Cafe Hayek

On Academic Tolerance of Hayekism

The Hoover Institution’s Arnold Beichman has a nice commentary in today’s Washington Times on Hayek’s The Road to Serfdom (2004 being the 60th anniversary of its publication). I like Beichman's use, in this essay, of the term "Hayekism." He concludes by focusing on the unfortunate hold that collectivist doctrines still have on academicians.

It’s true that nothing thrills the typical intellectual more than the prospect of his pet abstract theory being imposed whiz-bang, full-bore by government planners upon a subject population. (Note: this typical intellectual typically does not think deeply enough to understand that whenever government planners force any scheme upon any group of people, no matter how well-intentioned and how divinely promising that scheme might be, standing behind the seemingly genial planners are armies, armed policemen, and jailors. Always.)

But I don’t believe that things are as bad today in the academy as someone in 1944 might have predicted they would be 60 years hence. True, there remains in the academy an absolutely large quantity of prejudice, pettiness, silliness, closed-mindedness, and utter stupidity. But on the whole, I believe that there’s a greater tolerance for market-oriented views than seemed likely when Hayek was in his prime. Perhaps much of this greater tolerance is due to Hayek's own work.

Read the transcript of the radio interview that Hayek did in the U.S. in 1945 when he traveled here to promote the U.S. release of The Road to Serfdom. It’s in Hayek on Hayek. The rank disdain and scorn poured on Hayek by the interviewers (who were university professors) must be read to be believed. Throughout the interview, Hayek remained a gentleman, apparently never losing his cool. I can’t imagine such ignorant and rude treatment today. Perhaps I’m too much of a Polyanna on this score.... or maybe I’m spoiled by George Mason University.

Mind Your Own Business

While out for a drive this morning I scanned the FM radio spectrum and happened upon Hank Williams, Sr.'s recording of "Mind Your Own Business." (He also wrote the song.) Although as a rule I don't like country music, that of Hank Williams, Sr. is an exception to this rule -- and this song of his is probably my favorite. I especially appreciate the last two stanzas:

If I want to honky tonk around 'til two or three

Now, brother that's my headache, don't you worry 'bout me.

Just mind your own business

(Mind your own business)

If you mind your business, then you won't be mindin' mine.

Mindin' other people's business seems to be high-toned

I got all that I can do just to mind my own

Why don't you mind your own business

(Mind your own business)

If you mind your own business, you'll stay busy all the time.

Indeed. Mindin' other people's business is regarded as high-toned. It's the principal occupation of too many folks. How insightful of a twentysomething, poorly educated, guitar-strumming farm boy from Alabama to recognize an important truth overlooked by so many PhD-sporting intellectuals -- namely, for each of us, taking care of our own business is business enough. Minding the business of other people not only officiously and arrogantly interferes with other people's lives, it takes us away from the most important business that each of us should attend to: our own.

Inspired by The Day After Tomorrow

Roland Emmerich’s new film, The Day After Tomorrow, is being roundly panned by reviewers. See, for example, Stephen Hunter’s less than globally warm review in today’s Washington Post. This despite favorable reaction to the movie from Al Gore and various environmental groups – favorable reaction because the movie depicts colossal worldwide destruction and death brought on by violent weather and tidal waves allegedly sired by global warming.

Of course, the movie has no basis in fact or science. Even one of the movie’s admirers, Friends of the Earth Director Tony Juniper, concedes that “the depiction of the science is exaggerated and at times misleading.” However, this realization does not prevent Mr. Juniper from avowing that “the scale of the threat and the underlying politics are all too true.”

Suppose that a movie with exaggerations on a similar scale were made by a free-market enthusiast. That movie might contain some of the following scenes:

- A ten-cent increase in the federal minimum wage casts millions of blacks and Hispanics into permanent unemployment and despair; all of the unemployed women scrape up pennies by offering themselves as prostitutes, while all of the unemployed men swarm to the suburbs to rape soccer-moms and then riot so violently in the cities that the Empire State building, the U.S. Capitol, the Sears Tower, and the Bank of America building all crash violently to the ground, killing tens of thousands of innocent civilians, including a kindly book-peddler specializing in works by and about Ayn Rand.

- The top bracket of the federal income tax is raised to 50%. The astonishingly stupid, ideologically driven soak-the-rich politicians and their freshly-graduated-from-Harvard aides blithely ignore warnings that tax revenue will plummet and, worse, that such a tax rate will impoverish the country; sure enough, within 48 hours, 80% of the workforce quits their jobs; a few lucky ones move to Ireland or New Zealand, while many of the rest scrape buy as prostitutes (male and female), others rape every Georgetown hostess, and all riot so violently that the Chrysler building, the Prudential Tower, the Gateway Arch, and Mount Rushmore all crash violently to the ground, killing tens of thousands more people, including a saintly professor of economics who studied under Milton Friedman.

- An unholy alliance between greedy but smart (and subsidized) big chemical manufacturers and utterly doltish but ideologically fevered environmentalists cajoles Uncle Sam into banning all research on genetically modifying crops in ways that make them naturally resistant to pests. With this research halted by government, pesticides produced by the heavily subsidized chemical companies (who are also protected from foreign competition) pour into the water supply, poisoning millions. Frightened out of their minds, young mothers take to the streets en masse, rioting so violently that the Peachtree Plaza Hotel, the Grand Old Opry, the Superdome, and the Seattle Space Needle all crash violently to the ground, killing tens of thousands, including a brilliant young researcher who was just hours away from discovering the cures for cancer, AIDS, and acne.
....
I’m confident that, should any such silly movie ever be made, no president of a market-oriented thinktank would say about it that “the depiction of the economics is exaggerated and at times misleading, but the scale of the threat and the underlying politics are all too true.”

CEO Pay II: A Speculation

Why is the value attached by the market to CEO skills so high? Part of the reason might be that material wealth is today so abundant and widely available that access to distinctive species of material wealth is disappearing.
………..

CEOing is not easy. Successful CEOs possess great skill at motivating many different people, at polishing and maintaining an effective management structure, at mastering financial matters, at comprehending relevant technical issues concerning a company’s production processes and product lines, at grasping the extant and often-changing legal and political terrain – not to mention shouldering the enormous responsibility of being in charge of assets worth billions of dollars and that are unceasingly battered by fierce market competition.

This skill set is much more rare than most people suppose it to be. Therefore, competition among firms for management talent drives CEO pay to extraordinarily high levels. But why so high? Can’t a CEO be satisfied with, say, $25 million annually rather than $50M or $100M?

Most of us earn nothing near these sums; therefore, it’s near-impossible for us to imagine the difference between an annual salary of $25 million and $25 billion (much less than between $25M and $50M).

But because incredible material riches are increasingly available even to Americans of modest incomes, it’s a mounting challenge to entice someone fortunate enough to possess CEO skills to work like a dog at exercising these skills and to endure the anxiety and pressure that CEOs must endure. How to entice?

Money, of course, is always a chief enticer. But because even middle-class Americans can today travel around the world, buy homes with automatic dishwashers and vaulted ceilings and swimming pools, drive cars never break down, wear clothing that is indistinguishable from that worn by Bill Gates, J.K. Rowling, and other gazillionaires, eat fresh strawberries in January – the amount of money necessary to entice someone with rare and valuable talent to put that talent to use is enormous, especially if the setting in which that talent is to be exercised is infused inevitably with unending pressure and anxiety.

More specifically, if struggling ABC Corp. wants to attract Mr. Successful CEO away from his current post at now-smoothly-running XYZ Corp., or lure a promising V-P to tackle the greater responsibilities of CEOship, the marginal increase in salary must be enormous in order to enable the new president to enjoy a noticeable increase in his or her material standard of living.

CEO Pay I: The Easy and Uninteresting Answer

Executive compensation has long been a favorite topic of the economically illiterate. The man in the street and the pundit in the papers never weary of discoursing on how obscenely excessive is the pay of CEOs. (Similar objections are aimed at the pay of superstar athletes, although, mysteriously, not at that of superstar entertainers. See Allen Sanderson.)

The most-obvious response is that CEO pay is set by market forces. Because there’s no reason to assume that shareholders generally extend charity to high-level employees of their firms, there every reason to assume that CEOs’ salaries and bonuses reflect as accurately as possible their market values.

On the policy question of whether or not government should intervene to limit CEO pay, the answer is radiantly clear to anyone who knows some economics: no. It isn’t even an interesting question.

The more-interesting question is why the value attached by the market to CEO skills is so high. I will speculate in a later post on what might be a part of the answer. My speculation will rely upon the observation that the consumption abilities of very wealthy Americans is increasingly less distinct from the consumption abilities of ordinary Americans.

Confusing Libertarians with Communists

The Chronicle of Higher Education offers “a glance at the May/June issue of Society,” featuring a symposium on “The New Communism” – which, according to Berry College Professor Peter Augustine Lawler, might be libertarianism. He says: “What libertarian ideology promises today is strangely close to what Marx promised would come with communism – freedom from alienation and oppression, a life constrained by nothing but personal choice, the withering away of religion, and the withering away of the state.”

Of course, anyone can call himself or herself “libertarian” and then issue all sorts of positive predictions and normative assessments. Perhaps there is somewhere a self-styled “libertarian” whose philosophy and analysis fit Prof. Lawler’s description. But take mainstream libertarianism – represented by scholars such as Ludwig von Mises, F.A. Hayek, Milton Friedman, Robert Nozick, Richard Epstein, Deirdre McCloskey, Virginia Postrel, David Boaz, Tom Palmer, Steve Landsburg, and Sheldon Richman – and you’ll find no such doctrine as described by Prof. Lawler.

Few, if any, of even those libertarians who long for a stateless society actually predict (as Marx did) that the state will wither away. To hope is not to predict. More to the point, not all libertarians (indeed, not a majority of libertarians) are anarchists. As for religion, many libertarians, it is true, are atheists; but many others are deeply religious. And among atheist libertarians, I can’t think of one who predicts the withering away of religion.

Lawler’s most significant misrepresentation is his accusation that, like Marxism, libertarianism promises “a life constrained by nothing but personal choice.” Ugh! Barf! Arghh! Every libertarian whom I know has as part of his or her bedrock understanding of reality that the world is a constrained and constraining place. It is precisely because reality is no utopia, no empyrean dreamland of superabundance, that people must make careful choices – often very difficult and painful ones. It is not our choices that ultimately constrain us; it is the unavoidable scarcity of desirable things in the world that constrain us and that, in turn, oblige us to choose.

Libertarians (unlike Marxists) understand that even the most ideal economic system will never, ever eliminate scarcity and the consequent and constant necessity for each of us to make choices. Furthermore, libertarians (unlike most non-libertarians) understand that the state is a thoroughly human institution that is often asked to work miracles – which, of course, it has no hope of performing, but in its modern guise nevertheless specializes in pretending to perform such scarcity-eliminating feats. That is, it specializes in masking the need to make some choices. In the process, it actually reduces the range of options over which most people can choose.

Rampaging Presumptions

Today's e-mail brings an announcement from Virginia's Secretary of Transportation announcing a Memorial Day weekend crackdown on motorists who aren't buckled up. (Predictably, the e-mail's subject line is the irritating slogan "click it or ticket.")

I could fume about the paternalism of regulations that mandate seatbelt use. I could expostulate against the notion that someone’s failure to wear a seatbelt is an externality justifying regulation by government. I could pitch a fit and, risking cutting off my nose and my face, avoid wearing my seatbelt over the Memorial Day weekend as my own personal protest against such officiousness.

But I’ll rest content to quote the final two sentences of Thomas Sowell’s Knowledge & Decisions:

Freedom is not simply the right of intellectuals to circulate their merchandise. It is, above all, the right of ordinary people to find elbow room for themselves and a refuge from the rampaging presumptions of their “betters.”

The (Very) Small Edge of the Wedge in North Korea?

Randall Parker argues that China’s increasing wealth will soon enable significant numbers of Chinese men to buy, or otherwise to attract, women from impoverished North Korea as wives. If this predicted large net export of women from North Korea to China actually comes to pass, North Korean men will grow even more belligerent toward China.

Parker’s sensible prediction is not unqualified; it will come to pass, he says, “unless radical changes happen to North Korea's economy.” Such change is unlikely – but not out of the question. See this story from Sunday’s Washington Post, describing a small-scale experiment with markets now underway in North Korea.

I thank Tyler Cowen for the reference to Randall Parker’s post, and to my wife, Karol, for pointing out the story in the Post.

Charlotte Brontë Anticipates Anatol Rappaport

Charlotte Brontë understood the tit-for-tat strategy. Here is Jane Eyre talking to a schoolmate who admits to finding it easier to obey kind teachers than abusive ones:

You are good to those who are good to you. It is all I ever desire to be. If people were always kind and obedient to those who are cruel and unjust, the wicked people would have it all their own way: they would never feel afraid, and so they would never alter, but would get worse and worse.

Even Small Costs Must be Justified (I Presume)

Gregg Easterbrook, moved by a spirit similar to the one that inspires Charles Krauthammer, calls for a 50¢-per-gallon hike in the federal tax on gasoline. He argues, rightly, that such a tax will generate some benefits, including fewer highway deaths (as drivers switch from SUVs to smaller cars), fewer polluting emissions, and reduced political entanglements with oil sheiks.

What’s striking about Easterbrook’s case is the blitheness with which he presumes that these benefits would justify the costs of the tax hike. Such costs include reduced satisfaction of drivers who would prefer to drive SUVs (but who find doing so prohibitively expensive given the steep tax) and higher costs to motorists of fueling up to drive from point A to B. (Note that among the costs of the tax is not a heavier tax burden. Easterbrook proposes, and we can play along, that other taxes – say, income taxes – be reduced so that the higher gasoline tax is revenue neutral.)

The fact that the New York Times published Easterbrook’s op-ed is evidence that his argument strikes many people as sensible and sound. But suppose instead that Easterbrook had proposed a per-gallon tax hike of $50,000. Would the NY Times have published that proposal? No – at least, not unless Easterbrook had presented a sound argument, backed by evidence, that the benefits from such a tax hike might plausibly be greater than the obvious substantial costs.

The benefits of a $50,000-per-gallon tax hike would undoubtedly exceed those of tax hike of 50¢-per-gallon. The reduction in highway deaths, the reduction in polluting emissions, and the speed with which the U.S. government disentangles itself politically from oil sheiks would all be much greater with a tax hike of $50,000 per gallon than with a tax hike of 50¢ per gallon. But the costs of a $50,000-per-gallon tax hike would also be enormous – so enormous that everyone immediately sees that the costs of such a tax hike would swamp the benefits. Easterbrook could not get away with merely presuming that the cost-benefit calculation runs in favor of the colossal tax increase.

But when the proposed tax increase is only 50¢ per gallon, Easterbrook gets away with his presumption. Why?

My point is not that the substance of Easterbrook’s presumption is mistaken. It could be correct. My point is that too many people too gullibly assume that incurring modest costs is worthwhile if doing so promises any benefits whatsoever. That is, too many people are unaware that a policy proposal that burdens us with only modest cost is still not worthwhile if the size of its benefits is more modest still.

A Prize Paradox

The Sidney Hillman Foundation recently announced the 2004 Sidney Hillman Prize winners. This is an annual prize that recognizes “journalists, writers and public figures who pursue social justice and public policy for the common good.” An award is given each year in several categories, including books, newspaper journalism, and photo-journalism.

The 2004 winner in the newspaper-journalism category is “The Wal-Mart Effect” by Nancy Cleeland, Abigail Goldman, Evelyn Iritani and Tyler Marshall, appearing in the Los Angeles Times.

As summarized by the Hillman Foundation,

This in-depth Pulitzer winning series explains Wal-Mart's quest for "everyday low prices" and what that means for working men and women in the United States - and around the world. Wal-Mart, "the world's largest retailer," is now a global economic force, pitting vendor against vendor and contractor against contractor to drive down prices. The series is a powerful look at a powerful company - examining everything from Wal-Mart's history, vision and health care benefits to its procurement strategies, from the workers in Bangladesh who toil relentlessly for shameful wages to the U.S. supermarkets crushed under the competition, forced to lay off thousands. It illustrates the paradox of union members shopping there to snap up deals while labor organizers aimlessly try to organize Wal-Mart employees and communities attempt to keep the retailer out. "Wal-Mart gives. And Wal-Mart takes away," say the authors. This series explores that very observation in a myriad of ways.

One line in the above summary is particularly striking: “the paradox of union members shopping there [at Wal-Mart] to snap up deals while labor organizers aimlessly try to organize Wal-Mart employees and communities attempt to keep the retailer out.” This line nicely captures one of the chief tensions in the so-called (and terribly misnamed) “progressive” agenda. Contrary to the claim of the Hillman Foundation, the paradox is not that individuals choose to shop for bargains at Wal-Mart and to work for Wal-Mart on mutually agreeable terms while officious busybodies undertake political action aimed at making these options less accessible. That's a lamentable irony, not a paradox.

The real paradox is the "progressive" wish for abundant, high-paying jobs, combined with a simultaneous knee-jerk allegiance to “community” efforts to chill economic change – in this case, “to keep out the retailer.”

What, after all, is the point of organizing Wal-Mart employees into a labor union if other “activists” succeed in keeping Wal-Mart out?

Politicians and Shopping Carts II

Here’s another way -- related to an earlier post -- to see just how short politics comes up, compared to the market, at satisfying people’s preferences with precision.

The typical supermarket in the United States today carries 30,000 different types of grocery items – everything from bottled ammonia to fresh zucchini. If each of these items stands just as much chance of being chosen by a shopper as any other item, what are the chances that you and another shopper standing behind you in the checkout line – each of you with 20 different items in your shopping carts – will have in your carts the very same bundle of 20 groceries? The answer is: practically zero. Virtually no chance.

The formula for determining the number of different ways to fill a shopping cart with 20 different items from a total of 30,000 possible choices is 30,000! divided by [(29980!) X 20!] – an impossibly large number. Therefore, the chances of any two shoppers selecting the same collection of 20 items in a supermarket offering 30,000 different types of items is practically zero.

Of course, some supermarket items are more likely than others to be bought by any randomly chosen shopper – for example, milk, eggs, and laundry detergent are each more likely to be selected than is a Halloween card or a honeysuckle-scented candle. On the other hand, one of the dimensions of choice enjoyed by each shopper is choosing how many items to purchase. Some shoppers will choose fewer than 20 items, some will choose more.

Even a shopper choosing a mere 20 items will choose a different bundle than any other shopper choosing 20 items. But in voting booths, we are each obliged to choose among a tiny number of candidates, each embodying a immense number of specific stands on policy issues. The chances that any one of these ‘policy bundles’ – that is, any one candidate – has positions on all of the issues that match the favored positions of even a single voter on all of the issues is too small to contemplate.

Politicians and Shopping Carts

Thinking of retailing during this election year prompts the following mental experiment.

Imagine buying groceries in the same way that voters make political choices -- that is, you would choose among large bundles of grocery items just as, in politics, you choose among candidates who are each large bundles of positions on countless issues.

You’d walk into a grocery store, on schedule, once every week or month or whatever spacing of time is mandated by the Shopping Constitution. Upon entering the store, you’d see before you only two or three shopping carts, each pre-filled with a selection of groceries. We can suppose that each cart is covered with clear, distortion-free plexiglass, allowing you to review each cart’s contents before choosing.

Cart A might contain a leg of lamb, a baguette, a bottle of Merlot, a package of diapers, and a toothbrush.

You look at Cart A and think to yourself “I love lamb and Merlot and baguettes, but I don’t have a baby, and my toothbrush at home is just fine. Also, I really want a roll of paper towels, and Cart A doesn’t have one. Let’s see if Cart B meets my demands more precisely.”

You then examine Cart B. It has neither diapers nor a toothbrush, and it, too, has a leg of lamb. It also has a roll of paper towels. But it is missing the baguette and the Merlot – and, unlike Cart A, it also contains a 24-pack of feminine napkins, which you, unmarried guy that you are, do not need.

Cart C is another option. It has the merlot and a baguette, and is thankfully empty of diapers and feminine napkins, but it has no lamb and no paper towels. In their place is a pound of sliced ham, which you do not eat.

You must choose one of the pre-filled carts. Whichever one you choose will be chosen, in part, despite some of its contents. The cart you choose will be the best one for you given the other options – but it would not be as beneficial for you as would a cart that you personally rolled through the supermarket aisles and filled yourself, precisely as you wished, individually selecting and rejecting each item according to your preferences at the time you are in the store.

Perhaps that’s why so many Socially Aware people, so many Scolds, dislike retailing. In markets, each of us gets pretty much exactly the set of things we want (out of a vast set of possibilities). With each of us filling our own cart with exactly those items, and only those items, that each of us wants, there's no role for busybodies who fancy themselves to be especially fit for choosing what millions of other people have access to and acquire.

Cowen on Retailing

I very much like my colleague Tyler Cowen's observation about retailing:

Retailing isn't simply the final step at which goods are sold to consumers. Retailing is the stage where an economy elicits informationa about what consumers really want. Retailing stands at the heart of rational economic calculation.

Absolutely true. And yet retailing remains a favorite target for the Socially Aware, and for all other of society's self-appointed scolds.

Tyler goes on to ask why no government has identified retailing as a strategic industry. Good question. But let's not ask it too loudly, lest some politician be inspired by the notion.

Another Reason for Doubting the Existence of Predatory Pricing

Here's another thought on predatory pricing.

Predatory pricing is said to occur when a firm charges prices below its costs with the intent of bankrupting all current rivals and frightening away all future rivals. The firm’s ultimate goal is monopoly power, which it will use to raise prices, and thereby reap unusually high profits in the future.

All agree that the costs the predatory firm incurs today (by pricing below its costs) are an investment by the firm in securing future monopoly power. The firm will make this investment only if the investment's expected, risk-adjusted rate of return is the highest the firm can get for the funds it will invest.

But what a poor investment predatory pricing would be.

Wouldn’t any firm that is willing to invest, say, $1 million today in the hope of obtaining tomorrow a more-secure market position invest this $1M in something other than a price war against rivals who can efficiently operate in the industry? Wouldn’t these funds be better invested to fund the creation of new products, on differentiating the firm’s existing products from those of its rivals, or on improving the firm’s operation efficiency? New-product creation, product differentiation, and efficiency enhancements are not as precisely, as quickly, or as surely matched by rivals as is a simple price cut. Any imbecile can match a price cut with 100% certainty; it takes real effort even to have the hope of matching a rival on the product-differentiation front, or at improving efficiencies of operation.

Competent firms desiring higher profits are unlikely ever to seek more-secure, less-exposed market positions through such a juvenile and uncreative means as predatory pricing.

Hungry Only for Political Causes

Compelling evidence of Americans’ astounding wealth appears in the Week in Review section of today’s New York Times. One story – “When Real Food Isn’t an Option” – tells of the threat of starvation driving people in third-world countries to eat almost anything that won’t kill them. For example, Mozambiquers eat grasshoppers and Haitians dine on dirt cakes.

Another story, appearing immediately above a picture of an emaciated Somali woman gnawing on a strip camel skin, offers some quotations from Steven Wise, President of the Center for the Expansion of Fundamental Rights. This organization advocates, quoting Wise, “basic legal rights for some nonhuman animals.”

Mr. Wise likely does not wish to prevent nearly starved Somalis from eating camel skin, or hungry Ghanians from eating ants. But the very fact that American society spawns the idea of fundamental rights for nonhuman animals – and has courses in animal rights taught at prestigious institutions (Mr. Wise taught animal-rights law at Harvard) – is a gleaming testament to what is perhaps the greatest single achievement of the modern market society: triumph over starvation.

How Times Change at the Pump

Current concern over the run-up in gasoline prices calls to mind an attempt in 2002 in Virginia to keep prices at the pump from falling. Local distributors for ExxonMobile, Texaco, BP, and other major oil companies asked the state legislature to protect them from the low gasoline prices charged by Sheetz and Wawa, two innovative companies that operate conveniences stores on the east coast.

This effort to pick motorists’ pockets at the pump happily failed. (But just barely. The bill that would have restricted gasoline-retailers’ ability to cut prices passed in one house of Virginia’s General Assembly before failing in the other.)

The allegation by those who supported this bill was that Sheetz and Wawa would drive their competitors into bankruptcy and thereby monopolize gasoline retailing throughout the state. The result would be higher prices in the future. Even ignoring the fact that Sheetz and Wawa were not even accused of conspiring with each other, this charge of predatory pricing, like all others, doesn’t make sense.

One of the many reasons this charge makes no sense is that ExxonMobile, BP, and the other major oil companies each have especially good knowledge and incentives to give their local distributors the resources these distributors would need if it were the case that Sheetz and Wawa, deluded by dreams of monopolistic grandeur and profit, started a predatory-price war aimed at bankrupting all other gasoline retailers. Successful companies don't waste their resources on efforts doomed to fail -- and any attempt by Sheetz and Wawa to keep distributors of the likes of ExxonMobile and Shell out of Virginia would fail as surely as would an attempt to run an engine on Kool-Aid.

Even William Baumol, who endorses active antitrust policing against predatory pricing, admits that actual cases of predatory pricing “are very rare birds.”

Let's Tax Proposals to Raise Taxes

Charles Krauthammer endorses a permanent tax on gasoline designed to keep the real price at the pump at $3.00. His rationale is that, when the price of gasoline rose significantly in the 1970s, consumers responded by buying lighter cars and taking other fuel-conservation efforts.

Krauthammer is right that consumers will respond in these ways if the price they have to pay at the pump rises significantly. He is wrong to assume that such responses are inherently desirable.

Driving lighter cars and taking other fuel-conservation steps is desirable only if the effective supply of fuel is becoming scarcer relative to the demand for fuel. (Although they yield benefits to consumers, such steps are costly. If they weren’t costly, consumers would take these steps automatically.) The most reliable indicator of supply relative to demand is market price. And the long-run trend of real oil prices is downward.

Just as artificially lowering the cost to consumers of using fuel will cause too much of it to be used, artificially raising the price will cause too little of it to be used. Put another way, the Krauthammer tax will generate wasteful behavior: consumers will waste precious time and effort on fuel-conservation efforts that are unjustified given the actual supply of fuel.

Advocating such a tax reveals the advocate's arrogant conceit that he somehow knows more about future supply and demand conditions in the fuel market than do the thousands of experts who are specialists in that market and who have significant personal stakes in making correct assessments about that market's current conditions, and correct predictions about its future.

Nothing Wrong with Cost-Cutting

In today’s Wall Street Journal a reader expresses an opinion that I frequently encounter in discussions of free trade. The letter is about a recent WSJ story on the Electrolux Co.’s decision to close a plant in Greenville, Michigan, and produce instead in Mexico.

Here’s the letter’s core:

From the Jan. 20, 2004, edition of the Detroit Free Press: "The Greenville plant is a profitable operation, and Electrolux is a profitable company. During intensive talks on how to save these jobs, the company never once claimed this plant -- or the corporation as a whole -- was losing money. They just said they aren't making as much money as they need to suit their corporate strategy." The latest balance sheet of David Sikora's company, as posted by Yahoo Financial, reflects $47 million of current assets (mostly cash and short term investments), $10 million in current liabilities and no long-term liabilities. He has a very strong balance sheet and profits, yet he is outsourcing jobs and transferring them to India. His earnings statement reflects a 85% gross profit, which is extremely high by any measure.

William Kingston, CPA
West Bloomfield, Mich.

There are errors-in-reasoning here aplenty. One is that the letter-writer ignores what will happen tomorrow to Electrolux’s balance sheet (not to mention its income statement) if it bypasses today’s opportunities to lower its costs, leaving to its rivals an exclusive access to these opportunities. These opportunities will not remain unexploited. Competition abhors a vacuum.

More fundamentally, I would ask this letter-writer the following: When you buy a new car, do you seek out the best deal? Or do you pay a few thousand dollars more than you have to pay just because you can afford to do so? When mortgage-interest rates fall, do you refinance your mortgage even though you obviously can afford to pay the higher interest rate?

Each of us does indeed sometimes knowingly pay more than we must – say, to help a friend who is a local retailer. But none of us spends our money in this way as a general policy. Why should business firms be held to a different standard of (faux) morality?

In fact, it might be more dangerous for firms to bypass cost-cutting opportunities than it is for consumers to do so. In chapter five of his book The Gifts of Athena, Joel Mokyr argues that competitive pressures to adopt best-practice techniques are more acute on business firms than on households.

Is it Possible that the Quantity of Oil is Practically Infinite?

It seems obvious that we're destined to encounter seriously reduced supplies (and higher prices) of oil. Even physics professors say so.

But consider a couple of scenarios.

Scenario One: You’re a hungry mosquito on the surface of an enormous balloon. The balloon contains as much blood as an Olympic-size swimming pool contains water. You, hungry mosquito that you are, inject your snoot into the balloon and enjoy a meal. Of course, by doing so you negligibly reduce the volume of blood in the balloon. But whether you know it or not, you can gorge yourself on blood from this balloon for the rest of your life and there will still be far more blood remaining in the balloon at your death than you’ve consumed during your lifetime.

Scenario Two: You’re a hungry mosquito on a balloon the size of child’s marble. You take a meal. The size of your meal relative to the blood-contents of the tiny balloon is large; you significantly reduce the contents.
…..

I don’t know if humanity and its demand for oil is like the mosquito in scenario one, but I’m sure that we are not like the mosquito in scenario two. We might be in some intermediate scenario – say, like a mosquito sitting atop a blood-filled balloon the size of a large beach ball.

But we could be like the mosquito in scenario one. That mosquito needn’t know – probably wouldn’t know – that she’s atop a physical quantity of blood that is practically limitless. If she's told, accurately, that the amount of blood in her balloon is finite, she might worry that she’ll run out of blood, or that she'll drink so much that what eventually remains in the balloon will be too costly for her to suck out; she might persuade herself to drink less blood. Would she be wise to do so?

The economics of perfection

Michael Coffey in the New York Times notes that in the first 60 years of the 20th century, there were 4 perfect games in baseball, a game where a pitcher pitches a complete game and no one on the other team reaches first base. In the next 45 years, there have been 11, so the rate of perfection has roughly quadrupled. Why? He has a lovely incentive-based explanation:

Here's a theory. In 1904, when Cy Young pitched his gem, the term "perfect game" didn't exist. Young wasn't aware until the last out that no one had reached first base. The New York Times ran a two-sentence story. Young was making $4,500 a year, about three times a skilled laborer's salary.

By the time Bunning pitched his perfect game 40 years later, baseball was becoming a media business. Television had come on to the scene, prompting the Dodgers and Giants to move to the West Coast. Baseball underwent its first expansion, adding four teams to the original 16. After Bunning closed out his 6-0 win against the hapless Mets, he got $1,000 to appear on "The Ed Sullivan Show."

TV money not only inspired franchise movement and expansion, it also energized players to form a union to get a piece of the action through free agency, which was introduced in 1975. That year, the average salary was $44,000; today it is over $2.5 million. This year, Randy Johnson will make $16 million.

What does money have to do with perfection? With free agency, players are aware that their best efforts will be fairly rewarded. They work harder — and they have the financial incentive to do so. They also know that extraordinary accomplishments are wildly celebrated. Cooperstown calls for a piece of the gear used in the game. If this does not inspire the kind of mental focus a player needs to go the distance, I don't know what would. To make things easier, franchise expansion has brought many lesser talents to the major league level. Now with 30 teams, baseball offers 350 more roster spots than it did in 1960. Indeed, 5 of the 11 perfect games since expansion have come against expansion teams.

There is one other factor he does not mention. Groundskeeping and better gloves have improved fielding. I suspect a lot of perfect games were lost in the early years of the 20th century when hitters reached first due to errors or hits that might have been prevented by an Ozzie Smith.

Norman Borlaug

Yesterday evening, the Competitive Enterprise Institute celebrated its 20th anniversary with a gala dinner in DC. (Congratulations, Fred! You and your colleagues at CEI do important work.)

One of the guest speakers at the dinner was Norman Borlaug, father of the green revolution.

It isn’t often that any of us enjoys the privilege of being in the same room with someone who has saved over a billion lives, as Mr. Borlaug has.

Relatively few people recognize Mr. Borlaug’s name. Makes me think of the world as a place in which melodramatic loud-mouths thunder to and fro in the foreground while actually doing very little of any value but stealing all of the credit for civilization and its benefits. Meanwhile, in the background, millions upon millions of decent, creative people work diligently at their specialties – welding, waiting tables, writing computer code, performing orthopedic surgery, designing shopping malls, running think-tanks – each contributing to the prosperity of the rest. Some contributions are larger than others – as Dr. Borlaug’s certainly is – but even a contribution as colossal as his is quickly taken for granted, any potential notice of it submerged beneath the swagger and bellicosity of the political classes who pretend to be prosperity's source. How wrong. How arrogant.

Why oil (and lots of other stuff) gets cheaper

Arnold Kling argues that oil prices should rise roughly at the rate of interest. Oil is an asset. If you think oil prices over the next year will rise by 1% when interest rates are only 5%, you're better off selling your oil, taking the money, and putting it in the bank to earn interest. That urge to sell today lowers price today and steepens the growth rate in prices over the next year. If you think oil prices are going to rise by 10% when interest rates are only 5%, you're better off keeping the oil in the ground rather than selling it. That pushes up prices today and lowers the growth in prices. Only when prices rise by roughly the rate of interest are people content with their decision to leave some oil in the ground and to sell some.

Tyler Cowen wonders how to reconcile this result, sometimes called the Hotelling Rule, with the finding of Julian Simon that most, if not all natural resources get cheaper over time in real terms. Tyler cites some work that suggests that the standard explanations for reconciling these claims don't work:

This literature suggests that most of the standards "outs," such as changing costs of production, or new discoveries, don't square the circle for anything other than the short-run. Holding oil still ought to yield (risk-adjusted) market rates of return, unless again investors are fooled into underestimating how much prices will fall.

I have a semi-standard out. The Hotelling Rule assumes that the cost of extracting the oil (the cost of production) is zero. Selling your oil is just like taking money out of a savings account. But getting oil out of the ground takes real resources. (So does investing in bonds, but the cost of extraction is presumably much higher than the transaction fee on an interest-bearing asset.) When there is a cost of extraction, the arbitrage condition is no longer that the price rise at the rate of interest but that net profit rise at the rate of interest. That still implies that prices rise over time.

In the real world, there is an extraction cost, but over time, it doesn't stay constant. And it doesn't just change. It falls steadily over time, driven by technology. This allows the real price of oil to fall over time. To see the intuition, if oil prices are expected to rise at 1% when interest rates are 5%, that would normally encourage me to sell my oil today, driving down the price today and pushing the rate of growth in oil prices up toward 5%. But if I expect it to be a lot cheaper to extract oil next year because of technological improvements in extraction, my net return can actually be higher keeping the oil in the ground and harvesting it next year when extraction costs will be lower than they are today.

One more piece of intuition. You'd think that if oil prices were going to fall steadily over time, it would never be worthwhile to hold on to oil. Get rid of it. Sell it. Get the money out. Put the money into an asset that grows over time rather than one that is going to be worth less year after year. But if extraction costs are expected to fall steadily over time and fast enough to overcome the falling prices of oil, than it's still rational and profitable to keep some oil in the ground for the future rather than selling all today. The implication of this claim is it's not enough for extraction costs to fall over time—they have to fall faster than the expected fall in oil prices.

The forces of creativity and innovation that drive down extraction and production costs for oil are the same forces that drive down the price of most goods even when one component of costs, labor costs, is rising.

Costs of compliance

We're coming up to the two year anniversary of Sarbanes-Oxley, the legislation of numerous changes in corporate governance. The Financial Times reports on a survey that found a 50% increase in the number of firms considering going private:

The survey of over 100 public companies by Foley & Lardner, the law firm, and KRC Research, highlights that smaller companies are particularly hard hit.

"The average cost of being public for a company with annual revenue under $1bn in the wake of corporate governance reform has increased...130 per cent from the inception of Sarbanes-Oxley through full-year 2003."

The biggest effect of the Act itself is on company internal controls, mechanisms for ensuring that financial reporting is accurate and that a company is complying with regulations.

The Act mandates a new internal control regime in which processes are fully documented and tested, and then signed-off by the auditor. Audit fees, which the survey says are already rising steeply, are projected by accountants to rise in the next few months by a further 25-35 per cent for internal control work.

In the same survey last year, 13 per cent of companies said they were considering going private. That rose to 21 per cent this year. US regulators, however, say that the number of companies that have gone ahead and changed their status remains hard to quantify.

Talk is cheap. Saying you're thinking of going private may reveal little. But it is an interesting side-effect of the legislation that it encourages firms to go private.

Accounting for the Capital Account

Protectionists worry a lot about the trade deficit – that is, the current-account deficit. In response, pro-consumer economists point out that the larger the current-account deficit, the larger the capital-account surplus; therefore, a growing current-account deficit for the United States means increasing foreign investment in the U.S.

One protectionist reply to the pro-consumer economist is that most of the dollars spent by foreigners on U.S. assets are for existing assets and not for new investment. Relatedly (goes this reply) an increasing capital-account surplus means that “we” Americans are transferring “our” assets to foreigners. (A reply making these points came to me in a private e-mail that I’m not at liberty to share.)

This reply is irrelevant and mistaken.

Consider that nearly every dollar spent on stock exchanges such as the NYSE and the NASDAQ is for existing assets. Mr. Jones buys X shares of Microsoft stock from Mr. Smith. If investors are optimistic about Microsoft’s future, they bid up the prices they are willing to pay for its shares. As a result, Microsoft will be better able, if and when it wishes, to issue new stock and to float more debt. That is, a higher price of Microsoft stock means that Microsoft can more easily fund R&D, build new factories, expand its output.

Moreover, whether they're buying existing assets or building brand-spanking new ones in the U.S., the fact remains that investors (many of whom happen to be foreigners) are investing heavily in America – a fact that is irreconcilable with protectionists’ doomsday scenario of an America going to the dogs.

Finally, how utterly misleading is the term "our assets" when used to describe assets owned by others? A thousand shares of General Electric owned by Warren Buffett are no more "mine" or those of any other American, except Buffett himself, than they would be if Buffett sells them to a Japanese or a Sudanese.

A Thought on Democracy

In today’s Wall Street Journal, David Hale, an expert on China, has a bracing observation about that country. It’s inspired by the recent election outcome in India:

there is little doubt that if China had a truly open and competitive election, it would produce a populist party opposed to many recent economic reforms. It would demand the restoration of guaranteed employment in state-owned companies, coupled with the free health care, education and pensions which they traditionally provided. China's huge peasant population also would support candidates promising to raise farm prices, limit foreign competition and restore the social services which existed in the countryside 30 years ago.

I have always felt awkward expressing my sincere thoughts about democracy, but here goes: Democracy is poorly understood and vastly overrated. Americans knee-jerkily think of it as being synonymous with freedom, or at least as a damn reliable guarantor of freedom. It is neither.

Many reasons explain this false equation of “democracy” with “freedom.” Perhaps the most important is the simple-minded assumption that democracy gives “voice” to “the people” and, hence, that it gives the people what the people want. What freedom-loving, civilized person objects to letting adults have what they want, even if what they want appears to that person to be foolish?

The problem is that this way of thinking about democracy treats millions of disparate voters as if they are a single person. When thinking about democracy, we transfer all of our civilized and liberal tolerance of individual choice to “the People,” as if “the People” is a person with goals, preferences, perceptions. This move is illegitimate. Put bluntly, “the People” do not exist. It is an abstraction. Each of us, as individuals, exist. We do not become “one” when we yank levers in voting booths; we do not, in voting booths, morph together miraculously to achieve the moral or intellectual character and bearing and worth of an individual.

In addition to classic works in Public Choice economics, I recommend Geoffrey Brennan & Loren Lomasky’s Democracy and Decision, as well as the insightful, creative, and important work of my colleague Bryan Caplan.

And Mao was a world-class swimmer

When reports came out of China that Mao was ailing, the Chinese responded by claiming that Mao had just swam the Yangtze in world-record time. They even produced a photograph of Mao's head just above the water. This was pre-photoshop days and it looked as cheesy as one of those old movies where the couple is driving and the background out the window is clearly filmed.

Now comes news that Castro can live to 140:

Fidel Castro's doctor denied rumours that the president's health was ailing, saying today the 77-year-old leader is in excellent health and claiming he can live at least 140 years.

Dr Eugenio Selman Housein said Mr Castro continues to run and swim and pointed to the president's participation in a massive protest march on Friday.

Castro led the march past the US diplomatic mission in Havana to protest US policy against the island's communist government for about 800 metres, walking slowly and with some difficulty.

"He is formidably well," Mr Housein told reporters at a conference on "satisfactory longevity" in the capital city. The press "is always speculating about something, that he had a heart attack once, that he had cancer, some neurological problem."

But Mr Castro is healthy enough to live at least 140 years, said Mr Selman, who heads a "120-years Club" that promotes wholesome habits for the elderly.

Those Communist leaders are awfully fit. Must come from living well at the people's expense.

Here's a pretty entertaining article on Mao's formidable achievement.

The price of fame

Bill Clinton has received an advance of about $10 million for his memoirs. Jonathan Yardley writes that U.S. Grant while dying, fought terrible pain to finish his memoirs to keep his wife financially secure. She sold them for $450,000, about $9 million in current dollars. True, she couldn't buy any antibiotics or an iPod, but it's interesting how similar the two numbers are. Fame remains very profitable.

The rewards of fame reminds me of Truman Capote. I recently watched Breakfast at Tiffany's for the first time. The movie stars Audrey Hepburn, George Peppard and it's very entertaining—Hepburn is delightful and it's a weird portrait of the bohemian late '50s, pre-1960s lifestyle.

Then I decided to read the book. I had never read much by Truman Capote. His most famous book, In Cold Blood, never interested me. It was the first of the fictionalizations of non-fiction—the story of a brutal murder in rural Kansas. Breakfast at Tiffany's is a 111-page gem. It's a haunting evocation of one's youth, the lure of a woman who is apparently outside the bounds of conventional society and a haunting portrait of a woman who ceaselessly pursues pleasure, money, fame and sometimes, but rarely, contentment. In most dimensions, the movie follows the plot of the book, but they are two completely different works of art. One is a comedy (directed by Blake Edwards!), mostly. The other is tragicomedy. In the same volume with my edition of B at T is a short story, A Christmas Memory that may be the best piece of nostalgia without romance that I've ever read. Very beautiful.

Capote had a lot of Holly Golightly in him. His appetites appeared to have overtaken his talent, but perhaps that was the idea all along. Like his contemporary Norman Mailer, the siren song of celebrity was louder than the lure of literary immortality. In Capote's case, he wrote very little and virtually nothing in the last maybe 15 years of his life, dying at 59. My memories of him from my youth were of a gossip who showed up on the Tonight Show and gossiped about his rich friends. He was a great disher of dirt which has little appeal for me. But many must enjoy it. His celebrity status may have produced more pleasure and money for him and his audience than his books did.

We think we live in an empty age of celebrity but Truman Capote and U.S. Grant remind us that celebrity has been part of the American cultural scene for a long, long time.

Lore of the Civil War

Finished the wonderful April, 1865 by Jay Winik. Some of the things I learned from the book:

1. Andrew Johnson, Lincoln VP who ascended to the Presidency on Lincoln's death was a Democrat. Lincoln chose a Democrat was worried about losing the 1864 election to McClellan.

2. Mary Todd Lincoln had four brothers and three brothers-in-law, who fought for the Confederacy. Two died in the war.

3. What happened after the death of a President was very unclear even in 1865. The VP was expected to become an interim president until a new election. The first two VPs who ascended to the Presidency after the deaths of William Henry Harrison and Zachary Taylor both saw themselves as President, and not acting or interim. Neither appointed a VP to replace themselves. When William Henry Harrison died, his cabinet proposed to John Tyler, the VP, that all decisions be made by majority rule of the cabinet and that he would have one vote like everyone else. Tyler rejected this decision and acted as if he were the President, rather than a caretaker.

4. Booth also planned to have Andrew Johnson and William Seward, the Secretary of State murdered that night. One co-conspirator lost his nerve and left Johnson alone. The other stabbed Steward numerous times but he lived. It is hard to know what might have happened had all three men been killed that night.

4. John Wilkes Booth was a perhaps the most famous actor of his day and was easily recognized. His annual income was around $20,000 at a time when family income in the North was about $300 a year.

5. The expression Booth shouted from the stage, Sic Semper Tyrannis, (thus always to tyrants) is the Virginia state motto and is on the state flag.

Ye Olde Tyme

Last night, PBS aired two hours of the eight-part series Colonial House. Two dozen 21st-century folk live for four months in conditions as close to those of early 17th-century New England as the producers can recreate.

Of course, each of these modern people survived childbirth, many of the women survived child-birthing, and all are inoculated against several crippling diseases – something that was untrue in 1628. Allowing for these and other differences that separate these ersatz colonists from the genuine article of 400 years ago, I enjoyed the program. It’s good to see images of ordinary life in the past so that we understand just how incredibly, marvelously, astonishingly, fantastically, immensely, stupendously, vastly wealthy everyone is today in the industrialized west.

I do say “everyone.” Even the poorest American is today far wealthier than were even the upper classes in colonial America.

Some readers might shout “status goods”; others will remind us that preferences are subjective; yet others will point out that colonial America’s air and water carried no industrial pollutants.

Granted. These points (and others) are all relevant. But I stick by my claim.

Actually, there’s something of a test of this claim going on constantly. It is the fact that modern Americans who would truly prefer not to live in a 21st-century society marked by a deep division of labor can return to pre-industrial conditions. (And I mean really return; not return in the way that the two-dozen people in Colonial House returned.) There’s a good deal of wilderness remaining in North America – Montana, the Dakotas, Canada. At fairly low money prices (or perhaps for much of it, by squatting) acres of this land are still available.

People who doubt that they are really wealthy in modern society can live on this land and enjoy their subsistence lifestyles. See my longer essay on this possibility. The fact that only a very few people (including an infamous mail-bomber) choose to live apart from modern society is sound evidence that, for all of its flaws and anxieties, it's much better for almost everyone than available alternatives.

The Great Facilitator

Today’s The Osgood File (a radio program aired by CBS affiliates) is about book-club facilitators. Here's this program's brief transcript.

Book-club facilitation is an emerging profession of people who are hired by book clubs to facilitate their discussions – especially to keep the discussants on topic and to offer in-depth background on the books under discussion and their authors.

Book-club facilitators are paid well. The facilitator featured on The Osgood File is paid $200 for 90-minute session. That’s an hourly rate of $133.

I wonder if, and how, these facilitators are counted in employment and wage statistics. I wonder if anyone, say, 25 years ago (or even ten years ago) thought to make a living in this way. I wonder if such a way of making a living would be possible if those who today clamour for more protectionism get their way.

Fortunately, at least for now, the division of labor marches on. It is the great facilitator of widespread wealth creation.

Patently Expert

Marginal Revolution’s Tyler Cowen describes a book he recently purchased: Patently Absurd: The Most Ridiculous Devices Ever Invented. Judging from Tyler’s description, this book reminds me very much of another book that has long been one of my favorites: The Experts Speak, by Christopher Cerf and Victor Navasky.

The Experts Speak is an assemblage of pronouncements, by experts, that time has revealed to be spectacularly mistaken. Being a Beatles fan, one of my favorite examples is this gem offered in 1962 by the executives at Decca Records who, after auditioning The Beatles, decided not to sign them to a contract: "We don't like their sound. Groups of guitars are on the way out."

It’s fun to read such pronouncements today and hee-hee and haw-haw over them, just as I’m sure it’ll be fun to read about patented inventions from the past that time has revealed to be useless, often to the point of silliness when judged from our perspective today.

But there are serious lessons in such books. One obvious lesson is that being expert is a far cry from being infallible. A second lesson – related to the first but more subtle – is that decentralized decision-making and competition among many decision-makers is a vastly superior means of discovering the ‘truth’ – for example, if a long-haired group of guitar players from Liverpool really do or do not play music that lots of people enjoy – than relying upon experts given power extending over an entire society to go thumbs up or thumbs down on new ideas.

The latter means seems so rational, so much less wasteful and redundant, so much more focused and thoughtful, than allowing millions of flowers and weeds to bloom in a decentralized market. At least, such an idea was once believed by all of the experts. But it's wrong.

The market’s mistakes, no less than its proven successes, are evidence of its dynamism, creativity, vibrancy, and value -- not to mention its freedom.

Mencken on Economists

Of all Americans ever to put quill to parchment, or fingers to a keyboard, the one who surely possessed the greatest talent to blog is, alas, a man who likely never set his eyes on a computer: H.L. Mencken.
.....
Here's Mencken on the economics profession:

Its dismalness is largely a delusion, due to the fact that its chief ornaments, at least in our own day, are university professors. The professor must be an obscurantist or he is nothing; he has a special and unmatchable talent for dullness; his central aim is not to expose the truth clearly, but to exhibit his profundity, his esotericity -- in brief, to stagger sophomores and other professors.

Later in the same essay ("The Dismal Science") Mencken laments "the mental timorousness and conformity which go inevitably with school-teaching."

Allowing for Mencken's acceptable exercise of journalistic overstatement, his description, penned sometime in the 1920s and reprinted in his Prejudices: A Selection, rings true today.

"Poverty is not our goal"

The communist leader of the Indian state of West Bengal, Buddhadev Bhattacharjee, is quoted by the New York Times as declaring that “Globalization is a must.” More meaningfully, he succeeds in implementing some policies that encourage firms such as Mitsubishi and I.B.M. to invest in West Bengal.

Good thing.

The Communist Party of India will play a leading roll in the coalition being formed by Sonia Gandhi. And while pragmatic communists are better than dogmatic communists, the understanding of economics that even pragmatic communists (such as Mr. Bhattacharjee) express is scant. One troubling notion is the idea that India can develop an even-more-thriving modern commercial and industrial economy and immunize its rural economy from market pressures that attract resources from fields and flocks into factories and commercial enterprises.

According to the Times, “Seventy percent of India’s one billion people still live in the countryside and rely on agriculture for their livelihood.” This fact means that the division of labor in India remains only vestigial. It is sad.

One vital key to economic growth is the expansion and deepening of the division of labor, which results in an ever-shrinking portion of the population working to supply basic needs such as food. The growth of new industries and opportunities requires that resources – especially the ultimate resource, human creativity – be released from agriculture and made available for new industries and commercial enterprises.

It is a fantasy that India (or any less-developed country) can progress economically in the teeth of policies aimed at keeping its agricultural sector from shrinking significantly.

Mr. Bhattacharjee insists that “Poverty is not our goal.” I believe him. But if Indians are to enjoy more economic prosperity, most of the resources now consumed in agriculture must be released for industry and commerce.

What's Good for the Goose.....

The current issue of Wine Spectator reports on the increasing difficulty Americans’ endure in getting foie gras. One reason:

In February, citing unspecified concerns over food safety, the U.S. Department of Agriculture suspended imports of foie gras, sausages and pâté from France.

Another reason:

Bills have been introduced in California and New York – the locations of the only U.S. foie gras producers – to halt the force-feeding of birds to make foie gras, which would essentially shut down the businesses. Animal-rights activists argue that the ducks and geese are overfed to the point of becoming ill and are often kept in crammed quarters.

Perhaps the accusations of the animal-rights activists are correct. But why a foie gras ban? If enough consumers are sufficiently concerned about the health and comfort of ducks and geese, foie-gras producers would have incentives to find more humane ways of fattening and keeping their animals – ways that would be used to market foie gras to concerned consumers. (The fabulous supermarket chain Whole Foods is a vibrant testament to the market’s eagerness to satisfy such consumer demands. My wife, Karol – confessedly more sensitive to the welfare of animals than I am – finds Whole Foods attractive largely because of this reason.)

There’s another benefit of relying upon voluntary market adjustments to satisfy consumer concerns about animal welfare: it avoids an unnecessary slope that might well be slippery. This benefit came to mind when I read Chez Panisse owner Alice Waters’s objection to the possible ban on foie gras. Quoting Ms. Waters: “There are just a lot more important things to ban.... How about banning supersized Cokes – things that are creating diabetes and killing people?” Ms. Waters accepts the legitimacy of regulatory bans, but doesn’t find foie gras to be relatively important enough to get the attention it’s now receiving. But what happens once Cokes, Slim Jims, and Big Macs are banned? Foie gras might well be next in line of importance, not only for the ill-effects its production has on ducks and geese but also for the ill-effects its consumption has on humans; the fat content of this delicious stuff is incredibly high. How will Ms. Waters object then?

Anything's Possible

“Possibility” is a very weak standard. To describe something as “possible” is to say little. The reason is that the set of things that are possible is surprisingly vast. It is so vast that almost everything that is possible will never actually occur.

I’m much impressed by an account I once read (I think in Richard Dawkins’s The Blind Watchmaker) that it is possible for the atoms in the outstretched arm of a marble statue to arrange themselves such that the arm of the statue waves in the same way that a live human being can wave his or her arm. It’s possible. And it took a clever person to determine that such a thing is possible.

A wise person who sees the arm of a statue wave will understand immediately that the statue is a hoax – not really of marble, but instead that it's a costumed live person or a mechanical device.

I frequently think of the vastness of the set of possibilities when I encounter arguments such as the one that a reader of Café Hayek sent in recently on conscription. This person rightly and very cleverly described a situation that is possible and that, should it arise, would render conscription economically justified. I’ve read similar reports of “possibilities” on many other fronts, especially (lately) on international trade. I admit it: a set of circumstances is possible under which trade restrictions generate net material-welfare gains to domestic citizens.

Such possibilities are far too remote to justify any actual policy of conscription or trade restraints.

Another point that has long impressed me is the one made by Rutledge Vining in his book Performance of an Economic System, and emphasized by Jim Buchanan: sound policy is always a choice of rules, never of specific outcomes.

Sound rules are necessary. To abandon a sound rule just because a clever person describes a possibility that is inconsistent with this rule is unwise – possible, but unwise.

Don't Rushdie to Conclusions

Salman Rushdie, writing in today’s Washington Post, offers part of an explanation for the surprise outcome of the recent election in India:

It's no accident that the ruling alliance lost heavily in Andhra Pradesh and in Tamil Nadu, precisely the states that wooed information technology giants such as Microsoft to set up shop, turning sleepy "second cities" such as Madras, Bangalore and Hyderabad into new-tech boom towns. That's because while the rich got richer, the fortunes of the poor, such as the farmers of Andhra, declined year by year. The gulf between India's rich and poor has never looked wider than it does today, and the government has fallen into that chasm.

Rushdie’s assessment of the political situation likely is correct. But care is required when drawing inferences about economic progress from his claim that the rich are getting richer while the poor endure worse suffering.

If Madras, Bangalore, and Hyderabad truly were “sleepy” cities prior to their recent and significant growth powered by the information-technology industry, then many of the residents of these cities who are prospering today probably were not rich back in the “sleepy” days. Also, a good bet (although I don’t know for sure) is that, as these cities boomed, many people from rural regions moved to these cities and now take part in the new prosperity. Almost surely, many Indians who were poor before the recent surge in economic growth are today much more prosperous than they were just a few years ago – some, perhaps, are even rich.

Of course, economic progress does not benefit everyone equally, and in the short-run, it can even make some people worse off. Perhaps – perhaps – the tech-boom in these Indian cities is responsible for a decline in the well-being many people working in agriculture.

I use the weasel-word “perhaps” just above because I don’t know enough about the details of India’s economy and its recent history. Rushdie assumes that the decline in the material welfare of Indian farmers is caused by the tech-boom in the cities. Why would this be? Wouldn’t greater prosperity in the cities raise the demand for agricultural outputs and thereby increase the prosperity of at least some agricultural regions? Recognizing that wealth is created and not a fixed-in-size stock of stuff, the mere assumption that greater wealth at location X means less wealth at location Y is unacceptable.

In Praise of Wal-Mart

Dan Drezner understandably is pleased with Steve Chapman’s explanation of the benefits brought by Wal-Mart – and the economic institutions that foster it. Here’s another piece of praise for Wal-Mart, this time from the perspective of a Brit (John Blundell, Director General of the Institute of Economic Affairs in London).

Not an Unhealthy Trend

In a letter published in today’s Wall Street Journal, economist Micha Gisser reports data that contradict the claim that the percentage of Americans without health insurance is rising. Even more interesting is his conclusion (again founded on data) that the explosion in health-care expenditure during the past 40 years has not significantly reduced the rate of growth in real per-capita income spent on goods and services other than health care.

Here’s his letter.

The assertion that the number of uninsured is at an all-time high is misleading. The absolute number of uninsured is irrelevant. The relevant statistic, the percentage of uninsured of the total population, was 14.1% in 1992, reached an all-time high of 16.3% in 1998, fell to 14.2% in 2000, and was 15.2% in 2002 (Census Bureau/Current Population Reports). Health-insurance coverage reporting started in 1987, and it seems that what we observe is a cyclical behavior, rather than a trend.

Those who advocate a "slow march toward a government-driven system," basically the nationalization of the American health-care system as in Canada, point to the historical trend of rising national health expenditures as a percentage of GDP. Let's take a look at the data. From 1960 to 2000, health care's share of GDP in the U.S. has increased from 5.3% to 13.2%. Rising personal income and higher-quality care as well as the increased prevalence of medical insurance that insulates individuals from the real cost of their health are the main factors responsible. From 1960 to 2000 real GDP (1996 prices) per capita rose from $13,155 to $32,670; during the same period, real GDP per capita devoted to non-medical services rose from $12,458 to $28,358. Put differently, the "explosion" in medical-care expenditures reduced the average annual rate of growth of real GDP per capita devoted to non-medical goods from a potential 2.3% to 2.08%. The comparable growth for the four decades was 148% and 128%, respectively.

Today we pay a larger fraction of GDP for medical services, but we receive better high-tech care that was not available in 1960. More to the point, American consumers are wealthier than ever: The more than doubling over four decades of real GDP per capita net of medical expenditures is reflected in real consumption. The "explosion" in medical-care expenditures ate a bite of our salad, but hardly the whole lunch.

As a Rule, Freedom and Free Trade Work

The current hysteria over “outsourcing” – that is, importing services – often features opponents of free trade posing as defenders of workers who’ve lost their jobs even though these workers “played by the rules.” Sen. John Edwards, for example, during his bid for the Democratic presidential nomination, repeatedly spoke of people who “played by the rules” but who nevertheless got pink slips because of trade with foreigners. The assumption is that playing by the rules should be sufficient to protect you from losing your job.

Appealing to rules is powerful. Everyone understands that breaking agreed-upon rules is wrong.

But there is no rule in a free society that says if you play by the rules – if you work hard, get an education, and are a person of integrity – that you’re guaranteed never to lose your job. Put differently, the fact that honest, decent, hard-working people sometimes lose their jobs is not evidence of unfairness, wrong-doing, mischief, or poor policy.

If government ever tried to enforce a rule that guaranteed that no rule-follower would ever lose his or her job, government would have to (try to) freeze in place the current pattern of economic activity. Consumers would be prevented from changing their patterns of spending; new technology would be outlawed; pursuit of greater efficiencies would be prohibited; demographic changes would be fiercely regulated by government. Nothing that threatens to significantly reduce demand for the output of any existing industry would be tolerated – for any such reduction in demand entails a scaling back of production in that industry and, hence, possible job losses in that industry.

Economic growth would stop; indeed, it would shift quickly into rapid reverse, for any economy saddled with this sort of government regulation would collapse.

One set of real rules in a market-oriented, free society is the following: each worker gets to enjoy a standard of living that is incredibly high by historical standards and that likely will continue growing over time; each worker may spend and invest his earnings pretty much as he sees fit and seek out ever-better deals for spending and investing his earnings. Entrepreneurs and investors may produce and offer for sale pretty much whatever they want. If, and for as long as, consumers pay handsomely enough for firm A’s product, firm A prospers. If and when consumers chose to reduce the amounts they spend on firm A’s product’s, firm A reduces its output (perhaps even going out of business). We tolerate -- indeed, we celebrate -- economic change because, in market societies, that change is another name for economic growth that brings greater and more-widespread prosperity.

To protect workers “who play by the rules” against job loss would require that government break nearly all of the rules of civil, free, and prosperous society.

Development Bugs Me

The current issue of The Economist has an interesting story on the just-now-emerging-from-seventeen-years-in-the-ground cicadas. Here in northern Virginia, these bugs – Brood X of the 17-year cicada – will soon be swarming awkwardly in flight and making quite a racket, although not as densely as in parts of the American midwest.

One interesting hypothesis is that cicadas are now more numerous than in our less-developed past. The reason is that the larvae nourish themselves on tree roots, and, some researchers believe, the roots of younger trees are more tasty and have more nourishment than do the roots of older trees.

The suburbanization that has occurred in much of America has resulted in lots of “leafy avenues, lawns with the odd sapling growing in them, and golf courses” – which, as hypothesized by Prof. Keith Clay of Indiana University in Bloomington, are better for these insects than pre-Colombian foliage.

I wonder if Greenpeace will distribute a bumper sticker that reads: Hug a Developer: The Cicadas’ Best Friend.

Jobs for the Future

In today’s New York Times, Federal Reserve Bank of Dallas Chief Economist W. Michael Cox and co-contributors Richard Alm and Nigel Holmes present the optimistic – I believe the realistic – side of the jobs picture. Their interpretation of the current scene differs notably from the ominous interpretation that Paul Craig Roberts offers in yesterday’s Washington Times.

The text of their op-ed is short; I paste it below in full. But click on "present" above and then click on the link to “Graphic: Op-ed Chart,” which is just to the right of the text, for a nice visual presentation of job destruction and creation since 1994.

Job jitters are vexing America. Not even the striking gains in employment over the last two months have put an end to hand wringing over work being "outsourced" to low-wage countries. Americans had become used to shedding factory jobs, but the technology and service jobs now at risk were supposed to be secure, the guarantee of our future. So we're left to wonder: what will Americans do?

Well, just like previous generations of Americans, they'll learn to do something different from what they've done in the past.

Our history is one of a constant churning of jobs, with workers always finding the next step forward in the evolution of work — from farm hands to industrial workers to information handlers. They will do so again. As existing jobs succumb to shifts in technology and trade, the economy will adjust, creating new work that uses new skills and talents. Over time, workers move up what we call a "hierarchy of human talents" — they find jobs that demand higher-order skills and offer better pay and working conditions. As depicted in this chart, the hierarchy provides a guide to the traits and qualities that will dominate the next employment wave.

Over the past decade the biggest employment gains came in occupations that rely on people skills and emotional intelligence — like nurse and lawyer — and among jobs that require imagination and creativity: designer, architect and photographer. But not all of the new jobs require advanced degrees or exceptional artistic talent; note the rise of employment for hair stylists and cosmetologists.

Trying to preserve existing jobs will prove futile — trade and technology will transform the economy whether we like it not. Americans will be better off if they strive to move up the hierarchy of human talents. That's where our future lies.

Adam Smith on War

I’ve always liked Adam Smith’s cogent insight about imperial wars:

In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory from a longer continuance of the war.

(This quotation is in Book V, Chapter 3 of The Wealth of Nations.)

While Smith’s insight strikes me as retaining a great deal of explanatory power, I wonder if and how the Great Scot would modify his remark in this age of instantaneous, vivid mass communication of words, pictures, and video. Does a barrage of daily reports of fellow citizens – both soldiers and civilians – killed in action lessen the enjoyment that wars afford to “people who live...remote from the scene of action”? Probably. On the other hand, the same communication techniques that bring to us instant pictures and reports of dead Americans also bring us instant pictures of American military successes and of events such as the toppling of statues of Saddam Hussein and detailed accounts of how the real Hussein was captured.

I’m unsure if Adam Smith would modify his remark; I doubt that he’d change it substantially.

Outlandish Worries about 'Outsourcing'

Paul Craig Roberts has spent much of the past several months predicting that the U.S. will become a third-world country sooner rather than later if we don’t stop so-called ‘outsourcing’ – that is, importing some labor services. (Note: Paul Craig Roberts is unrelated to Café Hayek’s Russ Roberts.)

P.C. Roberts’s latest contribution to the public discussion of this topic – his latest assault on free trade (that his, his latest assault on consumers) and on those of us who endorse free trade – appears in today’s Washington Times.

Flaws too numerous to list contaminate his arguments. One of the most glaring of these flaws is his inexplicable (implicit) assumption that the world’s stock of capital is fixed. That P.C. Roberts makes this assumption is evidenced by his worry that capital invested abroad means less investment at home.

For America to become a third-world country (as P.C. Roberts fears) would require not only that capital flee the U.S., but also that new investment here would dry up. The record capital-account surplus that America now enjoys suggests that such drying-up of investment ain’t happening. More fundamentally, as long as America retains the rule of law, stable money, secure private property rights, and other institutions that investors find attractive, there's no reason to believe that the U.S. economy will suffer a secular decline in its stock of capital. Quite the contrary: new capital goods -- many that today are undreamed of -- will be created, put in place, and futher raise the productivity and, hence, the wages of American workers.

We're Not Running Out of Oil

MIT economist M.A. Adelman has a solid article in the current issue of Regulation, published by the Cato Institute. It’s entitled “The Real Oil Problem.” No one is better equipped to write on this subject.

Among the myths Adelman exposes is the one that shrieks “We’re running out of oil!”

First he points out that “reserves” is typically a shorthand term for the more technical term “proved reserves,” and any “well’s proved reserves are the forecast cumulative profitable output, not the total amount of oil that is believed to be in the ground.”

Then Adelman goes on:

But the “running out” vision never works globally. At the end of 1970, non-OPEC countries had about 200 billion remaining in proved reserves. In the next 33 years, those countries produce 460 billion barrels and now have 209 billion “remaining.” The producers kept using up their inventory, at a rate of about seven percent per year, and then replacing it. The OPEC countries started with about 412 billion in proved reserves, produced 307 billion, and now have about 819 left..... Growing knowledge lowers cost, unlocks new deposits in existing areas, and opens new areas for discovery. In 1950 there was no offshore oil production; it was highly “unconventional” oil. Some 25 years later, offshore wells were being drilled in water 1,000 feet deep. And 25 years after that, oilmen were drilling in water 10,000 feet deep – once technological advancement enabled them to drill without the costly steel structure that had earlier made deep-water drilling too expensive. Today, a third of all U.S. oil production comes from offshore wells.

He also reports on a recent study he did with Campbell Watkins in which they could find no evidence that the process of finding new crude-oil deposits in non-OPEC countries, and developing these into reserves, is getting harder or more expensive: "Statements about non-OPEC nations' 'dwindling reserves' are meaningless or wrong."

He exposes other myths as well. It’s well worth a read.

Skepticism, at Home & Abroad

Corey Robin has a nice essay in the Outlook section of the May 2nd edition of The Washington Post. In it, he takes issue with the neoconservative case for using the U.S. military on grand foreign adventures. Re-reading this thoughtful essay prompts many thoughts. Here's one.

One distinction separating many American conservatives from many American (left) liberals is that many of the same conservatives who don’t trust government to deliver the mail or to run a national pension fund emphatically trust government to carry out foreign military adventures. For many left-liberals, the opposite is true.

This distinction is curious. Which group has the better argument?

Left-liberals might say that they have the better argument because it’s easier for voters to monitor events at home, compared to monitoring them abroad. Moreover, voters are less likely to abandon their critical faculties when evaluating domestic policies than when, filled with patriotic fervor, they’re called upon to evaluate foreign engagements of U.S. troops.

Conservatives can counter by arguing that most military engagements have relatively simple, easy-to-monitor goals, such as “force Hitler’s army to surrender” or “get Iraq out of Kuwait.” Success and failure of military engagements can be gauged relatively easily – or, at least more easily than gauging the success or failure of domestic programs aimed at creating a more just or equitable society.

My own position is that conservatives and left-liberals both are correct – and both are mistaken. The same knowledge problems, the same diffused and muted and distorted responsibilities, and the same special-interest-group pressures that should cause us to be very skeptical of the case for government intervention into the domestic economy should also cause us to be very skeptical of foreign intervention.

Externalities Ubiquitous

Responding to Cafe Hayek's post "Externalities Unavoidable," David Henderson sent the following e-mail. David is a Research Fellow at the Hoover Institution (along with Cafe Hayek's own Russ Roberts), editor of the wonderfully useful Concise Encyclopedia of Economics, author of the the highly recommended book The Joy of Freedom, and frequent contributor to the Wall Street Journal and other high-quality publications.

Don Boudreaux pointed out that government creates as well as eliminates externalities. He gave as an example the externality that is caused by aggressive foreign policies of the U.S. government. People who dislike those policies, he noted, may terrorize innocent Americans in response to those policies.

All of this is correct, and I don't wish to dispute it. But there are even bigger examples (bigger meaning "more costly") of externalities caused by government..Take Medicare. Please. Government has structured the incentives so that a Medicare patient who uses health care imposes a huge cost on us taxpayers that she (most Medicare users are women) doesn't take account of. Every time someone uses Medicare, an externality is imposed. The size of that externality is tens of billions of dollars a year. And this is just one example. In fact, it wouldn't be much of an exaggeration, and may be literally true, that the majority of what government does nowadays is create externalities.

Trade and Per-Capita Income

Kevin Brancato, at TruckandBarter, just posted two illuminating graphs. One graph shows a significant positive correlation between the size of per-capita incomes within countries and countries' openness to foreign trade.

One interpretation of this unmistakable correlation is that freer trade generates higher per-capita incomes. More openness to foreign trade promotes the wealth of nations. That's my interpretation. Powerful support for this interpretation is found in Jeffrey Frankel & David Romer, "Does Trade Cause Growth?", American Economic Review, June 1999.

However, Harvard economist Dani Rodrick argues that causality runs in the opposite direction -- namely, that high per-capita incomes cause countries to be more open to foreign trade.

Again, I believe that Rodrick's hypothesis is mistaken. But let's assume here that he is correct.

Even if Rodrick is correct that more trade does not so much cause higher incomes as it itself is caused by higher incomes, an important empirical finding must not be overlooked: more trade does not reduce per-capita incomes.

Dani Rodrick's argument about the relationship between openness to trade and per-capita incomes does not amount to an argument against free trade.

Well Nye Correct

I thank a reader for reminding me that John Nye is another economist who emphasizes the fact that economic growth gives poor and middle-class people greater access to most material goods and services that, without such growth, would be enjoyed exclusively by the rich. In this way, market-driven economic growth promotes greater material equality.

But in another column Nye makes the further point that this same economic growth increases competition for positional goods, which Nye defines as

those products and services which are inherently impossible to mass produce because their value is mostly, if not exclusively, a function of their relative desirability.

A good example of a positional good is admission to an Ivy League college.

Because nearly everyone in market societies has ready access to inexpensive, high-quality clothing; an endless feast of food; automobiles; and many other amenities that only the rich in non-market societies enjoy, competition in market societies is channeled toward positional goods. Unequal access to positional goods persists, and looms larger in people's concerns.

But perspective is vital: poor and middle-class Americans are mighty fortunate to worry as intensely as many of them do about the difficulties their children encounter in seeking admission to Harvard, Dartmouth, and Stanford.

Earthworms vs. Earthquakes

Charles Darwin famously observed his backyard. Over the span of several years, he noticed that the soil had been completely overturned – by earthworms. This turning of his soil resulted from a series of individually minuscule acts of individual earthworms, each crawling and eating and in the process moving tiny particles of soil ever so minutely. The overall consequence is a changed (and healthier) backyard. Subtract any one act – subtract any one earthworm – from the yard and the extent of the soil-turning appears no different than if this act, or this earthworm, remained on the scene. But the sum total of each of these individually almost-irrelevant acts is significant in both its extent and importance. (See chapter nine of Stephen Jay Gould’s Hen’s Teeth and Horse’s Toes for a nice account of Darwin’s recognition of earthwormia’s influence on his backyard.)

Compare earthworms (who took years to turn Darwin’s soil) to an earthquake. An earthquake is big, discernable, attention-grabbing; its impact is immediate and vast. Take away a single earthquake, and you notice its absence.

I’m tempted to say that, while an earthquake will turn Darwin’s backyard soil every bit as reliably as earthworms will, it will do so with such bluster and heavy-handedness and violence that the final result will be far less agreeable than that of the earthworms’ much more gradual, combined efforts. But who knows if this claim is true? By what standards is the ‘agreeableness’ to be judged?

My real point is to warn against the temptation to ignore or to dismiss the small changes that take place everyday in the economy – the introduction of kitchen trash bags with deodorizers; the reduction in the amount of aluminum used to make a soda can; reductions in transportation costs that make affordable fresh fruit more reliably available year round; the invention of Listerine PocketPack breath strips; the availability of toothpaste with hydrogen peroxide; improvements in products that remove stains from clothing and carpets; improvements in the techniques used to freeze foods; the use of vinyl as siding for homes; the increasing availability of darn good sushi even in supermarkets.... the list is practically endless.

Pointing to any one of these developments (or any hundred of them) and saying “See, life for ordinary people in market economies is improving!” often inspires derisive dismissals. How much, after all, can a deodorized kitchen trash bag actually contribute to a better life?

But add up all the countless, individually nearly insignificant changes taking place every day in market economies – step back and look at progress over several years – and you see unmistakable and significant improvement.

Many people who don't appreciate the market look, I believe, for the equivalent of earthquakes -- large, boisterous, glamorous, big one-fell-swoop changes. Such changes can be imagined to be glorious. But can they compare with the market's equivalent of Darwin's earthworms?