September 09, 2004 5:55 PM

Michael Crichton Talks Sense

I had generally assumed that Michael Crichton was just the author of some sensationalist novels (including a recent one called "Prey" that does for nanotechnology a bit of what "Little Shop of Horrors" did for dentistry). It turns out, though, that he's got some interesting opinions:

There is no Eden. There never was. What was that Eden of the wonderful mythic past? Is it the time when infant mortality was 80%, when four children in five died of disease before the age of five? When one woman in six died in childbirth? When the average lifespan was 40, as it was in America a century ago. When plagues swept across the planet, killing millions in a stroke. Was it when millions starved to death? Is that when it was Eden?

I suggest reading the whole speech, which is about the environmental movement. I can't agree with all of it, and I spotted some factual errors, but overall, I found it refreshing.

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September 09, 2004 12:10 PM

N.H. has Highest Income, Lowest Poverty Rate

A newspaper article pointed out to me by my old friend Harry Hawk notes that New Hampshire has the highest median income and lowest poverty rate in the nation.

New Hampshire also has no income tax or state sales tax. This web page shows that it has a lower state tax burden than any other state in the country other than Alaska (and Alaska largely funds its state government by taxing oil production).


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September 07, 2004 1:22 PM

The Machinery of Freedom

Many years ago, I loaned my copy of "The Machinery of Freedom" by David Friedman to a friend who never returned it. Recently, I re-purchased it, and over this past weekend, while I was vacationing in the countryside, I re-read it for the first time in about 15 years.

I had forgotten how wonderful it is. It is one of the most important texts on libertarianism out there.

"The Machinery of Freedom" is structured as a series of short essays, all discussing a small part of the overall picture. Each is a small jewel. The essays are not academically rigorous — Friedman claims that such a style tends to interfere with coherent presentation of an argument, and I think he's correct. What the essays lack in academic depth, however, they make up for in clear argumentation and grand vision.

As I re-read each essay, I was stunned by how closely the ideas corresponded to my own world view. I kept wondering if I had held these opinions before reading the book, or if I had so thoroughly assimilated them years ago that I could no longer distinguish their origin. I suspect the latter. Although I was a libertarian before reading "The Machinery of Freedom", it is obvious that it profoundly effected my thinking. My belief that the state is likely superfluous certainly originated with Friedman's arguments.

Although David Friedman professes to feel that libertarianism is superior morally as well as pragmatically, he takes a pragmatic/utilitarian approach throughout on the basis that such arguments are more convincing than moral arguments. The result may have been a stronger one than he had intended — many of his disciples, such as myself, have long since ceased to make the argument for libertarianism on any sort of moral terms at all. Perhaps someday Friedman will write a book on moral philosophy and reverse the unintentional effect he has had on so many of us.

I've started reading Friedman's newer book "Law's Order", a text on the economic analysis of law. I may review it here in the next few weeks.

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September 01, 2004 6:43 PM

Another reminder of how good things are...

There's a pretty good entry over at Cafe Hayek that points out, quite poignantly, that the division of labor has improved the material conditions we live under beyond all recognition.

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August 20, 2004 12:44 PM

Tyler Cowen on Economic Growth

Tyler Cowen is apparently writing a new book explaining why economic growth is so crucial to improving people's lives. Quoting from his blog entry about the book:

The importance of the growth rate increases, the further into the future we look. If a country grows at two percent, as opposed to growing at one percent, the difference in welfare in a single year is relatively small. But over time the difference becomes very large. For instance, had America grown one percentage point less per year, between 1870 and 1990, the America of 1990 would be no richer than the Mexico of 1990. At a growth rate of five percent per annum, it takes just over eighty years for a country to move from a per capita income of $500 to a per capita income of $25,000, defining both in terms of constant real dollars. At a growth rate of one percent, such an improvement takes 393 years.

I'm looking forward to reading it.

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August 16, 2004 4:48 PM

Why France Doesn't Work

The New York Times Reports (though sadly only with registration and for a limited period) that a new book, entitled "Bonjour Paresse" (the Times translates this as "Hello Laziness") by Corinne Maier is becoming something of a best seller in France.

Quoting the Times:

"Imitate me, midlevel executives, white-collar workers, neo-slaves, the damned of the tertiary sector," Ms. Maier calls in her slim volume, which is quickly becoming a national best seller. She argues that France's ossified corporate culture no longer offers rank-and-file employees the prospect of success, so, "Why not spread gangrene through the system from inside?"


Her solution? Rather than keep up what she sees as an exhausting charade, people who dislike what they do should, as she puts it, discreetly disengage. If done correctly - and her book gives a few tips, such as looking busy by always carrying a stack of files - few co-workers will notice, and those who do will be too worried about rocking the boat to complain. Given the difficulty of firing employees, she says, frustrated superiors are more likely to move such subversive workers up than out.

One might argue that Ms. Maier is supporting evil behavior, but perhaps that's not entirely the case. Her argument is largely that French companies are not meritocracies and that they do not reward work, so why bother working?

Why indeed? In a country where work is legally limited to 35 hours a week, taxes are high, and failing companies are coddled by the government, perhaps there is indeed little rational incentive to do much. Take a bit of an objectivist viewpoint for a moment. If all else fails, isn't "striking" the "right" thing to do? Is such a book not, in a way, a call to "shrug" in an environment in which no other mechanism seems effective?

I'm being slightly facetious here. It is probably a violation of one's agreement with one's employer to do nothing for one's salary, and I doubt that Ms. Maier is an objectivist of any stripe. Indeed I would expect that she is hostile to that sort of philosophy.

However, one reaps what one sows. I'm hardly surprised that a country that has long made it difficult to get ahead now finds people wondering why they should even try.

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August 06, 2004 5:15 PM

News Flash: Anti-Drugs Campaign is Failing!

The BBC is reporting this absolutely predictable story:

US drugs tsar John Walters has admitted that Washington's anti-narcotics policy in Latin America has so far failed.

Naturally, of course, merely because it hasn't worked to date is no reason for doubt.

[Walters] predicted positive results would be seen within a year.

I wonder if an Idea Futures market on the success of U.S. drug interdiction would find many takers on the "drug war succeeds" side of the bet.

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August 03, 2004 10:06 PM

Is Piracy a Major National Security Threat?

Businessweek has an interview with David Israelite of the DoJ about piracy and its effects.

In it, he makes a rather remarkable claim:

Q: You've said that the theft of intellectual property is a national security problem. Why?

A: First of all, we talk about it being an issue of economic national security. Our economy is so based on intellectual property ideas that, unless we can protect them, we're really looking at a situation where it's going to hurt our ability to survive as a country.

Secondly, so much of what we do now involves computers, whether it be with software or other types of communication lines. Often, intellectual property is a key component to the things we do to protect ourselves as a country.

Lets have a look at these two claims.

First, there is the question of economic losses from piracy. The entire US movie industry's revenue stream is somewhere like $40B. The US recording industry's revenue is something like $15B. (These numbers might be off a bit but they're the right ballpark, which is enough for this calculation.) That's $55B total. The U.S. economy as a whole is somewhere in the vicinity of $12,000B. That means if the entire music and movie industries vanished without a trace, the economy would (worst case) shrink by something like 0.4%. Note that this does not take in to account new economic activity that might be engendered by piracy, which might be substantial.

Even assuming that we had much more than 0.4% drop in economic activity with the demise of the movie and record industries — which I seriously doubt — it would still hardly count as something that could, and I quote David Israelite, "hurt our ability to survive as a country". I suspect that, given the figures from recent recessions, we could manage far worse without our "survival" being at stake.

Second, Mr. Israelite notes that people use computers and communications lines, and then somehow implies that computers or communications systems would be threatened were intellectual property threatened. I will note that I am writing this blog on a computer using no proprietary software whatsoever, and my server has no proprietary software on it either. Obviously our use of computers and the internet could continue unabated were proprietary software to vanish. If Mr. Israelite has a specific point on this, he has made it rather poorly.

Overall, I judge the claims he makes to be poorly founded. However, the promulgation of such claims is rather predictable in the light of Public Choice theory.

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Intellectual Property, Politics

August 03, 2004 9:16 PM

Is Georgia getting real economic reform?

The Economist reports that Georgia (the country, not the state) has a new economy minister named Kakha Bendukidze who's hell bent on cutting taxes, reducing the size of government and privatizing everything in sight, as well as eliminating things like restrictions on foreign banks and legal tender laws.

Best quote:

As to where investors should put their money, "I don't know and I don't care," he says, and continues: "I have shut down the department of industrial policy. I am shutting down the national investment agency. I don't want the national innovation agency." Oh yes, and he plans to shut down the country's anti-monopoly agency too. "If somebody thinks his rights are being infringed he can go to the courts, not to the ministry." He plans, as his crowning achievement, to abolish his own ministry in 2007. "In a normal country, you don't need a ministry of the economy," he says. "And in three years we can make the backbone of a normal country."

Could Georgia be on its way to real reform? I have no idea. I've seen these sort of promising stories before, and politics usually gets rid the reformers before they get rid of the bureaucrats. However, if there was real reform on this scale, Georgia might turn into a quite nice place to invest someday. It probably bears watching over coming years.

(Much thanks to Samizdata for the link.)

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August 03, 2004 1:18 PM

DIMACS Workshop to focus on Idea Futures

DIMACS at Rutgers University runs some interesting workshops. One that was just announced focuses on "Markets as Predictive Devices". Given that my old acquaintance Robin Hanson is one of the instigators, I assume that it will focus pretty heavily on Idea Futures.

For those unaware of the concept, it is a means to quantify predictions by using markets. The notion is to set up tradable contracts, much like futures contracts, which pay off not if guesses about the price of wheat or oil are correct, but if guesses about the future direction of technologies or world events are correct. It is hypothesized that the implied predictions given by the market price of the contracts will be more accurate than the educated guesses of pundits, because traders will have a monetary incentive to follow their heads rather than their hearts. There is some (as yet limited) evidence that this hypothesis is true.

I first saw the concept of Idea Futures under another name in "The Shockwave Rider by John Brunner (which incidently also coined or popularized a bunch of modern computer security jargon, such as the terms "worm" and "virus"). However, it was Robin who really formalized and spread the concept of Idea Futures, first in the magazine "Extropy", and later in more academic contexts.

Some of you may remember a DARPA proposal to set up betting markets on the odds of terrorist incidents, which was later withdrawn under heavy pressure. Robin's work was the basis for that idea.

(Some of you may also remember my recent blog entry about a company that is enabling trading in idea-futures like contracts.)

I'm not sure whether or not Idea Futures will have a dramatic impact on society, but the concept certainly has intellectual appeal. Perhaps someone should start trading a contract on whether Idea Futures will have a widespread effect (if only they could formulate the claim well!)

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Science & Technology

July 31, 2004 1:57 PM

Supply, Demand, and Pataki

The economic way of thinking is a pretty powerful tool. Even very basic economic principles, which can be taught in minutes, immediately yield predictions about the real world impact of government policy.

For example, once you are familiar with supply and demand curves, you can already begin making predictions about the impact of price regulation. If you artificially lower the price of a good by government edict, the demand will exceed the supply, and you will get a shortage. (Try drawing a supply and demand curve on paper with price on the horizontal axis and draw a vertical line to the left of the supply/demand intersection if you don't see this.) If, on the other hand, you artificially raise the price, you'll get an unpurchased surplus.

This pattern is consistently seen in the real world, but it is rarely understood by people watching it.

For example, in 1973, the OPEC countries decided not to sell oil to the United States because of our support of Israel. There were, however, other producers of oil, including companies extracting it inside the United States itself. If the price of oil in the United States had been entirely based on market mechanisms, we would have expected the price to shoot up until demand fell enough to cross supply. There would have been no shortages, only a dramatic price rise. Additionally, Non-OPEC producers would have had a large economic incentive to find new ways to supply oil since the they could make large profits selling it, so supply would have eventually eased.

However, the price was not unregulated. The United States had price controls on all domestically produced oil. No one remembers this — you'll be hard pressed to find more than a passing reference to it in the Wikipedia article on the crisis, for example. What happens when you have government price caps? A shortage of course. At the artificially lowered price, demand exceeds supply. The gasoline rationing that immediately resulted was completely predictable, and yet almost no one understood it. The bulk of the population had no idea that they were victims of government price control policy. People instead usually blamed the oil companies for "profiteering", as though one could make more money by refusing to sell one's product than one could by selling it.

Today we are experiencing a significant rise in the demand for energy with a simultaneous tightening of supply, but there are no gas lines this time. Why is this? Because oil prices were decontrolled long ago, so the price merely rose until supply and demand met. Eventually, as oil supplies (which are finite) start to run low, the rise in prices will eventually drive people to use other sources of energy, without any need for outside interference.

Artificial price caps are not the only type of price regulation. Set a guaranteed price floor above the market clearing price, and demand drops while supply rises. Agricultural price supports have left us with things like vast government warehouses filled with cheese no one wants, made with milk from herds of cattle that we don't need. (The irony of the government deliberately raising the price of food while issuing food stamps to the poor who can no longer pay for it is rarely mentioned, but that's not our topic today.)

The minimum wage is an example of a price floor. The ideas behind it are as simple as they are incorrect. The advocates assume that wealth is some sort of finite resource that neither grows nor falls (the "zero sum" fallacy), that employers are a privileged exploiting class that unfairly pay people less than they are "worth", and that employers could choose to pay their employees any arbitrary wage we pick, but will deliberately pay low wages because they're mean people.

Thus, we assume that by forcing employers to pay some of their employees more, we will have "costlessly" increased the well being of low wage workers. Of course, in reality there are some pretty serious costs.

First, the supply and demand rule we've just studied means that the demand for low wage labor will necessarily fall. Some of the workers will get the wage increase, but others will no longer have jobs. Employers will look at the increase in their cost of labor and try to find ways to ameliorate it. Some may find that it is cheaper to buy more automated machines than to keep as many workers. Others might forgo an expansion, and perhaps others will cut employee benefits to make up for the increased cost of wages. One way or another, though, they'll be compelled to find a way to respond to their increased costs.

You might think this is a "mean" thing for employers to do, but in fact they have no choice. You as a consumer do not voluntarily buy the more expensive choice among equivalent products when you're out shopping, so producers are under tremendous pressure to minimize costs so that they can offer lower prices in the marketplace. If a producer lowers costs more than his competitors, he gains an advantage over them, and so the competitors have to follow suit or go out of business. No employer has an infinite pool of resources to draw on. Wages are set not by "exploiting employers", but by market pressures, just like every other kind of price.

Employers cannot unilaterally set wages. If they offer wages that are too low, they will not attract qualified employees. When you've looked for work, if there were two equally interesting jobs you could pick, and one offered twice as much money, would you pick the lower paying job? Could your boss offer you *any* salary without fear that you would seek another employer that paid more?

We are all employers at times, of course. Do you pick an arbitrary fee to pay your lawyer or plumber, or are you forced into a particular fee by the marketplace? If you wanted to, could you simply pay your plumber minimum wage? Of course not. No other employer has true control over wages, either. Employees are paid well because the market clearing price for their labor is high, or are paid little if the market clearing price for their labor is low. The market for labor is driven by supply and demand like all markets.

It is possible that in some industries, demand is sufficiently inelastic that employment won't drop much after a government imposed wage increase, because customers will absorb the increase in prices. However, those customers also have only finite resources available to them. If they pay more to one supplier, they then have less money to pay to other suppliers or workers. They will either employ fewer people, or purchase fewer goods (thus causing other suppliers to employ fewer people), but either way, the change will have negative effects.

Raising the cost of labor in the economy is thus not harmless — it reduces the amount that can be done with a given amount of resources. Increasing the minimum wage, no matter how well intentioned, creates unemployment for the poor and reduces economic output.

That brings up another point, which is that the economy is not a zero sum game. There isn't a finite pool of wealth out there which some mean people have seized and which others are being unfairly kept away from. The work we do every day increases the total wealth of the world. If I go into my workshop and build a chair, the wealth of the world is larger by the value of one chair. Every day, we make more and more things, raising the total wealth of the world. The reason that 7% of the U.S. population didn't have indoor plumbing in 1970 and that only 0.6% lack it now isn't because wealth has been redistributed — it is because there is a lot more wealth to go around with every passing day.

The government doesn't produce any wealth. Factories, software companies, farmers, and others are the ones producing wealth. All the government can do is make it harder for people to produce wealth or take wealth from one person and hand it to another. It can't actually make the pie larger on its own, but it can manage to drastically reduce the size of the pie by interfering. Only the people actually doing productive work can increase the size of the pie.

We see extreme cases of this in the third world. The reason people in Africa live in shacks and have to wear our cast-off clothing is not because we're mean and keep them from having all the wealth we've stolen from them. They have little wealth to steal in the first place. They are poor because their governments are run in a way that makes the creation and retention of wealth impossible. Unlike the booming Asian economies, where foreign factories are welcomed, few foreign companies "exploit" the poor of Africa, because the African governments have made running factories and businesses nearly impossible. Even indigenous entrepreneurs are regulated, shaken down and taxed into oblivion. If you want to make the poor wealthier, you have to stay out of the way of people who want to produce wealth. The more you get in the way, the poorer people will be.

So, we now turn our attention to New York State, where the legislature recently tried to raise the minimum wage to $7.15, an increase of nearly 40%. That's not a small adjustment by any means. Governor Pataki vetoed the legislation, saying that the minimum wage hike would put New York at a "distinct competitive disadvantage". This is a remarkably economically enlightened viewpoint. However, not all politicians in the state are this enlightened. Quoting the Newsday article I've just linked to:

Assembly Speaker Sheldon Silver called Pataki's veto "an outrageous slap in the face to tens of thousands of hardworking men and women in our state."

The assembly speaker appears to be basing this statement on the counter-factual belief system that I mentioned before. Repeating, this belief system claims that the economy is a "zero sum" game, that employers voluntarily choose to "exploit" people by paying them less than they are "worth", and that employers can choose to pay their employees any wage at all without impact upon them if they wish to. Therefore, these people reason, it must be the case that refusing to raise the minimum wage 40% is an attempt to continue the exploitation of the hard working men and women of New York State by evil employers, and that but for this veto thousands of people would have better lives without any negative repercussions.

As with most politicians, Silver shows a deep ignorance of how the economy actually works. This is rather ordinary. What I find unusual, and indeed praiseworthy, is that Pataki actually seems to have shown some considerable sense here, and was willing to stand up for his principles even though everyone "knows" that the minimum wage is "good".

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July 31, 2004 1:05 AM

U.S. Budget Deficit Hits $445 Billion

The U.S. federal budget deficit is reported to have hit a record $445 Billion.

To put that in perspective, were Bill Gates' entire net worth confiscated by the feds, it would only pay for 1/10th of this year's deficit. Indeed, everything the richest man in the world has ever earned wouldn't even pay for a small fraction of our war in Iraq. The federal government now spends more than his entire asset base every week.

The federal budget continues to grow at a pace far exceeding that of the GDP. It is amazing to me that George W. Bush can still claim with a straight face to be a fiscal conservative. Then again, shame is a rare commodity among politicians.

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Politics

July 28, 2004 9:03 PM

UK Academy Proposes Regulating Nanotechnology

This BBC story just in from the "strangling the infant in the crib" department.

The Royal Society and Royal Academy of Engineering in the UK are about to propose new regulations governing nanotechnology, long before any real nanotechnology has even be developed.

Best quote from the online article:

"Our main concern is that this is a new, powerful technological platform that could be disruptive," said Jim Thomas, from the campaigning ETC (Erosion, Technology and Concentration) Group.

"What does it mean for the poor, disabled, the disadvantaged - people who are usually left out of the debate?"

He stressed that nanotechnology should be developed to benefit all, and that public engagement was essential.

How the poor and disadvantaged might be helped by delaying things like lifesaving technologies and radically less expensive goods, Mr. Thomas doesn't say. Presumably the disabled might be angry about medical nanobots going in, fixing their severed spinal cords and permanently ending their blissful paraplegia.

I'm reminded yet again that the speeches the bad guys in "Atlas Shrugged" make are not parodies — they're the sorts of things real people say. It is almost enough to make me reach for a pack of ciggies with dollar signs on the filters, only I think smoking is stupid.

Perhaps we can introduce Mr. Thomas to the bureaucrats in Ghana, who are also working to help the poor. They may have ideas to trade about the public betterment.

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Politics, Science & Technology

July 28, 2004 2:27 PM


I've been citing Wikipedia articles a lot in my recent postings.

I'd like to give the Wikipedia people a bit of a plug. They've instigated a free encyclopedia, written by... well, anyone who cares to help write it. ("Free" in this case means both the free software and free beer senses of the word.) The web site that hosts the encyclopedia is a "Wiki", a system that allows anyone who sees a problem with a page or wants to contribute to do so, immediately. There's literally a button on every part of every page named "edit".

Wikis, like all "open source" style projects, work on the stone soup model. You start with a small implementation of an idea and convince lots of people that they should help you improve it. What starts as a kettle and a rock turns into something far, far better. The public good "problem" is stood on its head. The non-rivalrous, non-excludable nature of pure information doesn't bring the "market failure" traditional economic analysis would predict, but instead becomes an advantage begging to be harnessed.

If any project shows the power of an open source community, it is Wikipedia. In a few short years, they've produced, for free, one of the best information resources I'm familiar with, and they've barely even started. If you haven't looked at Wikipedia, you should.

By coincidence Slashdot is running an interview today with Wikipedia's founder Jimmy Wales.

There's a great quote in the interview that I'd like to share:

I frequently counsel people who are getting frustrated [...] to think about someone who lives without clean drinking water, without any proper means of education, and how our work might someday help that person. It puts flamewars into some perspective, I think.

Imagine a world in which every single person on the planet is given free access to the sum of all human knowledge. That's what we're doing.

I think he's on to something. Couple

  • An internet filled with the complete sum of human knowledge
  • $10 laptop computers with cheap satelite internet access
and I think that it will no longer be possible to keep people poor and ignorant except if they want to be, no matter what their neighbors, religious leaders and governments might want.

For a fictional vision of what such technologies could bring, see The Diamond Age by Neal Stephenson.

July 28, 2004 12:30 AM

Governments and Public Goods

Every once in a while, someone mentions the Public Goods problem to me as an example of why we need governments. They mention all sorts of things as potential public goods, like, for example national defense. This entry is my overarching argument for why the "Market Failure" argument is a poor excuse for government provision of services.

If you already know what a public good is, and a bit about the theory of market failure, skip down to And now for my point.

For the rest of you who want an explanation of public goods and "market failure", and don't want to look at the Wikipedia article I list above, a Public Good is an economic good (that is, a product, service, resource, etc.) that has unusual properties that lead us to believe that a free market might underproduce it.

Specifically, it has to be:

  • non-rivalrously consumed, meaning that any number of people (within reason) can use it simultaneously without impeding each other's access. For example, whether or not someone else is in a movie theater, I can still enjoy the show. Ten people watching does not mean I only get one tenth of the viewing pleasure.
  • non-excludable, meaning that no one can keep you from enjoying the good, and thus you might not pay for it and yet you might still consume it. For example, one might consider fishing in the deep ocean non-excludable, since no one can stop someone from fishing in international waters.

Goods that possess both these features are said to have a problem, which is called "market failure". It is said that the free market will not supply as much of the good as would be truly "efficient" (in the economic sense of the word), because suppliers will not be compensated as much as the "real" demand curve for the good would imply. (See this Wikipedia article if you aren't familiar with supply and demand curves.)

Put another way, if you could exclude people from the benefits of a good, people would be forced to pay for it if they wanted it, but since they can enjoy the benefit without paying, and since one person's consumption does not impact another's, the exhibited demand curve is much lower than the "true" curve, and thus supply will be much lower than might be abstractly thought of as "efficient".

Note that you need both properties for something to be a Public Good. A movie theater has a door that locks, and is thus excludable -- I can keep you from entering if you will not pay. There is not an infinite supply of fish, and thus deep sea fishing is (at the limit) not non-rivalrous. (Fishing might exhibit a different kind of market failure popularly called "The Tragedy of the Commons", but that's a story for another day.)

An example that is often given in economics texts for a Public Good is a lighthouse. Everyone benefits from it, but since it is non-excludable why should I pay for it if someone else will? Thus we would naively expect there to be an undersupply of lighthouses. Another example given is raising honeybees — the bees help nearby farmers, but because they can't be stopped from going to any field in the vicinity, you would naively expect that beekeepers would be under-compensated for their work and thus there would be an undersupply of bee hives.

As it turns out, both of these examples are historically false. Lighthouses were historically supplied by private means, and a lively market exists in renting the use of bee hives to pollinate crops. (See the collection "The Theory of Market Failure" if you are interested in details on both these "textbook fallacies".)

As it happens, I don't believe there really are any public goods (or at least, no "market failures" important enough that we should care much about them). However, let us assume that there might be a few. It is argued that one of the functions of government is to "fix" the market failures that a pure free market might have by intervention. For example, lets say that we believed that national defense was a "public good". The government could then provide the good directly (such as by collecting taxes and running an army with them), or could use subsidies or similar mechanisms to "correct" the market failure.

And now for my point.

For the government to actually fix the so-called "market failure", it has to do two things.

First, it needs to somehow assess what the "true" demand curve is. How might it go about doing that? Is there be some amazing scientific method for figuring out the "true" demand? Unfortunately, as Von Mises and Hayek pointed out in their work on the so-called "calculation problem", there is no particularly good way to figure out appropriate supply and demand curves without resorting to market mechanisms.

In practice, then, we end up with the "calculation" being made fairly arbitrarily, as the result of policial mechanisms. Sadly, as James Buchanan demonstrated in his pioneering work on public choice economic theory, the political method is likely to base its "computation" on the interests of powerful actors in the process rather than on any sort of rational basis. Bureaucrats will have a personal interest in the expansion of their fiefdoms, and thus will always argue for increased production of a good. Firms seeking government contracts will have an enormous incentive to lobby for increased production. (Indeed, if contract worth a billion dollars in profit is in danger, why not spend $900M lobbying if it will retain your business?) Individual members of the public, however, each have only a tiny fraction of the cost of any given government program to bear, so one's personal incentive to lobby against any given program is low. On a billion dollar federal budget item, the average American can save only $3.30 by getting the program canceled — the sum hardly makes the effort worthwhile.

We therefore expect that the government will not make rational decisions about the allocation of a public good, but will instead tend to overspend on it — perhaps even vastly overspend on it.

Second, to fix the "market failure", the government must somehow actually act to supply the missing good, either directly or via government contracts. Because there is no market discipline enforcing the efficient delivery of government services, these services are often supplied in a stunningly bad manner. You can't go to the competing DMV — there is none — so you wait on line for hours to get your drivers license. Why should we expect that the efficiency with which, say, national defense or other purported "public goods" will be supplied would be any greater?

So, here is the crux of the problem with the "let the government supply the public goods" argument: there is no evidence the government can supply putative "public goods" with any greater efficiency than the market that has "failed". Indeed, one might even get less efficiency than one started with. Why, then, is government intervention any better than the "market failure" we started with?

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Politics

July 27, 2004 2:09 PM

Denuding the Poor

One of the few economic success stories I can name in Africa is the used clothing trade. People in developed countries give vast amounts of clothing every year to charity. Most of it ends up being sold to used clothing traders, who in turn re-sell it to poor people all over Africa for pennies. African governments might do their utmost to destroy their local economies, but at least the invisible hand has usually been left free to clothe the naked.

Until now, that is.

This morning, I heard a story on the BBC World Service that seemed outlandish — they claimed that Uganda was now taxing imports of second hand clothing to "protect" the local clothing industry.

Naturally, I didn't believe anyone could be that stupid, but a quick search on Google reveals that it is true. See this article, for example, and this one. Indeed, it seems that Tanzania and other African countries are doing similar things.

I'm reminded of Frederic Bastiat's brilliant satire, The Candlemaker's Petition, except this isn't a joke — this is nightmarish reality. To protect a tiny economically inefficient local industry, these governments are driving up the cost of clothing bought by the desperately poor.

If you want to know why Africa is an economic basket case, look no further than this sort of insanity.

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Politics

July 25, 2004 2:43 PM

Election Betting

I just noticed (because of a link on Marginal Revolution) that there is an Irish based company called TradeSports that runs an unusual betting operation.

Instead of keeping their own book, TradeSports sets up futures style contracts with cash settlement that pay off based on the outcome of a future event. (I'm reminded of Idea Futures, except for the most part they're doing pretty ordinary sports bets.)

In addition to sports, they're running a number of contracts on future economic statistics, elections and other such things.

(One hopes that perhaps someday they'll do Idea Futures. There are places like the Foresight Exchange that do idea futures, but so far as I know none use real money.)

One reason I mention them is because they're running a set of contracts on the current U.S. presidential election, much like the Iowa Electronic Markets, except they're not a small scale academic experiment.

Currently, it appears that the people on TradeSports collectively believe George Bush's reelection is a 50/50 shot, which is pretty much the same prediction that the IEM and the Foresight Exchange.

Posted by Perry E. Metzger | Send Feedback | Permalink | Categories: Economics, Politics