The Angry Economist

Danielle Egan, Professor of Sociology (thank god not Economics), wonders aloud in a Watertown Daily Times article: "Why do we live in a culture where if a woman shakes her groove thing, she makes more money than an elementary school teacher or an administrative assistants?"

I could snipe at the construction of that sentence, but it's from an interview, and I know how easy it is to say silly things in an interview. So, not to be mean, but she could always go live in a different culture if she thinks it's that wrong.

Her question has three answers. One is really cheap and goes like this: "Just cuz". Why does anything cost more than something else? The exact answer to price differentials in labor is incredibly complicated and probably has something to do with the price of tea in China. But that's the cheap answer.

The less cheap answer is to hold jobs constant and vary labor. Who fills what jobs? We could choose them at random, but Danielle would probably not be the best professional basketball player since she's probably not seven feet tall. Not every person that tall is necessarily a good basketball player, but at least they have a chance at it. What if they'd rather be a professor of sociology like Danielle? How would you convince them to make use of their special gift of height? Answer: by paying them lots and lots of money.

Getting closer to the topic at hand, not every woman is well-suited (get it? Well suited?? Well birthday suited? Hahahahahahahahhaa!) for that job. Only a fraction of all women have the ability to make money taking their clothes off. Only a fraction of them have the desire. Judging from the evidence, there aren't enough, at the wages of elementary school teachers or administrative assistants. In order to persuade more women to accept this form of employment, they need to be paid more.

The more technical answer is that every job function has, at any moment, a certain number of positions. In order to fill all of them, you only have to pay enough to hire the last person hired. Why? Because if any one person already working at that job quits, then the person they hire to fill their job will probably take the job for the same amount of money as the last person hired. Or close enough. Now, obviously, experienced workers get paid more, but not an awful lot more.

I don't quite understand what is all the fuss over immigration. Everybody who evolved here from a worm, stand up and raise your hand. Anybody? Ahhh, exactly as I thought. We're all immigrants here. How can anyone possibly espouse a policy of anti-immigration? If they think immigration is bad, they have a very simple course of action: LEAVE!. "America: love its immigration policy or leave it."

In particular, conservative opposition to unrestricted immigration makes no sense to me. You hear conservatives say "When guns are outlawed, only outlaws will have guns." They understand the principle there very well. Then they complain that immigrants commit more crimes than average. Well, how about this:

"When immigration is outlawed, only criminals will immigrate."

I think most people know that Somalia has what is called a "failed state" in some quarters, and a "stateless society" in others. They have no central government, and yet they have police, laws, and courts (as they know them; not as we know them). They also have a national currency .... without a nation.

The Somali shilling is left over from the old government. I forget whether it was socialist, democratic, or a dictatorship. Doesn't really matter. A central government can issue currency and enforce its value by changing the amount of currency in a controlled manner. Typically, this is done by shooting counterfeiters. Counterfeiting is a very serious crime in every country.

And yet, since there is no functional central government, how can the Somali shilling possibly work? You would think that counterfeiters would simply print up more and more and more bills, since there's nobody to stop them. But that's not what happens. Yes, new bills have been printed up in the intervening years by private parties. But the currency has not suffered from unlimited inflation, and I think I know why.

A fiat currency functions because the government controls the supply of currency. Yet it also controls the denominations of the currency as well. The government can inflate the currency as much as it wants through the expediency of printing up a new bill with extra zeros, and paying its debts with these bills. By declaring that the national currency is legal tender, everyone must accept it as the equivalent of ten of the next smallest denomination.

However, that's not what happens in Somalia. There, the denominations of the bills is fixed. There is no central government to pay people with new denominations, or to force legal tender laws. Nobody would accept a new bill because "it's not money". Let's trace the state of currency affairs.

At the end of life of the former central government, there was some supply of bills. Two things will happen over time. First, the economy will grow, because any economy in which people trade is an economy that will grow. Second, the existing bills will wear out, get lost, be removed from circulation, or otherwise become unavailable. Both of these effects will increase the demand for currency. For any item of trade with a fixed supply, an increased demand will raise the price of the item, and that includes money.

So, over time, the shilling becomes more valuable. Against that effect you have the counterfeiter, printing up new bills. Initially, he will print up lots of bills, and make a windfall profit. However, as thse bills make their way into circulation, the value of the largest denomination will fall until its value matches the cost of printing. No counterfeiter will bother to counterfeit unless they can make a profit, so they will stop printing up new bills.

What makes this system different is that a government would react by adding zeroes to the currency, e.g. Weimar Germany in the 1920's, or Turkey in the early 2000's, or Zimbabwe as I write this. No new denominations can be created, so the value of the currency stays stable at about the value of printing the highest denomination. As soon as its value increases, counterfeiters will print more. Competition between counterfeiters will reduce their profit to an amount approximating their costs, so the harm from counterfeiting will be minimized. Society will have a stable non-fiat paper currency.

This answer generates questions (as do all good answers). First, that the currency will tend towards a single denomination of bill (presuming that all denominations cost equal amounts to print). Second, it suggests that the value of the largest denomination will be fairly low, so that people will have to pay with lots of bills. Third, it may be that people will rip the largest denomination of bills in half or in quarters. Fourth, people may staple ten of the largest denominations together to make a single "10" bill. I don't know if Somalis are doing this now.

I'm aghast that John McHugh would send out (masthead above scanned from his newsletter; red text is my own addition) a straight line like "Here to Help You" as if that were his motto in government service. Has he never heard of the Great Lie #3? "I'm from the government, and I'm here to help you." Has the man no sense of history? Prosperity is dependant upon the government not helping you, but instead on the government doing its best to make sure that you are left alone.

The freedom to be left alone is not the freedom to be lonely. Nobody wants that. The freedom to be left alone is the freedom not to be forced into relationships you didn't choose. For example, to have a thief take your money against your will. Or to have a politician take your money against your will. Those are the kinds of things government should be helping you with.

These facts are well-kept secrets of economists. The first rule of economics is: don't reveal the secrets. I'm going to take a big risk and reveal thse secrets. Don't tell anyone else!

• for a business, capitalists are a cost,
• "excess" profits go to the entrepreneurs who created the business,
• competition eliminates these entrepreneurial profits over time, and
• the primary beneficiary of capital investment are workers.

Historically, capitalists have only gotten about a 5% yearly return on their money.

Many countries, the USA included, subsidize all forms of transportation: road, air, canal, and rail. The problem with subsidizing things is that you remove individual choice from the equation. Individuals matter because individuals are the ones who have to use these services. The trouble with evading the price system is that prices work very well to direct resources to those things that people really want. Not pseudo-want, when they say "Oh, yes, people (that is, other people) should use public transit more." Not pseudo-want, when they lobby their legislators. Spending money is the most honest sentiment a person can express, because they had to give up a part of their life to get that money.

Roads, airports, canals, and railroads: none of them shoulld be subsidized. Users should pay the entire cost of their carriage. Why? Because those four technologies are each over a hundred years old. If all forms of transportation are subsidized, then the competition (such as the RUF and many others) can only succeed by getting subsidized. And yet politicians are very bad at choosing new technologies. Most of them don't work out, and politicians are chary of failure.