answer firmly in their head; it's just in their heart that they refuse to acknowledge it.

Sigh. Tom Blackburn is right and wrong, but mostly wrong in his column on the minimum-wage debate. He spends two thirds of his column summarizing the debate among economists, which is a waste of time. Only incompetent economists fail to acknowledge that the minimum wage creates unemployment to the extent that it actually raises wages above the market-clearing price. He does this in order to conclude that the argument for the minimum wage is moral, not economic. The thing is, he's right, it is a moral argument!

Economists do not make moral judgements. They tell you what will happen as a result of an action that you choose. It is up to you to decide whether those actions will be moral. Tom is trying to say that he can ignore economics when it comes to making his moral judgement. He has found economists who disagree with the truth of the matter. This is necessary for him, because Tom's morals require that paying a minimum wage only be a cost to businesses. If he was to respect good economics, he would have to conclude that the minimum wages are immoral. How can it be moral to help some low-paid workers at the cost of hurting lower-paid workers by causing them to be unemployable?

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.

This dude on slashdot complains about "our purely monetary system -- there is no measure for the labor hours, or the quality of those hours, that go into the production of much of anything. The cost of things that can't be measured monetarily is all too often assumed to be "ZERO", but that simply isn't true. Even freeware costs somebody something to make."

Marx had this theory for the source of value. At the time he was writing, there was no consensus among economists for the source of value. Why are diamonds more valuable than water? They couldn't explain that, since obviously water is more necessary to human life. They didn't have the idea of marginal utility, so they were casting about for an explanation. Marx's explanation was that the value of something came from the labor that went into it. Water was easy to get, but diamonds had to be mined from the earth.

Curiously, some people still believe that theory even though there are numerous counter-examples to it. For example, it doesn't take into account time preference. If all else is the same, people value something now over something later. If I hide two packets of gold coins, and offer to sell you their location, one of which you will be told immediately, and the other of which you will be told in twenty years, you will pay more for the first than the second. How can that be, according to the labor theory of value? The same exact labor has gone into each packet.

The slashdot dude has obviously made the same mistake. There is no measure for the labor hours or the quality of those hours, that go into the production of anything. That's not how you assign a value to something. First, since value is relative, everyone assigns their own value to something. There is no such thing a single measurement of value. Second, you cannot assign a value to something by looking at what it cost you. If the value of something was always equal to its cost, nobody would ever sell anything for less than what it cost them. Third, the way you find out how much somebody values something is by looking to see what they will trade for it.

If something is not scarce, it is not an economic good, and you cannot measure its value with anything, much less money. Since it's not scarce, nobody will trade anything that is scarce for it. Doesn't matter what: time, drugs, sex. Or even money. Economics is not about money. It's about figuring out what people will trade for what. So, what would you trade to get a copy of the Linux kernel? Not the bits themselves, I mean the right to use or redistribute the Linux kernel. What would you give up to get that right?

Answer: nothing, because you already have that right. It's not scarce. Its value to you has nothing to do with its cost to you, or to the amount of labor that went into it.

Sigh. George Gonos, thinks that the minimum wage should be doubled. It's currently $5.15, and he's quoted in the May 24th Watertown Daily Times as saying that he would like it "set higher than $10/hour". He's listed as having gotten his PhD in Economic Sociology. I would call it instead Economic Fantasy.

Anyone is free to demand a living wage, of course. That's not what George wants. He wants employers to be forced to have to pay a minimum wage. The trouble with that idea is that no employer is forced -- no employer can be forced -- to employ anybody.

Go to anyone who employs people at the minimum wage, and ask to see their books. It's quite likely that most of them would refuse, but you'll find one who will agree. Double the wages of anyone making the minimum wage, and bring everyone else up to George's new proposed minimum of $10. Suddenly the books won't balance. You can be 100% sure that the employer will now be losing money. So go through the expenditures, looking to see what can be cut so as to make the business break even again. I can guarantee that there's only two places to get enough money to cover the new costs: employees wages, and prices.

So, one way to pay the new living wage is to fire half your employees. This is actually do-able. What you do is tell your existing employees "At the end of this work week, the new living wage law goes into effect. Half of you will lose your jobs, and the other half will continue to be employed. The ones who will continue to have jobs are the ones who have doubled the amount of work they get done in the same amount of time. Have a nice week!" Your employees will hate each other by the end of the week, but that's not your problem. This is, by the way, likely not the solution that George expects will happen.

The other possibility is to raise prices. The problem with doing this, of course, is that not all work has to be done on the spot. Some of it can be moved offshore. If employers suddenly have to double their wage expenses, equally suddenly offshoring will grow. Those companies will not have to raise their prices, and the companies that do will go bankrupt. This, too, is probably not what George expects. Even if businesses manage to raise prices without losing business (when has that ever happened?), who will have to pay those higher prices? Yep, the same people earning the new living wage. So, the calculations that went into the living wage will get completely thrown off, and it will no longer be a living wage. George seems not to have anticipated this effect.

I'm not sure what George expects will happen, really, but doubling the minimum wage will also require the imposition of tariffs on many imported goods, as well as new laws forbidding the exporting of services. Laws do not lead to freedom. Laws lead to more laws. Freedom leads to prosperity.

Let's get this out of the way fast: any minimum wage law is wicked, and should be immediately abolished.

If that alone doesn't convince you, then let's get into details. A minimum wage law says, in effect, that anybody whose labor is not worth the minimum shall not be employed. Nobody would support a minimum wage law if it were written that way. The Department of Labor minimum wage page says "The FLSA requires that most employees in the United States be paid at least a minimum wage and overtime pay at time and one-half the regular rate of pay after 40 hours in a workweek."

Minimum wage laws are supported by four sets of people:

1. Employers who do not want to have to compete with other employers who have lower labor costs.
2. Employees who do not want to have to compete with other laborers willing to accept lower wages.
3. Employees, typically represented by unions, who can claim that they are providing skilled labor, and should be paid more than a worker hired at the minimum wage.
4. Busybodies, who support "a living wage".

The classic example of an employer supporting the minimum wage is the Northeast U.S. textile manufacturer. Textile mills were originally built in America in the Northeast, where water power was necessary and abundant. In time, water power became less important, and textiles could be manufactured anywhere. Labor was cheap in the South, and textile mills began to be built there, competing against Northeast mills.

The Northeast mill owners did not want to have to compete with the Southern mills. To raise everyone's costs to that of the Northeast, they supported a minimum wage law. Rather than allow the South to make textiles, and the Northeast workers move on to more profitable activities, the Northeast textile manufacturers lobbied for a minimum wage. In the end, they couldn't compete anyway, and most Northeast textile mills have closed.

Employees want to be paid as much as they can, of course. They will always have an incentive to have their own wages increased for the same amount of effort. The wise employee will realize that they are making a Faustian bargain. Their increased pay comes from another laborer's unemployment.

Unions are a legal monopoly on labor. A union will (at least in theory) take the members dues and spend them in such a manner as to raise the members wages enough higher to pay for the dues and then some. One of the ways they can do this is by supporting minimum wage laws. Typically, union members' wages are higher than minimum, sometimes by a factor of two or three. They do this so that they can argue "Well, the minimum wage is now fifty cents higher. Our members should get a raise of fifty cents."

Busybodies support minimum wages out of a sense of fairness. Some of them adhere to Marx's labor theory of value. This is the idea that labor produces all value, and so all profits should go to laborers. It's obviously balderdash, but it's convinced some people. There's also shouldness: nobody should have to work for such a low wage. This is obviously true, but the economist needs to add her own should: nobody should lose their job because of a minimum wage law. Equally obviously true.

Some busybodies total up the costs of living the way they want poor people to live, and call the wages necessary to pay thoses costs "a living wage". Without further thought, they support a minimum wage law to increase the wages to a "living wage." This is a "should" rather than an "is", just as in the previous paragraph. Just as they "should" get a living wage, neither "should" they endure the consequences of forcing employers to pay a living wage.

Follow the money

A minimum wage coerces an employer to pay more in wages than they are receiving in labor. Clearly, if the employer was receiving that value in labor, free market competition would force them to pay the wage for that labor. The money to pay wages in excess of labor received does not come from nowhere. It is a new cost imposed on a business. In a free market economy, in time, that cost will be reflected in the price of the good. Go read about prices, costs, and value if you think otherwise.

If nothing else changes, then, prices will rise to cover the increase to the minimum wage. The effect would be for everyone in the economy, including those formerly employed at the minimum wage, those currently employed at the minimum wage, and unemployed people, to pay for the increase. While the now-minimum-wage employees are better-off, the already-minimum-wage employees and unemployed people are worse off. They are paying more for things, but not getting any more themselves, even though they're equally or worse as well-off as the now-minimum-wage employees. This effect is ignored or dismissed by proponents of minimum wages.

You never have the case of nothing else changing, when you change the price of something. Because goods and services produced by minimum-wage employees are now more expensive, fewer of them will be purchased. Fewer minimum-wage employees will be needed. This effect is ignored or dismissed by proponents of minimum wages.

Labor is now more expensive. Whenever the cost of an input to production changes, the manager of that production will re-evaluate the production methods. It may be that a tool whose cost was formerly prohibitive is now cost-effective. The McDonalds near me now has a french-fry basket loader. They dump a big bag of fries into the hopper, and it loads a specific amount into a fry basket. No doubt the machine is cheaper to employ than the employee's time. This effect is ignored or dismissed by proponents of minimum wages.

An employer may reevaluate his processes, and find that he can do without the employee entirely. Perhaps a tool could be employed? Perhaps the production process may be made more efficient? Perhaps he can get other workers to work harder? This effect is ignored or dismissed by proponents of minimum wages.

No matter how you cut it, somebody worse-off than the employee ends up paying for the increased (above market) wages. That's a result of economics, which is value-neutral. We could use our values to decide that that's acceptable, fair, and moral. I don't think it is. Minimum wage laws should be abolished solely because of that negative effect.

Why didn't I notice this?

Right about now, somebody will say "there is no evidence that the minimum wage law creates unemployment." They are fortunately quite correct. The current minimum wage law doesn't lift wages much above the market level. That means that they also don't create much unemployment. You can point to the many people who have minimum wage jobs, if you want. That won't help, because some of those people will have minimum wage jobs anyway simply because the market price matches the minimum.

Another reason you won't notice the unemployment caused by the minimum wage is a very simple fact of human nature: it's hard to see things that don't exist. We are biased by millenia of evolution to notice things that exist, and disregard things that don't exist. It's very easy to see minimum wage jobs. They're advertized in the newspaper. People who are unemployed don't walk around with a sign saying "Unemployed because the minimum wage went up." Everybody who is alive today have ancestors who paid close attention to deadly things that exist, and less attention to things they only imagine.

Also, when a minimum wage law destroys a job, it does so stealthily. The loss of the job associated with an increase in the minimum wage might happen many months after the wage increase.

Some people want the minimum wage to be much higher than it is now. They would like to double the minimum wage. The Haitian lace industry was destroyed (and the livelihoods of thousands ruined) by application of a 1930's US minimum wage law which doubled the wages of workers there. We could try that experiment, but I wouldn't advise it. Any minimum wage law which significantly increased the minimum wage would also significantly increase unemployment. Thank your lucky stars that the existing minimum wage laws have so little effect.

Update, 09Dec2003: David writes:

He is, of course, quite correct. Making jobs illegal doesn't eliminate the jobs, but it does take them completely out of the purview of the legal system.

The most basic result of economics is the law of supply and demand. If the demand exceeds the supply, the price will go up. If the supply exceeds the demand, the price will fall. An indisputable observation is that people are getting paid more and more. This has been true for about the last four centuries. If you put these two things together, then you have to conclude that we don't have an overpopulation problem. We have, in fact, an underpopulation problem. It is not a new problem, and it is not likely to go away any time soon.

Just as in Lewis's The Last Battle, where "the dwarfs are for the dwarfs", so, too, "the unions are for the unions". Make no mistake about it, unions are not in any way public interest organizations. Oh, they'll tell you how good they are for society. There's even a bumper sticker that reads "Unions: the people who brought you the weekend." Don't believe it for a moment.

One of the functions of a union is to monopolize labor. To the extent that they actually succeed in doing so, unions are bad for society in the same way that any monopoly is bad for society. In case you haven't been following along on the play-by-play, it's because a monopoly can charge monopoly prices. A monopoly gets monopoly prices by restricting the amount of production so as to move the price point to a more profitable position. You can see, now, why unions are always threatening to strike, and why unions are hard to get into.

A union doesn't have to form a monopoly to be useful. They can still create benefits for their members by reducing transaction costs. They can also contract for insurance, which is substantially cheaper if you can supply the insurance company with a need-blind pool of customers. They can administer a pension program. They can supply social needs, like picnics and parties.

Unions claim to have coerced employers into reducing the work-week to 40 hours (in the US; 35 in France and Germany). This probably isn't the case. A union would have to have monopoly power over all labor, and that's never been the case. I don't remember the exact number, but even in the heyday of union power, they never had more than 50% of the work-force as members. What's more likely is that as people became more prosperous, they valued leisure over the incremental hour of work. In a free market, people generally get what they can afford. When blacks were freed following the US Civil War, they worked fewer hours per day. Not because blacks are lazy, but because they preferred leisure over the marginal value of those extra hours of work. Freed of the need to make a profit for their owner, they could afford the extra leisure.

Now I want to look at how unions form their monopoly over labor. It's not pretty. A monopoly is hard to maintain, particularly when it's over the efforts of individuals. Basically, some union members were assigned the task of beating the crap out of people who weren't union members, but did union work. Or burning their cars, or houses, or whatever. Most of the methods for monopolizing labor involve intimidation and/or actual violence.

Today, unions use the violence inherent in government to get their monopoly. In most states, a workplace is either unionized or it is not. If it is unionized, then you MUST be a member of the union to work there, and you MUST pay union dues. A simple majority vote of the workers is sufficient to unionize a workplace. The employer is very strictly limited in what she can say about unions.

It gets worse: unions, through the voting bloc of their membership, have extorted union workplace rules out of governments. As the membership of unions in corporations has decreased, it has increased in local governments. Yes, your taxes to go support unions whose purpose is to benefit a small class of workers, and the hell with everybody else. Outrageous? Enough to make you into an angry economist? It has me.

Update Sun May 18: the head of the CWA local, Mark Seymour, has a letter to the editor in today's paper, complaining about the DANC fiber. He uses some good reasons, but also a bad one (from an economist's perspective): because it might throw some CWA union members out of work. Sorry, Mark, I count you as a friend, but preserving your job is not a good reason to not improve society. It so happens that we're arguing the same point, but your reasons for doing so are not my reasons.

Unemployment. Sounds like an undesirable attribute, like "undressed", or "unable", or "unstable", or ... "undesirable". It's true that anybody who wants to be employed surely doesn't want to have the label "unemployed". And yet ... there are nearly always jobs being advertised in the newspaper. So why is there persistent unemployment?

Another word for unemployment is leisure time. Sounds odd to put it that way, but yes, someone who is unemployed can be said to value leisure over all possible jobs. Leisure don't pay the mortgage, so why would anyone prefer leisure over employment?

The answer is simple enough: because they're waiting to find a better job. Someone who has taken an inferior job will be hindered in finding and getting a better job. Rather than get stuck in an inferior job, they refuse labor.

Let's say it right out: there will always be unemployment in a free market. The "natural" level of unemployment is affected by a number of things: the likelihood of someone finding a better job than any of their choices, their savings, whether they have other means of support (e.g. relatives), and their non-discretionary expenses. This level of unemployment is called "structural unemployment." The only way to eliminate this type of unemployment is to take away people's freedom to work at the job of their choice.

Another possibility is simply that labor is not desirable. Take as an example my wife, Heather. She has worked part-time as a bookkeeper for the local food coop, and could surely work full-time elsewhere as such. My income as a consultant makes it unnecessary for her to work. The incremental value of her salary is below the value of her leisure time to the family, so she doesn't work.

Now comes the truly interesting thing: how do you measure unemployment? The answer can only be that you can't. Someone who has the attribute "unemployed" has that attribute solely in their head. If they want a job and don't have one, they're unemployed. If they don't want a job and don't have one, they're at leisure. The only way to tell the difference, all the work of the Bureau of Labor Statistics aside, is to ask. Conduct an opinion poll.

Unemployment is in the mind of the beholder. Remember that the next time you hear authoritative-sounding figures about unemployment.

People are, like, massively confused about "trade deficits", y'know? So often you hear this or that pundit pontificating about how horrible it is that we have a trade deficit with one country or another. We currently have a trade deficit with China.

It's more or less meaningless to compare the volume of goods sold by Chinamen to Americans against the volume of goods sold by Americans to Chinamen. They have very little to do with each other. Often you can make sense of trade issues by bringing them home. If it makes sense in your family, then it makes sense in international trade (if only because countries tend to act like two-year-olds!)

Let's say that you are a student at the University of Illinois at Chicago (UIC). You have a trade deficit with them. You buy more from them than you sell to them. Assuming that you can get the necessary tuition money, does anybody perceive this situation as a problem? The trade deficit could go on forever. Certainly there are some gradual students who would prefer that state of affairs.

Note the assumption, though. To make the previous paragraph true, I had to assume that you had a source of tuition funds. Where are the tuition funds going to come from? Let's say that you are very good at something, and you can do that thing well enough to earn enough money to pay the tuition, whilst still leaving you enough time for college classes. You could stay in college forever and have a permanent trade deficit with UIC.

In case that's not clear enough, consider that you have a permanent trade deficit with the supermarket that you buy your food from. They are forever selling you things, you are forever paying them, and yet you NEVER offer to sell them anything. Nobody has a problem with this. Nobody is decrying the trade deficits that customers everywhere have with stores. Of course not, because the concept is just wrong.

Another way to look at it: your employer has a trade deficit with you. You are constantly providing services for him; he is constantly paying you; and you rarely if ever buy anything that you produce for him.

Do you see why a "trade deficit with China" is a confusing idea? It has, at its core, an assumption that we are ultimately bartering with China -- that the sum total of goods we sell to them must be equal in value to the sum total of goods they sell to us. But we can sell things to Japan, who sells things to China, who sells things to us. That makes for three trade deficits and yet lots of happy people.

A trade deficit with everybody

Some people are less confused than others. They worry, instead, about having a trade deficit with everybody. Let's go back to our example. Let's say that we constantly shopped; had a trade deficit with every store we enter. To keep this relevent to international trade, let's say that we used our personal IOUs to pay (being a proxy for dollars). As long as we redeem our IOUs faithfully, stores will continue to accept them. If they pile up too excessively (trade deficit with the world), people are going to be reluctant to accept our IOUs. In the parlance of international trade, our IOUs (currency) will decrease in value. The dollar will fall against other currencies. Foreign products will be more expensive in dollars than they were. Our exports will be cheaper.

The goal is to import as much as you can, and export as little as you can. "Buy low, sell high" is not new financial advice. People will help us import by giving us some credit (by taking our money/IOUs), but only if we have a history of paying back the credit. In order to do this, we have to create products that other people want to buy. To the extent that we do this well, we won't have to export much (work hard) to get the imported goods we want.

There are other ways to get people to redeem our IOUs/dollars. We could sell ownership in our businesses. That has happened -- a LOT. Several reasons for this: 1) American businesses are very productive. We make very efficient use of capital. 2) Ownership is very secure in America. Businesses don't get expropriated like they do in other countries. 3) The dollar is widely accepted. Because of #1 and #2, Russians will accept dollars from Gambians. 4) The dollar has been fairly stable of late. We haven't been printing up new dollars since Reagan's presidency. That makes the dollar a reasonable currency to hold.

If people are willing to buy businesses in the USA, then just like a supermarket, we can have a trade deficit with the rest of the world forever. We need to stay productive, but it's not the bad thing that some pundits posit. We can keep creating new businesses to sell to foreigners until the cows come home.

Sigh. Some non-economist writer was given the task to write about inflation and botched it. Or, to be fair, some idiot editor got hold of the article and wouldn't let go of it until he had thoroughly screwed it up. "Wholesale prices up 0.7 percent in April, showing inflation on the rise". It's not just the headline that they botched, either, because the first paragraph ends in "... providing fresh evidence that inflation is awakening after a long slumber."

Inflation is not a general rise in prices. Inflation will cause prices to rise, but other things can also cause prices to rise. For example, everything gets transported somewhere, so if the price of transportation rises, prices will generally rise. Inflation is, instead, caused by an inflated supply of money. If you read farther on in the article, you'll see that the real inflation rate is only 0.2%, in line with analysts' expectations.

According to NPR, one of the forces driving up gasoline prices are speculators in the oil futures market. From the way they said it, it sounded to me like they thought that speculation was a bad thing. It's not. Speculation is a good thing.

Prices do more than simply determine how much you pay for something. They also carry information. When something gets more expensive in a free market, that indicates that the demand for it has risen without a corresponding rise in the supply. This has two effects. First, it rewards the people who were careful to own the thing which is now in demand. Second, it causes people to husband their supply of that thing.

Everyone expects us to run out of oil. My entire lifetime people have been anticipating the day when we'll finally "run out of oil." That day has not yet come and never will. We'll never run out--we'll just run out of oil that anybody is willing to pay for. So, the price of oil will rise in the future because of increased demand and lessened supply. The trouble is "when".

The function of a speculator is to tell is when oil will get more expensive. If they think oil will be more expensive in the future, they'll buy an option to purchase oil in the future at a fixed price. If everyone chooses wisely, the price of the options plus the fixed price of the oil will be the future market price of the oil. The more people who want these options, the higher the price for them will be. So, when people think oil will be more scarce, more valuable, and command a higher price, they'll bid up the options.

A speculator brings the future into the present. Sometimes the future is unpleasant (higher prices for oil). This leads some people to call for laws limiting speculation. This is merely shooting the messenger. If the speculators are right, oil will be more expensive, and the sooner we start acting that way, the better. Speculators who have bought oil (or an option to buy oil) now when it's relatively cheap will make a profit by conserving it until it's more valuable later. If speculators are wrong, they'll lose money. Speculators who are consistently wrong will go broke. That's one of the pleasant effects of a free market -- people who screw up lose their chance to screw up in the future.

Now, imagine instead if the price of oil was controlled by a government. Governments are typically short-sighted, where "short" is defined as the period between now and the next time they have to get elected (term limits help ensure the short-sightedness of a legislator--no need to think beyond the limit on your term). If the government sets the price lower than a free market including speculation, then people would consume oil at a higher rate. That would lead to shortages, and radically higher prices. If the government set the price higher, then people would consume oil too slowly, and miss out on some of the value of present consumption.

Outlawing speculation is like trying to outlaw the future.

If you're reading this blog, then you find economics interesting (I can't imagine why you would read it otherwise). I hope, then, that you will take this next lesson to heart. Do not mix moral judgement with technical description. Many times you will hear people talk about the greedy rich and the envious poor. These terms should be a marker that says "The following has nothing to do with economics and everything to do with morality."

People are people, and it's very hard not to have feelings about facts. There is definitely a place for acting on these feelings. However, if you are trying to pin down these facts, to find out what the truth is, you cannot let your feelings get in the way. To pick on the issue of the minimum wage, you might think someone heartless if they tolerate wages too low to buy basic necessities. If you stop there, if you act on those feelings, you will not come to the truth of the matter.

It is very tempting to call the rich greedy and the poor envious (although obviously the same person is unlikely to do both at the same time). It is very easy to conclude that, because someone continues to create value beyond their basic needs, that they are greedy. It is also wrong. It is very easy to conclude that, because someone wants someone else to pay for their basic needs, that they are envious. As judgements of rich people and poor people, without reference to the facts of the specific individuals, they are likely wrong. As economic pronouncements, they are certainly wrong, because economics does not make judgements of those forms, and when economists do that, they have taken off their economist hat, and should expect no special protection from criticism.

Ken Mortenson comments.

It should be clear that Health Care is an economic good. That is, it is a scarce good, in short supply. I noticed something interesting about Health Care today. I heard a story about the women's march on Washington on NPR. Some women were reported to be asking for "Better Health Care". Google says that that phrase appears about 65,900 times on the web. The very existance of that phrase points to an effort to turn Health Care from an economic good into a political good. That is, one which cannot be purchased, but which is available (at some level of quality and supply) to everyone.

Ponder this: have you ever heard of a Campaign for Better Hot Dogs? Or the Better Blue Jeans Taskforce? No, of course not, because those are economic goods are supplied via markets. There are many different amounts, kinds, and prices of these goods available to purchasers. Some of these are markedly poor quality, yet they are purchased anyway.

There are a set of people who do not understand economics. I will call them "Good Hearts", because they are generally good-hearted people who mean well. Good Hearts do not understand that everyone has a fixed amount of resources at any point in their life. Everyone has to make decisions about how to allocate those resources. Everyone has choices, and an opinion about those choices. There is in essence no way for anyone to make someone else's choices for them, because you would have to know the person's opinions as well as the choices. I mean, everyone can tell a funny story about an inappropriate gift that they received, right?

Some people, who are usually called poor people, have to choose from mostly unattractive choices. This really bothers the Good Hearts. Unfortunately, rather than try to make more choices available to poor people, they seek to eliminate all of the unattractive choices. This is done on the assumption that if poor people have no unattractive choices left to them, all their choices will be attractive ones.

This assumption is wrong.

Instead of having only attractive choices, poor people are left with fewer choices, or even no choices. This has the unfortunate problem of interfering with their ability to maximize the utility of their total set of choices. In other words, life sucks, then you die. For example, the Good Hearts don't like it when poor people have to live in poor quality housing. So, to make sure that poor people don't have to live in (say) a house with only one or two outlets per rooom, building codes specify that outlets must be every six feet, or eight feet, or ten feet of linear wall. What this does, though, is not to ensure that poor people have high quality homes, but instead to ensure that poor people have no homes at all.

There are many instances of regulations like this, which force a minimum level of quality upon people. There are no circumstances under which this makes people's lives better. All of these regulations should be repealed. Not for the sake of the rich, or the sake of the middle class, but for the sake of the poor, so they have more choices in how to allocate their very limited resources.

There is much to disagree with in David Morse's May Friends Journal article on globalization. Let me say only three things. First, that the condition of mankind for hundreds of thousands of years has been poverty, starvation, an early death, and pestilence. Three hundred years ago, capitalism was invented. Some cultures have adopted capitalism, and they have largely escaped those ill effects. One of these is America, where you can own a house with electricity and indoor plumbing, own a car, and two color televisions, and STILL live on public charity because you are poor. Other cultures have adopted capitalism only in part, and they still suffer some. Other cultures know nothing about capitalism either by ignorance or by choice, and they still suffer. I absolutely cannot decry capitalism, and would certainly not seek to deny its benefits to the entire world, as David seems to want. "Ye shall know them by their fruits." It's a quote from a book about some guy. Yes, I mean to call David a false profit.

Second, David makes the case for America being wealthy on the backs of the entire world, and he thinks that's horrible. And yet as I write this, the hottest topic of conversation is offshoring -- a transfer of wealth from America to third world countries through the export of jobs -- and everybody thinks that's horrible. I, myself, accept neither problem definition, and so David's proposed solutions are completely beside the point.

Third, David arrives at several conclusions about economics which if presented to economists would provoke howling laughter. For example, he claims that the WTO is run by capitalists for the benefit of capitalists (which fails to explain