Reality vs Perception

Over at the Liberty Law Blog, Prof. John McGinnis has an excellent piece on legislating.  He writes (emphasis added):

A Nebraska Senator has introduced a bill to require photo identification for voting, not because voting fraud is an actual problem, but because Nebraskans perceive there to be such fraud, whether it exists or not.

If voting is a fundamental right protected by the Constitution, legislation should burden its exercise only to address actual harms, not some people’s impressions of reality.  Thus, the legality of these laws should turn on the question of actual voter fraud and the utility of voter identification in curbing it.

I agree with the good professor, and think this rule should apply not to just legal matters, but economic matters as well.  An argument I’ve heard more and more in recent months in favor of protectionism from people who are nominally free market is that, with our current trade policy, it creates the perception of unfairness; it creates the perception of China “stealing jobs”, of a “hollowing out of the manufacturing base,” of “economic stagnation.”  It doesn’t matter that the data say otherwise, but the perception is there and that’s why Trump won.  Therefore, they conclude, we need some trade barriers to keep the protectionists at bay.

This argument is very similar to the one McGinnis addresses: there is this perception, so therefore we should pass legislation to combat the perception, even if it infringes on people’s rights.  For the same reasons McGinnis rejects the argument in the link, I do so here: legislation that burdens the free exercise of a right should only address an actual harm, not a perceived harm.  Given that free exchange is a fundamental human right, the infringement of such requires the burden of proof to be on those calling for tariffs; they must demonstrate actual unique and substantial harm, not just the perception of it and demonstrate the usefulness of their proposed actions in addressing the harm.*

In short, the perception of harm is not enough to justify the infringement of the right to trade.

*Notice I said “actual unique and substantial harm,” instead of just “harm.”  The reason for this, which will be addressed in a forthcoming blog post, is because any action whatsoever can conceivably harm anyone, but that alone is not grounds for outlawing it.

Ruminations on Monopoly and Antitrust

Monopolies are often derided by economists and non-economists alike, and often for good reason: monopolist firms are less efficient than their perfectly-competitive counterparts (to use more technical language, they charge a price higher than their marginal costs), which means consumers pay more for fewer goods.  Partly based off this theory (but also because of political pressures from reformers) the US in 1890 passed the Sherman Antitrust Act, which has become the main tool for the government to break up monopolies into more firms.  This act is hailed even by some free-market advocates for its efforts to create competitiveness.  Are monopolies undesirable and do they run counter to free market principles?  I argue “no” to both questions below the fold.

Continue reading

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.

In Defense of the Law

The great French economist and philosopher Frederic Bastiat wrote in The Law:

The mission of law is not to oppress persons and plunder them of their property, even thought the law may be acting in a philanthropic spirit. Its mission is to protect property.

The law is justice — simple and clear, precise and bounded. Every eye can see it, and every mind can grasp it; for justice is measurable, immutable, and unchangeable. Justice is neither more than this nor less than this. If you exceed this proper limit — if you attempt to make the law religious, fraternal, equalizing, philanthropic, industrial, literary, or artistic — you will then be lost in an uncharted territory, in vagueness and uncertainty, in a forced utopia or, even worse, in a multitude of utopias, each striving to seize the law and impose it upon you. This is true because fraternity and philanthropy, unlike justice, do not have precise limits. Once started, where will you stop? And where will the law stop itself?

Bastiat’s point, that the law exists to serve justice and nothing more, is the essence of the rule of law.  The rule of law is the idea that no one is above the law, but also no one is beneath the law.  Many people remember the first part, but conveniently forget the second.

Over the past few years, and especially since the election of Donald Trump, the law has come under attack, both by those on the Left and the Right.  Both want to carve out exceptions to the law, either by eliminating protections under the law for disliked groups (the Left for the alt-right, the Right for immigrants and Muslims) or by giving themselves greater share of “legal plunder” (tariffs, welfare, subsidies, etc etc).  As a classical liberal, it disheartens me to see my country, one founded on (if not always practiced) the ideals of justice, liberty, and the rule of law so willingly and vehemently attack these very ideals for the sake of political virtue-signalling or simple spite.

Justice is blind.  That means she sees not the devils nor the angels of our nature.  She hears only the circumstances, and defends the wronged party.  Whether that party is black, white, Hispanic, Republican, Democrat, Christian, atheist, Muslim, of the “right” mind, of the “wrong” mind, it doesn’t matter.  Justice defends them all.  This must mean that, yes, we must give the Devil himself the benefit of the law for the sake of justice.

A couple of examples.  First, here is a NYT story explaining the jubilation many had after Richard Spencer (the notorious neo-Nazi) was attacked.  Second, this story from Reason responding to the Republican (and sometimes right-libertarian) argument that immigration should be restricted because immigrants tend to vote Democrat.  In both cases, we have an ‘in-group’ trying to carve out exceptions to the law (in the first case freedom of speech, in the second case freedom of migration and protection under the law) for an ‘out-group’ who thinks differently from the in-group.  In both cases, the in-groups are making a mockery of the law.

As a classical liberal, I will defend the rights of both out-groups, indeed all out-groups, because Justice cares not whether one is in or out, and the law shouldn’t either.  I will defend them, not because of any sympathies to neo-nazis (of which I have none) or particular love of immigrants but for my own safety’s sake.  If we weaken the protection of the law for out-groups, what happens when we find ourselves the out-group?  To borrow the language from A Man For All Seasons, if we cut down every law to apprehend the Devil, what will protect us when the Devil turns on us?  Yes, I would give the Devil the benefit of the law for my own safety’s sake!

Tyrants rarely run roughshod over the law, but rather use precedence set by those before them (this precedence, although itself a mockery of the law, gives the illusion that the tyrant’s actions are lawful).  Exceptions to the law, granted by angles to pursue angelic ends, then become the tools of the devil to pursue devilish ends.  Vast presidential powers, handed over by Congress to the Executive Branch, now lay in the hands of Trump.  A vast regulatory government, once in the hands of relatively moderates now exists in the hands of an ignorant, egomaniac populist.  When the moderates were in power and wanted more and more leeway, the classical liberals objected; like More in the clip above, we refused to cut down the law to pursue the Devil for the exact reason that now is in our face: the Devil has turned ’round upon us and many laws have been cut down.

We must defend the rule of law and its protections for all people, including the Devil himself.  Once the door is opened that people who have “wrong” opinions do not deserve the same protections and liberties as people with “right” opinions, then it’s damn near impossible to close that door.

All Pain, No Gain

In a Facebook response to this cartoon, a Tim Moyers argues for protectionism because:

[H]e [will] get on a new bike. One that doesn’t need supplies from china. Sure there will be short term injury, but there will be long term gain.

Mr. Moyers has the situation exactly backwards.  Tariffs do not cause short-term pain and long-term gain.  They cause long-term pain for (maybe) short-term gain.  The gain are whoever keep their jobs for a little while longer and whatever company remains in business for a little longer (however, by the very virtue they need protecting, we can conclude their time will likely not be long).  In the long run, however, many more resources are poured into keeping these non-preferred firms operating: higher taxes, less resources used in more productive/valuable means, all of which in turn leads to a lower standard-of-living than what would otherwise occur.  To block or slow these innovations would lead to long-term pain in the economy.  Perhaps not enough to crash an economy (although the Smoot-Hawley Tariff didn’t do anyone any favors), but certainly enough to lower the trajectory.

Is There A Thing As Too Much Safety?

No one wants to be killed via a bad drug, right?  Safety is important!  But is there such a thing as too much safety?  Perhaps there is.  Let’s examine this question though the lens of economics: though a cost-benefit analysis.  But, let’s look at this in terms, not of money, but in lives.

Let’s say, hypothetically, that it takes the FDA 10 years to approve a drug for sale in the US market.  Those 10 years come with a cost in life: people who, if taking the drug, would survive but die instead.*  Let’s say that number is 100 lives (10 per year).  The benefit comes from those who, once the drug is approved, survive given a certain success rate.  Let’s say that number is 5/yr.  It would take 20 years for the drug on the market for it to “break even” in terms of lives saved vs lives lost during testing.  That’s a long time (a generation).  However, if the testing period were shortened , say to 5 years, it would take only a decade to “break even.”  The cost, in terms of lives lost, would be lower.  There is a benefit, in this example, to reducing the FDA’s regulatory ability.

“Well, that’s all well and good,” you might say, “but this is a hypothetical example.  In the real world, we don’t know what the outcome of drug trials may be!”  This is quite true: the FDA could rush through an approval that turns out to be unwarranted and costs more lives.  However, this is only tangential to my point, which is the cost-benefit analysis economists do can provide some insight into the “right” regulatory process: if the process is too long and doesn’t provide any additional benefits but incurs further costs, we may wish to reduce the regulatory burden.**

Cost-benefit analysis (which, as we have seen, needn’t be limited to just monetary costs/benefits) is a useful tool for assessing claims by those who lament deregulation and/or call for more regulation.  It could be such regulation would cause more harm than good!  (Likewise the opposite is also true: it could be the deregulation causes more harm than good)

*This is an extreme example.  We could easily have said “people who suffer instead” and the point would remain the same.  But allow me some dramatic flair.

**There is some evidence to this position, but I will refrain from making a judgement call at this time, sticking to the hypothetical.

Compared to Heaven, Earth Looks Like Hell

Economists have many models that exist in highly stylized theoretical settings (this is just a fancy way of saying “perfect settings”).  When we compare real-world institutions and situations to these stylized models, the real world often looks awful in comparison.  There are externalities, corruption, misallocation, a general lack of equilibrium, asymmetric information, etc etc etc.  Thus the models compared to real life look ever more better.  It’s severely tempting to use the flaws of the real life outcomes to justify moving toward theoretical approaches (eg. using market failures to justify government intervention).

But, as was discussed the other day in the Alchian quote, alternative institutional arraignments have flaws, too.  To compare a flawed institution to an ideal alternative is what Harold Demsetz called the “Nirvana Fallacy” and can lead to mistaken conclusions.  We need to compare institutions using the same assumptions about each one.  For example,   market operations are subject to externalities because of information asymmetry among the participants?  Government intervention must also be subject to such information asymmetry.  Markets misallocate due to imperfect information its participants?  The same must be said for government operators in the market.  And so on.  This application of consistent assumptions when comparing alternative institutions is, ultimately, at the heart of economics in general and Public Choice Theory in particular.

It is also important to note these flaws as well as virtues of alternative institutions because the situation may change and warrant different approaches.  Take, for example, trade tariffs.  As a general rule, the lower the tariff the better (I will refrain from proving this at this time and we will proceed with the assumption it is true for the sake of discussion)*.  Let’s say that the current tariff on Good X is 25%.  The economist would argue for lower tariffs.  Now, let’s say that a new government comes in and declares that tariffs on Good X will rise to 35%.  The economist’s position will now change to maintain the current 25% tariff.  The situation has changed and the comparatively better option is to maintain the status quo.**  Compared to Heaven, Earth looks like Hell.  But compared to Hell, Earth looks like Heaven.

When looking at institutions and discussing institutional change, we need to compare like with like.  Comparing a market failure with a highly stylized government intervention is unfair (and, likewise, comparing highly stylized markets with government failure is also unfair).  The flaws in each must be recognized and honestly discussed.  The existence of flaws in any given institution is not a reason to abandon it.

*If you disagree with this assumption, it doesn’t change the discussion.  Simply reverse the signs of the discussion in the paragraph.

**Of course, this is not to say the economist won’t/shouldn’t advocate for even lower tariffs once the 25% is met.  We’re just looking at this one situation.