Cafe Hayek

Rwandan Coffee, Commerce, and Cooperation

Karol and I -- actually, it's mostly Karol (who spends lots of time these days in Africa) -- write here about the civilizing effects of commerce.

Cartoons, Capital, and Competition

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I draw an economic lesson from The New Yorker's weekly cartoon-captioning contest, in which people are invited to submit captions to accompany uncaptioned cartoons.  My vanity compels me to quote at length from the heart of the article.

Think of each uncaptioned cartoon as a capital good. It has the potential to create value (in this case, to make readers laugh). By itself, though, this capital good produces almost no value; without a caption, each cartoon is virtually worthless. The cartoon becomes valuable -- it contributes to human satisfaction -- only when a clever caption is added to it.

Suppose for a moment that The New Yorker allowed only residents of Manhattan to submit captions. No doubt many submitted captions, when added to the cartoons, would produce the intended humorous result. But editors of the magazine could not be certain that the best possible caption was submitted.

What if, for a particular cartoon, someone living in Brooklyn had an even better idea for a caption? By prohibiting non-Manhattanites from contributing their caption ideas to the cartoons, the caption that would have been submitted by the person in Brooklyn -- the caption idea that would have added to the cartoon even more value than is added by the best caption from Manhattan -- never is added. Thus, the cartoon -- this particular capital good -- fails to produce as much value as it would have produced had Brooklynites been among those who were permitted to submit captions.

Sadly, though, no one ever learns this fact. The winning caption submitted from Manhattan might be judged by everyone to be excellent. But because the even better caption from Brooklyn never materializes, no one ever discovers just how funny that cartoon could be.

If the goal is to ensure maximum value of this particular capital good (a weekly uncaptioned cartoon), clearly it is advisable to have larger, rather than smaller, numbers of people able to try their minds at devising clever captions. With everyone in the world free to contribute captions, each cartoon is joined with cleverer and more creative captions than would be the case if only Manhattanites -- or only residents of New York state, or even only Americans -- were allowed to submit captions.

The very same process is true of factories and machines and workers. It might be that the entrepreneur with the best idea for how to use a particular factory and its machines and workers to produce maximum value is an American. But fewer than 5 percent of the world's people live in America. So it is inevitable that the best and most creative ideas for how to use particular assets that are located in America will often be possessed by non-Americans.

On Attitudes Toward Immigrants

From a review, by Jonathan Yardley, in today's Washington Post Book World of Peter Quinn's new book Looking for Jimmy:

Today the Irish are so thoroughly assimilated into the larger American society that it is difficult for anyone to remember how harshly and unforgivingly they were greeted as they arrived in the great wave that began in the mid-1840s and lasted for a decade, but white America equated them with blacks and stereotyped them accordingly as "childlike buffoons, lazy, superstitious, given to doubletalk, inflated rhetoric, and comic misuse of proper English.
....
White Anglo-Saxons who regarded themselves as "native Americans" gave the newcomers a frosty welcome. In Boston, employers famously posted signs that read: "No Irish Need Apply." Irish women, who outnumbered men, "worked in factories and mills. Irish maids became a fixture of bourgeois American life. Domestic service became so associated with the Irish that maids often were referred to generically as 'Kathleens' or 'Bridgets,' " just as black railroad porters were universally, and equally patronizingly, called "George."

Thus, often, are attitudes toward poor immigrants from poor countries.

In that age (mid-19th century) before the welfare state, how did these poor, poorly educated, and hated Irish immigrants survive and prosper in America?  Involvement in politics was certainly one way.  But hardly the only way.  According to Yardley, Quinn relates how this "immigrant group" "built its own far-flung network of charitable and educational institutions," and how the Catholic Church also played a major, positive role.

See this earlier post for references to some important scholarly research on the history of private means of providing charity and mutual aid.

We Do Cooperate

I'm pleased that The New York Review of Books published this letter of mine, as well as author Bill McKibben's response to my missive, in its Dec. 21 issue:

HOW CLOSE TO CATASTROPHE?

By Donald J. Boudreaux, Reply by Bill McKibben            

In response to How Close to Catastrophe? (November 16, 2006)

To the Editors:

I've read few passages in your pages that are as mistaken as Bill McKibben's assertion that "the technology we need most badly is the technology of community—the knowledge about how to cooperate to get things done.... We Americans haven't needed our neighbors for anything important..." ["How Close to Catastrophe?," NYR, November 16].

Each of us cooperates daily with countless others—neighbors, fellow citizens, foreigners—to ensure not only our prosperity but our very existence. My mind boggles at the number of people who cooperated to make available to me, for example, the shirt on my back. Cotton growers in Egypt; fashion designers in Italy; textile workers in Malaysia; merchant marines from around the globe; investment bankers in Manhattan; insurers in Hartford; truck drivers along the East Coast; department store executives in Seattle; security guards and retail clerks in Virginia—these people and millions of others cooperated so that I might wear an ordinary shirt. Ditto for my house, my food, my subscription to The New York Review of Books.

For McKibben to say that "cheap fossil fuel has allowed us all to become extremely individualized, even hyperindividualized" is to be blind to the amazing and vast system of cooperation that today spans the globe. Clearly, we have, in spades, "knowledge about how to cooperate to get things done."

Donald J. Boudreaux
Chairman, Department of Economics
George Mason University
Fairfax, Virginia

Bill McKibben replies:

Donald J. Boudreaux's response proves precisely the point I was trying to make—and it says something about the blinders that too many economists have strapped on. We do cooperate, unconsciously, to promote our individual self-interest; Chairman Boudreaux's slightly less elegant restatement of Adam Smith's remarks about the butcher and the baker are, as far as I can tell, not in serious dispute. What is in dispute is whether this cooperation carries over into more crucial matters—like keeping the planet from overheating in the next decade. Since my article came out, the British government has released a report estimating that the economic cost of global warming will exceed the combined impact of both world wars and the Great Depression of the 1930s. So far, there is precious little sign of our communities coming together to meet this challenge—politically, economically, culturally. Which doesn't prove Smith—or even Boudreaux—wrong. Just incomplete.

And I thank Tibor Machan for alerting me to my letter's appearance in TNYRB -- a fact that prompts me to share with you this wonderful recent op-ed by Tibor.

The Importance of Rules

On pages 127-128 of volume II of Law, Legislation, and Liberty, Hayek speaks to those who would inhibit or suspend market forces in order to protect identifiable individuals -- such as, today, workers at GM and Ford -- from the play of these forces:

In a spontaneous order undeserved disappointments cannot be avoided.  They are bound to cause grievances and a sense of having been treated unjustly, although nobody has acted unjustly.  Those affected will usually, in perfectly good faith and as a matter of justice, put forward claims for remedial measures.  But if coercion is to be restricted to the enforcement of uniform rules of just conduct, it is essential that government should not possess the power to accede to such demands.  The reduction of the relative position of some about which they complain is the consequence of their having submitted to the same chances to which not only some others now owe the rise in their position, but to which they themselves owed their past position.  It is only because countless others constantly submit to disappointments of their reasonable expectations that everyone has as high an income as he has; and it is therefore only fair that he accept the unfavorable turn of events when they go against him [emphasis added].

The above is Hayek's unique way of saying what I struggled to say in this post.

Thanks to Vernon Smith for reminding me of this Hayek quotation.

Who'd have thunk it?

The Washington Post (on the front page) makes a remarkable discovery (rr):

Many Displaced by Katrina Turn to Relatives for Shelter

Wow.  Incredible, isn't it.  There's actually an article, too.  First graf:

Owing to stealthy acts of hospitality that are largely invisible to government, aid agencies and the news media, hundreds of thousands of people displaced by Hurricane Katrina seem to be disappearing -- into the embrace of their extended families.

I'm not so sure about the word "stealthy."  Stealthy makes it sound like they're trying to hide.  I know it may appear that way to the government, the aid agencies and the news media who now want to show their incredible responsiveness, but stealthy?

I've been wondering about the centralized vs. decentralized aspect of this disaster since it was announced that the people in the Superdome would be moved to the Astrodome.  Were they cattle?  Or antiques?  If I were in the Superdome without food and water, surrounded by waste and terrorized by a few evil thugs and someone said, "Hey everybody, we're getting out of here.  We're going to Houston" I'd say whoa.  Hold on.  I don't want to go to Houston.  I certainly don't want to go to the Astrodome.  Get me to dry land and I'll find my own way, TYVM.  I don't understand the attitude of "what are we going to do with these people now that they're not dying right away."  These are human beings, not checkers or even chess pieces.  They have desires.  They have knowledge.  Some even have families and churches and friends.

The Spontaneity of Spontaneous Order

When we talk about spontaneous order, the adjective is trying to capture the fact that no one is in charge, controlling the economic system—the order we see around us is spontaneous, organic, emergent, rather than controlled, directed or managed.

I've never liked the word spontaneous in that context.  It captures the unplanned aspect but there's an implication of suddenness and out of-the-blue that seems misleading.  Emergent order is a little better.  Hayek complains in the Fatal Conceit and elsewhere about our language not having phrases and words for things that are not directed or planned.

But I've been thinking lately about a different sense of the word spontaneous.  It's the ability of the modern economy to deal with our spontaneity as economic actors.  (Notice how that sentence suggests the economy is doing something consciously to cope with our spontaneity.  Try and reword it to get rid of that implied management.  How about this: It's how order re-emerges in the face of our spontaneity as economic actors.  Better.) 

We don't have to submit our plans for the future in advance, be they plans of consumption, leisure, career and so on.  We are free to lead unscripted lives and the system responds to those spontaneous choices we make.  Thinking of order in this way gives a different meaning to the title, Free to Choose.  Freedom would be less appealing if when we chose, our choices couldn't be implemented or only implemented at great cost or with great delay.  I'm free to eat meat or be a vegetarian.  I'm free to keep kosher or go macrobiotic.  But it would be a less powerful freedom if those choices meant waiting weeks or years for my food choices to be available.  Or if I suddenly decided to become a vegetarian, my grocery store would be unable to cope with my choice without a six month in advance notice.

So when I marvel that the extended order of human cooperation delivers (oops, there's that implied intention/control thing) allows me to buy a dozen bagels for a brunch without having to call ahead, it's so much more than that.  The greater marvel is that thousands or millions of us can make those changes and the system simply readjusts to our new desires.  Super Bowl Sunday comes and goes and pizza and hot dogs and hot dog rolls and beer flood our stores and restaurants in advance to keep us sated.  The prices don't surge upward for those products, either.  The goods are even sometimes cheaper on that day as an inducement to come to the store. 

But that's nothing.  The Super Bowl is at least predictable.  What happens when there's an unanticipated, essentially spontaneous change of behavior?  What happens when millions of Americans decided they want more low-carb food and less of other stuff?  Suddenly, or nearly suddenly, groceries and menus are full of low-carb items.  The resources flow into those products and away from other suddenly less attractive options.  And the low-carb options aren't a fortune.  They just show up (spontaneously?) as if they'd been produced and marketed and delivered for years.  Yes, they get improved as time passes.  But the first low-carb loaf of bread isn't like the first fountain pen or first PDA with a big price premium.  It isn't that pricey.

The weird part of this is that we teach our students that sudden, unanticipated changes in demand drive up prices in the short run as a way of signaling to economic actors where resources are most valued.  But have we exaggerated the importance of the price mechanism?  What evidence do we have that the actual prices rise very much in the face of large shifts in demand?  Have recent improvements in just-in-time inventory control and other logistical improvements made price changes less important so that the mere possibility of price increases is sufficient?  Do such changes differ by industry?  Do services respond differently from electronics goods?  These are questions economists should be examining.  Is anyone out there doing it?

When Less is More

My co-host here at Cafe Hayek blogged recently on the question of whether firms should be required to reveal whether call center employees should be required to reveal whether they are taking our calls while living in a foreign land.  Don made the excellent point that location is just one question a caller might care about.  What about religiosity or sexual preference or social habits?  Where should we draw the line on what companies should be forced to reveal?

I want to argue here that most of us prefer trading with people in ignorance.

Hayek's extended order of human cooperation, the specialization and division of labor that allows millions of strangers to cooperate in serving me a bagel or a pencil or a car would be impossible if we only traded with people we liked or agreed with or found to be of upstanding character.  The beauty of a modern decentralized economy is the willingness all of us have to trade with strangers who we willingly interact with in ignorance. 

One dimension of that ignorance is computational—how could be begin to assemble information on all the people who worked to create any of the products or services I enjoy?  But the second is a different level of practicality.  If I only trade with friends or family or people who I approve of then I will be very poor.

There is a flip side to the right to know as well.  Why should the questioning be only one-way?  When I call American Airlines in search of a lost bag and reach someone at a call center in India, should I be required to provide them information about me that they would be free to act on accordingly?  When I walk into my local dry cleaner, should I be required to reveal my country of origin, religion, political views and so on and have to meet the approval of the owner before he serves me?

That is, I suspect, is not only not required, but against the law.  But most of the time, that law is superfluous.  In America at least, our culture would be offended by an owner who only traded with people he approved of morally, politically and religiously.  Privacy is respected by both buyers and sellers.  The only disclosure requirement is the color of your money (or the validity of your credit card) and the quality of the product that is received in return.

That culture that respects privacy helps produce the extended order of human cooperation that sustains our well-being.

As for the call center guy in India, you can always tell he's in India by the accent unless he's an immigrant in Nebraska.  But then again, are you sure it's OK for someone like myself who lives in Maryland to be served by someone in Nebraska?  Would it not be better to keep all the call center jobs in Maryland?  Or better yet, Montgomery County, where I live?  Or better yet, maybe I should refuse to deal with companies that hire people other than my friends and relatives for call center jobs.  That way lies not just madness, but poverty of the direst kind.

Starving in the Streets

I think the world would be a better place if government got out of the retirement business altogether and let us take of ourselves rather than have the government treat us like children, incapable of dealing with the complexities of risk and reward.

There are two different philosophical arguments against the idea of people taking care of themselves.  One view argues that government provision of social security is simply better because it is a contract between the generations where we all take responsibility for one another.  To me this is romance at best or a hoax or a fraud at worst.  What does it mean to say we all take responsibility for one another?  A family of 300 million people isn't a family.  And somehow I lose all the romance when poor workers are taxed to support wealthy retirees.  I just don't get it.

In the romantic view of government, collective provision of things is always better than private provision.  My favorite example of this comes from a New York Times review of Thomas Frank's One Market Under God a few years back:

At one point Frank discusses the proposition that Peter Lynch deserves middle-class hero status because people stop him on the street to thank him for running the popular Fidelity Magellan Fund so well that it allowed them to accumulate a bigger retirement nest egg, or to pay for their kid's tuition, or to build an addition to their home. Frank of course sees no heroism in this, and counters that ''each of these necessities -- pensions, shelter, college -- were things Americans had once sought to ensure through union activity or government intervention, things that Americans once believed were theirs simply by virtue of being citizens, things that could and should be available to everyone in a democratic society.''

At one level this is simply romantic nostalgia.  At another level it is delusion, thinking that somehow being a citizen generates these benefits without an understanding of the process that actually produces them.  I don't think Peter Lynch is a hero.  But even in Frank's romantic vision where government was once a source of material well-being, the government wasn't producing the well-being, it was redistributing it from someone who was doing the actual work.  Portraying the government as heroic provider is an intellectual dishonesty unless we're talking about Cuba, say, where life is simpler, poorer and more static.

But there is another argument against personal responsibility that I find even more mystifying.  In this argument, without government provision of something, it simply would not exist.  When I write or talk on getting government out of the retirement business, some people inevitably email me telling me that in my ideal world, poor seniors would starve in the streets because social security wouldn't be there to take care of them.

One of the problems with this argument is that it ignores the fact that poor young people have a tougher time because they are forced to pay for social security.  But the deeper problem with it is the presumption that without government, it simply would not get done.  In this view, without government schools, there would be no education.  Without government food stamps, there would be no aid to the poor.  Without the post office, no letters would get delivered.

This lack of imagination ties in to the earlier romance about government.  It ignores the private communities, the private ties, the voluntary associations we make that make our lives satisfying and make the world a better place.  It ignores that when government acts, it crowds out voluntary kindness and replaces it with a more sterile version.  Yes, it can be hard because of free-rider problems to voluntarily solve social problems.  But it is harder, not impossible.  And the quality of the care that results is often better.

Think of the myriad of small good deeds we do and receive from others that make life civilized—holding a door open for someone whose arms are full of packages, pushing a stranger's car out of a snow bank, giving blood, adopting a child.  These countless acts of kindness happen without collective action by government because the costs of a government doorman who springs into action when someone comes by carrying groceries would be too expensive.  But forget the cost issue.  Isn't it lovely to hold the door, to give to charity, to comfort the fallen?  Noticing that in the world around us, these good deeds happen without government may give some solace to the worriers who think that without social security, elderly poor people would starve to death.

I've been thinking about this since watching an EBay commercial.  (Go here.  In the left hand margin find the menu for "TV Spots" and choose "Belief.")

Finally, Bastiat, in The Law wrote eloquently on the lack of imagination I'm discussing here:

Do those worshippers of government believe that free persons will cease to act? Does it follow that if we receive no energy from the law, we shall receive no energy at all? Does it follow that if the law is restricted to the function of protecting the free use of our faculties, we will be unable to use our faculties? Suppose that the law does not force us to follow certain forms of religion, or systems of association, or methods of education, or regulations of labor, or regulations of trade, or plans for charity; does it then follow that we shall eagerly plunge into atheism, hermitary, ignorance, misery, and greed? If we are free, does it follow that we shall no longer recognize the power and goodness of God? Does it follow that we shall then cease to associate with each other, to help each other, to love and succor our unfortunate brothers, to study the secrets of nature, and to strive to improve ourselves to the best of our abilities?

Trust, Faith and Confidence

The other day I had to get some important tax receipts to my accountant.  He's in St. Louis, it's getting close to April 15 and it's really important that they don't get lost.  So I sent them via FedEx.

The woman behind the counter was pleasant as I filled out the air bill.  And it dawned on me that I had no worries whatsoever that my package would arrive in St. Louis the next morning as promised.  I didn't worry that the woman might open the package after I left the office to see what I was sending.  I didn't worry that the man or woman who would touch the package next might open the package to see what was in it.  I didn't worry that the myriad of people who might come into contact with my package would be checking it out to see if there was anything in it worth stealing.

I also never worried for an instant that one of the people who would come into contact with my package might just decide it was too much trouble to deal with it and throw it away.

Total strangers I would never see.  What word best describes my lack of worry?  Was it trust?  Faith?  Confidence?  And what was the source of my contentment?  Was it simply the law of large numbers?  After all, that's what I rely on it when I park my car at the airport parking lot.  I know there's a chance someone will break into my car.  But I don't worry much about it.  There are lots of cars to choose from.  Mine is probably fine.  But if anything, the law of large numbers works against me at FedEx.  After all, if one package doesn't make it, what's the big deal?  Who's going to notice other than me.  Whoever steals it or throws it away could say it's hard to keep track of so many packages.  It fell off the truck.  It got lost in a crevice.  A dog ate it.

My lack of worry at FedEx is different.  It can't be trust.  There are too many people touching my package who I will never see.  How can I trust them?  I know nothing about them.  The woman behind the counter seemed like a decent enough soul.  I trusted her somewhat.  But I don't even think that's the right word my feelings about her.  But it's certainly the wrong word to describe her co-workers who brought my package safely to St. Louis.  I can't say I trusted them.  I knew nothing about them.

Faith?  Seems too open-ended or something.  Faith comes from having used FedEx before and knowing that they always get the job done.  There's a little of that.  But I wasn't even worried the first time I used FedEx.

Confidence seems like the right word.  Confidence born from an understanding of how the division of labor works in a modern economy.  What Hayek called the extended order of human cooperation.

You can see the miracle of the modern economy if you contrast FedEx with a different system.  Let's look at a different way to get a package to St. Louis.  I go down to a street corner and find an honest looking person.  I give this person my package and a bunch of $1  bills.  Here, I say.  Take this money and this package.  I know you probably don't need to go all the way to St. Louis yourself.  So take it part of the way and give the package and some of the money to the next person on the promise that that person will keep the chain unbroken.

How would I feel using that strategy?  I would be trusting the first person.  But the ones after that?  And would I have faith that my package would arrive?  Confidence?  Neither.  The package would be unlikely to arrive and I would certainly need a lot of $1 bills to raise my hopes to even a modest level.  In fact, it's not obvious that giving the first person more money rather than less would make much difference to the odds of the package arriving.

So what's different about FedEx?  On the surface, it's the same thing.  I'm expecting somehow that a lot of strangers are going to come through for me and keep their promises.  What's different?  What's different is the feedback loops that exist to insure performance.  In the case of FedEx there are consequences of failure.  In the case of the guy I find on the street corner, there are no consequences for failure.  FedEx tries to hire honest people.  They fire people who consistently lose packages or steal them.  They honor and reward people who do their job well.  And why does FedEx try so hard?  Who is FedEx?  Why does FedEx try so hard to keep its reputation intact?  Competition is part of the answer.  But there is more to it as well.

Even those feedback loops that keeps the FedEx employees honest work best when people feel guilty being thieves and slugs.  Does capitalism work best when peole are basically honest or does capitalism help create the virtues that make it work well?

The other remarkable part of the extended order of human cooperation is that FedEx delivered the package to St. Louis by 10:00 am for only $19.  Nineteen dollars!  What a lot of confidence can be bought for only $19.  What a pleasant and effective world we live in.