Tag: economics

Every Industry Gets Worse When Government Gets Involved

This is easily provable with Public Choice Theory, and consistently proven in practice.

Contrary to the absurdly naive belief that monopolizing an industry will produce “efficiencies”, it has the opposite effect.  All the wrong things are incentivized and no one has any clear signal of what creates value. (See “Socialist Calculation Problem“)

Antony Davies shared this depressing graph with me last week.  If you’ve been to a health care provider in the last few years, you’ve felt the pain this causes in the realm of customer experience.

 

Non-Physicians in Health Care

Intellectual Property and Incentives

The standard theory behind support for creating a legal monopoly for certain ideas, processes, and inventions is that absent such promise of monopoly there would be far less innovation.

It has a surface level logic to it.  People respond to incentives.  Legal monopoly means more money for the one who has it.  People tend to like the money incentive.  Therefore, more people will innovate because they have the incentive to capture greater rewards by securing a monopoly on the production or sale of their invention.

The weird thing is it doesn’t play out like this in the real world.  Something is missing.

Inventions typically spring from technicians and masters at a craft.  These are the types who are driven by a passion for what they do.  They want to solve problems, discover things, build things, and create things.  So they do.  If they seek a legal monopoly on their invention this happens after the fact.  It is hard to imagine many innovators saying, “Oh wow!  Think of possibility of solving this chemistry problem and discovering an entirely new way to do X!  Wait…get a lawyer in the lab before I go any further.  I refuse to make any discoveries without proof that I’ll be protected from competition once I do.”

And innovation doesn’t look like that.  You can see this by observing areas without the ability to get legal monopolies on their inventions.  Fashion, food, and football are a few of my favorites.  You can copy, borrow, and imitate fashion designs, recipes, and defensive schemes with abandon.  Many people do.  Yet each of these fields is as dynamic as any industry, constantly evolving and introducing new things.  Apparently the innovative offensive coordinator, cook, and designer don’t require the promise of monopoly to entice them to innovate.

People do respond to incentives.  This is a fact of life and one that need not be overturned to overturn the belief that IP laws are required for innovation.  Any good economist will tell you that incentives are many, and value is subjective.  The innovators are certainly responsive to money incentives, but 1) legal monopoly is not the only or best way to earn money for inventions and, 2) money isn’t the only incentive driving invention.

As for number one, consider how many people are typically working on a similar innovation simultaneously.  With the current IP regime, only one can get the monopoly.  If we want to take incentives seriously, what kind of incentive does this create for all the others?  Furthermore, the one most likely to get the monopoly is the one with all the lawyers and accountants and resources and willingness to take others to court, not the one with the greatest contribution to the discovery.  This would seem to drive upstart innovators away from the task for fear of being sued by the big guys as much or more than it would drive them to innovate for the possible promise of securing a patent.

As for number two, while the promise of monopoly may be the dominant incentive for lawyers and R&D departments, it’s not the dominant incentive for inventors.  They innovate first, driven by a passion for the task, the desire to solve a problem, create their dream, help a colleague, or improve their own daily life with some small innovation.  Yes, they want and seek money for the invention once successful, but the absence of a promise of monopoly does not stop them from creating.

Understanding incentives is crucial to really understanding how the world works and how to change it.  But an elementary look at incentives that examines only dollars and cents and only their intended, not actual, beneficiaries will not get you very far.

For more on the problems with intellectual property laws, check out “Against Intellectual Monopoly“.  It’s excellent.

The Two Great Secrets of Higher Education

  1. Tuition is paid for one reason: to buy a signal.
  2. That signal is not worth the investment compared to what you can create elsewhere.

These two great secrets are known to almost nobody.  A few people know secret number one, but falsely conclude that the signal is still the best option.

A small but growing number of people partially understand what’s behind secret number two, but because they do not grasp that the product universities sell is a signal, they compare only alternative social and learning experiences to universities, not alternative ways of creating a signal.

The combined understanding of both of these secrets will completely revolutionize the way people think about and engage in education, career preparation, work, and life.

The Signal Secret

  1. Tuition is paid for one reason: to buy a signal.

A small number of economists and thinkers have identified that higher education is valued because of its signalling power.  That is, the college experience does not form people into more valuable or learned individuals capable of doing good work, but it sorts people into groups and attaches degrees to those who were already capable.

Signals are not bad things.  They are very valuable.  Employers need a way to narrow the pool of applicants and weed out the least likely to succeed.  There is a correlation between completing college and being a better worker on average.  But there is no causation.

Harvard doesn’t make you more likely to succeed.  The type of person who gets accepted into Harvard is already more likely to succeed.

Almost everyone objects to calling the product universities sell a signal.  They claim it’s a big bundle of goods.  It’s a social experience.  It’s a network.  It’s knowledge.

It is indeed a bundle of these things and many more, but these are all fringe benefits.  None of them are the core product being purchased.  When you pay to get your oil changed and the waiting room has coffee and magazines it’s a nice perk, but it’s clearly not the service you are purchasing.  If the auto garage didn’t have these comforts you might still go, but if they only sold coffee and magazines without oil changes, you wouldn’t.

College is the same.  Whatever other activities and benefits students may derive from their experience, none of them are the reason they are paying to be there.  They are paying for the signal, period.

It’s easy to prove this point.  List every other element of the higher education bundle.  Sports, parties, talks with professors, lectures, books, living with other young people, etc.  Now ask which of these would be possible if you never paid tuition?  All of them.  Move to a college town, sit in on classes, join clubs, go to events, read books, and live the college life to your heart’s content.

When you take away the credential at the end, it becomes clear how easy it is to get all the other aspects of college for free or very low cost, and often better.

This is also evidenced by the fact that everyone is happy when class is cancelled.  What other good do people pay for upfront and then cheer when it’s not delivered?  It’s because the classroom lectures and tests are not the good being purchased.  They are an additional cost that must be borne in order to get the real product, which is the piece of official paper.  The signal.

Young people may or may not enjoy some or all elements of the college experience.  But the reason they go and pay is because, in their minds, they have to.  They have to to get the signal, because without the signal you can’t get a decent job or be seen as a decent human being, so the prevailing narrative goes.

The signal is the product.  Until that is understood, no amount of tweaking or reforming or innovating any of the other parts of the higher education bundle will matter.

And it turns out, you don’t need the signal college sells after all.

The Alternatives Secret

  1. That signal is not worth the investment compared to what you can create elsewhere.

Everyone is thrilled to show you charts and graphs and statistics about the correlation between degrees and earnings.  None of that matters.

It doesn’t matter because aggregates are not individuals and because data can never show causation.

What happens to the average of some aggregate does not determine what course of action is most beneficial for an individual.  The average Ferrari owner earns a lot more than the average Honda owner.  No one assumes this means buying a Ferrari is a great way to improve your earning potential.

To the individual, the question is not whether college is a good investment for all young people on average.  The question is whether you can build a better signal with less than four plus years and five plus figures.  Turns out, that’s a pretty low bar.

The degree signals that you are probably a little above average for someone your age.  Maybe not even that as degrees proliferate.  This means if you are average or below average in ability, creativity, or work ethic, the degree signal may help you get a better job than you could without it.  (Though it won’t help you keep it.)

If you are above average in ability, creativity, or work ethic the degree signal sells you short.  It makes you blend in with all the lower quality people coming out of the same institution.  (Not only that, the college experience itself tends to foster habits that make you less able, creative, and hardworking.)

Young people today have at their fingertips tools to create signals far more powerful than generic institutional credentials.  Consider the impact of a tailored website that demonstrates the value you have created?  Better yet, a website or product that demonstrates to a company the value you will create for them?

Consider the value of working alongside a successful entrepreneur or industry leader for free or low pay for a year or two and parlaying that into a full-time gig?  Companies hate the searching and hiring process.  They’d always rather promote someone within who has a proven track record of value creation.  Compare the cost of low wages for a year or two to the cost of no wages and huge debt for four.

Businesses need value-creating employees.  They use degrees as an early proxy to eliminate some chunk of applicants (though even this practice is declining for big and small companies alike), but they only use them in absence of a better, clearer, more powerful signal.  When one exists, it trumps the academic credential.  When you realize all they want is proof of ability to create value, the world begins to open up.  How many ways are there to prove that you can?

It’s not only about getting hired.  Professors are quick to tell you that wages are not the only thing that matters when it comes to happiness and success in life.  They are correct.  Yet chasing the degree as the only signal often leaves people with debt that requires a relatively high wage to service, thus cutting off options and opportunities to explore and experiment.

Not least of these explorations is the wonderful and growing world of entrepreneurship.  It’s easier and cheaper than ever to create your own product or launch your own venture.  It’s also more and more valuable.  Machines and software can do rote tasks.  Humans’ greatest value add is creative problem solving and innovation.

The ability to freelance for a living, launch a micro business, or create a major enterprise is expanding every day.  There is no benefit to the degree signal in the world of entrepreneurship.  There are no HR departments wading through resumes looking for checklists.  Here, in fact, the college experience can be more of a detriment than a benefit.  It tends to restrict the imagination to known methods, restrict your network to same-aged people, restrict your financial flexibility and risk-taking, and cut into many of the easiest years for trying something bold when the cost of failure is lowest.

A 20-year-old who launched a KickStarter campaign, built an app, created a website, apprenticed for a small business owner, read 50 books, or even just has an amazing online presence signals more value creation potential than a 22-year-old with a BA and a 3.7 GPA.  Yes, you can supplement the college experience with these other things, but classes and obligations (not only time but financial and parental) get in the way of fully unleashing your independent signal-creating potential.

The Real Revolution

The real revolution in higher education will not come from better delivery mechanisms for lectures, or new platforms to sell the same signal.  It won’t be disrupted by online versions of the brick and mortar establishment.

The real revolution will look as varied as the people participating in it.  It will begin when people understand the two secrets of higher education.  When it is realized that college is selling a signal and that signalling your ability to create value can be done far better in myriad other ways, the world will bloom with alternative methods of getting young people from where they are to where they want to be.

Instead of 16, 17, and 18-year-olds stressing about how to get into colleges, they should focus their energy on how to begin building a better signal.  Instead of 19, 20, and 21-year-olds stressing about majors and minors and GPA’s, they should focus their energy on creating value and building a way to prove it.

What are you signalling?

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Want more?  Check out Praxis, a one-year apprenticeship + professional development + coaching educational experience for young people who want more than college.

The Economic Argument Against Immigration is Pretty Gross

The economic argument against immigration is especially disgusting.

You might think cultural arguments about keeping a country “pure” or safety arguments claiming all immigrants are criminals are more offensive.  But let’s examine what the economic argument against immigration really means.

The idea of forcibly preventing individuals from crossing a border in order to give an economic advantage to those on the other side of the line is barbaric when you ponder it.  Immigration restriction for the purpose of “protecting jobs” really means the violent prevention of people born in certain places from trying to earn a living.

Imagine you want a certain job.  So does your neighbor.  Would you slash his tires to keep him from getting to the interview?  Would you build a wall around his house preventing him from leaving because he might compete with you in the market?  Would you shoot him if he tried to scale it for the chance of landing the job?

If you knew a person living in horrible conditions, whose children may well die of an entirely preventable disease, and they just need a decent job to be able to afford better environs for their family, would you feel proud for sending armed thugs to follow that person around and ensure they never left their crappy neighborhood to apply for jobs elsewhere?  Even if it meant grinding poverty and possible sickness and death for the family?  Would you cheer and say, “Yeah!  I’m protecting my job opportunities!”

If you support immigration restrictions that’s exactly what you’re doing.

Economies are best served with open competition.  No one thinks forcibly shutting down competitors or collaborators is a good move or morally permissible…unless those competitors and collaborators happened to be born in certain places.

Can you think of more blatantly bigoted behavior?  The belief that certain individuals should be violently prevented from even trying to get certain jobs or live in certain places based purely on the piece of land on which they happened to be born is no less reprehensible than Jim Crow, Apartheid, or any of the other universally condemned forms of legal economic oppression.

Leave aside the fact that immigration restrictions are bad for the economy as a whole, and that far more people in the restrictive country are harmed by being unable to hire or buy from vast swaths of humanity.  Even if it were true that immigration restrictions made native born citizens better off they would be no less disturbing and morally bankrupt.

If I paid armed agents to keep every potential competitor for jobs or customers under house arrest you wouldn’t forgive me if I could prove that the practice helped me economically.  You’d call me a cold-hearted psychopath.  Even if border patrols gave you an edge by keeping some potential competition behind barbed wire it wouldn’t make your advocacy of them honorable.  “Hey look, I can get ahead by keeping this poor person from trying!” is not the cry of an honorable person.  “People who weren’t born where I was shouldn’t be allowed to apply for jobs!” isn’t a belief to boast about.

All arguments against the free and peaceful movement of people are bad.  Arguing it’s to protect your economic interests reveals a level of moral bankruptcy that is truly unsettling.

The Beautiful Language of Prices

Prices are a language.

The beauty of this reality hit me while on a walk.  I had my phone so I recorded my thoughts in the moment of delight.  I’m often overcome by how beautiful markets are.  It’s almost a spiritual experience when you ponder long enough.

 

A Tale of Two Cities Part 2: Why People are Dumb at the Ballot Box

This is the sequel to a post about the two spheres we all dwell in – the political and the civil – and how each affect our behavior.

Originally published in The Freeman.

Why do so many San Franciscans want to curb Airbnb’s innovative business model?

Proposition F would have restricted the number of nights owners could list their homes and which types of rooms could be listed; it would also have required a litany of paperwork and reporting to a city department. Listings that did not meet city standards would have incurred fines of up to $1,000 per day. The details are many, but the thrust is obvious: this proposal was to make Airbnb far less successful at creating value for customers and investors.

The proposal ultimately failed, but it wasn’t a landslide. Forty-four percent of voters supported it. Nearly half of the voters in a city that owes its recent prosperity and identity to this kind of innovative company wanted to strangle one of the geese on whose eggs they are feasting.

Most political action is signaling.

The simplest explanation is that proponents of this proposal were the minority of businesses and individuals who are in direct competition with Airbnb — hotels and those working or investing with them. True, but something deeper is at work. A surprising number of investors, entrepreneurs, and everyday residents of the city who are not involved with competing businesses voiced their support for the proposal. Some supporters were even Airbnb investors.

How could this be?

Here are five reasons (by no means an exhaustive list) why people behave so badly in the political realm.

1. Other People’s Problems

Milton Friedman famously described the four ways to spend money. You can spend your own money on yourself, your own money on someone else, someone else’s money on yourself, or someone else’s money on someone else. It’s clear that you’ll be most judicious in the first scenario, and less so in each that follows.

All political issues are a case of the fourth scenario, even when money is not directly involved. You’re voting on the use of resources that aren’t yours — the pool of taxpayer dollars that fund government bureaucracy — to solve someone else’s problem, in this case hoteliers threatened by competition and San Francisco residents supposedly being pushed out of affordable housing.

Ballot initiatives tell us that some people, somewhere, are having some kind of problem — and that we can vote to make it better. It’ll cost you nothing (at least nothing you can see at the moment), so why not?

Not only voters, but also the regulators, enforcers, and drafters of such propositions are so far removed from the issue at hand and have no personal stake in the outcome that it is impossible for them to make decisions or draft policies without unintended consequences.

2. Information Issues

Proposition F is ridiculously complex. To cast a fully informed vote on the Prop F, one would need to begin by reading all 21 pages of legal text. What’s more, the costs of obtaining the information far exceed the probability that your informed vote will be decisive. The result is what economists call “rational ignorance.”

Customers, employees, managers, and investors of Airbnb are best suited to optimize the service. Even the company’s competitors are in an excellent position to curb it or force it to improve if they channel their efforts where the information matters, namely in the markets where they stand to lose or gain.

3. Signaling for Survival

Most political action is signaling. It’s not so much that people want to buy American or recycle everything — we know this because when their own money is on the line in the real world of trade-offs, they mostly don’t. But people want to be seen as the kind of person who buys American or supports recycling. There is tremendous pressure in the political sphere to prove to everyone that you support all the right things — especially things that come at a direct personal cost to you. This proves you care about that abstraction called “society.”

Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

The best thing a rich person can do in the political sphere is vote for higher taxes on the rich. The best thing an Airbnb investor can do is claim to support regulations that restrict Airbnb. You’ll get lots of cheap signal points, even if what you support would actually be bad for everyone.

4. Binary Choices

Voting is a yes or no affair. The political sphere is incapable of genuine pluralism. Imagine if markets worked the same way. What if your local grocery store sent out a survey asking you to vote on which kind of wine you wanted them to stock, or how much, or at what price (with any losses to be made up by adjusting other prices)?

Can Airbnb be improved? Of course. Can a bunch of people with no control over the outcome and little skin in the game be given an up or down vote on a single policy proposal and make it better? Don’t be silly.

The adaptability, nuance, and diversity of options, offerings, and solutions in a market are the greatest strength and the very stuff on which the startup scene was built. Cramming broad society-wide solutions into binary choices is absurd.

5. The Problem of Power

The infamous Stanford prison experiment didn’t go horribly wrong because the wrong batch of subjects was chosen: it was a case of dangerous institutions and incentives. When rules are enforced by raw power, the person who wields that power has more control than any human being can responsibly handle.

Contrary to Thomas Hobbes, it is not the “state of nature” that is a war of all against all; it is Leviathan that rewards force over cooperation and cultivates the worst traits. Once control by force is an option, a great deal of otherwise productive energy and otherwise creative people are drawn into the crooked craft of politics.

F.A. Hayek wrote at length in The Road to Serfdom about why, in the political sphere, the worst get on top. It’s a predictable outcome of a powerful state.

Democracy doesn’t keep this tendency in check so much as it directs the power toward those who are best able to appeal to the desire of rationally ignorant voters to signal the trendy positions on the latest issues.

Focus on Freedom

The innovative startup founders on the San Francisco scene are an amazing force for good when they are pursuing their own interests within the incentive structure of civil society. Not one of them would remain a positive influence if they were granted monopoly power through the ballot box. Nor would their customers: even the most forward-thinking minds in the most innovative city in the world become petty and stagnant when operating within the confines of the political sphere.

When you act as a consumer and choose which kind of vacation housing to purchase, your action sends information and incentives rippling through the market price system, helping entrepreneurs guide resources to their highest valued use. When you act as a voter to support or reject a policy, you create losers and enemies, and your vote generates a host of destructive effects.

If you want a freer, better world, you’ve got to build it in the private sphere.

Ask Isaac: Marginal Utility for Beginners

In this episode I answer a very simple but incredibly important question from listener Steve Thomas:

  • Please explain the theory of marginal utility and give a few practical examples.

Through riddles and illustrations I try to make the ideas of value subjectivity and marginal utility easy to understand and recognize in everyday life.

Got a question? Ask here.

This and all episodes are available on SoundCloud, iTunes, and Stitcher.

The Economists Answer for Bad Drivers

I originally posted this as just audio, but then I had someone transcribe it for me on Freelancer.com.  I paid him $10 and he did it from Montenegro in 20 minutes.  Fun!

One of the many things I love about economics is that it helps you understand and make sense of things that otherwise seem irrational and mysterious.

It helps you come up with actual workable solutions, rather than of a bunch feel-good nonsense.

To give a concrete example, there are a lot of bad drivers out there and lots of accidents. It’s really scary, right?

So what’s the normal non-economist response to this? “Let’s produce and buy cars with more safety features, front airbags, side airbags, better brakes, glass that shatters in way that won’t hurt you.”

All these safety features seem like the thing to do, because with all these accidents and dangerous drivers you want to protect people, right?

Ah, but this is where the economic way of thinking sheds some light.  The economist says, “You fools!”

We don’t want to make cars safer, that’s just going to lower the cost of bad driving, let’s mount a spear on the steering wheel of every car at two inches from the driver’s chest. Now let’s see who’s driving recklessly! You don’t want to lower the cost of reckless driving, you want to raise it!

My comedian friend Jeremy McClellan has this great bit about whether you’d want your kids to take driver’s ed from cops, who basically drive as recklessly as they want to because they can turn on their sirens and get away with it, or from drug dealers?

The cost of a drug dealer getting in any kind of traffic accident is very high. If they get pulled over they could go to jail for carrying all these drugs around. You want to learn to drive from drug dealers. They’re going to be the safest on the road.  It’s all about the incentives.

This is the kind of crazy, seemingly barbaric but wonderful insight that economic thinking can bring.

Why in my neighborhood are all these soccer moms such reckless drivers? One of the reasons is because they have such wonderful breaks and safety features on their brand new SUVs.

They know they can scream up behind me at 65mph and slam on their breaks with two inches to spare and their car will come to a gentle halt.  Their latte won’t even spill. Meanwhile I’m terrified.  It’s endangering my heart rate if nothing else.

Then there’s me, driving my 2002 Saturn with a 195,000 miles on it. I’m like a train conductor. I start breaking about two and a half miles before the stop light to just ease into it because I know if I slam on the breaks with just 50 feet to spare my foot will literally go through the floor of my car and I’ll have to use my foot on the pavement as a break. That’s a really high cost. I don’t want to lose my foot.

I’m the most cautious driver you will ever see in my Saturn. I check my blind spot religiously, partly because my car is so low it could fit under other cars, but partly because I have no side mirror.  I lost that in an unfortunate parking incident.

This is just one little illustration of economic thinking and how it can help you develop counterintuitive insights and come up with counterintuitive solutions to common, everyday problems.

Below is the original audio, a note I left myself on Voxer.

Book Review: Anarchy Unbound

This is my Amazon review from some time ago, but I realized I never posted it here and I’m always looking for an excuse to recommend Leeson‘s work.

“Leeson puts together an amazing set of papers studying order in the most unlikely places. It will take decades for the main thesis of this books to really sink in, but when it does, it will radically change the foundational assumptions in the social sciences. Contra Hobbes and nearly every economist and political theorist since, Leeson shows that absent a coercive monopoly (a state), humans can, have, and still do cooperate peacefully and efficiently given the constraints they face. Leeson shows how complex institutions emerge to handle conflicts and bring about order, and how these institutions are often robust, nuanced, firm, flexible, and adaptive to the changing needs of the communities in which they emerge.

When it comes to comparative political economy and the much needed application of rational choice theory to historical and sociological studies, Leeson is the best in the business. It will take a little time after you read it for the implications of these simple yet radical discoveries to sink in.”

You can also listen to my podcast interview with Pete about this book and other ideas.

What to do When The Game Kills Your Entrepreneurial Dream

I’m putting the finishing touches on several presentations I’ll be giving next week at FEE’s Economics of Entrepreneurship seminar.  I always love crafting a new talk, and I’m especially looking forward to one on how insights from Public Choice Theory can help entrepreneurs.

I don’t want to give anything away, but here are the four options I’ll discuss for entrepreneurs when they face a clumsy, interventionist state that stymies innovative efforts with political games:

  1. Ignore the game
  2. Defy the game
  3. Play the game
  4. Change the game

We’ll see how the talk goes, and if it works I might keep it in the live mix and give it this fall at some events.

The Final Enforcer of Contracts?

Think about construction projects.  Which projects have the highest likelihood of being over budget, under expectation, and past schedule?  If you’ve ever built or remodeled a house you might say all of them, but there is one organization that consistently sees cost overruns, quality problems, and time delays more than any other.  Government.

Government projects are notorious for shady contracts in the first place, broken promises during the project, and lackluster results after, including continuous repair and maintenance far exceeding what was originally planned.  Government is a bad general contractor and project manager.

This is particularly interesting when you consider one of the major justifications given for the existence of coercive states.  We need, the argument goes, some entity with complete monopoly power to be the final arbiter and enforcer of contracts.  Yet we have this entity right now and it is consistently worse at making and enforcing contracts for its own projects than almost any private company or individual.

When will we stop believing that the incentives magically improve in the absence of competitive pressure?  When will we look around and notice that all the order we see and experience every day is being maintained by a complex web of emergent beliefs, norms, and institutions within a constant give and take marketplace?

Why Pool Attendants Are Better Than Bureaucrats

Originally published in the Freeman, and there is also a mini podcast version below.

“We’re not checking IDs today,” the pool attendant told me.

We have a nice pool for the neighborhood, maintained with HOA dues. The homeowners association has tried different methods of monitoring who comes in to keep nonresidents from filling up the pool and squeezing out dues-paying members. A few times last summer, this was a problem. This year, a new company was hired to issue IDs and ensure that only residents use the pool. But not today.

Today the water was a bit cold and the pool wasn’t busy. The attendant realized this and didn’t hassle swimmers and sunbathers with an ID check. When he uttered those words it hit me in a flash just how profound it was. The ease with which he used common sense to bend the rules was a beautiful moment. Maybe you think I’m being dramatic, but let me offer a contrast.

A few years, ago I was in the security line at the airport with my wife. She removed her plastic baggy of size-approved liquids and gels and placed it in the container. The TSA agent picked it up and grunted, “Uh-uh.” Bewildered, I asked what the problem was. She said my wife needed to remove an item from the bag. I objected that every item was within the approved size and the bag was a recommended part of the procedure. The agent said that, according to regulations, the items are supposed to fit “comfortably” in the bag. They were pushing against the sides, ever so slightly stretching the plastic. We had to remove one. I asked her which individual item was a threat to security. She told us it didn’t matter which item was removed. The absurdity of the situation was beyond parody. There is no conceivable world in which a too-snug plastic bag of harmless toiletries could pose any possible threat to security. But it was the rule. Every bureaucrat knows rules must be followed without question.

If you’ve ever gotten a speeding ticket, as I have, for going 10 over at 3:00 a.m. on a five-lane road with no traffic, or for running a red light in a sleepy town with no cars for miles, you’ve felt the same. It’s clear that the reason for the rule — to keep drivers and pedestrians safe — is no possible explanation for its enforcement in these situations. Indeed, enforcement itself makes roads less safe due to police vehicles sticking out into the road and blocking other potential drivers. Meter maids handing out tickets for 2 minutes over in a lot surrounded by empty spaces is just as crazy. Parking meters and tickets are there to ensure spaces are available in high-demand times. What’s the point of ticketing when ample parking is available? Carding geriatrics for buying alcohol and so very many other examples of this silliness abound.

I posted a complaint to Facebook after the TSA incident. One of the commenters said, “Sure, following the letter of arbitrary laws in bad contexts is a pain, but would you rather have those agents doing whatever they want and using their own discretion on the spot?” The question becomes more poignant when you consider not just the bureaucrats armed with bad attitudes like those at the DMV but the ones armed with guns on the police force. Rule following is paramount in a bureaucracy because the alternative is also frightening.

It’s easy in the public sphere to get caught up in such debates. Is it more practical and just for government agents to use discretion in the moment when applying regulations, or for across-the-board universal application? It seems vexing: a problem without a solution. Whatever side of the debate you take feels uncomfortable. The letter of the law is oppressive and in some cases downright crazy, certainly counterproductive with respect to the law’s intended purpose; but discretion is a scary proposition as well, as many cases of selectively enforced law attest.

Outside of government, however, this is a nonproblem. When something is moved from the private, voluntary sphere to the public, coercive sphere, debates and division arise where none previously existed. The real problem is not rule following or flexibility; it’s monopoly. The absence of competition in the government sphere and all the attendant incentive problems create this unnecessary quandary.

It’s not that the police officers and TSA agents are worse people than my pool attendant; it’s that they face worse incentives. There is no metric for them to determine customer satisfaction or the value of their actions, because there is no profit-and-loss signal and no fear of losing our business. We are legally obliged to pay for and receive their service (or disservice.)

The pool attendant can be flexible with the rules when applying them strictly would annoy customers. He can become stringent when things get busy and residents complain about freeloaders. His company knows that at any time, they could lose the contract, and the only reason they are hired is to make residents happy and solve a problem. It’s the outcome that matters, and all procedures, policies, and rules are measured against that. This leaves ample room for experimentation and adaptation, with immediate feedback and accountability.

The public sector has no such flexibility because it faces no competition. The political sphere can make social and economic problems that have already been solved with incredible nuance seem unsolvable. It offers only yes-or-no, either/or, once-and-for-all-and-everywhere solutions, applied and enforced by people with almost limitless job security. It is a blunt tool, and incredibly unresponsive. It is unconcerned with outcomes and measures effectiveness only by inputs, intentions, and actions — not results.

Whether the letter of the law or individual discretion is preferable is the wrong question. Both are to be feared with state monopolized services. Neither is to be feared in competition because the choice is no longer binary but an ongoing dance of pluralistic discovery.

We’re not checking IDs today. Those five simple words reveal the beauty, complexity, and humanity of the voluntary market order.

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I recorded an audio version of this first, live on-the-spot at the pool using my iPhone.  I’m experimenting with some mini podcast episodes like this.

Why I Love Las Vegas

I don’t play slots or gamble outside of house card games with a few buddies.  I don’t really enjoy the nightlife party and drinking scene.  I don’t do strip clubs.  I’m not a fan of musicals and shows.  Yet I love Vegas.

The first time I visited Las Vegas for a conference I was blown away by how much I loved the atmosphere.  Yes, it’s cheesy and ridiculous and lewd and in your face.  But it has in extreme measure that thing you find more in most American cities than just about any country in the world: customer service.  America has a deep and strong culture of entrepreneurship, hard work, and (partially) free-markets.  This results in a relentless drive and competition to please customers.  “The customer is always right” is a powerful adage that drives business, whether the owners like it or not.

Ludwig von Mises described the situation of producers in a capitalist economy well:

“Descriptive terms which people use are often quite misleading. In talking about modern captains of industry and leaders of big business, for instance, they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all; he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king — or the steel king or the automobile king or any other king of modern industry — depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.”

In other words, the customer is not only right, the customer is king.  The businesses are the subjects, always vying the for approval and happiness of their Kings and Queens.  The truth, of course, is that the producers are also themselves consumers.  Those who work in the hotel, or mall, or diner, or factory are also consumers who patronize businesses.  We’re all serving each other.

In the case of Vegas, the notion of customer service reaches new heights.  It borders on customer worship.  From the minute you step out of the concourse your eyes are dazzled with light, sound, and a flurry of activity intended to delight and amaze.  Every square inch of the famous strip is covered with people and signs and sights begging to make you happy.  The chubby middle-aged guy from the Midwest wearing a cheap Wisconsin Badgers sweatshirt is courted and complimented by beauty and talent all around.  The question that seems to be always on the mind of the businesses there is, “What can we do to make you happy?  How can we exhilarate you?”

You may call it tacky, but there are few places in the world where the commonest of people are treated like royalty 24/7.  There is something magical about it.  That’s what I love about Vegas.