Everyday Economics: Bioshock Edition

On my recent trek between Virginia and Massachusetts (and back), I listened to an audio version of the book Bioshock: Rapture by John Shirley (If you’re looking for something light to take your mind off of things, this is a good book).  The book details the rise and fall of Rapture, a massive underwater city built by Andrew Ryan (a not so subtle jab at Ayn Rand) to escape the “parasitic” governments of the world and build a society dedicated to freedom and free markets.  While the initial goal of Rapture may have been freedom and free markets, as the novel (and the video game that the novel is based on) details, Rapture becomes a totalitarian police state with an extremely wealthy (and often sadistic) upper class, and extremely poor low class, and no one in between.  Some see Bioshock as a refutation of Randian philosophy, however, I will not address that here as I am no expert in Ayn Rand (for an excellent discussion, see The Value of Art in Bioshock: Ayn Rand, Emotion, and Choice by Jason Rose).  I’ll leave that to people far smarter than I.  Rather, I want to address the economic situation of Rapture and discuss, briefly, how that contributed to the downfall.

A few quick disclaimers before I begin:

  1. As far as I know, Bioshock: Rapture is not canonical.  However, it is the only detailed source I can find thus far on the days of Rapture that take place before the video game (which is canon) so I will operate on the assumption that my source material is canonical knowing full well everything I write here could become completely worthless insofar as discussing canonical information (the lessons gleaned from this book are still important, however).
  2. Nothing in this essay should be taken as implying the rise or fall of Rapture is purely economic.  There are many other factors involved (social, political, medical, psychological, etc).  I skip or gloss over these not because I think they are unimportant (quite the opposite, really), but because I simply lack the expertise to discuss them with any confidence.
  3. I will be avoiding using direct quotes in this version of this essay.  The reason for this is simple: I have the audio book, not the book itself.  I can’t easily do verbatim quotes and attribute them to proper pages for citations.  Therefore, the reader should be aware that I am doing this partly out of memory (although I did scribble some notes) and further the reader should assume that whenever I describe what’s happening in Rapture, that is a reference to the work of Mr. Shirley.  The only original material will be my analysis.  Any inaccuracies, either to details or analysis, belong to me and me alone.

The short version of what follows: Rapture cannot be classified in any meaningful sense as a “free market.” It suffers from several deficiencies that prevent us from labeling Rapture as a free market: lack of property rights, lack of free trade (autarky), lack of labor mobility (autarky in the labor market), rejection of altruism, widespread and institutionalized fraud (this issue is speculative based off of interviews with characters within the book but not substantiated by details), and censorship (indirect at first, but more direct later).  In Andrew Ryan’s Rapture, “free market” and “laissez-faire” were not much more than dishonored buzzwords.  It can best be described, in the words of James Buchanan, as “moral anarchy,” (see Moral Science and Moral Order, especially page 190 and Limits of Liberty, especially Chapter 7).  These factors, coupled with other psychological, social, and other factors, lead to the decline, civil war, and eventual fall of Rapture.  Continue reading

Cleaned by Capitalism, Mold Edition

In humid climates such as Virginia, mold can be a real problem in homes and other poorly-ventilated areas.  There are lots of health issues associated with household mold, but fortunately, there are many ways provided to us by capitalism to fight mold.  Dehumidifiers, both large and small, can prevent mold from forming.  Should mold form, there are lots of products that make cleaning mold easy and cheap.  So, for less than an hour’s worth of work for the average American laborer, s/he can clean their bathroom from mold and prevent it from growing again.

This is just another small example of how our world is becoming a cleaner and better place.

Savings Is Not A Cost

Don Boudreaux draws my attention to an opinion piece at the Washington Post written by Robert Samuelson.  Don addresses one concern Samuelson has, but I want to address another, more fundamental point.

Samuelson writes (emphasis added):

A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; or (c) the shareholders of widget makers, which might raise dividends or build factories.

This logic could be thwarted if the windfall were saved and not spent.

Strictly speaking, this is not true.  If the windfall were saved and not spent, that does not mean that benefits do not occur.  Savings are economically productive, too.  Even if 100% of the windfall were saved, that would mean there are more funds for investment: housing loans, car loans, retirement, business loans, etc.  An increase in savings would help boost the economy, too.

Let’s do some thinking on the margin.  Let’s say that the windfall results in $1m saved.  Taking Samuelson’s argument above at face value, it’d mean that the $1m saved was a loss for the economy.  However, that $1m is loaned out to a new business owner who uses it to build his building, stock his store, and, once up and running hires more workers and produces more wealth for his community and the world.  The economy certainly has benefited.  I would suggest the following edit to Dr. Samuelson’s paragraph (bold and italicized part is my writing):

A simple example shows why the theory works. Consider (hypothetically) widgets. Assume that new technologies cut widget production costs by 20%. These savings must go somewhere, and the chances are that they will be spent, thereby creating new jobs. The major candidates to receive the windfall are: (a) consumers, who could benefit from lower widget prices; (b) widget workers, whose salaries might be boosted; (c) the shareholders of widget makers, which might raise dividends or build factories; or (d) borrowers/investors who now have a larger pool of loanable funds from which to draw, if some of the windfall is saved.

This logic could be thwarted if the windfall were saved and not spent.

 

Mistakes to Avoid When Discussing Health Care

Noah Smith has an interesting piece on health care at Bloomberg.  The piece is worth a read, although there are some head-scratchers in there.  Smith’s big conclusion is this:

In other words, don’t believe the argument that the cost difference between the U.S. and other countries is the inevitable price of a more innovative health-care system. Americans really are being greatly overcharged for their care. For whatever reason, health seems to be one industry where government does things more cheaply than the private sector.

There’s a problem with this conclusion, namely that it uses biased data to support the claim.  Health care is cheaper in other countries because the price system is rigged: universal health care keeps prices down by refusing to let them rise.  So, one cannot compare prices in a system where prices are allowed to fluctuate vs one where prices are determined by government diktat.

Prices are a signal.  They provide us valuable information about the relative scarcity of commodities.  When prices are allowed to adjust, they provide accurate information.  When they are not, they provide poor information, and lead to worse outcomes.

It is also important to note that monetary costs are not the only costs involved.  They are one cost, sure, but there are many other kinds of costs: wait times, quality, quantity supplied in general, that sort of thing.  Monetary prices can/will adjust for these different factors (for example, a luxury higher quality car may sell for more than a lower quality car), but if prices cannot adjust, these other costs will rise; there ain’t no such thing as a free lunch, after all.

Let’s take, for example, Canada.  In the US, monetary costs for doctor visits may be higher, but in Canada, wait times are much longer (in the US, it’s approximately 24 days to see a doctor.  In Canada, it’s 20 weeks).  This is a real cost.  Quality of care is another cost.  In Britain, for example, you’re about 45% more likely to die in a hospital than the US.  This is a real cost.

It’s admirable to want to compare costs and benefits among two systems like Smith does, but he makes two major mistakes when doing so: 1) he compares price signals from a relatively free market to price signals that are artificially low, thus biasing his estimate (this is a point Bob Higgs has made repeatedly when discussing GDP), and 2) does not do a full accounting of the costs.  Smith may be right that health care is an area where government can provide cheaper than the private sector, but the evidence he puts forth for his claim is weak.

A Non-Technical Guide to Econometrics

Chris Auld has an excellent piece on his blog regarding interpreting the “competing” Seattle minimum wage studies from the University of Washington and UC Berkeley.  It’s long, but very much worth the read.  In fact, it’s probably the best short introduction to statistics/econometrics I think I’ve read (another great one is Chapter 1 of Robert Abelson’s Statistics as a Principled Argument.  I’m also a big fan of Angrist & Pischke’s Mastering ‘Metrics).

Allow me to highlight two items in particular from this blog:

There is no statistical magic which can fully overcome these fundamental [causal] problems.  We will never be able to “prove” what the effect of the minimum wage was: that’s not the way statistics work in general, and in a case study like `what was the effect of the 2015 increase in minimum wages on employment in Seattle?’ the best we can hope for is to bring some suggestive evidence to the table. [Emphasis added]

 

In other words, what they Berkeley team means when they report “no effect” on employment is not that there is no effect on employment (yes, that is confusing).  What they mean, again, is that there is no statistically significant effect on employment, whereas the UW team, using different data and somewhat different statistical methods, finds a statistically significant effect.  But the difference between statistically significant and statistically insignificant is often itself not statistically significant.

One team found there were no statistically significant effects on employment, but that result should not be misunderstood as a claim that the study “proves” the effect was actually zero… [original emphasis]

Any additional commentary I add here will only detract.  Read Dr. Auld’s post.  It’s excellent stuff.

H/T: Michael Enz

Minimally Critical

Below is a letter to Ben Zipper and John Schmidt of the Economic Policy Institute:

Dear Sirs,

In your June 26th report on the University of Washington’s minimum wage working paper on Seattle, you claim:

One initial indicator of these problems is that the estimated employment losses in the Seattle study lie far outside even those generally suggested by mainstream critics of the minimum wage (see, for example, Neumark and Wascher [2008])—as the authors themselves acknowledge.

With respect, sirs, this is a rather weak criticism.  In fact, it’s logical that the results of the study are outside the norm given that the Seattle wage hike itself is outside the norm; it’s an unusually strong hike.  Given that the wage hike is higher than previous studies, it’d signal to me methodological or empirical issues if the results weren’t outside the typical range.

In short, your criticism amounts to saying “it cannot be true slamming on the breaks causes an abrupt stop because tapping the brakes causes just a slight deceleration!”

Sincerely,

Jon Murphy
George Mason University
Fairfax, VA

Update: an eagle-eyed reader caught a spelling error.  It has been fixed