Cafe Hayek

Happy 109th, Fritz!

F.A. Hayek was born on this day in 1899.  To mark this occasion, I offer a brief passage from page 104 of Hayek's 1973 book Law, Legislation, and Liberty, Vol. 1: Rules and Order:

Maintaining the overall flow of results in a complex system of production requires great elasticity of the actions of the elements of the system, and it will only be through unforeseeable changes in the particulars that a high degree of predictability of the overall results can be achieved.

Interfering with trade and technological advances in order to protect certain producers from disappointment (and, hence, from the need to adjust to changes) not only makes the economy less productive over time, but also infuses it with greater uncertainty.

Unreasonable Reasonableness

Here's a letter that I sent today to the Wall Street Journal:

Adhering to the general practice of saying that free trade has both winners and losers, you introduce two letters on Nafta with the heading "Nafta Has Helped Some, Hurt Some" (Letters, May 2).  But this familiar endeavor to appear reasonable misleadingly implies that trade across political boundaries has a unique propensity to help some and hurt others.  In fact, any economic change helps some and hurts others.

Would you introduce letters on the polio vaccine with "Vaccine Has Helped Some, Hurt Some"?  After all, the vaccine eliminated jobs for workers who made crutches, wheel chairs, and iron-lung machines.  Of course, the benefits of the vaccine - especially over the long run - far outweigh the costs.  Likewise with consumers' freedom to spend their incomes as they choose.  And free trade is nothing more than consistently allowing consumers to spend their incomes as they choose.

Sincerely,
Donald J. Boudreaux

This earlier post of mine addresses the same point in a slightly different way.

Capitalism Day

On this Earth Day, I celebrate capitalism -- the institution that, far more than any other, has made human lives clean, safe, dignified, and culturally rich.  Capitalism is also responsible for giving people the wealth and leisure to permit them to mis-perceive nature as loving and bountiful, and to enjoy nature in a way that few of our pre-industrial ancestors could ever have enjoyed it.

So, on this Earth Day, I offer you here my essay, inspired by the work of Julian Simon, entitled "Cleaned by Capitalism."  Here are the central paragraphs:

Before refrigeration, people ran enormous risks of ingesting deadly bacteria whenever they ate meat or dairy products. Refrigeration has dramatically reduced the bacteria pollution that constantly haunted our pre-twentieth-century forebears.

We wear clean clothes; our ancestors wore foul clothes. Pre-industrial humans had no washers, dryers, or sanitary laundry detergent. Clothes were worn day after day without being washed. And when they were washed, the detergent was often made of urine.

Our bodies today are much cleaner. Sanitary soap is dirt cheap (so to speak), as is clean water from household taps. The result is that, unlike our ancestors, we moderns bathe frequently. Not only was soap a luxury until just a few generations ago, but because nearly all of our pre-industrial ancestors could afford nothing larger than minuscule cottages, there were no bathrooms (and certainly no running water). Baths, when taken, were taken in nearby streams, rivers, or ponds, often the same bodies of water used by the farm animals. Forget about shampoo, clean towels, toothpaste, mouthwash, and toilet tissue.

The interiors of our homes are immaculate compared to the squalid interiors of almost all pre-industrial dwellings. These dwellings’ floors were typically just dirt, which made the farm animals feel right at home when they wintered in the house with humans. Of course, there was no indoor plumbing. Nor were there household disinfectants, save sunlight. Unfortunately, because pre-industrial window panes were too expensive for ordinary families and because screens are an invention of the industrial age, sunlight and fresh air could be let into these cottages only by letting in insects too. Also, bizarre as it sounds to us today, the roofs of these dwellings were polluted with all manner of filthy or dangerous things. Here’s the description by historians Frances and Joseph Gies, in Life in a Medieval Village, of the roofs of pre-industrial cottages:

Roofs were thatched, as from ancient times, with straw, broom or heather, or in marsh country reeds or rushes. . . .  Thatched roofs had formidable drawbacks; they rotted from alternations of wet and dry, and harbored a menagerie of mice, rats, hornets, wasps, spiders, and birds; and above all they caught fire. Yet even in London they prevailed.

Peace and free trade.

I'm Lovin' It!

George Will celebrates a great American institution: McDonald's.  Here's a key paragraph:

McDonald's exemplifies the role of small businesses in Americans' upward mobility. The company is largely a confederation of small businesses: 85 percent of its U.S. restaurants -- average annual sales, $2.2 million -- are owned by franchisees. McDonald's has made more millionaires, and especially black and Hispanic millionaires, than any other economic entity ever, anywhere.

Future Jobs

The following letter of mine is published in today's edition of the New York Times:

To the Editor:

Bob Herbert quotes the observation by Andrew L. Stern, president of the Service Employees International Union, that Americans today “cannot see where the jobs of the future are that will allow their kids to have a better life than they had.” Mr. Stern adds, “And they’re not wrong.”

But when could Americans of any generation foresee future jobs? Did the blacksmith in 1890 foresee jobs in the auto industry? Did the corner grocer in 1940 foresee his son prospering as a regional manager for Wal-Mart?

Did the telegram-deliverer in 1950 foresee his child designing software for cellphones? Did the local pharmacist in 1960 foresee his daughter’s job as a biomedical engineer?

Our inability today to see the details of the future is no more worrisome than was the same inability of our grandparents. 

Donald J. Boudreaux
Fairfax, Va., Dec. 22, 2007
The writer is chairman of the economics department, George Mason University.

The Case for Increasing Supplies of Petroleum

A few Cafe patrons have, quite reasonably, questioned my claim that it is not at all obvious that we're running out of oil.  The main point common to all of the e-mails that I've received on this matter is that, even though proved reserves of oil are today higher than they were in decades past, the actual, physical amount of oil in the ground must be less than it was back then.  After all, the more oil we use the less oil there must be remaining in the ground.

This fact is almost surely true.  But economically it might be irrelevant.  I reprise below one of my earliest posts here at Cafe Hayek:

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

Don Boudreaux

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?

If scenario #1 is closer to reality -- and the evidence so far is consistent with that possibility -- then the relevant constraint on our getting oil out of the ground is not any scarcity of the physical amount of oil that exists in the ground as much as it is the scarcity of our ingenuity and resources for use in that endeavor.  As this ingenuity and these resources become more abundant -- as their effectiveness in finding and extracting crude oil improves -- the amount of oil available for our use does indeed increase, in a very real way, over time even as we consume more oil.

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.

Don't Be Sari

Here's a letter that I sent recently to the Washington Post:

Dear Editor:

The moral of your report on the decline of family weavers in India is that globalization and modernization are suspect because they eliminate many ancient, home-based occupations ("An Ancient Indian Craft Left in Tatters," June 6).  And your quotations from out-of-work sari weavers are indeed moving.

Nowhere in this report, however, do you interview those Indians who now can buy machine-made saris at lower prices - thus improving their standard of living by enabling them to purchase other goods whose production creates new jobs for many Indians who would otherwise remain mired in poverty.  Yes, India has a long way to go.  But the notion that most Indians' lives would be better if that economy were frozen in its past ways is foolish.

Sincerely,
Donald J. Boudreaux

Voltaire's Disdain

Here's a letter of mine that appears in today's edition of the Wall Street Journal:

I share James Lange's disgust at environmentalists who relentlessly complain that corporate contributions to environmental causes are inadequate (Letters, May 14). In his poem "An Apology for Luxury," Voltaire addressed such shrill ingrates:

For thee the world at work has been / That thou at ease might vent thy spleen.

Unintended Consequences

Here is Glen Whitman writing about the anatomy of unintended consequences. It's a very nice essay which enhances the reader's understanding of the economic way of thinking. Whitman distinguishes between those economists and activists who understand incentives and those who understand that the implications of incentives can be a bit more complicated than they first appear.

Here's the opening:

In the developed world, we like to think of slavery as a bad memory. But slavery persists to this day, particularly in some parts of Africa, most notably the Sudan. Raiding parties steal children from their home villages and transport them for sale in slave markets many miles away. In the 1990s, when news of this ongoing tragedy came to the developed world, well-intentioned people formed charitable foundations that raised money for slave redemption—that is, buying people out of slavery.

Did these charitable efforts do any good? Certainly, some people are free now who might otherwise of have lived their whole lives in slavery. But there is strong evidence to suggest that slave redemption made the overall situation worse. As journalist Richard Miniter reported in a 1999 article in the Atlantic Monthly, the high prices offered by relatively rich Americans increased the demand for slaves, turned the slave trade into an even more lucrative business, and thereby gave raiders an incentive to conduct even more slave raids. If not for the activities of Western charitable organizations, many of the redeemed slaves might never have been enslaved in the first place!

How did the slave redeemers err? They focused on just one incentive (to release people already in bonds) while ignoring another (to capture more slaves). The sad result was an incentive scheme gone awry.

With just an iota of economics training, most people catch on to the importance of incentives. "Aha! To get people to do what we want, all we have to do is reward the good stuff and punish the bad stuff!" Alas, the world is not so simple. People don't always respond to incentives in the ways you might predict. What distinguishes good economic thinking from bad is recognition of the subtle, creative, and often unforeseen ways that people respond to incentives. Ignoring the complex operation of incentives is a recipe for unintended consequences.

Efficiencies Are a Service to People

As evidenced by this op-ed in today's edition of USA Today, there's a lot of anxiety about Circuit City's announcement that it's laying off many of its workers.  As usual, much of this anxiety is unnecessary, fueled as it is by misunderstanding and faulty reasoning.  Here's a letter that I sent to USA Today in response:

Dear Editor:

When criticizing Circuit City's decision to lay off many of its employees, you miss two crucial facts ("Circuit City's harsh layoffs give glimpse of a new world," April 3).

First, Circuit City is responding to consumers.  As electronic products become less expensive and easier to use, consumers have less need for on-site personal service.  This fact is one reason why consumers buy increasingly from on-line retailers.

Second, the money that consumers save by buying on-line doesn't disappear. Each dollar is either saved and invested or is spent on goods and services that previously were too expensive for most consumers.  Either way, opportunities are created.

Paper Principles

The danger to America posed by imports from China apparently has intensified.  Uncle Sam will now force American buyers of allegedly subsidized Chinese paper products to pay higher prices for these products.  (He'll do so by raising the tariff he imposes on these imports.)

Of course, as this report from today's New York Times reveals, labor-union leaders applaud this tariff hike because it helps "paper workers throughout the United States."  No doubt it does -- that is what is seen.

What is not seen is the harm done by such protectionism, such as--

- Obliged now to fork over more money to buy paper, American consumers have less money to spend on other goods and services.  As demand for these other goods and services necessarily falls, firms and workers in those other industries suffer unnecessarily.

- Foreigners, now earning fewer U.S. dollars, will spend fewer dollars in the U.S.  Demand for U.S. goods, services, and assets will fall.  To the extent that demand falls for U.S.-made goods and services, workers in the industries suffering the largest declines in demand suffer the most.  To the extent that demand falls for dollar-denominated assets, potentially even more workers suffer because such a fall in asset demand means higher real interest rates.  In turn, there will be less investment and, hence, slower growth in worker productivity and real wages.

Of course, some of the fall in demand for dollar-denominated assets might be reflected in lower demand for debt issued by Uncle Sam.  The consequence here, too, will be higher real interest rates and a greater reliance upon Americans to lend to Uncle Sam.

As William Graham Sumner observed in 1881 (in his essay "The Argument Against Protective Taxes"):

Any favor or encouragement which the protective system exerts on one group of its population must be won by an equivalent oppression exerted on some other group.

Protectionism is the freakish poster-child for the failure to see the full range of consequences of a policy action.  This latest episode is no different.  Nothing at all about subsidies -- real or imagined -- to foreign exporters changes matters.

The Wages of the Minimum-Wage

Gary Becker and Richard Posner offer, in today's edition of the Wall Street Journal, a clear explanation of the perils of minimum-wage legislation.  Here's the economic logic, tidily summarized:

An increase in the minimum wage raises the costs of fast foods and other goods produced with large inputs of unskilled labor. Producers adjust both by substituting capital inputs and/or high-skilled labor for minimum-wage workers and, because the substitutes are more costly (otherwise the substitutions would have been made already), by raising prices. The higher prices reduce the producers' output and thus their demand for labor. The adjustments to the hike in the minimum wage are inefficient because they are motivated not by a higher real cost of low-skilled labor but by a government-mandated increase in the price of that labor. That increase has the same misallocative effect as monopoly pricing.

And here are these scholars' thoughts on the empirical evidence:

Some economists deny that a minimum wage reduces employment, though most disagree. And because most increases in the minimum wage have been slight, their effects are difficult to disentangle from other factors that affect employment. But a 40% increase would be too large to have no employment effect; about a tenth of the work force makes less than $7.25 an hour. Even defenders of minimum-wage laws must believe that beyond some point a higher minimum would cause unemployment. Otherwise why don't they propose $10, or $15, or an even higher figure?

A number of countries, including France, have conducted such experiments; the ratio of the minimum wage to the average wage is much higher in these countries than in the U.S. Economists Guy Laroque and Bernard Salanie find that the high minimum wage in France explains a significant part of the low employment rate of married women. Mr. Salanie has argued that the minimum wage also contributes to the dismal employment prospects of young persons in France, including Muslim youths, an estimated 40% of whom are unemployed.

The System Is the Solution

Here's my latest column in the Pittsburgh Tribune-Review.  In it, I argue that people's propensities -- as uncovered by behavioral economics -- to behave "irrationally" from time to time do not mean that the market will fail to perform well.

Blind Side

Just finished (in half a day) Michael Lewis's Blind Side, the story of...lots of things—the hidden side of football, race and class in the South, an inner-city kid's journey, how market forces move things in unexpected ways. It is not as analytical as Moneyball but the underlying story is more dramatic and it's very well told by Lewis. Along with all of the above, the book captures the poetry of athletic excellence, the sheer magnificence of the outlier—the man playing a boy's game. It reminds me a bit of The Courting of Marcus Dupree, an under-appreciated gem and the movie The Scout, Albert Brooks's offbeat portrait of the baseball scout who finds a player too good to be true.

Fans of economics will love the way Lewis talks about the evolution of football and how what fans see and often respect is only part of what is really going on. You'll also like how Lewis understands and explains how competition in the free agent market makes left tackles on the offensive line the second most highly-paid players in football. Who knew? These themes are the framework for the human drama that Lewis portrays and that makes up most of the book—the tale of an inner-city black kid who finds himself taken under the wing of a rich, white, emphatically Christian, driven, sports-loving family. If you like football at all, you will not be able to put this book down.

Weighing In Against the Minimum Wage

In my view -- expressed today in my latest essay at Tech Central Station -- the empirical fact that economics empirical studies are so extraordinarily challenging, combined with the ambiguity of the findings of recent empirical studies of the effects of minimum-wage legislation, gives us good reason to accept the theoretical case against the proposition that minimum-wage legislation helps low-skilled workers.

Oh Mais No!

When Karol and I were at Clemson University (1992-1997), we once had the chairman of Clemson's Department of Philosophy & Religious Studies to dinner at our home.  He was (and, I presume, remains) far left.  I recall that at that dinner he accused Karol, me, and others who support markets of being "brainwashed" into thinking that high marginal tax rates discourage productive, income-earning activities.  According to this gentleman, raising tax rates even to stratospheric levels does not affect taxpayers' behavior.

He  was  sure that  Europeans had a much better model than Americans.

Now comes word from France, through this report in today's Washington Post, that

On average, at least one millionaire leaves France every day to take up residence in more wealth-friendly nations, according to a government study.
....

[France's] wealth tax -- officially called the solidarity tax -- is collected on top of income, capital gains, inheritance and social security taxes. It's part of the reason France consistently ranks at the top of Forbes magazine's annual Tax Misery Index -- a global listing of the most heavily taxed nations.

Wealthy citizens' tax bills can be higher than their incomes, according to tax analysts. President Jacques Chirac's government attempted to rectify that disparity last year with changes intended to guarantee that no one would pay more than 60 percent of income in taxes. But many businesspeople say actual maximum tax rates still hover at around 72 percent.

It's delicious to imagine what fun Frederic Bastiat would have with the fact that this tax that drives many French from France is called "the solidarity tax."

Oh, no surprise:

Socialist leaders and some government officials argue that the rich are merely trying to shirk their social responsibilities by fleeing the country with their millions.

A Not-So-Timely Proposal

As a means of conserving oil, Sen. Hillary Clinton wants Uncle Sam again to mandate a maximum speed limit of 55 MPH.  Presumably she's aware that lowering the speed limit will cause us to spend more time on the roads and less time at our destinations. But on her website, Sen. Clinton expresses concern that Americans are strapped for time: "Today's families are often stretched thin - working to make ends meet while also trying to carve out time to care for their young children and aging relatives." Assuming consistency across her various policy positions, we can conclude that Sen. Clinton is confident that the value of the time that a 55 MPH speed limit will force us to waste on the roads is worth less to us than oil we'll save by driving more slowly. Let's explore.  Assume that the typical car on the road today gets 25 miles per gallon on the highway and that a gallon of gasoline costs $3.00.  Further assume (rather generously) that driving more slowly will increase the typical car's fuel efficiency from 25 mpg to 35 mpg. On highways where the speed limit currently is 75 MPH, reducing the speed limit to 55 MPH will cause a driver to cover 20 fewer miles in one hour of driving.  To travel these 20 miles at 55 MPH will take 21.82 minutes.  That is, the distance a driver covers in one hour driving at 75 MPH requires 81.82 minutes to cover while driving at 55 MPH. At today's average hourly wage rate for non-supervisory workers of just over $16 -- but let's call it an even $16 -- this 21.82 minutes is worth $5.82.  (That is, working at a wage rate of $16 per hour, a worker will earn $5.82 in 21.82 minutes of work.) But how much does the driver save, fuel-cost-wise, by driving more slowly? Driving at 75 MPH (and getting 25 mpg) costs the driver $9 of gasoline per 75-miles driven. (Remember that gasoline is priced at $3 per gallon.)  Driving at 55 MPH (and getting 35 mpg) costs the driver $6.42 of gasoline per 75-miles driven. In short, for every 75-miles covered on a highway, reducing the speed limit from 75 MPH to 55 MPH will save a driver $2.58 in fuel cost -- and this assuming that the increase in fuel efficiency of the average car caused by the lower speed limit is a whopping 10 mpg.  But the resulting greater time on the road will cost a driver earning the average non-supervisory wage $5.82 worth of his or her time per 75-miles driven. The net cost to the average worker driving the average car will, under the above reasonable assumptions, be about $3.24 per 75-miles driven.  Not a good deal, Sen. Clinton.

......

Here's a challenge for a clever student: assume (as is reasonable) that an enforced speed limit of 55 MPH will cause the price of gasoline at the pump to fall.  By how much would it have to fall (under the above assumptions) in order to make the $$$ saved on gasoline exceed the $$$ value of the extra time spent driving?

The Unseen Aspects of Fielding

One of the reasons I enjoyed Moneyball so much was the aspect of the seen and the unseen in baseball. Billy Beane leans heavily on statistics and notes the importance of the unseen or hard to see or hard to perceive the importance of factors like walks or doubles or how many pitches a batter takes. Baseball scouts overemphasize dramatic factors they can see that are tangible--home runs, fielding slickness, speed of a pitcher's fastball and overall athleticism.

This article in the Washington Post looks at a new book by John Dewan on fielding, a very difficult skill to quantify but where analysts have been making progress.

Are such skills measurable? Author John Dewan has come closer than anyone else to quantifying defense in his book "The Fielding Bible," but some skeptics suggest Dewan -- with an assist from noted stats guru Bill James, Dewan's business partner and friend -- has just tried to do something that can't be done...

Dewan's company, Baseball Info Solutions, employs "video scouts" who review every major league game, charting every batted ball and recording its direction, location, speed, type (line drive, fly ball, etc.) and result. Given any combination of those factors, a computer can spit out how frequently such a play is made by the average major leaguer at that position...

Some of the results are not surprising. Alfonso Soriano, for example, achieved a rating of minus-40 over the previous three years as a second baseman -- meaning he made 40 fewer plays than the average second baseman -- which ranked next-to-last behind only Bret Boone.

Derek Jeter, on the other hand, last season's American League Gold Glove winning shortstop, does not fare so well:

James, for instance, spends 4 1/2 pages near the front of the book explaining why Houston's Adam Everett is a far superior shortstop to Derek Jeter. In fact, Jeter, according to James, was "probably the least effective defensive player in the major leagues, at any position" over the last three years.

But what is seen is easier to accept than what is unseen:

"Some people think you can [quantify defense]. I don't really buy that myself," Dombrowski said. "I've looked at some of those new formulas. I'm not sure I would believe everything I've seen there. It's one of those things where, if you study [the players] yourself, you can have a better feel for those things than any numbers can tell you."

A Simple Rule for a Complex World

"'Let the market handle it! Let the market handle it!' Don't you tire of muttering this simplistic formula?" So ended an e-mail that I received from a reader.

It's true that all of us sometimes are tempted to avoid thinking hard about complex issues and, instead, to fall back lazily upon simplistic mantras. We should guard against this weakness, in ourselves and in others.

At the same time, though, we shouldn't confuse consistency with simplicity. The two are different. Just because I instruct my eight-year-old son to be always truthful does not mean that I'm a simpleton offering simplistic advice; it means, instead, that truthfulness is a virtue that should be pursued consistently -- even if in a handful of instances my son might be made better off by telling a lie.

I admit that my proposed solution for many public-policy problems is to say "Let the market handle it." But this response is neither naive nor lazy. It's realistic. It reflects my understanding that almost any problem you name -- rebuilding the Katrina-ravaged Gulf Coast, providing excellent education for children, reducing traffic congestion on highways -- is most likely to be dealt with efficiently, fairly and effectively by the market rather than by government.

Saying "Let the market handle it" is to reject a one-size-fits-all, centralized rule of experts. It is to endorse an unfathomably complex arrangement for dealing with the issue at hand. Recommending the market over government intervention is to recognize that neither he who recommends the market nor anyone else possesses sufficient information and knowledge to determine, or even to foresee, what particular methods are best for dealing with the problem.

To recommend the market, in fact, is to recommend letting millions of creative people, each with different perspectives and different bits of knowledge and insights, each voluntarily contribute his own ideas and efforts toward dealing with the problem. It is to recommend not a single solution but, instead, a decentralized process that calls forth many competing experiments and, then, discovers the solutions that work best under the circumstances.

To recommend the market is to understand, or at least to cooperate with, the wisdom of James Buchanan's important insight that "order is defined in the process of its emergence."  It is to understand, at some level, Vernon Smith's awareness that "ecological rationality" is greater than individual or "constructivist" rationality.

This process is flexible and it encourages creativity. It also denies to anyone the power to unilaterally impose his own vision on others.

In brief, to advise "Let the market handle it" is a shorthand way of saying, "I have no simplistic plan for dealing with this problem; indeed, I reject all simplistic plans. Only a competitive, decentralized institution interlaced with dependable feedback loops -- the market -- can be relied upon to discover and implement a sufficiently detailed way to handle the problem in question."

None of this is to say that getting the government out of the way is sufficient to create peace and prosperity. Markets require a rule of law to ensure that, among other blessings, property rights are secure and exchangeable. At their best, governments can help to protect our rights. Markets also require a culture in which commerce flourishes.

Unfortunately, no recipe exists to create the legal institutions and commercial culture required by capitalism. If these prerequisites are absent, there can be no market to handle any problem. So saying "Let the market handle it" is not the same as saying "All will be just dandy if only the government gets out of the way."

But when these prerequisite institutions are mostly in place, as they are in the United States and other developed countries, markets are amazingly creative and reliable. Calling on markets to deal with problems is then the wisest course.

Alas, though, foolishness frequently triumphs over wisdom. People too often suppose that large social problems can be solved only by deciding ahead of time which particular group of people and procedures hold the key to the solution.

While declaring "Let the government handle it" comes across as a solution, it's no such thing. Instead, it is merely a sign of a simple and baseless faith -- a simple and baseless faith that people invested with power will not abuse it; that political appointees possess or will find better answers than will millions of people pursuing solutions in their own ways, and staking their own resources and reputations on their efforts; that only those 'solutions' that are spelled out in statutes and regulations and that have officials paid to implement them are true solutions.

So yes, show me a problem and I'll likely respond "Let the market handle it." I'll respond this way because I know that not only is my own meager knowledge and effort never up to the task of solving big problems but that not even the Einsteins or Krugmans or Bushes amongst us can know the best solution to any social problem.

Solutions to complex social problems require as many creative minds as possible -- and this is precisely what the market delivers.

 

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.

Missing Portraits

[This post has been edited since it was first posted]

A picture is worth a thousand words.  So the New York Times Sunday Magazine article (discussed earlier here and here by Don and me) that found so many reasons to love living wage ordinances and so few reasons to be skeptical of their virtues, included powerful photographs of workers who expect to benefit from the Santa Fe living wage ordinance with poignant descriptions of what these workers plan to do with their raises:

 

Alessandra Petlin for The New York Times

Name: Manuela Soto. Marital status: Single mom. Occupation: Assistant hotel housekeeper. Home: Santa Fe, N.M. Hourly wage before local "Living Wage" ordinance: $7.50. Hourly wage now: $9.50. What she'll do with raise: Pay bills faster, offset higher gas prices, buy more supplies for sons. More Photos >

Strangely enough, there were no pictures of the workers who expect to lose their jobs because the legislation will price them out of the job market, though some of the pictured workers may tragically fall into this group.  Nor were there any descriptions of how anyone who loses their job plans to cope with being unemployed.

I am proud not to be a progressive.