Modern Miracles

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The above comes from the City of Concord’s facebook page.

What an amazing world we live in where the vast majority of us have little holes in our homes that whisk away unsanitary matter to be disposed of in a proper way and keep us all safe?  All I need do to remove potentially diseased meat juice from my home is to put it down this drain and *woosh!* it’s gone.  All I need do to remove human waste from my home is to push a lever and *woosh!* it’s gone.  All I need do to remove infectious excrement from my home is push a lever and *woosh!* it’s gone.

The sewer system is a miracle, pure and simple.  And the miracle workers are not some wizards or alchemists chanting arcane words, but hard-working men and women who keep the water flowing.  Our world is cleaner because of it.

Costs and Benefits are Culturally Dependent

futurama culture

The above screenshot is taken from Futurama.  Lrrr and his wife, Ndnd, rulers of the planet Omicron Persei 8, are aliens from a warlike race.  Violence permeates their culture.  While Lrrr himself is not particularly warlike (he half-heartedly invades Earth in one episode just to stop his wife from nagging him), the culture still is ingrained in him and much of his confusion regarding Earth is why it is not more warlike (another quote I could have chosen is when he is watching an episode of the in-show spoof of Ally McBeal called Jenny McNeil, he asks “if McNeil wants to be taken seriously, why does she not simply tear the judge’s head off?”).

Lrrr’s confusion stems from the two different cultures of Earth and Omicron Persei 8.  What is “foolish” behavior for him is normal behavior for the people of “ancient” Earth (Futurama takes place in the opening decades of the 3,000’s, so “ancient Earth” to him is the 90’s and 2000’s for us).  For Lrrr, there is a benefit to demonstrating strength before (or to) friends.  For the people of Earth, it is a cost.

This simple fact makes the job of the economist difficult when it comes to regulation.  The typical Econ 101 story for regulation is to do a cost-benefit analysis and, if the costs are less than the benefits, then regulation may be justified.  But this seemingly straightforward process is, as we can see above, actually quite complex.  What counts as a cost and benefit, as well as the relative values of those costs and benefits, are subjective.  It depends on the person observing the situation.  For us, Ross’ behavior is normal and praiseworthy.  For Lrrr, the exact same behavior is confusing and foolish.  And Earth observer might propose a regulation that rewards people who act like Ross.  And Omicron Persei 8 observer might propose legislation that punishes people who act like Ross.

Ultimately, the determination of regulatory behavior comes down to the subjectivity of the observer.  What this means is “optimal” regulation (such as a tariff, tax, wage, etc), while possible in theory, is practically impossible.  What may be an optimal tax for one observer may be too high/low for another and may be a subsidy for a third.

This subjectivity is why I adhere to a status quo bias and a presumption of liberty.  Legislative and legal changes should not be done casually, and even with great thought and analysis, should be undertaken only very carefully.

Today’s Quote of the Day…

…is from page 14 of Mancur Olson’s 1982 book The Rise and Decline of Nations:

Although we should not be satisfied with any theory that fails to explain a lot with a little, we need not of course expect any one theory to explain everything, or even the most important thing.  Absolutely nothing in all of epistemology suggests that valid explanations should be monocausal.

JMM: It’s typical to hear opponents of this theory or that theory be dismissive of the theory because it fails in some way (“Economics is broken because it failed to predict the 2008 recession!” or “Socialism is broken because it failed to predict Venezuela!” etc).  But the world is a complex place.  Few things, if any, are monocausal: Did the Red Sox win the World Series because they had the largest payroll?  The best players?  Luck?  A favorable schedule?  Some kid in Maryland was watching them?  All of these factors played in (well, almost all of them).  They’re all part of the cause (and some even in more ways than one).

When evaluating a theory, we always need to remember to evaluate it on its own terms.  Does it make sense doing what it is trying to do?  Three great examples of this are Adam Smith’s examination of mercantilism in The Wealth of Nations (see Book IV) and Hayek and Mises’ critiques of socialism in the Socialist Calculation Debate.

Are US Property Rights Contributing to the Trade Deficit?

The United States has relatively strong property rights protections compared to other nations.  According to the Economic Freedom of the World Index, the US remains in the top quartile when it comes to property rights protection (although the absolute score has fallen in recent years).  Could this ranking be contributing to the US’ global trade deficit, and especially that with China?

When looking at international trade accounts, what is typically reported on is the trade balance or current account.  This is, generally, the amount of goods/services imported and exported between two countries.*  However, there is an opposite side to the coin here that is less discussed: the capital account or the importation/exportation of asset ownership between countries.  Asset ownership includes things like real estate, ownership of firms, etc.  By definition, the current account and the capital account must sum to zero.  In other words, foreigners sell to us in order to buy either US made goods/services or US assets.  If the US has a trade deficit (more imports being sold to US buyers coming in then exports being sold to foreign buyers going out), then the US must necessarily have a capital account surplus (more assets being bought in the US by foreigners then US citizens buying foreign assets).

So, where do property rights play in?  Property has long been a good vehicle for saving as it literally provides shelter and typically has some value.  As with any nation that gets wealthier, the wealthy people in China are looking for safe yet productive ways to invest and save.  Property does not play that role in China.  Much of Chinese property is, at best, leased from the government; it cannot be outright owned.  What can be owned, however, is always at risk from nationalization or appropriation from the Chinese government, especially if one becomes a political target.

In the US, property rights are much more secure.  Except under few conditions, and with compensation, the US government cannot just appropriate property to itself.  Property is easily transferable, either by sale or by inheritance or gift, in the US.  The US has a strong rental market, meaning they can earn rents, and the police generally enforce property rights from burglary and fraud.  In short, property is generally safe in the US.**

If a Chinese person wanted to put money in property as a means of saving, putting money in his own country would not necessarily make sense given their instability when it comes to property rights.  S/he may be more interested in investing in the US.  In order to do this, however, they would need US dollars.  US dollars are acquired by selling goods in the US.  The Chinese person then, instead of using those dollars to buy American-made goods/services, invest in the American economy by buying real estate and turning them into investment properties, an option not easily available to them in China.

Trade deficits are not, prima facie, a reason for worry.  they do not mean that the economy is weak or weakening.  Indeed, just the opposite: in the above discussion, the trade deficits exist precisely because the US economy is strong!

*It’s slightly more complicated than this, but for our purposes here that does not matter.

**Of course, a glaring exception to this is the abomination known as civil asset forfeiture, but even that is restricted in the US and, God willing, on its way out

Today’s Quote of the Day…

…comes from page 236 of Bruno Leoni’s 1961 work Freedom and the Law (3rd Edition, emphasis original):

If we consider it well, there is nothing “rational” in voting that can be compared with rationality in the market.  Of course, voting may be preceeded by argument and bargaining, which may be rational in the same sense as any operation on the market.  But whenever you finally come to vote, you don’t argue or bargain any longer.  You are on another plane.  You accumulate ballots as you would accumulate stones or shells – the implication being that you do not win because you have more reasons than others, but merely because you have more ballots to pile up.  In this operation you have neither partners nor interlocutors but only allies and enemies…The political language reflects quite naturally this aspect of voting: Politicans speak willingly of campaigns to be started, of battles to be won, of enemies to be fought, and so on.  This language does not usually occur in the market.  There is an obvious reason for that While in the market supply and demand are not only compatible but also complementary, in the political field, in which legislation belongs, the choice of winners on the one hand and losers on the other are neither complementary nor even compatible.

JMM: This difference between the market and the political realm is utterly lost on those who advocate for government directing of the market: those who argue for “trade wars” or “minimum wage” or any other government interventions.  Markets are about cooperation, not violence.  When China sells goods to the US, it is not a battle, China is not the enemy.  When Wal-Mart hires workers at a given wage, it is not Wal-Mart exploiting workers or some great battle between labor and management, but rather cooperation between the two.

Political language easily lends itself to conflict and violence.  But to use that same language in the market is to fundamentally misunderstand what the market is.

What is Free Trade?

The following is a letter to the Wall Street Journal:

Edmund Miller argues that Dr Boudreaux misses the point of President Trump’s trade policy, that he is merely just using tariffs to get “free and fair” trade and zero tariffs.  Ignoring the fact President Trump has explicitly denied this is his goal at all (see, for example, his comments here and here), Mr Miller rather misses the point of free trade.

Free trade is nothing more than this: the observed outcomes that occur when people are free to make their own decisions.  Nothing more, nothing less.  By using his authority as the head of the executive branch of the US government to punish certain people for behaving in certain ways, President Trump is explicitly against free trade.  It may be “fair trade” (however we wish to define that), but it cannot be called free trade in the correct sense of the word.

Jon Murphy

Fairfax, VA

PS: see also Don’s response here

Today’s Quote of the Day…

…comes from pages 86-87 of Bruno Leoni’s 1961 work Freedom and the Law (3rd Edition, emphasis added):

Common citizens were the real actors in this respect [the formation of common law], just as they still are the real actors in the formation of the language and, at least partially, in economic transactions in the countries of the West.  The grammarians who epitomize the rules of a language or the statisticians who make records of prices or of quantities of goods exchanged in the market of a country could better be described as simple spectators of what is happening around them than as rulers of their fellow citizens as far as language or the economy is concerned.

JMM: The economist as a scientist is one who observes, records, and explains phenomena.  Our models and metrics work best when they are describing these outcomes.  To use them to be prescriptive fundamentally changes the nature of the being.  For example, to try to manipulate the price system to get higher wages (eg, a minimum wage) causes distortions: less labor is purchased, overall wages may drop, etc.  Tariffs, as a means to produce more profit for firms, lead to overall poverty.  It’s easy to boost some metric merely by monkeying about with its components.  But do not fall into the mistake of thinking that now higher metric is comparable to the metric one observed before.  GDP manipulated is not the same as GDP arisen from market transactions even though they superficially look the same.

The good economist, like the good jurist or the good grammarian or the good scientist, observes the world.  He does not try to impose his own viewpoints onto the data.  He is a discoverer of economic relations (or legal relations or grammatical relations etc), not a creator of one.

Somewhere along the line, this simple fact was lost.  Economists are all about “policy recommendations” now.  Optimal tariff this and carbon tax that.  They have ceased being economists and have become applied mathematicians.  Likewise, judges, lawyers, and legislators have ceased trying to discover the law (that the law is) and have moved toward telling us what the law should be.  As such, they have ceased being judges, lawyers, and legislators and moved into being commanders of humanity.  What they do can no longer be called law; it is a farce wearing the guise of law.