Tag: economics

A Few Insights on Institutions and Sports

One of the reasons I love sports is the opportunity they provide to see how formal and informal institutions and norms interact to create outcomes, often surprising.  When athletics and economic thinking intersect, I’m a happy man.

An excellent article on Grantland by Brian Phillips got me thinking again about the incentives in college basketball.  Small changes in formal rules and small changes in the informal enforcement of those rules can lead to pretty big consequences.  In the case of college basketball it’s resulted in a far more painful viewing experience.  Watch some of the tournament games this year and you’ll see what I mean.  Basketball is a game of runs and big emotional momentum swings over a series of plays.  Yet instead of fast paced scoring streaks I’ve mostly witnessed a baseball-like process of a play or two followed by long pauses for TV or coaches timeouts or free-throws, followed by another play or two.

There are several possible changes that could improve the experience.  Economists Ed Lopez and Wayne Leighton in their phenomenal book, Madmen, Intellectuals, and Academic Scribblers discuss the origin of the shot clock.  The game was in a similar place.  The best teams were known to get a small lead and then pass the ball for several minutes at a time to run out the clock.  A sensible strategy but a horrible spectator sport.  The introduction of the shot clock dramatically improved the experience.

The shot clock is an example of a new formal rule.  Mike Munger and Russ Roberts talk about not just formal but informal rules and norms in sports in one of my favorite EconTalk episodes.  We tend to assume the order around us, in the world as in sports, is the result of formal rules and enforcement, but more often there is a far more powerful substrate of informal norms and expectations with their own unique enforcement mechanisms.  Fights in hockey, or fake fights in baseball are great examples, as is the social approbation faced by teams who run up the score at the end of an inevitable victory in football, or those who continue to foul the opposing team when trailing by double-digits in the waning seconds of a basketball game.

What I like about the Grantland article is that it touches on formal and informal institutions in its analysis of what’s happening to college basketball.  It’s not only the number of timeouts allowed and the defensive rules (formal), it’s also the way refs choose to call fouls and coaches choose to reign in improvisation by players (informal).  The article went further than this.  It had some profound insight into something even more fundamental than formal and informal institutions.  It touched on the beliefs of fans, players, coaches, officials, and everyone involved.  It’s not only the rules written on paper, or the unwritten rules in our heads that create these outcomes.  The beliefs we have about the game and the rules create the context within which all these institutions must operate.  Beliefs are the ultimate binding constraint on what kind of institutions can exist.

In the case of college basketball, Phillips argues that we all know deep down it’s a professional affair the goal of which is entertainment, yet none of us wants to admit this to ourselves or publicly.  We wrap it in the cloak of character building, preparation for life, team-work, and a lot of old-timey notions about young men getting exercise for their bodies to compliment the mental exercise of a college education.  It’s not that sports don’t do these things or offer no life lessons.  Far from it.  It’s that the primary goal of sports is to make money like any other enterprise, and in our society the great lie we all pretend to believe is that self-interest is inferior to altruism as a motive (even though the beneficial outcomes of self-interested behavior far exceed all the altruism in human history).  We have to keep up the fiction that college athletics is not primarily a moneymaking entertainment enterprise.

Lots to think about on this topic, but I think the insights about the role of our beliefs (and the contradictory nature of our stated vs. revealed preferences) in shaping institutions which shape incentives which result in outcomes is powerful.  For the future of sports and society as a whole.

How to Keep the Young and Poor from Succeeding

Let’s face it. I’m not that young anymore. I’m also not poor anymore, and I live a comfortable middle-class American life. Most older, better-off middle-classers like me got where we are through the dynamic market process. The trouble is, now that we’re doing pretty well, that same dynamic process is a threat. I don’t want some young whippersnapper or poor immigrant to outwork me. What if they succeed faster than I do? What if they create more value than I can, and so outcompete me for a job?

Take heart, well-heeled middle-agers. I have a plan. My scheme for keeping younger and poorer people from succeeding—and possibly making us have to work harder to stay on top—is two-pronged: We’ve got to affect both supply and demand.

We need to restrict the supply of economic opportunities. We need to make those opportunities more costly and thus out of the reach of many young and poor. We also need to suppress the demand for jobs and entrepreneurial ventures. We need to make it more beneficial to stay out of the market than to participate in it.

Let’s get to some specifics.

Restrict the supply of opportunities

The biggest advantages young and poor people have over us are very low opportunity costs and a low-cost lifestyle. This means they don’t have to give up much to work a job, and they don’t need to earn much to cover their expenses. Because of these major advantages, they can work for very low wages, and thus become attractive for employers to hire and train. At low wages, they’ll always find work, and worse yet, they’ll be constantly learning and improving—adding to their stock of human capital.

The obvious solution is to make it illegal to work for low wages. Working for free is absolutely out of the question. If young and poor people could simply offer to work for little or no pay, they’d soon be gaining valuable skills and competing with us for jobs! Let’s cut that first rung off the ladder, lest they climb over us some day.

Young and inexperienced workers don’t have a lot of expertise. They make mistakes. Of course, if they’re allowed to participate in the trial-and-error process of the market, the incentives will soon drive them to develop expertise and be reliable suppliers of goods and services. That would be a travesty for us. We need to keep them unskilled and unreliable. The solution is to create a labyrinthine web of licenses and regulations that make it illegal for anyone but experts to sell goods or offer services. Since we’ve already banned working for low wages or apprenticing for free, it will be almost impossible for these novices to learn from a seasoned expert until they gain the necessary skill. We can make it even harder by adding lots of fees and costly training sessions to obtain licenses.

There needn’t be just one law making low wages illegal or just one licensing and regulatory regime. We need a wide variety of complex and ever-changing barriers. High taxes on productivity and profit, union dues and demands, work restrictions, rigid job categories, seniority bias, massive credential requirements, health and safety rules to cripple upstarts, consumer protection laws to hamper smaller producers, no access to capital or ability to stay in line with the law without costly lawyers and accountants, etc., etc., ad nauseam.

My recommendations are myriad, but they all boil down to a simple principle: Do anything we can to make economic opportunities more costly and rare. This reserves most of said opportunities for us.

Now for the second prong.

Reward non-participation

We don’t want to seem callous and cold toward those less comfortably situated. Indeed, we harbor no ill will toward the young and poor. We just don’t want them to compete with or catch us.

Since we care—and especially because we want people to believe that we care—we can’t be all “stick.” We need some “carrot,” too. It’s not enough to restrict the supply of opportunities, because some people will break the rules or work around them. We also need to suppress demand by offering some sweet incentives for young workers to stay unproductive and uncompetitive. We need to make non-participation in the market more attractive than participation.

First, I recommend a strict policy of forced education for the first few decades of life. We’ve already discussed making it illegal for the young to work or the poor to work for low wages. But we also need to make it mandatory that they do something else, and something that won’t make them more likely to compete with us now or later. We should create giant institutions where we send them all day to follow rules and do what they’re told without question. We don’t want them becoming innovative, or pursuing passions and interests that they might become experts in and thus supplant us in the market. They must only learn what the bureaucrats who run the system tell them to. (Oh, and the people who run the system should only be those who don’t really know much about competing in the market, because we wouldn’t want them passing on such knowledge.)

We can’t just make school mandatory. Many would still play hooky if it cost too much. We also need to hide the cost by paying for the whole thing through taxes and borrowing. We need to subsidize it so much that alternatives can’t compete. We need to weave a narrative about its glory so that no one wants to opt out.

But 18 years isn’t enough. We need to keep these young, hungry individuals out of our way as long as possible. I say we artificially lower the cost of otherwise very expensive degree programs and advanced studies. We can guarantee low-interest loans, throw a lot of grants and subsidies around, and always, always parrot powerful propaganda about the inestimable value of classroom learning. Let’s make the most attractive option—socially and economically—the one that keeps them from the commercial world as long as possible.

The longer we can make the education process, the better for us. Defer, defer, defer the time at which young people start entering the productive sector. The more loans they take on in the process, the better. Maybe they’ll even get married, get a nice house (we can incentivize the buying of expensive consumer goods via debt as well!), and have kids. All of these things are good because they take away one of the major advantages the young have in the workforce—their low cost of living and hence ability to bid for lower starting wages. We want them saddled with so much debt that they have to earn high wages to get by, and thus have to compete with workers who are a lot more experienced for those higher wage jobs. We need them coming out of college looking for salaries that don’t comport with their skill levels. This increases the odds that older workers like us will win.

We’ll need to address those too old or too poor for school as well. We need basic income guarantees, food stamps, and all manner of welfare to cover the costs of low-income life such that no part-time entry-level job could pay quite as much. Again, we need to make not working worth more than working.

The best part

Here’s the best part: By the time these young and poor find themselves unable to compete, with costly lifestyles and loans to maintain and little skill or experience, they’ll be older. They’ll join our ranks. They’ll lobby for even harsher restrictions on those even less experienced and less well-off than they are. They’ll demand to get the low-skill jobs they’re qualified for, but demand the pay be raised to high-skill wages. They’ll make the list of degrees and credentials they’ve accumulated the new barrier to entry to artificially raise their market value. They’ll help us perpetuate the very policies that caused their plight!

As with the first prong, these are but a few examples. Ideally a massive and shifting bundle of incentives to not enter the market as a producer can be put together: education mandates and subsidies, tax incentives to spend rather than save and to purchase education rather than other goods or business tools, housing and healthcare as long as you don’t work, and rewards for any activity that makes one less likely to try to compete with us in the market.

These policies will subtly turn the attention of nearly everyone away from value creation, innovation, and serving customers—all of which might threaten our dormancy. It will turn everyone’s attention and energy to fighting over the details of these policies and programs, to who gets which slice of the artificially limited pie and at whose expense. Some of us can really take advantage by running for political office and dividing up the warring interests we’ve created by promising them more restrictions and subsidies.

Above all, with both prongs of this strategy, we need a narrative that calls these policies noble, compassionate, and wise. We need them to be perceived as humanitarian aid to the young and poor, not as ways to keep them from succeeding. We need to make these programs universal values in themselves—regardless of the outcomes they produce. Who could oppose better wages? Who could oppose more education? Who could oppose more loans for homes or college? Who could oppose work rules and consumer safety regulations? Middle-aged, middle-class people certainly won’t, if we know what’s good for us.

We cannot abide an America in which plucky newcomers outperform us at every turn. Join me in securing our future.

Originally published in The Freeman.

What Does a Degree Signal?

There are plenty of critics of college.  It’s not uncommon to hear prominent pundits challenge the prevailing narrative that everyone should go to college.  Many contrarians say that too many young people are going to college, not too few.  They say that higher education is well-suited for the smart, hard-working, above average types, but too many mediocre students are attending.  They say it works better when only the best and brightest attend.  I think most of these critics have it backwards.

A degree is a signal.  It is well established that higher education’s primary value, and hence business model, is as a sorting mechanism rather than a forming mechanism.  Sure, you learn and change and gain things through the typical four year experience.  But all of those things could be had without being a registered student.  The only reason people keep paying to make the experience official is because of the signalling value of a transcript.  Given this fact, it follows that the signal would provide the most value for the marginal students, and the least value for the smartest, hardest working, highest achieving (not merely academic achievement, which doesn’t always mirror what matters in the world outside the walls of the classroom).  In other words, college is far more valuable to an average person who is content to put in less effort it than an above average talent who is very ambitious.

Considering how widespread the granting of degrees is, and considering the talent level of the typical college classroom, the degree doesn’t signal much.  It signals that you are average.  You’re like most other people.  If you’re at or below average, it can be valuable to have a way to let people know this.  If you’re above average, you want signals that demonstrate that you are, not merely those that lump you in with average.  Look around a college classroom and remember; what you’re purchasing is a signal that says, “I’m about the same as these people.”  For many of the sharpest, hardest working students, a degree signal greatly undersells them.

So much so that degrees have actually become a reverse signal in some circles.  In the venture capital world, it’s not uncommon for investors to count skipping or dropping out of college as a big plus for founders they want to invest in.  Entrepreneurs who have the courage to pursue their vision in the face of social pressure signal something really powerful.  Some of the most interesting people and opportunities in the world want an answer to the question, “Why did you go to college?”, rather than why didn’t you.  If you’ve got drive, creativity, and smarts above average, why did you choose the relatively easy, prevailing path?  Why did you wait four years to get started on the really good stuff?

Like most critics, I agree that college is not for everyone.  Where I disagree is that I think those who benefit least from it are those who are smartest and hardest working and most able to do more without it.  College is a least common-denominator signal.

A Book That Will Help You Understand Why Bitcoin is Amazing

My friend Steve Patterson – a brilliant and clear thinker, excellent writer, radical, tech enthusiast, and scholar – has written what I think is the best intro to bitcoin you can find.  It’s sufficiently basic, so even a tech noob like me can grasp it, but it doesn’t shy away from delving into the details of how the technology works.

downloadWhat’s the Big Deal About Bitcoin is the kind of book that, as you read it and immediately after, make you feel like you completely grasp the intricacies of bitcoin.  After a few days you can’t really explain or recall exactly what had you so excited.  That is a sign of a book that does a great job boiling down really complex ideas.  Big ideas take a while to understand, longer to be able to explain to others, and longest to become second-nature.  A book this small that can give you the complete intellectual understanding of the concept immediately is rare.  One encounter will convince you of the power of bitcoin.  Another will help you be able to explain it.  I’m reading it for a third time as I try to gain a level of understanding sufficient to convey it to others!

Prior to reading Steve’s book I was excited about bitcoin as currency from primarily a theoretical standpoint.  I know the dangers and limitations of government issued currency and the power and beauty of competitive, market-based currencies.  I was also very interested in bitcoin as method of payment as a practical solution to the archaic, costly, time-consuming methods currently available to individuals and businesses.  Transferring money is ridiculously cumbersome, and the fact that I’ve had to physically enter a bank branch twice in the last month – with several paper documents in hand – is absurd and annoying.  I knew bitcoin had potential as both a currency and method of payment, and I loved buying and transferring small amounts to play around with it.  What I did not understand was the real source of bitcoin’s value and power, the blockchain itself.

The blockchain is nothing more than a public ledger, but one that is completely decentralized and essentially eliminates fraud and most of the biggest problems that have long plagued both physical and digital financial transactions.  But the blockchain is more than just a financial innovation.  It’s a unique distributed software process that can be applied to anything where proof of ownership is incredibly valuable and forging such proof is low cost. (Copying paper money, or paper titles, for example).  It makes units of digital information, which by nature are infinitely copy-able, into unique, scarce pieces of data.  That single innovation has the power to transform the world, and the number of applications and technologies than can be built on top of it are endless.

Don’t get too bogged down trying to understand my explanation – I’m reading the book again to get better at explaining it, but I’m not there yet!  Pick up a copy and read it for yourself.  I’ll be surprised if you don’t walk away thinking bitcoin is the biggest innovation since the internet.

 

 

The Education Calculation Problem

In the last century a minority of great economists, led by Ludwig von Mises, clearly and forcefully pointed out the impossibility of calculation and planning under a socialist economy.  History bore them out, and the Soviet Union collapsed under the crushing weight of its own absurdly uncoordinated production patterns.  Absent a price system, planners grasped for anything they could measure in order to get the right mix of goods.  They judged the success of the nail factory by the total weight of all the nails it produced, which naturally led to factories producing giant nails of no use to anyone.  Then they switched to the number of nails produced, which led to tiny nails, equally useless.  It may seem like a silly case of some rascally producers, but regardless of the intentions or skills of the workers or planners, how were they to know what type, size, quantity and quality of nail to make?  They had no connection or effective communication channel to the consumer.

The insights about the impossibility of planning under total socialism apply equally to so-called “mixed” economies, except that whatever remnants of a market are in operation will stave off total collapse at least for a time, acting as a kind of safety valve.  In other words, the same top-down disorder that resulted in a surplus of mustard and a shortage of bread can be expected in the “planned” segments of any economy.

Education is “mixed” in the US, but more top-down than market based in almost every case.  There is almost no relationship between the end users of education – students and their parents – and the producers and planners in the system.  It is no wonder the education system focuses on compliance, obedience, respect for authority, behaving exactly like other people your age, memorizing things whether or not they’re valuable, and a lot of other characteristics inimical to a free society and entrepreneurship, production, and innovation.  They focus on these things because they can be measured absent a market.  Something like student satisfaction is far more important, but only the nuanced, complex, adaptive market order can cater to such individualized, subjective vagaries.  Top-down orders don’t know what to do with it so they endlessly tweak and argue over Common Core and other arbitrary outputs that can be measured.

Are teachers paid too much?  Too little?  Are facilities too big and costly?  Too small and dated?  Are class sizes too big or too small?  Do students need more tech, or less?  Longer school days and years, or shorter?  More extra-curriculars or fewer?  More or less homework?  More STEM or more arts?  No one knows, and no one ever can know absent a market.

Imagine markets for other goods and services if they were managed in this way.  Does your local grocery store need more of fewer types of refried beans?  Do you think a town hall meeting and a few bean board elections would come to a better solution than the market process?  Does “society” need more trucks and fewer sedans?  The absurdity of these questions ought to give pause before we enter ridiculous debates about whether schools or universities need more of this, or less of that.  Good intentions and good people can’t make sense out of the chaos.  Only markets can.

The more managed a system, the more it relies on what can be easily measured, and will therefore tend to produce those things rather than what is of value to consumers.  If this goes on long enough, consumers may forget that they even have an opinion, or that they could even value things other than the low-quality product they’re given.  If you’d never lived in a world with a flourishing, diverse market, you may not even know that you wanted low-sodium extra smooth refried beans, because you didn’t even know canned beans existed.

The solution in socialist countries was private property.  Even at its peak, those who went outside the system and operated in black markets kept some semblance of quality of life possible.  Once people were formally allowed to take ownership over their own lives and resources, markets and a functioning price system emerged and quickly began the ongoing coordination and creative destruction of a beautiful spontaneous order.  Consumers were once again king, and their wants and needs (sometimes unknown until entrepreneurs offered it to them) were the ultimate driving force.  Production patterns became flexible yet highly efficient at moving resources from lower value to higher value uses, as determined by the preferences of the end user, not some board or commission.

Unless private property (the ownership of ones own learning) in education reigns, educators will continue to grasp in the dark for what to produce.  They’ll tend toward uniformity, authoritarianism, and clumsy, blunt approaches that lend themselves to easy measurement.  Once consumers seize ownership of their own learning and seek products and services outside the grip of the state, the education market will reach full bloom and a cornucopia of methods and means will emerge.  Until then, the question, “What should education look like?” is as unanswerable as, “What should an economy produce?”.

Why I Love the Anonymity of the Market

A lot of people say they want to know the person who sells to them.  They want a tight-knit Mayberry-like marketplace where you buy from and sell to your friends and family.  Seems more civil and cozy than the widely dispersed and highly specialized global market, doesn’t it?  I don’t think so.  And I don’t think most people realize that the very anonymity they claim to dislike is one of the more humanizing and freeing aspects of the market.

Trying a new format, I recorded this while driving home from Starbucks.

It Goes Both Ways

People have a tendency to put themselves into one role in the market, and vilify the other.  They think of themselves as consumers, and producers are nasty.  They think of themselves as employees, and employers are greedy.  They think of themselves as sellers, and buyers are stingy.  They think of themselves as borrowers, and lenders are predatory.  To condemn any of these roles in the market is to condemn oneself.  We all play every role at one time or another.

Why is it wrong for the price of gas or groceries to go up, but right for the price of your home or the value of your 401(k) to go up?  You’re the “greedy” seller when you post on Craigslist.  You’re the “stingy” capitalist when you shop for the bank with the highest interest rate.  You’re the one “taking advantage of others” when you take a few extra minutes on lunch break or treat customers rudely.

There needn’t be any bad guy.  The point is, in a market we’re all at once buyers and sellers, producers and consumers, borrowers and lenders.  These are functions, not people, and all market participants play these roles at various times.  None of these roles are more or less noble than the other.  They’re all wonderful, so long as they’re all voluntary.  If they’re voluntary, they only come into being when another person, playing the counterpart, agrees to the exchange.  There are no sellers without buyers, there are just people with stuff they can’t get rid of.

Go easy on the one-sided category judgments.  Next time you’re tempted to condemn a company for taking advantage of employees, for example, consider all the employees that take advantage of the company as well.  Consider that both parties have to agree to work together, and both are aware of the ways in which the  other will try to get the most for the least in the deal.

Milton Friedman on Risk, Choice, and Regulation

A while back I came across one of many video clips in which Milton Friedman insightfully responds to a tough question.  The question is about Ford making a car with a part that saved 13 dollars, when studies showed that using the more expensive part could reduce harm in the case of collision and potentially save 200 lives.  The questioner feels this is a clear example of the callous, money-grubbing nature of the free market, the implication being that some regulatory body should prevent Ford from making such calculations.

Friedman asks how much Ford should be willing to spend to reduce the risk of a single death.  The student refuses to answer.  Friedman’s point is that the question was not over any principle, but over what amount of money Ford should be willing to pay for a single life.  It’s about costs, benefits, and trade-offs.  The student doesn’t seem to follow, but Friedman is dead-on.

Let’s say Ford decides to install the more expensive part.  Their profit margin goes down, maybe some shareholders start selling shares.  How do they make-up the difference?  Maybe they lay off a few low-wage workers.  Maybe they raise the price of their cars, putting them out of the reach of a few low-wage consumers.  Is it worth it?  Maybe these consumers would have been happy to buy the cheaper car, even if it was less safe.  Aye, there’s the rub.

Friedman mentioned this, but in the short Q&A there wasn’t sufficient time to really hammer it home. This real discussion is not about what Ford should make and sell, or how much risk is too much. It’s about who should decide how much risk is acceptable.  That’s the principle worth debating.

Advocates of free-markets like Friedman believe that each individual is in the best position to decide how much risk they are willing to incur.  In every action, every purchase, and every sale, there are costs, benefits and risk involved.  You are the best person to decide whether you should buy a motorcycle, or not buy the most expensive dead-bolt, or produce and sell an extremely sharp cooking knife.  The principle Friedman was referring to is that of freedom to choose what decisions to make and what is in your own interest.

Those who favor regulatory intervention want such choices made once for all by bureaucratic bodies.  They want a set standard of tolerable risk to apply to every human in every situation, no matter how costly abiding by it may be, or how much poverty or even death may be the unintended result.  These regulatory bodies are in the perfect situation to be captured by the largest, most connected businesses who will get them to pass regulations that help them and hinder smaller competitors, with no concern for what it does to consumers.  These bureaucracies are also most attractive to the very kind of unscrupulous, greedy sociopaths that interventionists worry about in the marketplace.

If Ford sells a risky product it may be a bad move on a variety of counts, but no one has to buy it.  Government decisions are the only ones that every single person is forced to abide by, no matter how bad they may be.  Regulatory intervention not only falls far short of free-markets on moral grounds – coercing everyone to make choices set by elites – it dramatically reduces the benefits to all.  It destroys wealth and the incentive and space to innovate.  It rewards political gamesmanship over consumer service.  It interferes with valuable signals sent by and to all market participants about what level of risk people want, and what makes them happy.

There are trade-offs all around us.  The question is not which decisions are correct for other people – we have a hard enough time figuring out which are correct for ourselves.  The question is, where should these decisions be made, and by whom?

Regulation Schmegulation

The number of hurdles to jump before you can legally create value is astounding.  There’s a law at every corner, working to impede the peaceful pursuit of profit.

Highly resourceful or talented people simply find ways around it.  They pivot, contort, or even work to alter the law to achieve their goal.  They devote entire divisions of their companies to overcoming these arbitrary obstacles.  But eventually, they can overcome them.  Some entrepreneurs have an amazingly high risk tolerance, and choose to ignore the laws entirely and provide their products illegally.  Others aren’t willing to risk prison but have the smarts, connections, or wealth to navigate and comply with the labyrinthine legal system.

So what’s the problem with state intervention in the market?  Visionaries can find a way to achieve their vision, laws or not.  The problem isn’t for them.  It’s for everyone else.

People with limited means and average ability suffer.  The barriers are often too much for them to overcome and too risky to ignore.  Their ideas languish.  Each new obstacle sucks away too many resources and leaves them unable to move forward.

Even those who with no particular entrepreneurial vision suffer.  The immense dead-weight loss of all the creators devoting resources to fighting, influencing, or complying with the regulatory state destroys value for all.  I’ve met business owners who devote ten or twenty percent of company resources to state created problems, meaning ten or twenty percent fewer resources are available to solve customer problems and make everyone better off.

People think economic regulations hamper big businesses and rich people.  The opposite is true.  If an idea is big enough and an entrepreneur driven and resourceful enough, it can come to fruition, despite the state.  But there’s no way to comprehend just how many smaller ventures never got started, or how much more wealth would be created for all if the ham-fist of regulation were entirely replaced by the invisible hand of the market.

Where Are All the Factories?

My wife and I recently watched a few seasons of Stargate Atlantis on Netflix. (Go ahead, say it.) Something that always bugs me about the show and many like it is the incredibly unrealistic way in which alien societies are portrayed.

There are countless episodes where the team finds a new planet with a thriving civilization. No matter what period of development the people are in, they always have a vast array of highly produced goods. Villages have houses with uniform, manufactured bricks, panes of glass, ornate wood and metal work, produce and meat, cooking utensils, tools, textiles, weapons, and on and on. These items require an expansive division of labor, a high degree of specialization, and a very deep or “round about” capital structure. Yet there is rarely any indication of these things. Most societies only have raw materials, like land and some farms or pastures, and consumer goods. It’s seems these societies magically convert raw materials into serviceable items with none of the complex, multi-layered in-between processes required in the real world.

It’s possible the writers cannot portray these features due to constrained budgets. After all, we see the same set re-purposed with a few small tweaks to represent several different villages. When the plot-line isn’t about the structure of society, it doesn’t make sense to spend a lot to show the way it works. But often the plot is built around the way the society works.

One episode had cities that followed orders from a computer screen, and structured their way of life to fit exactly what they were told, a la Sim City. They’d switch from making furniture to steam engines overnight. Somehow the invisible capital, labor and knowledge markets seamlessly switch course, and no major shortages or surpluses result. The childish absurdity of this is hard to fathom.

If it’s not because of budget, perhaps the simplistic portrayals are a reflection of the economic ignorance of the writers. It’s sad that so many intelligent people are utterly unaware of how the market works. It’s sad that so few have tried to contemplate the incredible complex dance of unplanned coordination required to produce a single, simple consumer item. Yet the fact that so many can be so ignorant of the workings of the market is also one of the things that makes true capitalism so great.

These writers are showing the world as they experience it. A huge marketplace of end-products, available everywhere you look in dizzying array. Their experience is one in which they have access to the products of the free market, without having to understand or even be aware of the incredible process that took raw materials, capital, ideas, and labor, and transformed them. No one has to be an economist or an expert in any field or industry to participate in a capitalist system; indeed to meaningfully contribute to that system through their actions.

As much as I’d love Hollywood writers and everyone else to understand the full-fledged spontaneous beauty of the market, I’m even more excited that they don’t have to in order for the market to serve them.

Five Great Economics Books

Originally posted here.

1. That Which Is Seen and That Which Is Not Seen, Frederic Bastiat

This essay is almost single-handedly responsible for sparking my interest in economics. If you don’t have any economic understanding, this is sure to give you several “lightbulb” moments. Though two centuries old, it is still the best introduction to the economic way of thinking I know of. The book addresses common economic myths—like the idea that government programs can boost the economy—with clarity and wit. Henry Hazlitt’s Economics in One Lesson is essentially a modern revision of Bastiat, and it is also excellent, but I still find Bastiat’s style and frequent sarcasm unbeatable. Start with this book, and if you’re not intrigued by what you learn, you can have your money back.

2. Beyond Politics, Randy T. Simmons

This is a fine introduction to the field of Public Choice Economics. Just when you thought you had come to the end of epiphanies after reading Bastiat, you discover Public Choice and the lightbulb goes on hyperdrive as you see economic thinking applied to the political process. This book is a must for anyone who thinks democracy is the cure for the world’s ills, or that electing better politicians is the key to securing liberty. In fact, I would be so bold to say that if you engage in any type of efforts to reform policy without a knowledge of Public Choice, you are acting irresponsibly and doing more harm than good. Beyond Politics will open your eyes and clear your head.

3. Economics for Real People, Gene Callahan

This is an incredible book. It’s not only fun to read and at times humorous, but it’s immense scope is dumbfounding given its reasonable length. If you want to understand economics from the very first principles and see how things like the law of demand are derived, this is your book. It is an introduction to the Austrian School of economics, so you will not have math and charts and graphs, but logic as your guide. If you have no mainstream economic knowledge, start with this book before you take a class and become polluted by make-believe models and regressions. If you already have mainstream economic knowledge, read Economics for Real People and be refreshed!

4. The Fatal Conceit, F.A. Hayek

Hayek is not always easy to read, but this is his best book in terms of readability, and I think his most profound in terms of possible applications. Hayek’s most interesting work focuses on the role of information in the economy, and how amazing markets are at giving us information to act on. The Fatal Conceit is the opposite side of that coin; how deluded central planners are to presume to have enough information to make good decisions absent the market process. This book is short, but after you read it you will want to apply these Hayekian insights elsewhere. I suggest reading some Thomas Sowell to follow the rabbit trail.

5. Human Action, Ludwig von Mises

I know, I know, this book is really big. Some people complain Mises is hard to read. I could not disagree more. His writing is very structured, his arguments very logical and clear, and his conclusions groundbreaking. Human Action is one of those very few books that every thinking person should read. This is the more sophisticated version of Economics For Real People (but don’t worry, real people can read this too!). Mises takes aim first at the methodology of economics as a discipline, then builds a comprehensive theory of economics from the ground up, and uses it to expose all manner of fallacies in socialist and mainstream economic thought. Before you either embrace or dismiss the Austrian School of economics, you have to read Human Action. After you read it, you will start to see everything else through a Misesian lens, and you will be the better for it. This book changed my life!

I decided to stop at five books, but I am going to add a little caveat to sneak in a few more.  The granddaddy of the discipline, and still probably the single most insightful book that launched political economy as we know it is Adam Smith’s The Wealth of Nations.  When paired with his Theory of Moral Sentiments, you get the moral backdrop.  Everyone talks about Smith, but really reading and rereading him firsthand is unbeatable, even if challenging at times.

For a more modern intro to basic economic thinking than Bastiat or Hazlitt, Stephen Landsburg’s Armchair Economist is a great book.  It’s got a lot of non-intuitive insight, but on a more solid foundation than some of the Freakonomics style stuff.  If you have an interest in economic history or you are grappling with questions about economic booms and busts and the growth of government, Crisis and Leviathan by Robert Higgs is your book.

Finally, some readers may have noticed that my economic reading list includes nothing of what people call economics today. Between the five books above I don’t believe there is a single chart or graph. There is no talk of determining someone’s utility function, no calculus, and none of the stuff that most people associate with the discipline. That is because I think most of that stuff is bogus and has nothing to do with understanding how the economy works. If you are unsatisfied with my dismissal of what most economics courses teach, and in particular if you are curious to learn about macro economics, I highly recommend Micro Foundations and Macro Economics by Steven Horwitz. Read it after you have read Economics for Real People and preferably also Human Action, and it will help you relate those principles to the things your professors talk about.

We Already Have the Solution: It’s Called Freedom

Milton Friedman once said of the political system,

“I do not believe that the solution to our problem is simply to elect the right people. The important thing is to establish a political climate of opinion which will make it politically profitable for the wrong people to do the right thing.”

There already exists an institution that ensures people, be they right or wrong, do the right thing.  It’s called the market.

Any wish to constrain government, or keep political interests behaving in the interest of the general public, is a wish that government behave more like a market; and that the political class behave more like individuals must behave to succeed in a market.  All reform efforts aimed at making the state smaller, less oppressive, more accountable, more efficient in it’s various activities, and less arbitrary are efforts to make it completely unlike itself, and completely like the market.

What I mean by the market is the entire realm of voluntary exchange and coordination.  Politics, like all institutions, is a type of market, but not the type I mean.  It has two unique feature that no other institution has, it produces a host of things unthinkable under other institutions.

The first unique feature is coercion.  The transactions in the political system are not voluntary.  This dramatically alters the incentives and signals in all the exchanges.  “Customers” tolerate what they hate, because it’s not worth being jailed for.  The second unique feature is near universal moral approval.  Though the coercion is real and known by all, it is not only accepted, but praised and condoned.  No other institution enjoys this kind of unskeptical reception and sanction.  Without these two features, there is no state.

It is easy to see why governments produce so much of what we hate, and destroy so much value.  Any market entity that attempted to engage in a single activity the way government does would cease to become profitable and receive universal scorn.  On the market, people think it immoral and tasteless to say you’ll provide a free soft drink with a sandwich and not make good.  That kind of behavior from a corner deli wouldn’t last a week.  On the political market, people think little of a politician who promises to stop sending young people to kill others across the globe, but then sends more instead.  That kind of behavior might get you another four years.

If we wish for the wrong people to do the right things, we can engage in the monumental task of altering public belief and preferences enough that they are willing to pay the price for resisting the state.  We can work to continually alter the incentives faced by politicians on every single issue, fighting back against every incentive built into government.  Of course, the state itself resists this by its very nature, and always will.

The real solution is not the state at all, but the market.  It’s not changing the state, it’s letting it fade into irrelevancy as markets grow up around it, carrying out all the activities states try so jealously to monopolize.  Markets don’t require perfect consumers or producers.  They put bad people in the position where they must do good to succeed.

Friedman was right.  The easiest way to do it is to force political entrepreneurs out of government, and into the realm where they’ll have to be market entrepreneurs.

I Want Rocket Scientists to Have the Rockets

I want those who know how to create the most value out of a resource to have the most access to it.  Silicon and copper in my hands are just about worthless, yet in the hands of computer manufacturers they can change the world and make millions of lives better, not to mention dramatically reduce the quantity of other resources required to accomplish tasks.

Resources need to flow where they can best be used for all of us to get the most out of life and what’s around us.  That’s why I like markets.  Those who can get most out of a resource bid the most for it.  Initially, those who created a lot of value in the past and thus earned wealth are in the best position to obtain new resources.  But if they can’t do anything to enhance the value of those resources, they’ll want to resell them to others who can, or loan money to people who can enhance the usefulness of the resource.  Quickly, resources start to flow to where they can be utilized to create the most value.

Imagine the disaster if, instead, resources flowed where some resource manger thought they should.  No expert has expertise enough to know the best use of every material in every field.  Of course, we needn’t imagine what would happen, because we’ve seen it.  “Planned” economies like the Soviet Union were an unmitigated disaster that literally starved millions to death.  Factories produced massive quantities of goods that had no value, and there were chronic shortages of important stuff.  Valuable resources were converted into worthless objects left to rot.

Worse still, innovation was nearly impossible.  How could cutting edge inventors get resources to work on something new?  They had to be politically connected.  How much value they could create for people with their improvements was irrelevant.  What a terrible system for everybody except the dictator and his buddies.

Maybe total top-down control is out of vogue, but democratically controlled resource directives are no better.  Rather than channeling resources to those willing to bid the most for them because they expect to transform them into something valuable enough to exceed the cost, democratic institutions channel resources to people who merely “like” things, or those who are good at political games.

Imagine you’re stranded on an island with a handful of people including one radio expert.  You stumble upon a broken radio.  The expert is confident she can fix it and send a distress signal.  Two other people think it would look really cool as a decoration for their lean-to.  Being firm believers in democratic institutions, you vote and the coalition of two wins.  The radio expert tried offering whatever she had to convince others to vote for her to have access to the radio, but the group considered that unfair tampering with the decision making process.  Everyone gets one equal vote, regardless of how important the resources are to them.

Thank goodness there is still enough of a free-market in the world that most resource allocation happens via voluntary transaction, and goes to those who can use it in productive ways.  Imagine how much better off we’d be if the coercive absurdity of politics was completely absent from the process?

Individuals Act in Own Self Interest!

BREAKING: Individual’s, when given a range of choices, do things they see as most beneficial to themselves. Surprisingly, giving them titles like “public servant”, paying them with a percent of earnings taken by force from others, providing a lot of power and public trust, and offering little scrutiny do not reduce the tendency towards self-interest.

First, Do No Harm

Last summer I had a trip to the emergency room that highlighted one of the perversities of the medical industry in the United States: Health practitioners are prevented from helping patients because of regulatory hurdles erected by the state at the behest of vested interests.

We were on vacation in a small town on the shore of Lake Michigan, and I experienced some intense stomach pains. When the pain persisted, I wondered if it might be my appendix and decided to hazard a trip to the ER to get it checked out. Fortunately, my appendix was fine and the pain subsided not long after I arrived at the hospital. Unfortunately, my experience in the ER was painful for other reasons.

I arrived late at night to a small but clean new building. There were only two other people in the ER waiting room and there were several nurses and hospital personnel on hand to take my information. I was in the system and seated in no time.

Then I waited for an hour and a half.

Given that effective pricing mechanisms are not available to the hospital, the long wait actually makes sense as a way to weed out the more frivolous ER visitors. Hospitals are required to see everyone who comes in, and virtually no one pays directly for their health services, so the incentive is to abuse the ER with visits of low importance. Making patients wait a long time is one of the only means available to the hospital for reducing low value visits. Indeed, one of the two patients there before me left during this time.

Finally I was admitted. A very energetic 30-something nurse took my vitals and inquired to the nature of my visit. I discussed my abdominal issues at length, and he looked very thoughtful and excited, like an engineer relishing the challenge of a puzzle he knows can be solved. He asked a slew of good questions, some of them unexpected to me. He looked pleased in a Sherlock Holmes kind of way.

Now I was excited. I could tell he had several ideas about my condition. He said, “Well, you have to wait for the doctor.” He paused and lowered his voice a bit, “but I can tell you that I don’t think you’re in serious trouble … I’ve got some really good ideas on what’s going on and what you can do about it. I’ve seen and experienced what I think you’re dealing with.”

This was great news! I’ve had on and off unexplained stomach issues for a number of years, so I was eager to hear his thoughts. I asked him to elaborate and he looked a little dismayed. “I’m not a doctor. It would be outside of my professional boundaries if I told you more. The doctor will be in soon.” Then he left.

I was irritated, but glad at least that he seemed so energized and full of ideas. I was hopeful he’d talk to the doctor—and the doc could share his thoughts. I waited.

I waited some more.

After 45 minutes, I wandered into the hall (revealing hospital gown and all) looking for signs of life. I rounded a corner and came to a room where six or seven nurses were hanging around chatting. I asked if the doctor had forgotten about me. They casually said he’d come soon and returned to their chit chat. I went back to the room. At this point the pain had subsided quite a bit, and after my vague conversation with the nurse, I was convinced I was not in danger. Still, I wanted his thoughts. The nurse poked his head in again, seeming to feel sorry for me and, showing signs of frustration said, “Sorry, the doctor will be here soon. Hang tight.”

I waited another 45 minutes. Nothing.

I was tired, feeling better and getting grumpy. I had no cell signal, and I knew my wife was worried. I wandered the hall one last time with no result, so I decided to leave.

As I drove back to the cottage, I couldn’t help thinking of the frustrated nurse who seemed to have some helpful information he was dying to share with me but couldn’t. Why couldn’t he? Because he’s not a state-licensed doctor, and state-licensed doctors have made sure they are the only ones allowed to provide certain information.

The public justification for medical licensing laws is that they protect patients from bad service. The idea that state bureaucracies are the best way to guarantee good service is laughable. Just visit the DMV. The laws do offer protection, but not to patients. They protect doctors’ economic interests from the competition of other health practitioners with less training who might offer services at lower cost. This is an ethical problem for the medical profession.

The famous medical creed, “First, do no harm,” means that doctors ought not intervene with a patient if the intervention might cause more harm than doing nothing. But what about legal intervention? Left alone, I would have happily paid the nurse for his insight into my discomfort. He would have happily offered it. The doctor’s cartel, far from doing nothing, intervened with the long, blunt arm of the law and prohibited this interaction from taking place. In doing so, they caused harm to me by denying me information that could prove valuable to my health. In this case, it was not an emergency, but it very well could have been. There are instances of medical services prohibited by regulations that cause severe illness or death.

In South Carolina, where I now live, a law was recently passed banning midwives from assisting in home births if the mother has previously had a C-section or is otherwise considered a “high-risk” birth. The nurses and doctors advocated this law. It reduces the growing competition from the more personal, convenient and far less expensive home birth practitioners. Of course you can’t reasonably make it illegal for so called high-risk mothers to have home births across the board, because sometimes it just happens. So the law only makes it illegal for a midwife to assist. The result has been an increase in unassisted high-risk home births and an increase in medical problems as a result.

In both cases, the doctors’ lobby violates the creed to do no harm. Rather than letting people follow their planned course of action, professional associations concerned with the economic interests of their members run to the state and demand intervention that prohibits voluntary exchanges and does harm to the patients.

Milton Friedman argued long ago against medical licensing because it raises the cost and reduces the accessibility of medical services. Not only is it a bad practice for these economic reasons, but it is unethical as well. If doctors have an ethical obligation not to interfere with a patient when it might do harm, they should start by opposing state licensing regimes that do just that.

Originally posted here.