The Angry Economist

I received the following email in response to a previous posting about why a MOGOW would vote Republican. I have to agree with the author. George H. W. Bush is not an exemplary Republican. Two notes: first is that I am an autodidact economist; that is, I am self-taught. If I see far it is because I am standing on the feet of giants. Second is that a Goldwater Republican can and should stand up for liberty by voting not for Tweedledum, but instead for Michael Badnarik, Libertarian candidate for President. He won't get elected, not in America's winner-take-all two party system. But voting for him will send a clear message that the Republican party needs to move closer to the Libertarian party, just as the people who voted for Nader caused the Democrats to move farther to the anti-corporate, anti-market, anti-prosperity, pro-justice, pro-equality, pro-poverty position. They didn't waste their votes, and you won't be wasting yours by voting for Badnarik. The only way to waste your vote is to vote for someone because his opponent is worse.

I have no trouble seeing why MOGOWs would vote Republican. I do, however, have trouble seeing why anybody economically literate would vote Republican in this election (as opposed to past ones, which were understandable).

As the Economist magazine has said, George W. has invented a new classification of politician: "Big Government Conservative".

Even subtracting military & homeland security spending, George W. has increased government intervention in the economy by more than any president since LBJ. He has thrown over the "small government" Reaganism in favor of expansive intervention on the economic level - against free trade (remember Steel tariffs?), for expansion of government (notice the government spending levels?), for increased transfer & social payments (remember prescription drugs?).

I can completely understand if you wish to vote for him because of his international policies; I am consistently shocked when people let that or their past voting patterns blind them to Bush's surprise reversal on economic matters.

As one schooled in economics, you should be the first to be educating your readers that the real "tax" is government spending since it removes productive resources from other uses; the level of "tax" you pay only determines how much you pay now and how much gets added to your national debt tab. Bush has been the instigator behind many "deferred tax increases" while trying to persuade us they are tax cuts.

I'm forced to vote for the Democrats this year, not because Bush is too conservative, but surprisingly, because he's too liberal.

Steven E. Landsburg maintains "It is almost impossible to maintain the old argument that minimum wages are bad for minimum-wage workers." Far from it. I maintain that old argument, because the old argument is still true. To the extent that minimum wages actually raise wages above the market-clearing level, they create unemployment. I really don't care about the statistical studies of actual minimum wage changes, because legislators carefully ignore the moronic requests to double the minimum wage. Instead, they wait until nearly everyone is being paid more than the minimum wage, and raise it just a little. The effects of these kinds of changes are not discoverable by statistical studies because they are lost in the noise.

Steven also shows that he is indifferent to the fate of the people who become permanently unemployable. He claims that they don't care about having their job destroyed. He says "... so what? Sure, you've lost your job. But don't forget, this was a minimum-wage job in the first place.". How in the world can he speak about, much less *for*, someone he has never spoken to? That is, you see, the gist of the problem. The minimum wage destroys the jobs of people who are not known to be willing to have their job destroyed. This seems to me to be completely immoral.

Steven makes the point that published statistical surveys are not representative. He's probably right that we should ignore them. We should ignore them not for the reason he gives, but instead because it's simply bad statistics to measure the results of ongoing production. Instead you should run an experiment at the ends of the parameters you wish to study. The trouble is that we've done that experiment already, and whole industries got destroyed.

Morosoph fails to get the minimum wage argument correct. He makes three glaring errors. First he says "Well, everybody will just raise their prices", ignoring the fact that some will compete by cutting costs. Second, he admits that some poor shmuck is going to lose his job because of the minimum wage. How can that ever be moral? And yet people support the minimum wage because it's just. Third, he thinks that "Decent statistical analysis would clear the air..." It won't, and not for a lack of trying. There are many reasons why a person might lose their job. The effect of a minmum wage increase happens over time, not immediately. This information is lost in the noise. There's no way to pull it out of the noise except by raising the minimum wage by a lot. That's been done before, and yes, many people lost their jobs, so no, we don't need to run that experiment again.

The theory predicts it, the evidence supports it, the only question is "how many people lose their jobs vs. how many people's income goes up." But how can any moral person ask that question? How can it be right to hurt some innocent person just so you can help other people?

Morosoph's kind of economics is the kind that just pisses me right off, because he Just Doesn't Understand how economics works in the real world. He thinks that legislated laws can break natural laws. He would probably vote in favor of changing the speed of light.

I received email from a reader, asking me to resolve a dispute between her and a friend:

I hope you don't mind if I ask you a question: I am having a little argument with a friend about if capitalism requires winners or losers. He says no, and in fact, that losers hurt the market because they have less money to spend.

I, on the other hand, think that capitalism requires, at least, the opportunity to fail. From there it doesn't seem like much of a leap to say that it requires losers. My questions is, what would a capitalist economy look like if every transaction was a win-win transaction? Would that be an ideal economy? Would it be sustainable? What would happen?

I think that they are having trouble resolving this question because it's a wrong question ("Ask the wrong question, you'll get a wrong answer.") It can be answered trivially, so let me propose a better question, and then answer that.

By definition, every transaction in a free market economy is a win-win transaction. Both parties see more value in what the other party has than in what they have, so they trade. In any other circumstance, one or both value their current circumstances better, and refuse to trade. The only kind of trade you can have in a free market economy which leaves one of the parties immediately worse off is when they are forced to trade against their will.

Leaning heavily on Ludwig von Mises' tome Human Action, remember that the future is uncertain. People's opinions about the future differ. People take actions based on those opinions. All actions involve an element of risk. It's simply not possible in this world for all actions to succeed. Some will pan out, some will come up dry (very deliberately choosing to use those two cliches).

Every transaction is undertaken because the individual perceives a benefit at the time. Therefore, her question is trivially answered "every transaction in a free market (capitalist) economy already is a win-win transaction." I don't think she'll be satisfied with that answer, however, because I don't think the question is right. I think a better question, following from the dispute between her and her friend, is "Does the proper operation of capitalism rely on some people making mistakes?"

The answer to that question is "No". It's more a matter of mistakes being inevitable, and capitalism surviving them. If people didn't make mistakes, then capitalism would work much better ... but then again, so would socialism. Capitalism has a lot of flaws, whereas socialism is perfect in its design and has no flaws. The trouble is that imperfect people have to carry out both systems. Capitalism trades off the constant presence of small mistakes and thereby avoids the big mistakes that a socialist economy will make.

Poor Gregory Mankiw. He points out a fundamental theorem of modern economic science, and gets excoriated for it. I refer of course to his statement that outsourcing American jobs was good for the country in the long run.

He's right.

You can practically use people's reaction to his statement as a litmus test of economic understanding. Does somebody understand the least bit of economics? If so, then they agree with Gregory. If not, then they disagree with him, often vocally and vehemently. Economic flat-earthers, I call them.

America's strength is its willingness to lose jobs. Look at all the buggy-whip jobs which don't exist anymore. Or whaling jobs. Whole careers have been eliminated. Not just some jobs, but all of them. Gone. Not overseas, but gone from the face of the earth. Now, if we're willing to destroy jobs, why is it such a Big deal if somebody else in some other country gets that job? This whole outsourcing flap is like throwing something out, and then finding that somebody has garbage-picked it.

Okay, you can make the point that we weren't really done with those jobs. That people were still willing to do them. But here's the catch: for what wages? There is no such thing as "unemployment", and there is no such thing as "unemployment insurance". Something exists that has that name, but it is not insurance. You cannot insure against something over which you have full control. Insurance doesn't work that way. Insurance covers you against things that you cannot control.

The alternative to losing jobs is to keep jobs doing things that people don't want. Besides the morale problems with doing something that nobody wants, you also have a serious economic problem. You can't have everyone doing useless work. Somebody has to be productive to pay for those jobs that are no longer needed. What happens when people in the former group move into the latter group? There's no such thing as a perpetual motion machine.

You may question my assertion that "unemployment" does not exist, particularly since you hear unemployment figures quoted weekly. Very simply, yes, there are people who choose not to work for a particular wage. They are not simply unemployed; they cannot find work for a wage of their choosing. So, it doesn't make sense to talk about "unemployment" without knowing more about the jobs that aren't being taken. If a Wall Street stockbroker cannot find a job paying $200,000/year, is he unemployed? According to the Bureau of Labor Statistics, yes, he is.

Let's take a case which might be more obvious. Let's say that a laborer earning the minimum wage becomes unemployed. The stockbroker can probably find a job by offering to work for less money. The laborer doesn't have that option. He is not unemployed by choice, but instead by fiat (and no, I don't mean that the Italian car manufacturer refuses to hire him!). The source of minimum wage unemployment is the minimum wage.

Now any non-economists must be livid. "Ask people to work for less money!!! How can you do that?? You are cruel and heartless!!" Um, no. Consider the plight of the poor unfortunate Indian worker who gets paid far less to work in one of those Indian call centers we've heard so much about. Instead of answering the phone as Suskana, she has to answer the phone as Susan. Instead of working during the day, she has to work when most of her countrymen are asleep (IST == +1030, as opposed to an EST of -0500. Do the math). For this onerous duty, she gets paid $2 an hour, for which no American would work, could work. The thing is that her expenses are much lower. She can eat out every day for those wages, and afford a nice three-bedroom apartment in downtown Mumbai. Wages have no meaning unless you consider what they'll buy.

An efficient economy is constantly driving down prices and profits. This seems counterintuitive to anybody who lived through the inflation of the 70's. Inflation, though, is a monetary phenomenon. While it doesn't affect every price identically or immediately, it affects all prices because it's a change in the supply of money. What matters is the amount of time that you have to work to exchange for something of value to you. That amount of work has been dropping more or less steadily for the past five centuries. It may be that this year or this decade is one in which that trend shows a temporary reversal. As Mankiw said, in the long run, it's good for US jobs to be exported overseas. What he didn't say, but which is equally true, is that it may be painful in the short term when US jobs are exported overseas.

The good sense of "You do what you do best, I'll do what I do best, and we'll trade" cannot be denied ... except by people without a good sense of economics.

TM Lutas comments, making the point that social relations create pressure to assist transitions into new fields. Indeed yes, but if you try to restrict job loss or tie training to the ability to eliminate jobs, then that becomes an economic issue and worthy of criticism. Separately he points out that sometimes other countries make a gift of their wealth to us, and he claims that's a problem. Personally I think "Hey, thanks for the wealth" is an adequate response, and the louder we say it, the better.

TM Lutas comments again, saying that I just don't get it. I think I do get it.

It's surprising how many people don't understand the nature of profit. They think that people who are wealthy must have become so at the expense of other people. They think that if you have more than other people, it must be that you profited at the expense of another. I don't mean to dismiss their objections or their outrage. But surely it can't be "profit" that they object to. Look at this:

• What if I have something you want more than I want?
• What if you have something I want more than you want?
• What if we trade?
• We're both better off.
• We've both profited from the trade.
• That profit wasn't at the expense of either of us.
• No third party was involved in this trade.
• Not all profit can be said to be "at the expense of another".
• So, they must actually be objecting to something other than profiting.
• For the sake of conversation and clarity, let's call that "orange".

Orange and profit, as attributes of human action, may be related. That is, there may be actions which result in neither orange nor profit, and actions which result in both orange and profit. If that's the case, then they are related to each other, or said to be co-related, correlated, or positively correlated. On the other hand, it may also be that you have actions that result in orange but not profit, and actions which result in profit but not orange. If that's always the case, then they are negatively correlated. They're still correlated because if profit is present, then orange is not, and if orange, then not profit. It's just that the relationship is negative.

When profit is created by some actions, and other actions create profit and orange, then there is no correlation between profit and orange, because the presence of orange has nothing to do with the presence of profit. Profit is always present, and only orange depends on which action is chosen.

My point here being that you have profit without orange. Presumably, since people are objecting to orange and calling it profit, then you can have orange and profit at the same time. Profit and orange are not correlated with each other, and yet people criticize profit for being orange. I think they do this because most actions are neither profitable nor orangable, and then lump the remainder into just one category: profit or orange. The critics miss the cases where profit is present but not orange.

Why don't they see those cases? Because, surely, not seeing those cases is a symptom of bad economicing. Perhaps we can come closer to identifying the nature of orange if we can discover why the case of profit without orange is invisible to them or otherwise not a part of their experience? I need to ruminate more on this, so I'll pick this topic up later and link forward to it, and back to here. Comments and guesses welcomed.

Earlier I mused about some people's reaction to profit. I noted that profit didn't have the qualities that they imputed to it. I guessed that they were actually objecting to something else, which I called "orange" (so as not to prejudice myself or anyone else as to its nature). Bob Johnson suggested that orange==passivity, noting that the harder someone sweats for their money, the more acceptable are their profits.

I think Bob is quite right here. The quintessential honest job is that of a farmer, and you know that farmers put their backs into their jobs. The next most honest job is a steelworker, another sweaty job. A more "orange", or passive, job is secretary. Secretaries rarely get sweaty; if they do, they're probably doing their job wrong. Still, the pay isn't very good, so the lack of sweat can be forgiven. Still more "orange" is the job of college professor. The perception is that they only have to come in to the office a few hours a week, teach a class or two or three, and rake in the bucks. All those perceptions are wrong, but the perception of passivity is there.

Even more passive is an insurance company. Their profits are assumed to come with no work. More passive yet is the job of landlord, particularly a landlord who doesn't reinvest money in repairs (but if those repairs won't result in more or retained income, why spend money on repairs?) The most passive is someone who merely invests in a company. Of course, if you invest passively, you get some pretty passive profits. While there's condemnation of investors when they're making money, there's little sympathy when an investor loses money.

Andy McAdoo, General Manager of Nicholville Telephone Company, writes, in part, about my earlier essay on DANC:

The central issue of the DANC project should be cream skimming. DANC discounts prices to large anchor users while ignoring the needs of smaller, less attractive users. DANC's cream skimming approach is widely viewed as anti-competitive by most knowledgeable regulators. By removing the large "anchor" customers from market, DANC creates a disincentive for service providers to invest in infrastructure and is actually limiting choices for the small business community and consumers in SLC.

Sorry, no, Andy, but free markets don't quite work that way (then again, with a government agency under discussion, who's talking about a free market, but I get ahead of myself). It's a serious problem, but not for the reason you state. Cream skimming is a natural effect in a free market, and one to be expected and enjoyed in its way.

Rich people have yachts. Everybody expects this to be the case. Only the people who worry that some rich person, somewhere, might be having fun oppose this (they are, by the way, the people responsible for killing the yacht industry by taxing it out of existance). Most people really don't care for yachting, so the price of yachts has remained high.

Rich people also buy Cadillacs, or at least they used to. The Cadillac still has the imprinteur of style, class, and just plain wealth, even if there are other expensive cars competing with them. A childhood friend of mine, Peter Goldring, had a father who worked on Madison Avenue. They had a Cadillac (this was back in the 60's). It was an amazingly plush and well-equipped automobile. It had automatic windshield washers and electric windows.

I always wanted to own a car with windshield washers and electric windows. I thought they were the neatest gadgets. I dreamed of being wealthy enough to own a Cadillac with those features. Of course, now I own a fairly pedestrian Subaru Outback with windshield washers and electric windows. You can't buy the car without them. It also has -- get this -- electric seat heaters. Not even Cadillacs had them back in the 60's.

Was Cadillac cream skimming? Yup. Was there anything wrong with that? Nope. They were specifically targetting a wealthy minority with advanced features and benefits, with no intention of ever providing them to the rest of us.

Why, then, do we have them now? The answer, simply enough, is free markets. In a free market, new things are always provided to wealthy people first. In time, entrepreneurs find a way to reduce the cost of those things, and sell them to everyone else.

What is wrong with the DANC proposed cream skimming? It is that it intends to operate outside free markets. First of all, they plan to sell to BOCES, which are about as socialist, centrally-planned institution as you can find in America (where is McCarthy when you really need a hearing?) apart from Congress itself. I'm not going to get into BOCES right now, since I've already ripped them up and down, and back up again.

But second of all, DANC is not a profit-seeking institution. They could, quite reasonably, stop at providing Internet access to the schools, hospitals and local governments. They don't have stockholders clamoring for the last bit of profit in a market. Andy is upset, and reasonably so, because DANC is planning on monopolizing the marketplace with subsidized (paid-for by grants) Internet. It would be too bad for Andy if DANC was a private company and was able to out-compete him. But they're not. DANC has their hand in the public till.

After all, once you've provisioned Internet access to the schools, hospitals, and local governments, what's left? Fibermark? Resnick Mattress Outlets? Kinney's? Wisebuys? Potters? In a competitive marketplace, a private DANC would end up taking only part of the market, leaving some for Nicholville Telephone, and Verizon, and Time-Warner. Everyone would skim off whatever cream they could, and in order to gain continued growth in profits, they would have to sell to the little customers who are less profitable to begin with.

So no, Andy should attack DANC for having their fingers in the public till (and that includes accepting money from BOCES) rather than attacking the idea of cream skimming. Given the chance, he'd do it himself. Or try, but so would everyone else who owned a right-of-way on the utility poles of St. Lawrence County.

Steve den Beste talks about economics. He does a pretty good job, but falls down on the parts he's not really talking about.

In a free market, over the long run, price == cost == marginal value. Everything that den Beste says about prices is true only in the short term. In the short term, the price is going to be higher than the cost in order to pay the entrepreneur who set up the business. However, that profit gets competed out, so that in time, the price of something equals the sum of the costs of it. Gotta remember that the cost must include everything: cost of goods sold, rent, power, light, salaries, interest and dividends. Interest is rent on money lent, and dividends are rent on capital ownership. Neither are profits to a business; the business pays them out.

The marginal value of something equals the price of it. If you valued the next one of something more than the price, you'd buy another one. There are obviously quantizing problems here (for most people, the first car is the only one whose marginal value exceeds its price), but if you average out the purchasing decision, it will close in on the price. For bulk-purchased commodities like loose candy, the value (to you!) of the last candy you slipped into the jar is equal to the price of it.

den Beste said that people have to value something more than its price or they won't buy. That's just a specific case of the marginal value being the value of the very first one.

So, all that said, is den Beste wrong about the inverse network value? Not at all. He is specifically not talking about a completely free market. He's talking about a market where the Rolls-Royce company has a monopoly on producing Rolls-Royce cars. The whole point behind trademark law is to allow producers to charge monopoly prices. In a completely free market, when Rolls-Royce tried to restrict production to keep prices up, other people would step in and create more Rolls-Royces. Not clear that anybody wants markets to be that free.

Update: Ron writes in with some confusion over marginal value: "The marginal value equalling the price depends on den Beste being right. It's the last customer that has value equalling price. If the price rises, he drops off and there's a new last customer at the higher price. If the price falls, another customer comes on and the former last customer makes a profit. All the customers but the last make a profit."

Ron, marginal value refers to the value to *you* of buying yet another one of the things. In the case that Steve is talking about (cars), very very few people buy more than one at a time. Therefore the marginal value in this case is going to be the same as the value. Quite clearly the value must be equal to or exceed the price for someone to purchase something. My point being that the marginal value might only equal the price. In the long term, in a free market, with something that doesn't suffer too badly from quantizing effects, it makes sense for somebody to keep adding items to their cart until the marginal value *equals* the price. This is true even if the first one purchased is the last one purchased.

Since I'm on the topic, what happens if the seller is deliberately quanitizing the price so as to "steal" profit from the consumer by arranging things so that the last one purchased always ends up with marginal value equal to the price? This is where the beauty of competition shines. Another less greedy seller could rearrange his sales so that he takes only half of the profit from that sale, and shares the other half of the profit with the customer (e.g. by offering a discounted price for buying that larger quantity).

I should note that transaction costs interfere with causing the price to exactly equal the cost, and the marginal value to exactly equal the price. Transaction costs suck, but then so does friction.

We live in an age when legislatures create laws from scratch. Laws were not always created de novo. Earlier, laws were discovered rather than created. A conflict between two parties was seen as a problem to be solved. A solution was discovered by wise people working on the problem, just as are solutions to most other problems. Once a good solution was discovered, it would be applied to all further instances of that problem. Thus was the law born.

Legislatures, on the other hand, make up laws even when no problem is to be seen. This has a well-known corrupting influence on legislatures, what with people convincing a legislature that a personal or corporate problem is actually a public problem. Beyond that, though, a legislature, in my experience, will create more laws than it is willing to pay to enforce.

By corrupt, I mean that they take money for a service with no intention of supplying that service.

Having a surfit of laws and a deficit of funding puts the executive body into a quandry. Since it cannot enforce all the laws, it must pick and choose. Once it has this discretion, it has the ability to grant favors. With freedom comes responsibility, or irresponsibility in this case.

Now, I don't want anybody to take this as a blanket condemnation of all executive bodies. I'm merely pointing out the economics of the situation. The legislature (itself an easily corrupted organization) has created an incentive for the executive body to be corrupted as well.

What is the cost of a man? Poets and philosophers have tried to answer that question for centuries. Give an economist space to try.

The cost of a person's death is the loss of their productive output. Some people are very much more productive than other people. A Hemingway, a Mozart, a Monet, or an Einstein, all have had a greater impact on society than a Smith, a Baker, or a Barber. Can we then say that some people's death would have cost society more than others? Only weakly. Once someone is dead, they're dead. The future is closed to us; their future is closed to us.

We cannot value a person by looking at their death. We can only value a person by looking, not at their life, but what they would trade for their life. People do dangerous things all the time. Driving down the road is dangerous enough. People are trading (a risk to) their life all the time. That means that we can conclude that people do not value their lives infinitely.

How to determine how much someone values their own life? You can look at it by how much life insurance they buy. That's not a very good metric, though, because people are not often in such a risk of their lives that they purchase all the insurance they need. A better metric is to look at the actions of people with hazardous jobs, for example an explosives truck driver. They're much more likely to look at the risk, and decide how much risk they're willing to bear for how long. That risk, carried out, is how much they value their lives.

I won't hold you in suspense any longer. The figure comes out to about $1.2 million. It's not an unreasonable number. It's about $26K per year over a 45 year productive lifetime.

Thanks to David D. Friedman for doing the actual research behind this, and publishing it in his excellent book Hidden Order.

There is no such thing as "the environment" from an economics point of view. People use that word, but it's poorly defined. There is only property. Some property is land, some is air, and some is water. Some owners of property are careful to prevent others from damaging their property, some are not.

Economists study markets. Markets only trade in property. If you want to examine something from an economics point of view, you have to consider that thing to be property. The defining characteristic of property is that it has a single owner. The owner gets to decide who does what with the property. These are called property rights. Some owners are of course not individuals, e.g. partnerships, or corporations, or governments. Still, the owner of property acts with a single voice when it comes to trading that property.

If you listen to some people, you would hear them talk about "the environment". They want to protect "the environment." Specifically, what do they mean by that? It usually means that they are against pollution (it means other things as well, but let's ignore those other things). What is pollution, though? Pollution is anything that they think shouldn't be there; for example noxious gasses or liquids or solids. Pollution is illegal when it is trespass. Sometimes pollution is not trespass because the property owner has a reason to accept the pollution. The difficulty is that not every property owner chooses to prosecute the trespass.

Why should these people care about "the environment?" After all, it's not their property -- it's the property owner's problem. Sometimes they care because they are a part-owner of the property. It's owned by a government that's under their control (or vice-versa), and the government is failing to take good care of the property. Sometimes they care because they are subjected to externalities of the pollution. Every use of property has externalities; the existance of externalities is not sufficient reason to discontinue that use of the property. The most interesting reason is due to the way in which we have split up ownership of land.

Ownership of land

Property rights may not be completely unique in the same volume of space. That is, you may have the right to do one thing with a piece of property, while I may have the right to do a different thing. For example, you may own the surface rights to land, and I may own the mineral rights. The US government owns the right to fly an airplane over that land. The same land has multiple owners of the property rights.

As every land-owner knows, one of the things you have to do with your land is pay taxes on it. You can reasonably view that right as "the right to collect property taxes". Some states are willing to sell you that right, e.g. Nevada. You can, when you purchase the set of rights we commonly call "ownership of land", you can pay extra (a lot extra) to purchase the right to collect property taxes.

The existance of this right to collect property taxes causes a problem. What if the property taxes are not paid? What happens then is that the property tax owner can get a lein on the rest of the owners. If the taxes become large enough, they can take possession of the land and sell it. Aye, here's the rub. What if the owner of the surface rights has extinguished the value of his right by allowing pollution? The owner of the property rights does not wish to see his value destroyed by another, and so he will take legal action to prevent the extinguishing.

This interferes in the market by preventing some worthwhile uses of land. What if someone could concentrate pollution on just one bit of land in exchange for money? That would be worthwhile because it would keep the pollution away from others. It would concentrate the pollution so that if the pollution becomes valuable it is available for easy recovery. After all, Pennsylvania farmers thought that oil springs were a nasty nuisance.

Government Pollution

Except in western states where water is scarce, both the air and water have long been considered to be owned "by the public." Before governments were forced to take notice by their constituents, they were poor shepherds of their property. Air and water pollution by industrial processes are well-known problems. Note, though, that when water is privately owned, it is taken care of. This is the same effect you see when pollution of privately-owned land is not tolerated.

Still, calling air and water "the environment" confuses and conceals the issue. It's not an "environment", it's property, and the owner of that property is the only party that should be stopping pollution.

I got frisked by the Portland airport TSA folks. Somebody forgot to tell them that modern batteries and explosives are mostly the same thing. They saw my four-NiMH-D-Cell battery box on the x-ray, and thought it was Semtex, a plastic explosive. I think their chemical detector also id'ed it as Semtex, but nobody ever explicitly said that to me.

While they were gingerly pawing through my possessions as if they might explode, I noted aloud how disconcerting it was to see them pawing through my possessions as if they might explode. Somehow they turned that into some kind of bomb threat, because they called down their manager, the airport administration, the Portland police, and a Delta representative on me. While I'm not stupid enough to bring up the subject of bombs at airport security, watching somebody act as if my stuff might explode weakened my resistance to said stupidity.

It was only about a half-hour delay, however, it was a half-hour during which seven members of the security infrastructure paid sole and exclusive attention to me. It's obvious to me that I was a false positive. It was less obvious to them that I was a false positive; nonetheless I was a false positive for their tests.

One thing that economics teaches us is that you can't do everything at any one moment. At any one moment, the resources available to you are limited, and you must choose how you wish to allocate those resources. If you do one thing, you cannot do another. If you chase down a false positive, that leaves less resources to deal with other positives. Computer security folks are well aware of denial of service attacks. I think that the Transportation Security Administration folks are less aware.

Let's say that I wanted to get something through security. The best way to do it is to try sending pristine folks through security in a way that will trigger a false positive. While security is dealing with them, they go through security themselves, to find out what level of false positives are needed to overwhelm security. At some level, the security folks are likely to start sending people through with decreased scrutiny.

Of course, the whole increased airport security thing is a moronic waste of time. No hijacker would dream of hijacking a US airplane. Everyone would assume the worst, and fight the hijacker for their lives. There was a reason why there were four sets of simultaneous hijackings, and why Flight 93 ended up on the ground in Shanksville, PA instead of Washington DC. Airports were secure enough before; what was not secure was the instructions given to flight crews to cooperate with hijackers. Bombs on airplanes are still a risk, but for killing people, you can't beat a crop duster flying over any outdoor festival.

We have built a Maginot Line in our airports. You can be sure that the next terrorist attack will come in through the Ardennes Forest or the Low Countries. The economics virtually guarantees it.

"My" (I certainly didn't vote for her; just because lots of other people did, that doesn't create any ownership for me over her) State Senator Hillary Rodham Clinton writes:

While the bill focuses on transportation, Mrs. Clinton is selling it as economic stimulation. Every $1 billion in highway construction creates 46,500 jobs, she said. "This is a jobs bill."

Her statement is true and false. She is correct in saying that it's a jobs bill. She is incorrect in saying that when the government spends money, that creates jobs. In fact, it's likely that it destroys jobs. The money that the government spends didn't come from nowhere. It came from taxpayers, who now have less to spend on whatever they wanted to buy. Those purchases would have created jobs as well, and everyone would have gotten what they wanted most. Instead, if a highway is constructed, some people will get what they want, and some people will not.

If you want to have a high Economist Intelligence Quotient (EIQ), you have to avoid these pedestrian errors. When you get really basic things like this wrong, as Hillary did, then you're starting from zero, as she is.

Andy Oram, who ought to know better, since he isn't a fool or loon, posits that Universal Service is a good thing. After all, he says, many other things are subsidized to good effect -- why shouldn't telecommunications be subsidized? As a perfect example of why subsidies are wrong from the start, look at the subsidized bus service between Plattsburg and Watertown (NY). Riders pay $10.30 to ride from Canton to Watertown, and $15.90 from Canton to Plattsburg, but the ride costs $115.

I think that, as penance, Andy should have to ride the bus himself, and whenever somebody tries to get on it, offers them a check for $115 if they'll find another way to get there. Anybody think he won't get any takers? Think anybody will refuse?

That's not his only mistake. He praises the E-Rate program (in spite of its flaws) saying "Tens of thousands of institutions have received Internet access thanks to the fund." He is making the classic non-economist mistake of only seeing what exists, what has happened, what has occurred. Give yourself ten points if you immediately saw the flaw in his reasoning. Economists realize that everything is a trade-off. If you do one thing, you don't get to do another thing. So, no action can be evaluated by itself. It must be evaluated in the light of what else could have happened. "What would have happened with those E-Rate dollars?" is the question Andy failed to ask.

Orson Scott Card is nominally a writer of Science Fiction. In his recent essay covering Optimism, Pessimism, War, and Oil, he gets the economics wrong. He insists that government has a magic wand which it can wave to create the next source of energy beyond oil. He wants government to wave that magic wand.

Orson needs to get a clue. Every time the government waves its magic wand, it's a swing-and-a-miss. Look at canals. Not a one of 'em made money except for the Erie, and it only made money if you assume that the capital that went into it had no better use. Look at railroads. The ones that the government subsidized didn't make money, and the ones that it didn't need to subsidize did.

Orson has several suggestions for what people should do. The major point that he's missing is the time value of oil. He suggests that we should preserve it for the future, because it will be more valuable then. If he was right, then people who have oil in the ground would be happy to leave it there in anticipation of a higher price later. They don't do that, though. Instead, they sell it. They sell it because they expect that oil, like every other commodity, will be cheaper and more available in the future.

Orson might be right. The people who stand to make a lot of money if he's right are doing the exact opposite of what he suggests. I think, therefore, that it's most likely that he's mostly wrong.

Update: Oleg Dulin comments, wondering how future value can be brought into the present. Ordinarily the way that is done is through property rights and futures contracts. If you own something, and you think it will be worth more tomorrow, you won't sell it today. But what if you need money today? If your property rights are secure, then you can sell a futures contract. You agree to sell something in the future for a price greater than the current price, but less than what you actually think it will sell for then. You accept the payment today, and transfer ownership tomorrow.

The problem that Oleg doesn't anticipate is: what if your property rights are not secure? What if you are the corrupt ruler of an oil sheikdom, and are shaking your country down for the oil? You can still sell a futures contract. It currently discounts the price as described above. The discount is increased by the unlikelihood that your country will actually transfer the oil after you have transferred the profits to your Swiss bank account.

Before you get too smug about those corrupt oil sheikdoms, consider that the same mechanism applies in an elective democracy, in spades. When a politician is elected for only four years, he has no guarantee that he will continue to have the same power beyond the election. Elected politicians cannot afford to waste time taking advantage of their power. An oil sheik can reasonably rip off his country for the rest of his natural life, and so can afford to take the long-term view.

Both Brad DeLong and Steven Landesburg get the minimum wage argument wrong (thanks to Tyler Cowen for pointing me to them. Don Bordreaux has also blogged on it recently.). The theory predicts that a minimum wage will destroy jobs. You sell the most of something when you're free to set your own price. If somebody forces you to set it higher or lower, you'll sell less or more than you would like. If somebody forces you to sell your labor for a higher price than you'd like, you'll sell less of your labor. This isn't Economics 101, it's Economics 001. If it's not true, all economists go home and cry into our beer because our work is all completely wrong. In order to arrive at a conclusion that goes against the theory, you need very good empirical data. If you want to prove that light can travel faster than the speed of light, you need very good evidence. That data doesn't exist.

The data is in fact crummy given the size of the increases in the minimum wage. First, the minimum wage intentionally affects very few workers. Second, the minimum wage is only increased after it isn't really necessary. Third, you can count the people who got more money, but you can't count the people who lost their jobs.

I took a course in statistics when I worked in production engineering at Hewlett-Packard. They emphasized several points. In order to get good data, you can't just monitor your processes. You have to run experiments at the limits of your processes. You have to replicate to reduce experimental error. You have to randomize to eliminate changes over time.

So, in order to answer the minimum wage question, you can't just increase the minimum wage by a few cents and then go measure everything you possibly can measure. You have to both completely eliminate it, and double it. You have to do it for two randomly-selected populations. Nobody wants to run that experiment. Everybody knows what would happen if the minimum wage was doubled: Huge numbers of people would lose their jobs. That's exactly what happened in Haiti in the 1930's when a continental US minimum wage law accidentally applied to Haiti. So, really, everybody who refuses to run the experiment has the answer firmly in their head; it's just in their heart that they refuse to acknowledge it.

Sigh. Tom Blackburn is right and wrong, but mostly wrong in his column on the minimum-wage debate. He spends two thirds of his column summarizing the debate among economists, which is a waste of time. Only incompetent economists fail to acknowledge that the minimum wage creates unemployment to the extent that it actually raises wages above the market-clearing price. He does this in order to conclude that the argument for the minimum wage is moral, not economic. The thing is, he's right, it is a moral argument!

Economists do not make moral judgements. They tell you what will happen as a result of an action that you choose. It is up to you to decide whether those actions will be moral. Tom is trying to say that he can ignore economics when it comes to making his moral judgement. He has found economists who disagree with the truth of the matter. This is necessary for him, because Tom's morals require that paying a minimum wage only be a cost to businesses. If he was to respect good economics, he would have to conclude that the minimum wages are immoral. How can it be moral to help some low-paid workers at the cost of hurting lower-paid workers by causing them to be unemployable?

Just got back from my third trip to India. I've been working with Rediff on Rediffmail for going on five years. When I first went there, they had 125K users. When I left ten days later, they had 143K users. Now they're pushing 30M users if they're not there already, with terabytes and terabytes of disks spinning and servers and servers handing out webmail.

On my first visit, we were troubled by two strikes. One was actually not so bad, as it was the taxis and I had a company car and driver (if you can drive in Mumbai, you can drive in Boston; the converse is not a given) at my disposal. Without the badly-tuned diesel taxis on the road, the air cleaned up first-rate. But still, Mumbai basically shut down for the day, and the taxi drivers made their point. Similarly, truck drivers went on strike the same week, and delayed shipment of the servers we needed for the cluster.

The strikes were caused by the government trying to increase the price of diesel fuel to match the market price they had to purchase it at. Clearly, it was the opinion of the strikers that they should not be subject to market discipline. Perhaps if they were, the taxi drivers would have taken their taxis in for a tune-up to increase their fuel efficiency. Pollution is not just trespass, it's waste.

Several of the people I spoke to said that conditions for business were improving in India. This is good. It is VERY good. All the socialist redistribution in the world won't help if there is no capitalist production to redistribute. More than that, a wealthier economy helps everybody by creating surplus. This increased prosperity increases the price pressure on the only truly scarce commodity: human attention.

India is reducing its tariffs, making it easier to start a business, eliminating anti-competitive laws, and privatizing businesses. They still have a long way to go. They gave up about fifty years of development while pursing a socialist fantasy. But they are making progress, and we should cheer them on. Go India! Huzzah! Huzzah! Huzzah!

If I had my choice of perfect worlds, there would be no government in it. People purchase protection from a private company of their choice. This company, in turn, subscribes to a system of laws which is privately written. Independent judges interpret the law fairly, or they don't get the business next time. Some legal systems will come into conflict, which will be resolved by a payment in one direction or another. The price one pays for a legal system determines the amount of conflict one bears. Poor people obviously get a cheap one which doesn't allow for much conflict. But it does cover them against the essentials -- no murder, no theft. In the end they get more justice by buying it in an efficient market than what they're currently getting through government -- arguably less than zero.

There's a lot of reasons to expect that this would result in better laws.

Obviously, in my perfect world, some parents still hurt their own children, so there must be provision in people's laws to protect children against their parents as well as others. And equally obviously, some people will seek to employ inordinate violence against their attackers, so there must be provision in people's laws against that as well. How do I know that these provisions will be there? Because people will purchase a subscription to a legal system without knowing whether it will be used for or against them. So, they will shop carefully. Will they make mistakes even though I'm supposing a perfect world? Sure they will. But the mistakes come from their own choice of legal system, and they have the power to correct that.

None of us has the power to correct our governmental legal system single-handedly. A private legal system, on the other hand, would quickly triangulate on what the majority desire for justice. The legal systems that gave out the justice that most people wanted would be cheapest, which would tend to bring in people from the sidelines to the same majority legal system. In practice most legal systems would be very similar to each other, and would be very close to optimal. This should be contrasted with the current governmental systems, which tend to produce laws optimized for special interests.

If you want an example of how this might work, take an extremely difficult example -- abortion. Clearly many people want the freedom to abort their babies. Many people also think that's murder. They would each choose legal systems that allowed or disallowed abortion. How, then, would these legal systems work? How could you both allow and prohibit abortion?

Let's follow an example. A woman gets pregnant and decides to carry the baby to term. Fine. She's not disobeying anybody's laws. Let's say that she decides to have an abortion. Obviously she hasn't chosen the anti-abortion legal system. She would contract with a doctor for an abortion. However, the pro-choice legal system has been paid to include a term that says that an anti-abortion protection firm will be informed of such a contract. Maybe the woman doesn't like this very much, but she chose that system, and besides it made her legal system cheaper. Now the anti-abortion firm knows that she's serious about getting an abortion. They offer to buy her all the medical care she needs to deliver the baby, and will find parents willing to adopt the baby.

Now here's where it gets tricky. Exactly what happens depends on exactly how many people are in favor of abortion choice and how much they're willing to spend to get their way. Let's say that the anti-abortion people are in the minority. They won't have the resources to help every women, but they'll have it for some, as many as possible. So, even though they're in the minority, they'll get their way more often than they do now.

Let's suppose it's the other way around -- that the pro-choicers are in the minority. It's likely that their legal system will be more expensive, because it includes the choice of abortion. It also requires them to seek counselling before getting an abortion. It also imposes a mandatory 7-day waiting period. Both of these were purchased by the anti-abortion majority, who have large resources at their disposal. A license to have an abortion might cost some serious amount of dollars.

Do poor people get screwed by a private market for law? Yes, absolutely, no question about it. If they weren't screwed, you'd have a hard time calling them "poor", or saying that "poor" was a bad thing to be. The harder question to answer is whether they are screwed more or less under a system of governmental legislated law as under a system of purchased private market law. At least under private law, somebody can purchase a subscription and donate it to them. If you think nobody would do that, you must first take your magic wand and wave away the existance of the Carnegie libraries.

In this manner, through a market for law, you have people purchasing, not voting for, law systems. To the extent that they purchase non-controversial, majority law, it's cheap. If they want to do something most people disagree with, it costs them money, and not many people can afford to do it. Contrast this with the current system where every man has a vote regardless of how strong he feels about the subject, and every decision is decided regardless of how many people feel strongly about it.

New Jersey State Senator Shirley Turner has done it again. Oh, I don't mean that she's ever done it before, although she probably has. She's proposed Yet Another short-sighted law. She's "protecting jobs in this country."

Bullshit. Pure, unmitigated bullshit. Sorry, Shirley, dear, but I gotta call it the way I see it. And you are full of it. You aren't "protecting jobs in this country." You're protecting visible jobs and destroying invisible jobs.

Here's the problem: it's visible when an employer shifts a job performing the same task from one place to another. The people of the first place tend to get resentful of the people of the second place. Don't matter if it's a Potsdam job that moved to Canton (e.g. the County Health Services), or a New England job that moved to the South (e.g. garments -- incidentally the cause of northern support for minimum wage laws), or a New Jersey job that moved to India.

What they fail to see is the new job "taken away" from the people of the second place. Inevitably, when there is free trade, trade balances. It MUST balance. If the state of New Jersey pays Indians dollars to do something for it, those Indians now have dollars. They're going to spend those dollars somewhere. Maybe they'll spend them buying tiny Japanese cars? But now the Japanese have dollars. Eventually, somehow, those dollars that New Jersey spent are going to come back to the US, and create a job for somebody.

Generally speaking, everyone is best off if they do what creates the most value, and trade for everything else. This isn't news. Adam Smith wrote it as our country was being formed. It seems very strange that our elected representatives -- who in theory are wiser than the common rabble and better able to take a wider and longer-term view -- don't know that.

Fortunately, there are a limited number of economic ignoramuses like Sen. Turner in the New Jersey legislator, and the bill hasn't made it out of the committee yet. Let us hope that it never does!

Inflation is a description of an decrease in the price of money; nothing else. Den Beste gets it wrong when he attributes inflation to the price of oil. It doesn't affect the point of his posting, but why not get all the details right?

UPDATE: Joseph writes, saying that Den Beste is correct because the price of so many things is dependent upon oil that when oil gets more expensive, so does everything else, and rising prices is inflation. No, that's not right. Increasing prices are a symptom of inflation, but they are not inflation. Other things can cause prices to rise or fall. See the chapter on Inflation from _Economic Freedom & Interventionism by von Mises.

Earlier, I wrote about Lemon Laws. These laws exist to solve the problem of cars which require "too many" repairs. The problem is not that the seller does not honor a warranty. The assumption is that the existance of problems -- even repaired problems -- is evidence of the existance of more problems. You can see this in the computer software field. Some programs are written securely and never have any security problems. Other programs were written without security as a goal, and trying to bolt on security later proves difficult.

So, the problem exists. The question for an economist is what to do about it. I can answer that question (and I may be right or wrong), but the process of answering it is more interesting than the answer itself. Leo writes to tell me that car dealers often try to cheat their customers. That fact (which, really, surprises nobody) is almost completely besides the point.

First, interesting economic things happen in the middle, not the edges. It's not likely that any businessman is completely honest or completely dishonest. Instead, some businessmen will be more honest than other businessmen. So, saying that car dealers often try to cheat their customers says nothing. The real question is whether more honest car dealers make more money than dishonest car dealers. If they do, then the tendency will be for honest car dealers to out-compete dishonest ones. If they don't, then there's clearly a business opportunity for someone.

Every trade in a free market generates a surplus in value for both parties. You could argue that a "fair trade" is one in which the surplus is equal. Most often the surplus isn't equal. Sometimes it's a seller's market, where the seller sets the price, for example in an emergency. Any time the surplus (on either party's side) is large enough, it will attract more entrants into the market. This results in competition and tends to reduce the surplus.

Markets work best when people buy things often, and when there are multiple suppliers. This isn't the case when you're buying a car, which people may do only five times in their life. Automobile companies try to reduce competition by only establishing a limited number of dealerships in a region. As a general rule, competition works well because experts are competing against experts. You may not know how to bottle up soda, but the experts are coke, pepsi, and many other cola suppliers do. By competing against each other for your business, they keep each other honest. That competition is lacking in the automobile market.

There oughtta be a law!

You've no doubt hear the clarion cry "There oughtta be a law!" uttered in response to some inequity or another. You shouldn't be surprised to hear me question that request. Laws and markets work in very different manners. For any arbitrary problem that a market has trouble solving, it may be that a legal solution works better or worse. Far too many people assume that a law can solve any problem which is not solved to their satisfaction by markets.

For example, you could attempt to solve this problem by passing various laws related to automobile quality representation and guarantees. Or you buy insurance from a company which will buy your car if it needs too many repairs. Since the company doesn't want to lose money, it will charge you more to insure a car from a company which often makes lemons. You could use that as a clue not to buy that company's cars, or if the cars are special, just knuckle down and pay the higher premiums. Such a company doesn't exist right now. That's because the lemon laws have legislated such a company out of existance. Or, at least, they ensure that no such company could make money.

The biggest problem with passing a law is that you lose information. Since everybody has to comply with the law, there is no way to find out if a more or less strict law would work better. With a market solution, you have competition to provide the best solution. People are free to experiment with different solutions.

Dividends and capital gains are now taxed at the same (low) rate. Heretofore, capital gains (an increase in the value of a stock) have been taxed at a lower rate than dividends (corporate earnings distributed to stockholders). This led corporations to prefer capital gains over dividends. Over time, companies have ceased to pay out dividends because they can deliver more value to stockholders by increasing the price of their stock. This has led to some poor practices. Paying dividends is a good thing, for several reasons.

First, because capital -- deferred expenditures -- is the only thing that makes society wealthier. Even if you think we should soak the rich, that doesn't work if there are no rich to soak. If you think that a rising tide lifts all boats (which is a code phrase for "Don't tax the rich; the rich create more jobs by spending their money than the government will.") then you definitely want society to be wealthier. Taxing dividends is a form of capital consumption.

Second, because dividends keep a company honest. Enron got into trouble because they falsified earnings. The value of a company is based on its earnings. By creating book (accounting) earnings, they increased the value of their stock. This encouraged people to invest more money in Enron. If, instead, investors demanded dividends, Enron's duplicity would have been discovered sooner. False earnings cannot be turned into cash and paid out.

Update: Marc points out that false earnings can be turned into debt. He's right. For example, a company committing fraud can sell more stock based on their false earnings. This amounts to a classic Ponzi scheme -- paying off early investors with new investment. Or they could convince a bank, on the strength of their earnings, to give them a line of credit. Let's say, as a weaker form of my point, that having to pay dividends eliminates the ranker forms of fraud, but not all of them.

Third, because the stockholder has chosen wisely by purchasing a stock that produced earnings. Obviously, some stocks do not generate the earnings that people expect. Perhaps the marketplace of the business is declining (think buggy whips), perhaps the company is badly managed, perhaps the company has simply been out-competed by a more efficient company. The fact that the stockholder chose wisely says that the stockholder should be given a chance to do it again. She should be paid a dividend, so that she can use her wisdom to purchase more of the same stock, or another stock even more likely to generate earnings.

Fourth, because corporate managers have a built-in incentive to grow the company in opposition to paying out dividends. A bigger company is expected to pay higher salaries to the top managers because of the increased responsibility. These managers tend, then, to engage in mergers which turn out to be unprofitable. The majority of purchasing companies pay too much for the purchased company. If, on the other hand, the company pays a dividend, that reduces the amount of available cash for frittering-away purposes.

Classic investment advice, such as that in Benjamin Graham's book _The Intelligent Investor_ advises investors to put a premium on stocks that consistently pay a dividend. Hopefully we can return to the days when companies that are pleasing their customers can also please their stockholders by paying them a dividend.

According to Walter Williams, New York State has statutory minimums on gasoline prices. That means that a portion of your gas dollars goes to the state to pay for taxes, and another portion goes to prop up the price of gas to reduce the effects of competition. .... Just so you know where your money is going.

This dude on slashdot complains about "our purely monetary system -- there is no measure for the labor hours, or the quality of those hours, that go into the production of much of anything. The cost of things that can't be measured monetarily is all too often assumed to be "ZERO", but that simply isn't true. Even freeware costs somebody something to make."

Marx had this theory for the source of value. At the time he was writing, there was no consensus among economists for the source of value. Why are diamonds more valuable than water? They couldn't explain that, since obviously water is more necessary to human life. They didn't have the idea of marginal utility, so they were casting about for an explanation. Marx's explanation was that the value of something came from the labor that went into it. Water was easy to get, but diamonds had to be mined from the earth.

Curiously, some people still believe that theory even though there are numerous counter-examples to it. For example, it doesn't take into account time preference. If all else is the same, people value something now over something later. If I hide two packets of gold coins, and offer to sell you their location, one of which you will be told immediately, and the other of which you will be told in twenty years, you will pay more for the first than the second. How can that be, according to the labor theory of value? The same exact labor has gone into each packet.

The slashdot dude has obviously made the same mistake. There is no measure for the labor hours or the quality of those hours, that go into the production of anything. That's not how you assign a value to something. First, since value is relative, everyone assigns their own value to something. There is no such thing a single measurement of value. Second, you cannot assign a value to something by looking at what it cost you. If the value of something was always equal to its cost, nobody would ever sell anything for less than what it cost them. Third, the way you find out how much somebody values something is by looking to see what they will trade for it.

If something is not scarce, it is not an economic good, and you cannot measure its value with anything, much less money. Since it's not scarce, nobody will trade anything that is scarce for it. Doesn't matter what: time, drugs, sex. Or even money. Economics is not about money. It's about figuring out what people will trade for what. So, what would you trade to get a copy of the Linux kernel? Not the bits themselves, I mean the right to use or redistribute the Linux kernel. What would you give up to get that right?

Answer: nothing, because you already have that right. It's not scarce. Its value to you has nothing to do with its cost to you, or to the amount of labor that went into it.

Sigh. George Gonos, thinks that the minimum wage should be doubled. It's currently $5.15, and he's quoted in the May 24th Watertown Daily Times as saying that he would like it "set higher than $10/hour". He's listed as having gotten his PhD in Economic Sociology. I would call it instead Economic Fantasy.

Anyone is free to demand a living wage, of course. That's not what George wants. He wants employers to be forced to have to pay a minimum wage. The trouble with that idea is that no employer is forced -- no employer can be forced -- to employ anybody.

Go to anyone who employs people at the minimum wage, and ask to see their books. It's quite likely that most of them would refuse, but you'll find one who will agree. Double the wages of anyone making the minimum wage, and bring everyone else up to George's new proposed minimum of $10. Suddenly the books won't balance. You can be 100% sure that the employer will now be losing money. So go through the expenditures, looking to see what can be cut so as to make the business break even again. I can guarantee that there's only two places to get enough money to cover the new costs: employees wages, and prices.

So, one way to pay the new living wage is to fire half your employees. This is actually do-able. What you do is tell your existing employees "At the end of this work week, the new living wage law goes into effect. Half of you will lose your jobs, and the other half will continue to be employed. The ones who will continue to have jobs are the ones who have doubled the amount of work they get done in the same amount of time. Have a nice week!" Your employees will hate each other by the end of the week, but that's not your problem. This is, by the way, likely not the solution that George expects will happen.

The other possibility is to raise prices. The problem with doing this, of course, is that not all work has to be done on the spot. Some of it can be moved offshore. If employers suddenly have to double their wage expenses, equally suddenly offshoring will grow. Those companies will not have to raise their prices, and the companies that do will go bankrupt. This, too, is probably not what George expects. Even if businesses manage to raise prices without losing business (when has that ever happened?), who will have to pay those higher prices? Yep, the same people earning the new living wage. So, the calculations that went into the living wage will get completely thrown off, and it will no longer be a living wage. George seems not to have anticipated this effect.

I'm not sure what George expects will happen, really, but doubling the minimum wage will also require the imposition of tariffs on many imported goods, as well as new laws forbidding the exporting of services. Laws do not lead to freedom. Laws lead to more laws. Freedom leads to prosperity.

Let's get this out of the way fast: any minimum wage law is wicked, and should be immediately abolished.

If that alone doesn't convince you, then let's get into details. A minimum wage law says, in effect, that anybody whose labor is not worth the minimum shall not be employed. Nobody would support a minimum wage law if it were written that way. The Department of Labor minimum wage page says "The FLSA requires that most employees in the United States be paid at least a minimum wage and overtime pay at time and one-half the regular rate of pay after 40 hours in a workweek."

Minimum wage laws are supported by four sets of people:

1. Employers who do not want to have to compete with other employers who have lower labor costs.
2. Employees who do not want to have to compete with other laborers willing to accept lower wages.
3. Employees, typically represented by unions, who can claim that they are providing skilled labor, and should be paid more than a worker hired at the minimum wage.
4. Busybodies, who support "a living wage".

The classic example of an employer supporting the minimum wage is the Northeast U.S. textile manufacturer. Textile mills were originally built in America in the Northeast, where water power was necessary and abundant. In time, water power became less important, and textiles could be manufactured anywhere. Labor was cheap in the South, and textile mills began to be built there, competing against Northeast mills.

The Northeast mill owners did not want to have to compete with the Southern mills. To raise everyone's costs to that of the Northeast, they supported a minimum wage law. Rather than allow the South to make textiles, and the Northeast workers move on to more profitable activities, the Northeast textile manufacturers lobbied for a minimum wage. In the end, they couldn't compete anyway, and most Northeast textile mills have closed.

Employees want to be paid as much as they can, of course. They will always have an incentive to have their own wages increased for the same amount of effort. The wise employee will realize that they are making a Faustian bargain. Their increased pay comes from another laborer's unemployment.

Unions are a legal monopoly on labor. A union will (at least in theory) take the members dues and spend them in such a manner as to raise the members wages enough higher to pay for the dues and then some. One of the ways they can do this is by supporting minimum wage laws. Typically, union members' wages are higher than minimum, sometimes by a factor of two or three. They do this so that they can argue "Well, the minimum wage is now fifty cents higher. Our members should get a raise of fifty cents."

Busybodies support minimum wages out of a sense of fairness. Some of them adhere to Marx's labor theory of value. This is the idea that labor produces all value, and so all profits should go to laborers. It's obviously balderdash, but it's convinced some people. There's also shouldness: nobody should have to work for such a low wage. This is obviously true, but the economist needs to add her own should: nobody should lose their job because of a minimum wage law. Equally obviously true.

Some busybodies total up the costs of living the way they want poor people to live, and call the wages necessary to pay thoses costs "a living wage". Without further thought, they support a minimum wage law to increase the wages to a "living wage." This is a "should" rather than an "is", just as in the previous paragraph. Just as they "should" get a living wage, neither "should" they endure the consequences of forcing employers to pay a living wage.

Follow the money

A minimum wage coerces an employer to pay more in wages than they are receiving in labor. Clearly, if the employer was receiving that value in labor, free market competition would force them to pay the wage for that labor. The money to pay wages in excess of labor received does not come from nowhere. It is a new cost imposed on a business. In a free market economy, in time, that cost will be reflected in the price of the good. Go read about prices, costs, and value if you think otherwise.

If nothing else changes, then, prices will rise to cover the increase to the minimum wage. The effect would be for everyone in the economy, including those formerly employed at the minimum wage, those currently employed at the minimum wage, and unemployed people, to pay for the increase. While the now-minimum-wage employees are better-off, the already-minimum-wage employees and unemployed people are worse off. They are paying more for things, but not getting any more themselves, even though they're equally or worse as well-off as the now-minimum-wage employees. This effect is ignored or dismissed by proponents of minimum wages.

You never have the case of nothing else changing, when you change the price of something. Because goods and services produced by minimum-wage employees are now more expensive, fewer of them will be purchased. Fewer minimum-wage employees will be needed. This effect is ignored or dismissed by proponents of minimum wages.

Labor is now more expensive. Whenever the cost of an input to production changes, the manager of that production will re-evaluate the production methods. It may be that a tool whose cost was formerly prohibitive is now cost-effective. The McDonalds near me now has a french-fry basket loader. They dump a big bag of fries into the hopper, and it loads a specific amount into a fry basket. No doubt the machine is cheaper to employ than the employee's time. This effect is ignored or dismissed by proponents of minimum wages.

An employer may reevaluate his processes, and find that he can do without the employee entirely. Perhaps a tool could be employed? Perhaps the production process may be made more efficient? Perhaps he can get other workers to work harder? This effect is ignored or dismissed by proponents of minimum wages.

No matter how you cut it, somebody worse-off than the employee ends up paying for the increased (above market) wages. That's a result of economics, which is value-neutral. We could use our values to decide that that's acceptable, fair, and moral. I don't think it is. Minimum wage laws should be abolished solely because of that negative effect.

Why didn't I notice this?

Right about now, somebody will say "there is no evidence that the minimum wage law creates unemployment." They are fortunately quite correct. The current minimum wage law doesn't lift wages much above the market level. That means that they also don't create much unemployment. You can point to the many people who have minimum wage jobs, if you want. That won't help, because some of those people will have minimum wage jobs anyway simply because the market price matches the minimum.

Another reason you won't notice the unemployment caused by the minimum wage is a very simple fact of human nature: it's hard to see things that don't exist. We are biased by millenia of evolution to notice things that exist, and disregard things that don't exist. It's very easy to see minimum wage jobs. They're advertized in the newspaper. People who are unemployed don't walk around with a sign saying "Unemployed because the minimum wage went up." Everybody who is alive today have ancestors who paid close attention to deadly things that exist, and less attention to things they only imagine.

Also, when a minimum wage law destroys a job, it does so stealthily. The loss of the job associated with an increase in the minimum wage might happen many months after the wage increase.

Some people want the minimum wage to be much higher than it is now. They would like to double the minimum wage. The Haitian lace industry was destroyed (and the livelihoods of thousands ruined) by application of a 1930's US minimum wage law which doubled the wages of workers there. We could try that experiment, but I wouldn't advise it. Any minimum wage law which significantly increased the minimum wage would also significantly increase unemployment. Thank your lucky stars that the existing minimum wage laws have so little effect.

Update, 09Dec2003: David writes:

He is, of course, quite correct. Making jobs illegal doesn't eliminate the jobs, but it does take them completely out of the purview of the legal system.

The most basic result of economics is the law of supply and demand. If the demand exceeds the supply, the price will go up. If the supply exceeds the demand, the price will fall. An indisputable observation is that people are getting paid more and more. This has been true for about the last four centuries. If you put these two things together, then you have to conclude that we don't have an overpopulation problem. We have, in fact, an underpopulation problem. It is not a new problem, and it is not likely to go away any time soon.

Just as in Lewis's The Last Battle, where "the dwarfs are for the dwarfs", so, too, "the unions are for the unions". Make no mistake about it, unions are not in any way public interest organizations. Oh, they'll tell you how good they are for society. There's even a bumper sticker that reads "Unions: the people who brought you the weekend." Don't believe it for a moment.

One of the functions of a union is to monopolize labor. To the extent that they actually succeed in doing so, unions are bad for society in the same way that any monopoly is bad for society. In case you haven't been following along on the play-by-play, it's because a monopoly can charge monopoly prices. A monopoly gets monopoly prices by restricting the amount of production so as to move the price point to a more profitable position. You can see, now, why unions are always threatening to strike, and why unions are hard to get into.

A union doesn't have to form a monopoly to be useful. They can still create benefits for their members by reducing transaction costs. They can also contract for insurance, which is substantially cheaper if you can supply the insurance company with a need-blind pool of customers. They can administer a pension program. They can supply social needs, like picnics and parties.

Unions claim to have coerced employers into reducing the work-week to 40 hours (in the US; 35 in France and Germany). This probably isn't the case. A union would have to have monopoly power over all labor, and that's never been the case. I don't remember the exact number, but even in the heyday of union power, they never had more than 50% of the work-force as members. What's more likely is that as people became more prosperous, they valued leisure over the incremental hour of work. In a free market, people generally get what they can afford. When blacks were freed following the US Civil War, they worked fewer hours per day. Not because blacks are lazy, but because they preferred leisure over the marginal value of those extra hours of work. Freed of the need to make a profit for their owner, they could afford the extra leisure.

Now I want to look at how unions form their monopoly over labor. It's not pretty. A monopoly is hard to maintain, particularly when it's over the efforts of individuals. Basically, some union members were assigned the task of beating the crap out of people who weren't union members, but did union work. Or burning their cars, or houses, or whatever. Most of the methods for monopolizing labor involve intimidation and/or actual violence.

Today, unions use the violence inherent in government to get their monopoly. In most states, a workplace is either unionized or it is not. If it is unionized, then you MUST be a member of the union to work there, and you MUST pay union dues. A simple majority vote of the workers is sufficient to unionize a workplace. The employer is very strictly limited in what she can say about unions.

It gets worse: unions, through the voting bloc of their membership, have extorted union workplace rules out of governments. As the membership of unions in corporations has decreased, it has increased in local governments. Yes, your taxes to go support unions whose purpose is to benefit a small class of workers, and the hell with everybody else. Outrageous? Enough to make you into an angry economist? It has me.

Update Sun May 18: the head of the CWA local, Mark Seymour, has a letter to the editor in today's paper, complaining about the DANC fiber. He uses some good reasons, but also a bad one (from an economist's perspective): because it might throw some CWA union members out of work. Sorry, Mark, I count you as a friend, but preserving your job is not a good reason to not improve society. It so happens that we're arguing the same point, but your reasons for doing so are not my reasons.

Unemployment. Sounds like an undesirable attribute, like "undressed", or "unable", or "unstable", or ... "undesirable". It's true that anybody who wants to be employed surely doesn't want to have the label "unemployed". And yet ... there are nearly always jobs being advertised in the newspaper. So why is there persistent unemployment?

Another word for unemployment is leisure time. Sounds odd to put it that way, but yes, someone who is unemployed can be said to value leisure over all possible jobs. Leisure don't pay the mortgage, so why would anyone prefer leisure over employment?

The answer is simple enough: because they're waiting to find a better job. Someone who has taken an inferior job will be hindered in finding and getting a better job. Rather than get stuck in an inferior job, they refuse labor.

Let's say it right out: there will always be unemployment in a free market. The "natural" level of unemployment is affected by a number of things: the likelihood of someone finding a better job than any of their choices, their savings, whether they have other means of support (e.g. relatives), and their non-discretionary expenses. This level of unemployment is called "structural unemployment." The only way to eliminate this type of unemployment is to take away people's freedom to work at the job of their choice.

Another possibility is simply that labor is not desirable. Take as an example my wife, Heather. She has worked part-time as a bookkeeper for the local food coop, and could surely work full-time elsewhere as such. My income as a consultant makes it unnecessary for her to work. The incremental value of her salary is below the value of her leisure time to the family, so she doesn't work.

Now comes the truly interesting thing: how do you measure unemployment? The answer can only be that you can't. Someone who has the attribute "unemployed" has that attribute solely in their head. If they want a job and don't have one, they're unemployed. If they don't want a job and don't have one, they're at leisure. The only way to tell the difference, all the work of the Bureau of Labor Statistics aside, is to ask. Conduct an opinion poll.

Unemployment is in the mind of the beholder. Remember that the next time you hear authoritative-sounding figures about unemployment.

People are, like, massively confused about "trade deficits", y'know? So often you hear this or that pundit pontificating about how horrible it is that we have a trade deficit with one country or another. We currently have a trade deficit with China.

It's more or less meaningless to compare the volume of goods sold by Chinamen to Americans against the volume of goods sold by Americans to Chinamen. They have very little to do with each other. Often you can make sense of trade issues by bringing them home. If it makes sense in your family, then it makes sense in international trade (if only because countries tend to act like two-year-olds!)

Let's say that you are a student at the University of Illinois at Chicago (UIC). You have a trade deficit with them. You buy more from them than you sell to them. Assuming that you can get the necessary tuition money, does anybody perceive this situation as a problem? The trade deficit could go on forever. Certainly there are some gradual students who would prefer that state of affairs.

Note the assumption, though. To make the previous paragraph true, I had to assume that you had a source of tuition funds. Where are the tuition funds going to come from? Let's say that you are very good at something, and you can do that thing well enough to earn enough money to pay the tuition, whilst still leaving you enough time for college classes. You could stay in college forever and have a permanent trade deficit with UIC.

In case that's not clear enough, consider that you have a permanent trade deficit with the supermarket that you buy your food from. They are forever selling you things, you are forever paying them, and yet you NEVER offer to sell them anything. Nobody has a problem with this. Nobody is decrying the trade deficits that customers everywhere have with stores. Of course not, because the concept is just wrong.

Another way to look at it: your employer has a trade deficit with you. You are constantly providing services for him; he is constantly paying you; and you rarely if ever buy anything that you produce for him.

Do you see why a "trade deficit with China" is a confusing idea? It has, at its core, an assumption that we are ultimately bartering with China -- that the sum total of goods we sell to them must be equal in value to the sum total of goods they sell to us. But we can sell things to Japan, who sells things to China, who sells things to us. That makes for three trade deficits and yet lots of happy people.

A trade deficit with everybody

Some people are less confused than others. They worry, instead, about having a trade deficit with everybody. Let's go back to our example. Let's say that we constantly shopped; had a trade deficit with every store we enter. To keep this relevent to international trade, let's say that we used our personal IOUs to pay (being a proxy for dollars). As long as we redeem our IOUs faithfully, stores will continue to accept them. If they pile up too excessively (trade deficit with the world), people are going to be reluctant to accept our IOUs. In the parlance of international trade, our IOUs (currency) will decrease in value. The dollar will fall against other currencies. Foreign products will be more expensive in dollars than they were. Our exports will be cheaper.

The goal is to import as much as you can, and export as little as you can. "Buy low, sell high" is not new financial advice. People will help us import by giving us some credit (by taking our money/IOUs), but only if we have a history of paying back the credit. In order to do this, we have to create products that other people want to buy. To the extent that we do this well, we won't have to export much (work hard) to get the imported goods we want.

There are other ways to get people to redeem our IOUs/dollars. We could sell ownership in our businesses. That has happened -- a LOT. Several reasons for this: 1) American businesses are very productive. We make very efficient use of capital. 2) Ownership is very secure in America. Businesses don't get expropriated like they do in other countries. 3) The dollar is widely accepted. Because of #1 and #2, Russians will accept dollars from Gambians. 4) The dollar has been fairly stable of late. We haven't been printing up new dollars since Reagan's presidency. That makes the dollar a reasonable currency to hold.

If people are willing to buy businesses in the USA, then just like a supermarket, we can have a trade deficit with the rest of the world forever. We need to stay productive, but it's not the bad thing that some pundits posit. We can keep creating new businesses to sell to foreigners until the cows come home.

Sigh. Some non-economist writer was given the task to write about inflation and botched it. Or, to be fair, some idiot editor got hold of the article and wouldn't let go of it until he had thoroughly screwed it up. "Wholesale prices up 0.7 percent in April, showing inflation on the rise". It's not just the headline that they botched, either, because the first paragraph ends in "... providing fresh evidence that inflation is awakening after a long slumber."

Inflation is not a general rise in prices. Inflation will cause prices to rise, but other things can also cause prices to rise. For example, everything gets transported somewhere, so if the price of transportation rises, prices will generally rise. Inflation is, instead, caused by an inflated supply of money. If you read farther on in the article, you'll see that the real inflation rate is only 0.2%, in line with analysts' expectations.

According to NPR, one of the forces driving up gasoline prices are speculators in the oil futures market. From the way they said it, it sounded to me like they thought that speculation was a bad thing. It's not. Speculation is a good thing.

Prices do more than simply determine how much you pay for something. They also carry information. When something gets more expensive in a free market, that indicates that the demand for it has risen without a corresponding rise in the supply. This has two effects. First, it rewards the people who were careful to own the thing which is now in demand. Second, it causes people to husband their supply of that thing.

Everyone expects us to run out of oil. My entire lifetime people have been anticipating the day when we'll finally "run out of oil." That day has not yet come and never will. We'll never run out--we'll just run out of oil that anybody is willing to pay for. So, the price of oil will rise in the future because of increased demand and lessened supply. The trouble is "when".

The function of a speculator is to tell is when oil will get more expensive. If they think oil will be more expensive in the future, they'll buy an option to purchase oil in the future at a fixed price. If everyone chooses wisely, the price of the options plus the fixed price of the oil will be the future market price of the oil. The more people who want these options, the higher the price for them will be. So, when people think oil will be more scarce, more valuable, and command a higher price, they'll bid up the options.

A speculator brings the future into the present. Sometimes the future is unpleasant (higher prices for oil). This leads some people to call for laws limiting speculation. This is merely shooting the messenger. If the speculators are right, oil will be more expensive, and the sooner we start acting that way, the better. Speculators who have bought oil (or an option to buy oil) now when it's relatively cheap will make a profit by conserving it until it's more valuable later. If speculators are wrong, they'll lose money. Speculators who are consistently wrong will go broke. That's one of the pleasant effects of a free market -- people who screw up lose their chance to screw up in the future.

Now, imagine instead if the price of oil was controlled by a government. Governments are typically short-sighted, where "short" is defined as the period between now and the next time they have to get elected (term limits help ensure the short-sightedness of a legislator--no need to think beyond the limit on your term). If the government sets the price lower than a free market including speculation, then people would consume oil at a higher rate. That would lead to shortages, and radically higher prices. If the government set the price higher, then people would consume oil too slowly, and miss out on some of the value of present consumption.

Outlawing speculation is like trying to outlaw the future.

If you're reading this blog, then you find economics interesting (I can't imagine why you would read it otherwise). I hope, then, that you will take this next lesson to heart. Do not mix moral judgement with technical description. Many times you will hear people talk about the greedy rich and the envious poor. These terms should be a marker that says "The following has nothing to do with economics and everything to do with morality."

People are people, and it's very hard not to have feelings about facts. There is definitely a place for acting on these feelings. However, if you are trying to pin down these facts, to find out what the truth is, you cannot let your feelings get in the way. To pick on the issue of the minimum wage, you might think someone heartless if they tolerate wages too low to buy basic necessities. If you stop there, if you act on those feelings, you will not come to the truth of the matter.

It is very tempting to call the rich greedy and the poor envious (although obviously the same person is unlikely to do both at the same time). It is very easy to conclude that, because someone continues to create value beyond their basic needs, that they are greedy. It is also wrong. It is very easy to conclude that, because someone wants someone else to pay for their basic needs, that they are envious. As judgements of rich people and poor people, without reference to the facts of the specific individuals, they are likely wrong. As economic pronouncements, they are certainly wrong, because economics does not make judgements of those forms, and when economists do that, they have taken off their economist hat, and should expect no special protection from criticism.

Ken Mortenson comments.

It should be clear that Health Care is an economic good. That is, it is a scarce good, in short supply. I noticed something interesting about Health Care today. I heard a story about the women's march on Washington on NPR. Some women were reported to be asking for "Better Health Care". Google says that that phrase appears about 65,900 times on the web. The very existance of that phrase points to an effort to turn Health Care from an economic good into a political good. That is, one which cannot be purchased, but which is available (at some level of quality and supply) to everyone.

Ponder this: have you ever heard of a Campaign for Better Hot Dogs? Or the Better Blue Jeans Taskforce? No, of course not, because those are economic goods are supplied via markets. There are many different amounts, kinds, and prices of these goods available to purchasers. Some of these are markedly poor quality, yet they are purchased anyway.

There are a set of people who do not understand economics. I will call them "Good Hearts", because they are generally good-hearted people who mean well. Good Hearts do not understand that everyone has a fixed amount of resources at any point in their life. Everyone has to make decisions about how to allocate those resources. Everyone has choices, and an opinion about those choices. There is in essence no way for anyone to make someone else's choices for them, because you would have to know the person's opinions as well as the choices. I mean, everyone can tell a funny story about an inappropriate gift that they received, right?

Some people, who are usually called poor people, have to choose from mostly unattractive choices. This really bothers the Good Hearts. Unfortunately, rather than try to make more choices available to poor people, they seek to eliminate all of the unattractive choices. This is done on the assumption that if poor people have no unattractive choices left to them, all their choices will be attractive ones.

This assumption is wrong.

Instead of having only attractive choices, poor people are left with fewer choices, or even no choices. This has the unfortunate problem of interfering with their ability to maximize the utility of their total set of choices. In other words, life sucks, then you die. For example, the Good Hearts don't like it when poor people have to live in poor quality housing. So, to make sure that poor people don't have to live in (say) a house with only one or two outlets per rooom, building codes specify that outlets must be every six feet, or eight feet, or ten feet of linear wall. What this does, though, is not to ensure that poor people have high quality homes, but instead to ensure that poor people have no homes at all.

There are many instances of regulations like this, which force a minimum level of quality upon people. There are no circumstances under which this makes people's lives better. All of these regulations should be repealed. Not for the sake of the rich, or the sake of the middle class, but for the sake of the poor, so they have more choices in how to allocate their very limited resources.

There is much to disagree with in David Morse's May Friends Journal article on globalization. Let me say only three things. First, that the condition of mankind for hundreds of thousands of years has been poverty, starvation, an early death, and pestilence. Three hundred years ago, capitalism was invented. Some cultures have adopted capitalism, and they have largely escaped those ill effects. One of these is America, where you can own a house with electricity and indoor plumbing, own a car, and two color televisions, and STILL live on public charity because you are poor. Other cultures have adopted capitalism only in part, and they still suffer some. Other cultures know nothing about capitalism either by ignorance or by choice, and they still suffer. I absolutely cannot decry capitalism, and would certainly not seek to deny its benefits to the entire world, as David seems to want. "Ye shall know them by their fruits." It's a quote from a book about some guy. Yes, I mean to call David a false profit.

Second, David makes the case for America being wealthy on the backs of the entire world, and he thinks that's horrible. And yet as I write this, the hottest topic of conversation is offshoring -- a transfer of wealth from America to third world countries through the export of jobs -- and everybody thinks that's horrible. I, myself, accept neither problem definition, and so David's proposed solutions are completely beside the point.

Third, David arrives at several conclusions about economics which if presented to economists would provoke howling laughter. For example, he claims that the WTO is run by capitalists for the benefit of capitalists (which fails to explain the WTO's ruling against the Bush steel tariffs). If he were to propose similar conclusions about physics, say, that all objects fell at different speeds, or cosmology, say, that the earth is flat, or that the sun rotates around the earth, surely everyone would laugh at him. Why can he say these kinds of things about economics and still be taken seriously?

How can an earnest, sincere, and honest Friend like David make these kinds of errors? It seems to me that he is operating on faith not science. Yes, of course, faith is a central element of any religion. However, there are two kinds of faith: faith that something which is unprovable, right or wrong, is right; and faith that something which is provably wrong, is right. We cannot prove whether God exists or does not exist using the scientific method. It is only right to rely on faith in this matter. In other matters of which science can speak, evidence must override faith. The earth is not flat, objects fall at the same speed, the WTO is not in the pocket of capitalists, and capitalism is a good thing for all free people.

Inflation is not widely understood. A Friend explained it thusly: "Inflation is when people demand raises, get paid too much, and compete for goods and services, driving the price up, which causes people to demand raises." The cause in that scenario is the demand for higher pay, and the solution is to impose wage and price controls, ala Nixon (God help us when politicians think they understand economics, .... or economists politics!)

That explanation is complete doo-doo. The way to understand money is to think of it as a good unto itself. The fiat currency (the dollar is not backed by anything other than people's willingness to accept it) we use now has no other use than as money. You shouldn't dwell on the arbitrariness of the value of money, though. You should think of it as if it were gold, or silver, or cigarettes, or something else with an intrinsic use. Money evolved from the use of a good of some sort.

If money is a good, then money will have a value which is only partly related to its exchange value. Gold is made into jewelry, silver is made into photographic film, cigarettes get smoked. But the exchange value is itself also something desirable to have. If you have a painting which is worth $200 (to the right buyer), that's not the same as actually having $200. Money, both in its intrinsic value and its exchange value, is a good that has value beyond what you can exchange it for. As a good, it has a value, a supply, and a demand, like any other good.

Yes, the value of money changes. A dollar is not always worth a dollar. In uncertain times, people value exchangability. If you don't know that you can sell your $200 painting for $200, you might just sell it now for $190 and hold onto the $190. That $190 is worth more to you because you have it now, than the $200 might be worth to you later. The demand for money has risen.

Money also has a supply. Only the US Mint can legally issue US dollars. There are also counterfeiters, of course, but the only difference between a counterfeiter and the Mint on the supply of money is who gets to spend the dollar first. And the fact that the Mint exercises some restraint on printing excess dollars. The same goes for private currencies, such as the Ithaca Hour.

In order for money to have a stable value, the supply and the demand should be matched. The Mint prints dollars, but the Federal Reserve controls the supply of money through the interest rate at which it loans money to banks. It has no control over the demand for dollars. It will be reasonably stable and predictable in a peaceful free-market society. If the Fed did nothing or didn't exist, prices and wages would slowly drop as the economy grew. Because of productivity gains caused by capital investment, prices would drop faster than wages and everybody would be richer. However, nobody but nobody wants to see their wages go down, even if prices are going down faster. Therefore, we have the Federal Reserve.

To avoid the unattractiveness of falling wages the Fed is always increasing the amount of dollars. If they increase them too quickly, the supply of money exceeds the demand, and the value of dollars drops. The thing is, though, that when you inflate the currency, you get to spend the money first. That's the attractiveness of counterfeiting. It also explains why inflation is so common and deflation so rare. To deflate the currency, you need to buy dollars with hard goods, and then destroy them. It makes almost zero sense. Governments use inflation as a source of income.

Why dollar inflation is not likely any time soon

People who loan money are concerned about inflation. If they loan $1K, and the government prints up a matching $1K, they'll effectively get paid back only $500. That's why interest rates rise in the face of inflation. Lenders want to be paid back the same value that they loaned even if it has a different number on it. Lenders do whatever it takes to avoid inflation.

The Federal Government raises funds by taxing, selling bonds, and inflating the currency. To a very large extent, foreigners are buying the bonds. That's because they have a lot of dollars because they sold things to us in exchange for dollars. They are holding dollars because they expect that dollars will be worth more in the future. If the Federal Government tries to raise funds by inflation, these dollar-holders will sell off their bonds and buy something else that they expect will hold its value. If they try to convert those dollars into their own currency, the demand for their currency will rise and dollars fall. This is precisely where you see the value of the dollar changing: in the foreign exchange markets.

The trouble with a falling value of dollars is that it makes foreign goods more expensive. Because we buy so much products from abroad, expensive, not cheap dollars, are important. The Federal Government wants to continue this flow of cheap goods into the US, so it will refrain from activities which cause the dollar to fall in value.

Continued from a previous posting on The Price of Gasoline.

Went to David Isenberg's WTF!?! retreat last weekend. The retreat was held at Edith Macy conference center, owned by the Girl Scouts. It showed, too. Isabel Walcott pointed out, with far too much glee, that the women's room had 7 stalls while the men's room had only 2 stalls. Since WTF was male-heavy we got a taste of the common problem women face in buildings designed by idiotsmen.

Heard from many interesting people. One of them was Kenneth S. Defeyes, geologist and author of Hubbard's Peak. He is fervently pointing out to everyone who will listen that we're really, really not discovering any more oil this time. He's using the same method which predicted the peak of oil production in the USA, a prediction which history has supported. He's even going so far as to put forth the specific date of November 29, 2005, plus or minus a few weeks.

So, are we going to run out of oil? The answer is that no, we're never going to run out of oil. Oil is used for many things: it's cracked into various densities, and each one has its own use. As long as there are uses for any one of those densities, oil will sell for the price of the substitute for that use. If there is no substitute at all, then the oil will sell at the price of doing without it. If the price of extracting oil exceeds the price it can be sold at, then the oil will be left in the ground, hence the statement that we are never going to run out of oil.

Kenneth is saying that we have a problem, because the demand (which has always increased and may be expected to increase in the future) and the supply (which has always increased) are soon to be headed in opposite directions. What he wants is for people to realize that oil is going to becomes several times more expensive (he estimates $7/gallon), and unless people start doing something about it now, people are going to suffer.

I told him, in the Q/A session after his talk, that I couldn't dispute his geology, not being a geologist, and that while I agree that there are a bunch of quack economists out there, I had to disagree with his economics. (BTW, Isen gave me grief for not being angry enough, particularly given the way I savaged Eli Noam, who also spoke at WTF. If you want to change people's minds, you can't get them into their lizard mind.)

The way that the world changes is that people go along, doing stuff. The level of stuff-doing may go up and down a little, or there may be a trend towards expansion or contraction. If there is some predicted problem with stuff-doing, people do not immediately change, no matter how reliable the prediction. That is simply because the future is uncertain, and people are inherently conservative. This conservativism comes from the first year of life, where babies learn object conservation, and learn that when they put one foot out, the floor is there when they put their foot back down. The world doesn't change that quickly, and neither do people. It takes a crisis for people to change. Kenneth is being a poor economist but a good geologist when he says "Hey! If you don't prepare for a lack of oil, you're going to suffer!" I had to tell him "There's going to be a crisis no matter what you say." After I returned to my seat, Sara Wedeman said "you're right!" She's a behavioral psychologist with an MBA.

The price of gasoline will rise long before we actually "run out of oil." What is happening, and what should be happening is that the shortage will be brought from the future into the present by people creating stockpiles of oil against its future scarcity. Some will no doubt be accused of hoarding. But what's the difference between a hoarder and a salesman? Simply that the hoarder refuses to sell at the current price whereas the salesman is willing.

The technical term for this is speculation. You see it on the commodity exchanges all the time. People buy a commodity because they think it will be worth more later, or sell a commodity they have now because they think it will be cheaper later. It's even possible to sell things which don't exist yet--that's called a "future". Someone agrees to provide a commodity for a given price on a certain date, and they'll sell that future to someone else. They no longer care how much the future is worth, because they know how much they're getting paid. That lack of uncertainty is worth a lot to them, so they sell the future at a discount relative to the price an omniscient being would sell it for.

The trouble with speculation is that people see it as an offense against society. The speculator is holding onto something that is desperately needed by people, "just cuz". The "just cuz" shows a profound ignorance of economics. The speculator is actually helping society by preserving something from being used prematurely. For example, a speculator might purchase land from a logging operation because they anticipate that in twenty years the land will be in demand for recreational uses. In the meantime they keep people out because people will harm the growing trees. Once the trees have regrown, and the land is worth more, the speculator will want to sell it for a much higher price. This will cover any effort they put into improving the land, the taxes they spent to hold the land, and the foregone value of the money spent to purchase the land. However, from a non-economist's point of view, the speculator didn't "do anything" worth paying for.

An ethicist on 4/4's Sunday All Things Considered make a similar mistake. I would never presume to judge an ethicist's ethics, but I feel competent to comment on his economics. He said, in relation to the ticket prices "you haven't contributed anything to the production of the value of the ticket." That's wrong. First, he paid for the ticket in the past and plans to sell it in the future. In the meantime he's giving up the value of anything else he could have bought with the same money. Second, the ticket is worth more later, as more tickets are sold to people who value them higher.

Long before gasoline actually becomes scarce, it will become expensive. The price of gasoline has risen lately, but it's still cheaper in real (inflation-adjusted) dollars, than it was twenty years ago. You'll still be able to drive to the store when gas costs $3/gallon, you'll just think about it before you go. As a recent political cartoon put it, gasoline is cheaper at $2/gallon than most other fluids that people buy.

Interested in interest? Good! It seems that every major religion is interested in interest as well. They call interest usury, and condemn it. Some religions only condemn excessive interest; some continue to condemn any interest at all. The trouble with doing this is that a desire to be compensated for a loan seems to be a part of human nature.

Economists assume that if all other things are equal, people value an economic good (that is, a scarce product or service) now rather than later. If you want to use something that someone else owns, they will want something from you. In the case of neighbors, this will most likely simply be goodwill, or an expectation of a similar lending in the reverse direction. In market transactions, this is called originary interest.

Interest and rent are the same thing. I'll only talk about interest here, but all the aspects pertain to rent as well.

When you pay "Interest", you're paying for more than just originary interest. Interest also covers other costs. It covers the risk that the good willl not be returned. It covers any damage to the good, or, if money, it covers the possibility that the value of money will change over the course of the transaction. There are some types of loans where those risks are so small as to be inconsequential. Originary interest remains.

What about zero-interest loans, such as have been made in Japan in recent years? These loans still have originary interest. Their currency was deflating at the time, so the lenders were willing to be paid back less money plus originary interest, which added up to the same amount they were loaning.

What about a zero-interest loan such as one Muslim might make to another when selling a house? The loan still has originary interest, but it's being forsaken by the first Muslim, just as it was forsaken by the person who sold it to him. The person who built the house originally got screwed. They had to save their money while simultaneously paying interest in the form of rent (no, it doesn't make any sense).

Von Mises, in Human Action, pointed out that people take action to change the future. The past is fixed and cannot be changed. Any action must be in response to a dislike or unease with the anticipated future. This unease exists because a person is applying a value judgement to the anticipated future. What is expected to happen is bad, and what they want to have happen is good. Or, succinctly, people take actions for a reason.

Obviously, individual actions and reasons are always considered by the individual to be for the benefit of the individual. Nobody deliberately harms themselves. Even though the action and reason may be judged by other people to be good or bad for that individual, the individual himself always considers both the action and reason to be beneficial to himself. Altruism is seen by the individual as enhancing her reputation. There are no exceptions to this rule. Even insane people consider what they do to be good.

So, the only time someone is going to judge an action or reason as bad is when they're judging someone else's actions (or if they're judging their own past actions, but I don't want to talk about that here).

You may have noticed that I keep talking about both actions and reasons. That's because I want to consider them separately. It's interesting that some people refuse to consider them separately. Sometimes people criticize free markets because the participants do not have the goal of improving society even though that is exactly what happens. Some people praise actions which are bad for society, such as fair trade, or minimum wage laws, because those actions are taken for a good reason.

These people are poor economists. Even worse, they take that as a compliment. I believe that this is mostly because they do not understand what constitutes good economics. A good economist will not allow the reason for doing something to override the effects of the action itself. I'm not alone in saying this: "Ye shall know them by their fruits" and "The road to hell is paved with good intentions."

Not all economists are worthy of the name. Imagine if anybody in the following set of people called themselves physicists: perpetual motion kooks, flat earthers, Velikovskians, and finally, the intellectual sons and daughters of Newton, Einstein, etc. Unfortunately, there's a lot of pseudo-scientists in the field of economics, and some of them graduated from Harvard, Princeton, and Yale, so a storied college degree is no help.

Criticize economics if you must, but at least take the time to understand that which you criticize!

A primary goal of any two nations at war is to stop the other's international trade. This is without dispute, as there are innumerable instances of naval blockades, or trade sanctions, or sieges. During WWII, Japan did not attack the USA out of the blue; we were blockading them. We currently maintain trade sanctions against various countries that we consider our enemies: at least Cuba, Libya, and (formerly) Iraq.

What does this say about people who want to limit, control, or reduce America's trade with other countries? Without meaning to, they would cause us to treat all countries as our enemies. Even though some of these people are our citizens. Even though some of these people work in our government. Even though some of them have been elected as our representatives. Even though some of them ... are us.

Since I'm too lazy to change my blogging software so it supports a blogroll, consider visiting this Marginal Revolution posting.

Everybody has surely noticed that the price of gasoline has risen by about ten cents in the USA. As one commentator put it, "Still sounds like a rip off to me djf". Hopefully I can explain why the free market is acting the way it does.

When prices are stable, you see certain aspects of the station's pricing policy. Martin's Citgo here in Potsdam will take personal credit. Their prices are accordingly much higher, by about twelve cents per gallon. The Stewart's is usually two cents cheaper than the Mobil across the street. They don't let you pay at the pump. They hope that when you come in to the store, you'll purchase enough to make up for the lower cost of the gasoline.

The first effect you see is a rippling of price increases throughout the community. Different gas stations will adjust to the increase at different times. Nobody wants to gratuitiously raise their prices, because that will send their customers elsewhere. Gasoline is a commodity, and retail sales of gasoline are very competitive. Everyone who raises the price of gasoline has a good reason for doing so.

When a gas station buys a tanker of gas, they pay the same price for every gallon of it. Once they've bought it, the cost is immaterial. That price is history. The price they want to charge for that gasoline is the cost of the next tanker of gasoline. That's why prices in a community will rise quickly, even before the next tanker comes. If a gas station has sold most of their gas at the lower price, they'll have to dig deep to pay for the new tanker at the higher price.

Prices will rise on bad news. No gas station wants to sell cheap and buy dear. If they anticipate that the price that they pay will rise in the future, they'll raise their own prices. The worse the news, the higher the increase. The more uncertainty, the more likely any news will be interpreted as bad news. Even rumors will then cause the price to increase.

Prices fall more slowly. First, a company would prefer to make as much money as possible on every tanker they purchase. Second, the only thing forcing the prices down is their desire to sell more gas at a lower price thereby generating more profit. The fall in prices is a process of discovery: how much will you lower your prices by? Nobody wants to lower them too far too fast. That causes a price war, and lowered profits.

Price-setting is always a gamble, a risk, a guess. You have to buy in the past and sell in the future. Anything can happen in the meantime. Everyone who sets prices takes that into account, and adds a little to cover for it. The more uncertainty, the more they have to add. When there's a war in Iraq, when refineries are having trouble, when Venezuelans are up in arms over their national banking policy, when pipelines burst, they add more. Sometimes a lot more.

I haven't said a word yet about demand. The demand for gasoline always rises in August. For whatever reason people take their road trips during August. Probably trying to get in a vacation before school starts, or trying to take advantage of what is usually the warmest weather of the summer. Demand is going to push the price up as well.

Transportation also plays a part in the price of gasoline. Gas is heavy and needs to be transported. If there's a pipeline, that can keep the cost down substantially. The teamsters used to charge $3 to haul a barrel of oil from Pithole, PA to the railhead a century and a half ago. A pipeline could carry it for $1 per barrel. The teamsters didn't like that and sabotaged the pipeline. The pipeline owners hired armed guards to protect it. If a pipeline serving your area breaks, that's going to substantially drive up the cost of gasoline.

Do you think the price of gasoline is too high? You can do your part to lower it by refusing to buy it at those prices. You can (in essence) pay companies to lower their prices by buying gas from companies that lower their prices first. Frequent a website such as Gas Buddy, which keeps real-time local gas prices.

Continued in The Price of Gasoline 2

The Gross Domestic Product (and its friend the Gross National Product), is often criticized because it does not measure the wealth produced by non-market transactions. For example, if we do favors for each other, that does not contribute to the GDP, but if we pay each other, it does. Or take stay-at-home mothers who keep house and home together, or who do volunteer work outside the home. What they do is much like paid work, but because it involves no pay, it's not part of the GDP.

People use these examples to criticize economists for using a poor representation of the wealth of a society.

Problem!

Economists aren't using the GDP to represent the wealth of a society!

Only non-economists think the GDP represents the wealth of a society. They're constantly misled by news reporters who report changes in the GDP as if that number means anything to a working stiff. It doesn't. It measures trade, not value. Its only use is in comparing the size of one country's trading against the size of another country's trading.

I'd really, really like to see non-economists completely forget about the GDP. Or, if they simply cannot forget it, at least stop paying any attention to it. It's only meaningful to economists. Everyone else should ignore it.

Ng asks "I'm a little disturbed by this: If people give the fruits of their labour away and inform others that they value the time and effort involved very lowly, are they not undermining their economic future somehow?"

It's advertising, but only in roughly so. Most advertising is not functional. It gets presented to people as a public bad, by way of overcoming the transaction costs involved in making a public good available. Everywhere you see advertising, it's associated with some other thing which you value, e.g. advertising and publicly presented information goods are very often associated.

That said, it's not at all advertising, because it is in itself the public good. Nor does it serve to advertise itself, because the user already has the item of value. It serves to advertise ancillary things, e.g. services offered by the distributor of the software, or the reputation of the author.

One of the difficulties of purchasing a service is that by the time you have it in your hands, you've already incurred an obligation to pay for it. Much more than products, services are valued based on their reputation. You may know that many insurance companies are based in Hartford, Connecticut. This is because during some disaster centuries ago, the only insurance company which was able to pay out in full was from Hartford. The name became associated in the public eye with sound fiscal sense.

That's why the price of identical services can vary wildly. Only after the service has been performed can you be sure that it's identical. One vendor might do the same work in less time, or poorer work in less time. Another vendor might take longer, be harder to schedule, and charge more, and still produce a service whose value to you exceeds what anyone else can do by a sufficient amount to make it worthwhile. For example, when we had our kitchen cabinets done by a local Amish craftsman, we had to get on his list a year in advance. When he came to measure the cabinets, he told us what cabinets we wanted where. The cabinets were at least a week late. On the other hand, the cabinets were made from solid oak. And when the 12' x 12' J-shaped counter came in, it fit right into the space allotted for it with no more than 1/8th inch error.

Another way an author of free software can monetize the public benefit he has created is by enhancing his reputation. This reputation will make him more valuable to employers. Every book on getting a job tells you to polish your resume. Tell me: if you were hiring a programmer, you would hire one with a polished resume or one with polished software? It's very risky to hire someone, because you might find yourself having to fire him early in the relationship. A portfolio of popular open source software reduces the risk of hiring a programmer. From the programmer's perspective, it means that he can take a greater share of the value produced by his corporate efforts. A programmer of lesser reputation would have a portion of his effort spent to cover the risk that his work may not be up to snuff.

So why is most software proprietary, you might ask? I believe that it is because of an intellectual error made back in the late 70's. Proprietary software is a monopoly, and invariably commands monopoly prices. Monopoly prices are bad for society, and are only tolerated because no alternative is thought to exist. Somehow, during the time I was in college, some number of people became convinced that software was a scarce resource, and would only be produced by being subsidized by granting government monopolies (copyrights first, and later patents).

It's becoming obvious to more and more people that software is not scarce. The scarce good is people's time, and that is what commands the big bucks. Of course, people's time needs no monopoly (aka intellectual property protection) since people are free to withhold their efforts until they are paid.

The days of software as a product are numbered. Software has become more of a service than a product and will in time switch to being fully a service. At that point, all software will be open source software.

Stephen Turnbull writes, in part, on the Free Software Business mailing list, "If you have a job because somebody else is prohibited from offering the product at a lower cost, you're not on salary, you're on welfare."

Further, I would say that if your job depends on subsidies or tariffs, you're not working for a living, you're begging for one.

Eli Noam embarrasses himself with an egregiously wrong-headed analysis of Market failure in the media sector. One thing that you must, must know, is that any economist who talks about "market failure" needs to put his feet on his shoulders and push. Markets do not fail any more than gravity fails. What would you think of a physicist who talked about "gravity failure"? Probably not much. You should think as little of an economist who talks about market failure.

Now, you can certainly claim that a broken egg is due to gravity failure. That's not science, however. That's a misdirection; applying fault to something which is clearly not culpable. In terms of fault, the person who dropped the egg is much more likely to be guilty. Furthermore, it's assigned a negative quality, when in fact the egg may be broken because it was dropped into a mixing bowl.

The real kicker, however, can be seen by reading farther down in Noam's article. You can see that his prescription for "market failure" is government interference. That points to the cause of his claims that markets have failed. Once markets have failed, no sensible person could possibly object to government picking up the pieces, could they? Well, I think I'm sensible, and I object!

Now, I would be the last person to claim that markets always produce good results. Some problems are hard for markets to solve simply because they are hard problems. Pointing to a problem which is hard for markets to solve doesn't automatically mean that solution-by-government will be better. It may turn out to be that government interference will produce a better result (pareto optimal) than peaceful cooperation. I allow that as a possibility at the same time that I doubt it will ever happen, once all costs are accounted for.

I'm very skeptical of the idea that taxation can solve free rider problems and transaction cost problems and create positive externalities. Controlling taxation has free rider and transaction cost problems and creates negative externalities. In essence, rule by majority turns into rule by special interest minorities, and since everyone is a special interest, everyone ends up trying to lord it over everyone else. Sure, you can saddle up the horse and it's a lot faster than walking, but by the same token it doesn't pay much attention to how you yank on the reins.

I wouldn't be the first person to propose this theory. The Anti-Federalists wrote it all down over two hundred years ago. They predicted what we have now. It's hard to argue against a theory that produced a correct prediction.

Here's the analogy I make: Three hundred and fifty years ago, everybody thought that a country had to have a single religion. Politics and religion were thought to be inseparable. These days, politics and economics are thought to be inseparable. The idea of politicians not interfering in the economy is unthinkable. Most people seem unable to think of such a thing. And yet ... I believe that some day in the future, people will consider it a basic human right to have freedom of trade, just as we do for freedom of speech, press, assembly, and yes, religion.

A reader relates the following story. I don't argue from anecdotal evidence because you can always find an opposing anecdote. Still, it's always nice to hear that the theory can work in practice, because if the theory never works, the theory is definitely wrong.

TM Lutas comments again, saying that I just don't get it:

He's conflating two different topics. If you're trying to explain and elucidate, as opposed to convince, you shouldn't do this. Topic #1 is "What do you do when a foreign trader is willing to sell you things for a price substantially below their value to you?" Topic #2 is "What do you do when a foreign trader sells and sells and never buys from you?" I'll address them separately, as they deserve to be treated.

Selling below value

In a certain sense, everyone does this. In a free market, nobody sells something for less than they think it's worth. How does trade, then, occur? Simple: because people value things differently. Anybody who sells something for money values the money more than the thing. Anybody who buys something for money values the thing more than the money.

When can this be a problem? In a free market, it can't. The trouble is when governments interfere with markets, by, for example, fixing exchange rates, by fixing interest rates too low, by allowing slave labor, or by capping wages. In each of these, the government is destroying information about who wants what, and how badly. Another term for that is censorship. (As a side note, I wonder why leftists decry government censorship but allow government interference in markets?)

The trouble with this censorship is that it can lead country A's customers to buy products from country B even though country A can "really" produce the products more cheaply. Some might argue that it's inherently unfair for one country's citizens to be set against another country's citizens. They're right, it is inherently unfair, but the unfairness is created by country B's government against its citizens. They're producing something which is "really" cheaper for country A to produce. Country B's citizens should be left free to produce some other product which they can "really" produce more cheaply.

I put "really" in quotes above because you can't really separate out the actions of a government from the economy of the country. Any government is going to use its power to extract income from the citizens of the country. This inherently distorts the economy. A good government will make sure that it only does things which are good for its citizens in both the long and short terms. I must point out here that a country which elects new caretakers every few years is going to have a hard time maximizing its long-term welfare. In part, the incumbent factor, and bureaucrazy and "Washington insiders" that so many people decry function to mitigate this factor.

From outside a country, it's hard to tell on a market basis if coal is cheap in the country because they have so much of it, or because it's being mined by slave labor. In other words, a free marketplace is going to treat the product as it appears in the marketplace. If a government acts against the interests of its citizens by causing them to produce less than they might, then that is the government that those citizens deserve. This is one of the impacts of economic ignorance that I'm trying to communicate to you, gentle reader

Regardless of the cause of the low price from country B, the producers in country A are going to be priced out of the market. Regardless of the cause, the producers in country A are going to go out of business. While one might regret that the citizens of country B are harmed, and in being harmed, are creating an externality that harms country A, the exact cause is really besides the point. Conditions are such that country B can produce the product cheaper than country A.

TM Lutas's implication that "country A ought to do something" about country B is wrong. All that country A can do is say "thanks for the products" and move on.

Selling and never buying

International trade seems hard to understand, at least judging from the number of people that are confused about it. Bring it back down to the level of the household, and it's much easier to understand. What happens when you buy something? You have to pay money for it. When you sell something? You get money for it. International trade works the same way. When someone in the US buys something from another country, they pay dollars. When someone in the US sells something to another country, they get dollars.

The key complicating factor here is that, in another country, dollars are nothing more than collectible monochrome presidential portraits (and of US presidents, to boot). Dollars are a very widely accepted currency all over the world, but you have to want to buy something. Some countries sell a lot to the US, in particular Japan and China. These two countries have not been buying products from the USA (or products from other countries who have already bought from the USA and who now need more dollars). Instead, they have been accumulating dollars and buying Treasury Notes.

The point to which TM Lutas was referring is that you have a small number of entities which control those Treasury Notes. They can choose to destroy some of their accumulated wealth by selling those Treasury Notes in large quantities. This has a negative effect on them, but also a negative effect on the USA as well. The USA government is getting its spending money (on the margin) by selling Treasury Notes. If the price it gets for them drops, it has to sell more to get the same amount of money.

In essence, these external borrowers have a doomsday device located in the USA. They can harm our economy by dumping large numbers of Treasury Notes. They can use this leverage to extract political favors. Here's the problem with that threat: it's a paper tiger. They can sell Treasury Notes, but they have to sell them for dollars. The very same reason why they do not sit on dollars would force them to buy something else with the proceeds of the sale of those Treasury Notes. Yes, they could cause some short-term harm, but they are subject to their own internal pressure to do something useful with those dollars. The harm they cause by dumping Treasury Notes will be made up by the benefit caused by whatever else they do with those dollars. There is nothing they can do to eliminate that pressure except to destroy the dollars. That would hurt them more than it would hurt us. We can be confident that they won't do that.

TM Lutas is worrying about a mirage of quicksand.

Surely you've noticed that nobody has servants anymore. It used to be that members of the middle-class had household servants. A maid to clean, and a cook to, well, cook. Why has that job nearly died out? Well, for one, people don't want those kinds of jobs anymore. They can get other jobs that pay more (there's an economics lesson there that I'll leave for another day).

For another, we have technology which eliminates those jobs. Household robots. These robots started off pretty stupid, e.g. a robot which would stir a bowl forever at whatever rate the cook set it at. Or a robot which would peel and core an apple just by turning its crank.

What can we learn from the existance of these robots? Mostly, you're seeing the effects of capital formation. Back when everything had to be done by banging two rocks together (e.g. laundry, food processing, knife creation), you had to spend a lot of time banging those rocks. Some people found that specialized rocks did a better job. To find or create these rocks, they had to take time out of doing their job. They needed to be able to give up current consumption to create a greater efficiency. That's capital. Tools are capital.

Of course, if it's not your effort, you don't care quite so much about making it efficient. Not, that is, until the end of the month, when you have to pay for the effort. At that point you have to consider: do I continue this consumption, or do I do without for a while, save my money, and buy a machine to do this job?

Some economic illiterates will, at this point, say "But you're talking about putting that person out of a job!" No, I'm not. I'm talking about putting them out of *that* job, not every job which they might possibly perform. There are some jobs which are so tedious that nobody wants to do them, e.g. scrubbing a floor, or handling garbage. We now have floor scrubbing and vacuuming machines available at a reasonable price. There is no machine for handling garbage that I've heard of. No doubt multiple inventors have created them, but human labor is still cheaper than the necessary capital.

Specifically, iRobot has created the Roomba vacuuming robot. The key to its success, besides its cuteness and its efficacy, is its price. They have brought the price of a robotic vacuum cleaner down to the point where a lot of people value $200 less than their time spent doing all the vacuumings that a roomba can do over its lifetime.

irobot's next product should be a mini-zamboni for clearing and cleaning pond ice. It can cost 15x what the Roomba costs. Call it a Zoomboni. There's an attachment for your John Deere lawn tractor for cleaning pond ice, but what lunatic parent wants to be out there in the cold running a lawn tractor around on the ice?? But to be able to buy a robot that does it while you're sitting inside the house? Now that's worth money.

Of course, it could fall through the ice. Yes, no question. But if it's gonna, then you were gonna, and why were you so foolish as to consider going out on that ice much less sending a valuable robot out on it? But yeah, somebody will do it, so a retrieval tether is a good idea. If you had two of them, the Zoomboni could tell where it was on the ice, which is also a necessary characteristic. Probably can't use Roomba's random walk and wall-following algorithms.

A Canton, NY auto dealership was cited for tailing to identify one of its vehicles as a "lemon". This is another example of the principle that rules don't lead to freedom. Instead, rules lead to more rules. The state of New York has a "Lemon Law", which says that if a new car goes in the shop four times (three times for a used car) to fix the same thing, the car is a lemon. You can return it and get your money back.

Let's think about this law as economists. Is it a good law or a bad law? One's instinct is, and should be, to not interfere in the workings of the marketplace. After all, if people wanted protection from buying a lemon, they would purchase lemon insurance, or buy from a dealership with anti-lemon policy. Why is this law at all conscionable?

In fact, the law might not be conscionable. Who gains and who suffers from it? Obviously, it imposes a risk on a dealership that a car will be judged a lemon, and they'll have to take it back. While that may seem on one hand to be entirely within the control of a dealership (fix it on the first three tries), it will lead to risk-avoidance behavior. A dealership will be more likely to do a more expensive repair than otherwise. Instead of attempting to fix something, they'll replace it outright.

Some might say "Well good enough!" to that. But remember that in a free market, eventually price == cost. Anything that increases the cost of an automobile will in time be reflected in the price of the automobile -- including risks placed on a dealership.

It imposes a cost on taxpayers -- even taxpayers who do not purchase cars. You can argue that, well, nearly everybody buys a car now and then, so it's okay to impose on the few that don't. Perhaps the few feel differently? But they're a minority and voting their desires is a guaranteed loss.

Who gains from this? That's harder to say. The person who gets their money back? In the end, they still don't have a useful car, which was what they wanted in the first place. They're still out the time it took them to deal with the malrepaired car.

People don't buy that many cars in their lifetime. There's not much opportunity in the way of repeat business, given how much people move around. And yet, dealerships can be seen to be concerned about their reputation. Someone who has gotten a lemon will surely be cautious about purchasing that brand of car from that dealership ever again. They will also undoubtedly be seen to be unhappy.

I think that, on the whole, it would be better to let the usual market process of business reputation work. A law has its compliance overhead, as the Canton dealership found to its loss. Not clear that that overhead is better than the overhead of letting the business's reputation speak for the quality of its cars.

Time Magazine reports that the Air Transport Association is suggesting that the airlines might have to be nationalized.

Without having read the report, I can state without fear that nationalizing anything is a bad idea. First, what are the costs that airlines face?

• Landing fees at airports. Before there's any talk of nationalizing, how about dropping landing fees? That wouldn't work very well, because landing fees pay for the operation of the airport, and the airport is typically municipally funded.
• Fuel costs. Well, fuel costs what fuel costs. If fuel is too expensive, and the cost gets carried through into higher ticket prices, and people aren't flying, well, maybe it's because people prefer not to fly.
• Transportation Security Administration. Oops. That's not paid-for by the airlines. It's a cost, but the airlines aren't paying it. You are, even if you don't fly.
• Amortization of airplanes. They had to pay for the airplanes in the first place. That cost, although paid up-front, is accounted for by reducing the value of the airplanes.
• Staff. Staff are pretty highly paid. Hard to use fewer of them, though. They're unionized, but unions are a paper tiger in the face of bankruptcy. "Wanna keep your jobs? Take less money."

Maybe the airlines can trim some costs, maybe not. If they go bankrupt, though, it's because people don't want to fly. They're not going to go bankrupt at the same rate. Some will go bankrupt before others, and stop operating. Other companies may be able to pick up their passengers, and avoid bankruptcy. Nationalizing the whole industry assumes that passengers want every flight to continue -- an assumption based on a price-preference of zero

Another effect that nationalization will have is to reduce the pressure for profitablility. Profitability is price - costs. An airline tries to keep its costs down, because its profits are based on the difference between price of a ticket, and the cost to fly the passenger.

Airlines can be interesting to run because every flight has a large fixed cost. The incremental cost of flying one passenger is very low -- lower now that fewer flights have food. This leads to all sorts of price discrimination as airlines try to over their fixed cost while still giving everyone a price they can afford and are willing to pay. Still, that problem goesn't go away with nationalization.

The problem with nationalization and profitability is that profitability goes out the window. Nobody expects a nationalized business to make money. You lose control over the costs. If every airline has been nationalized, then you lose competition. Without competition, you have no reasonable way to set the price of the tickets.

Nationalization is a major lose, and while airlines and their stockholders would benefit, the flying passengers would lose, and taxpayers would lose more.

As someone who has spent his entire adult life building software for others, I am insulted whenever Free Software Stallmanites accuse me of theft or other crimes because of my expecting to be paid for the good that I have brought society.

Nobody is disputing the good you have done. Creating new ideas is laudable. Patenting them may not be. It is inarguable that your patent has given you a monopoly. This gives you the ability to charge monopoly prices. Monopoly pricing is a-priori a cost on society. You charge more than you otherwise would be able to, and fewer implementations of your idea will be sold.

The idea behind the patent system is that the cost is acceptable because without paying that cost, the ideas would not be created. Without the ideas, there would be no benefit, and no cost either, for that matter. So the cost is thought to be acceptable.

Is this a true idea? It's disputable. For those people who say that it is a false idea, it inevitably falls out that society is paying for something without gaining anything in return. There is another word for that: theft. But it all hinges on the idea being false. If you don't think the idea is false, and by definition American society does not, because it has not seen fit to dismantle the patent system, then you can sleep easy.

Bob writes to say: Patents aren't "theft," they are payment for documentation and they are payment for release of the claimed methods into the public domain.

You assume that simultaneous invention and reinvention never happen. They do. If they are common rather than rare, then the patent system is theft from the public domain rather than a contribution towards it.

Eric writes to say "If the government is going to make a lot of decisions that involve transfer payments, they're going to necessarily make a number that aren't efficient. I don't think it really makes sense to label all those theft, unless you basically think all government is illegitimate. I doubt that most people think that."

Theft is an intentional act intended to transfer value from one party to another without the first party's consent. The fact that society itself is an unwitting accomplice to this theft makes it no less theft. It is still theft even if the victim doesn't realize that value has been taken from them. It is still theft even if the absence of the value is never discovered.

I want to close off this discussion of patents as theft with an observation: If A owns a patent, and B acts as if the patent belongs to him, if B publicly claims that the patent belongs to him, if B seeks to stop other people from using his patent, most people would consider that theft. If A is actually the public domain, then B is equally guilty of theft.

They say that it appears that SARS has a 4% fatality rate. Doesn't sound too bad, you say? That's only four people out of a hundred. Do the math, though. A billion Indians. That's four crore corpses. 250 million Americans. That's ten million dead people. Or to put it more personally, it's one dead family per block.

The 1917 influenza pandemic. The Black Death. Now SARS. While some good people may imagine that they wish for there to be fewer people on the world, none want it to happen this way. I suspect that, once this has passed, said people may change their mind. Besides all the obvious costs of a pandemic: medical treatment and lost work, you have the deaths.

Dead people cost society incredible amounts of wealth. Imagine each person creating a million dollars worth of value in their lifetime. Not hard to imagine. Now imagine that value gone. Let's say that SARS really does kill ten million Americans. Let's assume that it kills people evenly across the board. It won't, but assuming it does gets us closer to reality rather than farther. Now make Americans poorer by five trillion dollars.

Five trillion dollars. Doesn't sound like much? It's a half a years worth of production by the entire US economy. Wiped out. Gone. Imagine if you had to work for six months accepting no pay.

Are you all imagined-out yet? Now think about what Europe was like after the Black Death. It killed 33% of all people in Europe. Their economy didn't just suffer, it collapsed. Too many holes in the economy. Too many butchers, bakers, and candlestick makers gone the grave.

Now we get into total imagination fatigue. You know, of course, about the aboriginals of North America, commonly called Indians even though they had no clue how to play cricket. We killed some of them in the Indian wars. Those numbers pale in comparison to the ones we killed with our germs. The Indians had no natural resistance. By one estimate I've seen 95% of Indians were killed. Others say 90% or 80%. Everybody agrees that at least two-thirds of Indians were killed.

I am done with you. You cannot imagine anything worse. That's good, because SARS isn't going to be that bad. It's just going to be bad.

Wheels to Work is a program of St. Lawrence County. Under the yearlong program, the county will spend more than $300,000 in federal welfare-to-work funds to provide used cars for 50 to 70 residents who have at least one child and who meet income guidelines -- about $35,000 a year for a family of four. Participants will have to pay for routine maintenance and insurance and be free of drunken-driving convictions for 15 years.

Now, you might expect that a liberal economist would think that any government give-away or subsidy is a bad thing. It is, of course. The question, though, is which is worse: to keep someone on welfare, or to kick them off welfare and give them a car. The long-term answer clearly is the latter, if one must choose. A better long-term answer is to have not taxed away those dollars from private sources in the first place. A good economist must keep both short-term and long-term in mind, and this is a reasonable short-term solution to help wean people from the government tit. (Note: just in case you're wondering, I think corporations should also be weaned from the government tit, and they don't need to get cars to do it, either!)

Wheels to Work might be a bad thing is if it causes some people to change their activities to make themselves eligable for a car. If someone is earning $36,000 a year, and can reduce their income to $35,000 to qualify, they have just purchased a car for $1,000. Or else, if they don't qualify, they have just squandered $1,000.

This, by the way, is what economists call "rent-seeking". If government is giving away actual cash grants, then it's rational for everyone to spend nearly all the value of the grant in order to receive the grant. They have to factor in the chance of getting the grant, of course. Example: if there's a grant for $30,000, and an agency has a 50% chance of getting that money, it makes sense for them to spend up to $15,000 to get it. They won't actually go that high, because that would destroy all the expected value of the grant to them. So they'll stop at $14K, with an expected winning of $1K. $1K in free money is still free money.

The problem with rent-seeking is that people have a tendency to over-estimate their chances of winning (which is why Las Vegas is swimming in money). It's quite likely that government grants of cash are completely squandered by rent-seeking. It's even possible that, when the government gives away cash, they actually destroy all the cash plus some more in addition. How much more depends on how over-optimistic the grant-seekers are. Anything over a total of 100% of expectations results in lost money.

Yeah. It's that bad. Fortunately, governments aren't completely stupid, and so their grants are usually matching grants. In order to get $30K, you have to come up with $30K from other sources. Still, it's a bad deal, since the $30K is almost completely wasted in an effort to extract $30K from other sources.

Another way Wheels to Work might be a bad thing is if it becomes an addition to instead of a replacement of welfare.

Hezekiah Niles, writes, in Niles' Weekly Register (10/21/1826),

Niles was probably not the first person to express that economic fallacy, nor has he been the last. Keynes said we owe it to ourselves," by way of excusing public debt. Yes, you can be pedantic and say that yes, literally, had the canal been paid for with dollars that had "New York" written on them, only a few of them would have been initially spent or taken out of state. But that's not really Niles' point. His point is that it literally didn't cost anything, just like Keynes' point is that public debt doesn't cost anything because we're just paying the interest to ourselves.

This all is yet another flavor of Bastiat's broken window fallacy. In this fallacy, a vandal breaks a window, and creates employment for the glazier. And yet that doesn't make sense, because the world isn't made better, and more people aren't employed by destroying things. The key is what is seen and what is not seen. What is not seen -- and it's hard to see because it ends up not existing -- and not seeing is not believing -- is whatever the homeowner would have done with the money besides repairing windows.

Similarly, what Keynes and Niles miss is what would have been done with the money had it not been spent on a canal, or borrowed and spent by the government. Don't be fooled by "We owe it to ourselves."

I've been having a discussion with someone about the value of recycling. I said: William, the resource stream from a physical point of view is obviously not endless. From an economic point of view, the economic value of the resource stream *is* endless. Since you have to use economics to weigh recycled versus virgin materials, you can't rely on a physical analysis to come to an economic conclusion. It would be like trying to use algebra to solve a problem that needed calculus.

William responded:

William is confused, so I must be writing badly. I'll try responding at length.

Economic Subjectivism

Over a century ago, economists generally agreed that something was worth what it took to make it. That is, something had an intrinsic value. We now know that's not true. It completely fails to explain trade in a free market.

If you had intrinsic value in a free market, nobody would bother to trade anything. Whenever anybody traded two things, they would be just as likely to trade them back, because they're of equal value. In a market is free of coercion, nobody would bother to trade one thing for another unless it was of equal intrinsic value. The only way out of this failure is to claim that free markets don't exist, and that all trades occur because the traders have unequal power.

If you can coerce people by applying power to the trade, then you will have trade. The more powerful party will force the less powerful party to hand over something of greater intrinsic value. Clearly, there is trade, so if you assume intrinsic value, then you must deny the existance of free markets.

Remember, Marx devised his theories in the face of intrinsic value theory.

What economists know, and what many people seem not to know, is that value is not intrinsic to the item, but is instead an attribute that each person applies to the item. This insight, although seemingly simple and perhaps even obvious, explains many things previously thought paradoxical.

Everyone has likely had the experience of going grocery shopping before dinner. Everything on the shelves looks so good. Doing the same shopping after dinner will produce different results, and yet the groceries haven't changed. You have, so you place different values on the foods. If food had an intrinsic value, you would purchase the same food before or after dinner.

Free markets are easily explained by the fact that parties trade for things that they value more. If I'm buying milk at the store, the store values my money more than their milk, and I value their milk more than my money. That's why they bothered to keep their store open and pay cashiers, and that's why I bothered to drive to the store. Sometimes I've traded a dollar for a dollar, because I had a bill and wanted four quarters. I valued the one form of a dollar higher than the other form, and the other party was indifferent to the form but desires the intrinsic pleasure of being helpful.

Infinite Value

Infinite value is the proposition that a finite amount of something can have an infinite amount of value. People who are not economists, and are stuck in the 1870's objective value see this as being obviously false. How could a finite amount of something be valued infinitely high? The idea is, as William said in the opener, false, QED. Unfortunately for him, he hasn't proved anything, but is simply assuming his result.

Infinite value is an inevitable result of relative value. Let's say that you were using natural resources at a certain rate, and you were increasing the relative value of these resources faster than you used them. Specifically, let's say that you produced a certain amount of value out of consuming the first half of a resource. You were able to double the value of a specific unit of the resource, so that you could consume half of the remaining resource and produce the same value. Like Zeno's paradox, the resource continues to produce value forever.

In the real world, you reach the atomic level sooner or later, and effectively run out of the resource. Does this invalidate the idea of infinite value? No, because in time, the substitutes for a resource become cheaper than the resource, and people will switch to those substitutes. What this means, though, is that people can consume resources based on the price, rather than having to worry about running out. You can act as if resources were infinite even though they're physically finite. That's a surprising result, but if a science doesn't surprise you from time to time, why bother studying it?

Recycling

What lesson does this have for recycling? Simply put, it means that you don't have to worry about running out of resources. Recycle when it makes sense for you. If it's cheaper to recycle something, then recycle it. If it's not cheaper for you, don't recycle it.

"K J" has these comments about a recent issue of The Quaker Economist:

This is an anti-economic idea. First of all, there are no subjects of study which are "squalid". To say that is to expose ignorance of what economists actually do. Economists study spontaneous order. To suggest that we shouldn't study something is to suggest that economics should not exist, as a profession, as a science, as a way of thinking.

Second of all, the mere existance of external benefits is not, a priori (and since K J rejects the idea of studying the issue because doing so is "squalid", they don't want there even to BE an postori) reason to spend coerced money on the source of the positive exernalities.

At a minimum you should ask the question "Will the recipient of the benefit pay for it anyway?" before deciding whether taxation is necessary. If they will, then there is absolutely no need to take money from other people and spend it against their wishes. For taxation by definition is spending money against people's wishes. If they wished to spend the money, they would do so with no need to threaten to hurt them if they don't.

Taxation is violent. You would be surprised how many leftists oppose war in the name of justice but promote violence in the name of justice. Poor justice, to be used and abused so!

The following reprint from the Federal Reserve Bank of Dallas explains why job destruction is an essential part of job creation. Yes, it's a PDF, but download it and read it anyway. It's good, like everything I've seen come out of the Fed of Dallas. Good people there.

http://grift.com/churn.pdf

Economists, questioning why America's job creation in the recovery of the early 1990s fell short of expected levels, have reconsidered the ideas of Joseph Schumpeter, who offered the first scholarly explanation of the churn in the 1930s. Schumpeter advanced the paradox that economic progress destabilizes the world. Progress and job destruction go hand in hand in a dynamic process he called creative destruction. Today, as in the 1930s, Schumpeter's insights help explain how jobs emerge and disappear through the innovation and entrepreneurship of free enterprise.

....

"Sustainable" is a religious term. You can substitute "sacramental" wherever you see it. This is because it does not withstand the application of rationality. It requires, instead, a faith which is not borne out by past history.

"Sustainable" is a positive attribute. Sustainable is clearly better than unsustainable, isn't it? Who would want to engage in any unsustainable activity? There are, however, activities which are bad that should not be sustained. Take, for example, sustainable whale hunting, or sustainable pollution.

Sustainable is good only if the activity is good. The people who preach sustainability simply assume that the activity will be good forever, unchanged. This misses out on two possibilities, however. First, that the goals of the activity may be achieved through different methods (e.g. unsustainable fishing may be substituted for by fish farming, and leaving alone native fish populations), or the activity may be changed from being considered good to being considered bad.

There was a news report on NCPR about "sustainable agriculture" this morning. That prompted this entry even though I didn't hear it (had to walk the dogs). My assumption is that "agriculture" is considered to be a good thing, now, forever, and always. Yet just as we consider whale hunting to be bad, perhaps some day we will consider agriculture to be bad? Maybe we can grow the food we need hydroponically under grow lights, leaving the vast bulk of the land to go back to wilderness?

I contend that everyone who thinks "sustainable agriculture" is good would also think that returning farmland to wilderness is better.

Steven Den Beste asserts, by way of finding, some good -- any good -- in Marxism, the hoary chestnut that " it is the rise of labor unions in the 19th century, which led to a rising standard of living for blue collar workers." Steven is a very good, generous, and kind-hearted person, but in this case he gives undue credit. The unions are for the unions.

There is a problem with giving credit to unions. Von Mises, in Human Action, points out that all costs to a corporation have been allocated. Wages go to the workers, inputs go to the suppliers, dividends go to the capitalists, and profits go to the entrepreneurs. Yes, from a corporation's point of view, dividends and profits are costs.

Consider why a servant is so expensive. Personal help used to be so cheap that any middle class person had at least one servant in the house. The job has not changed and yet almost nobody can afford a servant anymore. Somehow, the wages that a servant can demand have risen far out of proportion to their increase in productivity. A clothes washer, or a dishwasher, or a vacuum cleaner might help a servant do their job better, but not so much better.

The reason is not because the servant's tasks have changed. The reason is that all the other jobs a servant might employ themselves at have changed. Capital makes workers more productive, and yet capitalists get the same 5% (on a relatively risk-free loan) that they've always gotten. The rest of the productivity gains have been allocated to workers.

This, not labor unions, is the reason why workers are so prosperous in free market economies. Free markets are wonderful for the common man. Capital earns only a small percentage of the gains of production, and competition drives out the entrepreneurial profits. The rest of the gains go to workers, and entrepreneurs are forced to continue to create new business opportunities.

Now, let's say that workers wanted higher wages than supported by the increase in productivity. There are only three sources for the money to pay those increased wages: the customers, the capitalists, and the entrepreneurs. In each case, the only way they could get more money is by persuading or coercing the entity to continue with the deal for less money.

Customers might pay more for the same goods if they can be persuaded that unions are good for the customer. This has been done by propagandizing customers. A union might say "Look for the union label on the garment." Unions say things like "Unions ... the people who brought you the weekend." Since everybody likes not having to work on weekends, they pursue this non-sequiter to its illogical conclusion -- that since people don't have to work on weekends, and unions don't want union members to work on weekends, that unions have been responsible for people not working on weekends. No, it doesn't follow.

Unions can get capitalists to settle for a lower return on their money by threatening to harm the capital investment. This is most commonly done by destroying the workplace, sabotaging the workplace, occupying the workplace (the sit-down strike), or boycotting the workplace. The latter only works if the union can monopolize the workforce. In a town with a single large employer, there usually aren't enough spare laborers to replace the entire workforce. Replacement laborers are looked down as 'scabs'.

Entrepreneurs are harmed in the same manner.

You can see, therefore, that to the extent that unions have helped their membership, they have done it through fraud and force. The results of their efforts have been to discourage customers, capitalists, and entrepreneurs. Nobody can say how much better-off people would be had unions not held so many people in their thrall. The one bright light is that union membership is steadily declining in all but the public sector. That employment in the public sector is growing cannot be said to be a good thing, but that's another subject.

I've been writing quite a bit recently because there's been much stuff, nonsense, and folderol published lately. The most recent I've seen is this:

Many economists predict that the dollar will continue to decline for some time, and that the declining dollar will help boost American industry by making American products cheaper in countries with strengthening currencies. "In the short term, it is probably helping the United States," said Robert Hormats, vice chairman of Goldman Sachs International.

Remember that money is just a thing. It's quite possible to have too much cash, particularly if you can't trade anything for it. The Germans discovered this in the 1930's, when they turned their currency into toilet paper. If you've traded away too much cash for goods, people will start to reject your cash. Your currency gets devalued on the global market. Same as Paris Hilton's currency has become devalued.

We are currently in that position. We have traded too many dollars for hard goods, e.g. from China. Now the Chinese have dollars that they don't know what to do with. They don't want our stuff quite so badly, and they can't buy things from other countries, because they don't want dollars either.

Mr. Robert Hormats is describing something that is bad as if it were good. We don't export because it's good for business. We export only so that we can import. Importing is the good part, because you get goods and give away pieces of paper. Exporting is the bad part, because you have to take back those pieces of paper, and you have to ship goods.

Sigh. This is all nonsense, nonsense, nonsense. Outsourcing, or offshoring is very simple to understand, if you but take a moment. Let's take a typical reaction to offshoring and reduce it to the absurd:

Indiana Gov. Joseph Kernan in November ordered a state agency to cancel a $15.2-million contract with an outsourcing firm after citizens went ballistic at the notion of workers in India upgrading their state's computers to, of all things, process unemployment claims of laid-off Hoosiers.

Indianans think that money sent to India somehow disappears, or is lost to Americans. Let's say that, to stop that from happening, Indiana hires an on-shore firm. They're still sending their money out of Indiana. Were they to hire me to upgrade their state's computers, I must surely admit that I have absolutely no plans to buy anything from Indiana. Their money is equally as lost to them by spending it on-shore in New York as it is off-shore in Bangalore.

So let's say that the state government in Indianapolis hires somebody in Bloomington. Trouble is, that money is lost to the state government, since the Bloomington company spends it on Michigan outsourcers.

So they hire somebody in Indianapolis. They, in turn, have outsourced the work to somebody in Elkhart, Indiana, and that money has no return path to Indianapolis.

So they give up, and hire an Indianapolis resident to actually work full-time in the state IS department. Trouble is, nobody currently in Indianapolis is qualified to do the work. So they move from Bangalore, New York, Michigan, Bloomington, or Elkhart into Indianapolis, and no employment for any current Hoosier is created.

I'm running out of imagination, but the eventual end of this process is that Indiana Gov. Joseph Kernan has to perform every state job himself, because otherwise, some Indiana dollar might leave Indiana.

Can everyone see the absurdity here? There are no dollars that say "Indiana" on them. There aren't even any dollars that say "India" on them. It's too bad that Indians can't stamp the dollars that we pay them with "India Money". If they did, then we'd start to see India dollars in circulation inside the US.

The economic fallacy being promulgated by offshoring complainants is simple to explain but hard to internalize: The dollars that we pay to Indians don't get magically converted into rupees. They stay as dollars, and have absolutely no value to Indians unless they are ultimately spent as dollars back in the good old USA. Perhaps those dollars take a side trip to France, and then Britain, before coming back to the USA, but it should be emphasized again and again and again: we buy other countries products so they can buy our products.

You want to support Americans? Buy other countries products.
You want to support Indianans? Buy New Yorkers products.
You want to support Indianapolisians? Buy Bloomingtoners products.
You want to support Main Street Indianapolis? Buy Elm Street Indianapolis products.
Buy from whoever provides you with the most value regardless of their country, state, city, or street of residence.

There should be no confusion about how value is created: when two parties trade freely, each of them gains. The more that each of them thinks they got the better of the other, the more value created and the better the trade. Don't worry so much about who is getting the value. Worry more that the value created should be as large as possible.

Let me make this as absolutely simple as possible: nobody, but nobody refrains from outsourcing their own personal needs. I don't wash my toilet paper--I buy new, with the full confidence that, if I continue to do things that other people want, I'll get that money back as pay.

If there is to be a great hue and cry about offshoring, it should not be about the lost jobs, but about the new jobs that will be created once those dollars find their way back home.

Update: John Parmater's response was published on Dave Farber's Interesting People list. He says much the same as I, but probably more eloquently.