Today’s Quote of the Day…

…is from Robert Tollison’s forward for the Liberty Fund edition of Jim Buchanan and Gordon Tullock’s classic work, The Calculus of Consent:

“Politics and the market are both imperfect institutions, with the least-cost set of institutions not being obvious in any real case. The moral: We must better understand how institutions work in the real world to make such choices intelligently.”

Water, Water Everywhere

This morning at Cafe Hayek, Don Boudreaux writes on water, responding to a radio program describing water as “our most precious resource.”  Don says (emphasis added):

While it’s true that water is a scarce resource, it is simply untrue that water is a precious resource.  Potable water is sufficiently abundant today in most places where human beings live that it can be acquired at a low price.  Indeed, given modern techniques for delivering and safely storing potable water, water is widely available today even in some desert areas, such as Las Vegas and Tucson.  And while I don’t defend (quite the contrary!) government subsidies that make water more available where and to whom it would be less available, it remains silly-talk to say that water is “our most precious resource.”  The market price of water testifies powerfully to the contrary.

Don’s comment is true for most of the US.  But what about places it’s not?  Third-World countries and the like?  Why is it we can produce water in Las Vegas, Phoenix, and Tucson, but not Venezuela, Zaire, and Somalia?  It’s clearly not the environment; the US has harsh deserts and tundras and yet no water issues (in fact, water to spare!).  I suspect it has more to do with the free market institutions of the United States that allows us to bring water everywhere.  There’s a lot of private water here (think bottled water).  It is sold (mainly) at market prices, so places that have abundant water (like Maine) can bottle it and sell it to Arizona, where it is more scarce.  The areas where there are no functioning price systems and lots of trade controls (like Venezuela, Zaire, and Somalia) are facing water crises.

In short: water is precious in places where it is not treated as a commodity (and, in some cases like Venezuela, called a “right”).  It is abundant in places it is treated as a commodity.

Warts and All

Yesterday was Opening Day for the Washington Nationals at Nationals Park in Washington, DC.  Some 40,000 people made their way to the Waterfront to see the Nationals take on the Miami Marlins.  At the corner of N and First Streets, SE, the traffic and pedestrian crossing was a nightmare.  People were flooding out from the Metro headed to the Park.  The crossing guards could barely keep order, and both cars and pedestrians were getting frustrated (this effort was compounded by the fact the traffic lights were still on, often contradicting the guards’ orders).  It was, in short, a charlie-foxtrot.  One might even say it was a government failure.

Although the government’s solution to the pedestrian issue was less-than-ideal, it would be incorrect to immediately jump to the conclusion that a laissez-faire approach would automatically be better; that a “free-market” approach would be better than the government approach.  The free-market approach would come with its own set of problems (perhaps, for example, since pedestrians have the right-of-way, tens of thousands of people would have crossed the streets and no car would have been able to move for hours).  It’s indeed possible that the free-market approach would have generated a worse outcome than the government approach.

Harold Demsetz (among others) warns us against the Nirvana Fallacy; that is, assuming a different (often preferred) method would not contain the same flaws (or flaws at all) from the current method.  We see this very often in politics (eg socialism), but free-market supporters can run aground of the fallacy, too.  Markets, just like governments, are populated with humans with the same foibles.  The incentives are different, to be sure, but markets can fail, too.  One mistake I think far too many market supporters is to assume that markets are not only perfectly efficient (the “efficient market hypothesis”), but also they instantly adjust.  That is not the case.  By arguing, as many do (especially many anarcho-capitalists) that the market solution is always the superior solution is incorrect for the exact same reasons that socialists arguing the government solution is always superior to the market solution.

Markets are extremely powerful.  Generally speaking, they provide excellent results.  But markets are just one of our institutions, and they function best when search and transaction costs are minimized.  For certain problems, there may be other institutions out there that would perform better.

Do Free Markets End Discrimination?

Spoiler: no.

Writing at FEE.org, Dr Steve Horwitz has an excellent article on the gender pay gap (word of advice, always read Horwitz).  This part in particular stands out:

You’ll notice that I said “the clear majority” of the gender wage gap is explained by factors other than discrimination, but not all of it. The consensus of the economic studies is that there is still about 3 to 5 percentage points of the 20 percent, or roughly 15 to 25% of the gap, that cannot be accounted for by economic differences and that might well be due to discrimination.

So it is not a myth that there might be discrimination in labor markets. Even the economic studies that show that most of the gap is explained by other factors do not say that all of the gap can be accounted for by such things. Although the economic studies don’t test directly for discrimination, the fact that other kinds of studies suggest that it exists in labor markets is consistent with the existence of an economically unexplained portion of the gap.

The most accurate summary is something like the following:  “It’s a myth that women get paid only 80% of what men do when they have the same skills and experience and are doing the same work, but it’s also a myth to claim that economics shows there is no gender discrimination in labor markets because studies show that economic factors cannot explain all of the gender wage gap.”

The nuance of this argument stands in stark contrast to the graphic below, originally published by “Anarchyball” on their Facebook page:

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I know Anarchyball is a Facebook activist group, and thus aren’t a standard of academic integrity but rather going for pithiness, but the error they make is still important.  Note that they list the “wage gap” as part of the set of “economic impossibilities.”  But, as Steve Horwitz notes, not all of the gap is explained by economic factors.  It is possible (maybe even probable) that the unexplained portion is partly due to discrimination.

There is nothing about the free market that suggests discrimination is economically impossible.  Price theory teaches us that free markets make discrimination more costly, but nothing says that a person may not participate in discrimination (even if s/he is profit-maximizing!).  That person may feel their discrimination brings them more benefit then the cost thereof.

Discrimination is more costly, yes, but it is not impossible (just like an Jaguar is more expensive than a Honda, but people still buy both).

The Case Against Renewable Energy, as Presented By Bernie Sanders

On his Facebook, Sen. Bernie Sanders uploaded the following graphic*:

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The Senator is trying to spin this as an argument for renewable energy, but in doing so he confuses costs and benefits.  Ironically, he makes an extremely strong case against renewables:

Looking at this chart, we see approximately the same number of jobs in coal and nuclear.  Renewables have a considerably higher number of jobs.  But their output are quite different.  According to the EIA, coal produces approximately 16% of our energy consumption (or about 15.6 quadrillion BTU).  Nuclear power is ~9% (or ~8.8 quadrillion BTU).  Renewables are ~10% (or 9.8 quadrillion BTU).

What does this mean for resource efficiency?  Quite a lot.  The average worker in coal produces 2.1e^11 BTU.  The average nuclear worker produces 1.1e^11 BTU.  The average renewable worker produces 1.8e^10 BTU.  That means the average coal worker is 1033.92% more efficient than the average renewable worker!   We’d need to put in approximately 10x the number of labor resources into renewables as coal to get the exact same results!  That’s highly inefficient and quite against the idea of resource conservation.  On environmentalist grounds, I oppose renewables at this date and time.

But, the point the Senator is making, is that the jobs themselves are desirable.  But he confuses costs and benefits.  Jobs are a means not an ends.  Our lives are improved by finding ways to reduce the amount of labor in them, not increase it.  In short, the Senator has things exactly bass ackwards.

*Note: I have not independently verified these figures.

Economic Growth is Not A Given

A large amount of macroeconomic thought is given toward the question: “what causes recessions?”  Monetarists, Keynesians, Austrians, New Insitutionalists, Neo-classical all often approach macroeconomic thought in this manner (note well: I am not saying this question is central to the above-mentioned schools-of-thought, just that their practitioners will study this question).  In my opinion, this is the wrong question to ask.  The right question is not “what causes recessions” but “what causes growth?”

This may seem like a semantic game; aren’t I just stating the inverse of the first question? Yes and no.  If we know what causes growth, we can (generally) inverse that and learn what causes recessions.  But the second question remembers what I think is crucial to economic understanding: growth is not the state of nature; stagnation is.  Humanity, by sitting on its collective ass didn’t generate the Industrial Revolution or invent medicine.  Despite terms like “natural unemployment” or “natural rate of growth”, none of those are natural.  The true natural unemployment rate is 100%.  The true natural rate of economic growth is 0%.  Growth requires effort to occur; it requires trading and production.  It requires human action.

This lesson is important because it prevents us from making mistakes that can be detrimental to economic well-being.  For example, some trade-protectionists worry about trade deficits because it means foreigners are buying more and more US assets.  This, supposedly, is a bad thing.  Here’s why, according to a commentator, Ed Rector, at Cafe Hayek [emphasis added]:

However if the Chinese use their trade-surplus US dollars to buy already existing US assets (USG debt, office buildings, hotels, etc.) there is no significant increase in employment in the USA [compared to building new factories]. So to that degree the existing wealth of the USA IS transferred to foreign ownership, where it will presumably generate investment returns to the foreign owners.

Here, Mr. Rector makes the mistake I mention at the beginning: he assumes growth is given.  The counterfactual here is not whether an American or a foreigner owns an asset, but whether that asset is owned at all.  The fact the asset is up for sale tells us it is likely no longer productive to its current owner; if it is not sold, the asset would likely become idle and produce nothing.  When it is bought, the asset remains productive (indeed, this is how it generates returns for its owners).  By remembering that the default is not growth but stagnation, we are counseled to not fret about who owns an asset, just that it is owned and productive.  We cannot take the productivity as given.

Today’s Quote of the Day…

…is from pages 5-6 of Frederic Bastiat’s 1850 essay The Law (Mises Inst. Edition):

But [man] may live and enjoy, by seizing and appropriating the productions of the faculties of his fellow men.  This is the origin of plunder.

Now, labor being in itself a pain, and man being naturally included to avoid pain, it follows, and history proves it, that wherever plunder is less burdensome than labor, it prevails; and neither religion nor morality can, in this case, prevent it from prevailing.

When does plunder cease, then?  When it becomes more burdensome and more dangerous than labor.

As with anything, people will choose the least-costly option for their actions, in this case in the trade off between labor and plunder (Bastiat uses the phrase “plunder” here meaning the legal appropriation of one’s property by the state to transfer to another person).  As the cost of labor rises (or the cost of plunder drops), the attractiveness of plunder increases.  Things like occupational licenses, tariffs, and even progressive taxation all increase the costs of labor, and thus make plunder more attractive, which in turn leads to more lobbying and resources spent to get a share of the plunder.

Respect for the law cannot long be preserved when the law becomes a tool for plunder rather than preventing it.