Tag: markets

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.

Crowd Funding vs.Taxation

The main justification given for taxation is that it solves a collective action problem.  Everyone would be better off, we are told, with the construction of a road or a park, but no individual has the incentive to pay for it, and if a collection were taken up, everyone would shirk and expect the next guy to pay.  If you know your few bucks won’t make or break the project and you’ll get the benefit either way, why pay?

There are many flaws in this analysis, but even if we accept it, consider the emergence of crowdfunding as an alternative.  You can share the details of a project and the cost, and offer specific access or benefits to those who contribute a certain levels.  The project does not move forward until full funding is committed.  This is an amazingly powerful tool that is just starting to reach its potential.

If what is funded benefits the whole world, great!  They needn’t be labelled free-riders, because everyone who pledged to support it knew ahead of time this would be the result, and indeed welcomed it.  If it’s a project that can’t sustainably benefit everyone, crowdfunding allows the ability to restrict access to those who pay.  It also utilizes the power of transparency and shame.  If you claim to really want a project to succeed, yet you pledge no money yourself, you’ll incur the wrath of your peers.  Crowdfunding harnesses people’s public spiritedness.  It lets you openly demonstrate what you’ve pledged.  It creates competition to cooperate.

I’m not just talking about bake sales for summer camp.  There have been startups that raised ten million dollars on sites like Kickstarter.  There have been massive research projects and prescription drug advances utilizing crowdsourcing (harnessing dispersed knowledge) as well as crowdfunding; not just the supply of capital, but the supply of human and intellectual capital can be done without central control.

The very projects that people worry wouldn’t happen without government funding are those most suited for crowdfunding.  Works of art that won’t generate tons of popular sales through traditional channels.  Highly speculative research.  Space travel.  Charity and welfare enhancing programs.  Helping a single person pay for a costly medical procedure.  Why couldn’t bridges or buildings be financed in the same way?

We live in an amazing world.  Every day, more people voluntarily coordinate and co-create and make the functions the state tries to monopolize less and less relevant.  Humans have always created free institutions that, under no compulsion and with no clear designer, enhance our individual and collective well-being.  Technology just puts it in high relief and speeds the process.

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.

Private Charity Isn’t Enough

Originally posted here.

“The idea that churches can tackle national poverty, take care of those who are ill, and rebuild communities after natural disasters requires a spoonful of bad moral theology and a cup of dishonesty.” – Robert Parham

In this blog post, EthicsDaily.com editor and Executive Director of Baptist Center for Ethics Robert Parham claimed that churches and charities could never do enough to alleviate poverty. I agree.

Poverty will never be “tackled” because it is a relative term; a moving target. If you could describe the plight of America’s poor today to a poor person in another country, or an American 100 years ago, they would conclude that poverty had been eliminated. The standard of living among the poorest Americans today is incredible by world and historical standards. Yet we still wage the war on poverty, even in America. This is not a bad thing – helping the down and out can be wonderful. But when we aim at targets like the “end” of poverty, there is no end to what we can justify in order to reach this impossible goal. “The poor will always be with you.” The question is how best to reach them, spiritually and materially.

The second reason I agree with Parham’s claim is that, to the extent that poverty can be reduced, private charity alone is simply too small to do it. The incredible gains in social and material welfare of the poor in America have not primarily resulted from charity, churches or governments. They have resulted from (mostly) free-market economies.

If we look at poverty in a vacuum as Parham does and ask how private charity compares to government efforts, we could conclude that private efforts are too small. But if we look at government and private efforts combined compared to the power of the market, they would be dwarfed so as to make them hardly important in the big scheme. Charity is a targeted and short-term salve for the wounded; its value is far more in its spiritual nourishment and encouragement than any material progress it brings. A vibrant free-market is the only institution powerful enough to bring about the kind of dramatic increases in standard of living that most of us wish to see.

Public Choice

Jumping from the premise that private charity is not enough to the conclusion that government must do something places a blind, sometimes idolatrous faith in government that counters logic and experience. The incentive structure in government departments is to perpetuate and grow regardless of their effectiveness or the need for their services. There is no check on whether or not they are effective. In fact, the less effective a bureau of poverty relief is, the more they are rewarded with bigger budgets. If poverty is on the rise, and they will always claim it is so as to increase their importance, the last thing to do is cut the department of poverty relief!

Government programs are also subject to “capture” by interest groups and politicians. Scratch the surface of any government program and you will find that it is not the “general welfare” being promoted, but the welfare of a very small and politically connected group at the expense of the general welfare.

To examine private efforts and claim they cannot tackle a problem is only half the analysis needed. We must also examine government efforts and ask if they can tackle the same problem before we charge them to do it. The field of Public Choice Economics does just this, and you would be hard-pressed to find a case where the market is not providing something and getting government involved makes it better. If Christians have a duty to help the poor, they also have a duty to use their brains to discover ways that actually work. Intentions and actions are not enough, we need to understand how to be effective. This requires some knowledge of economic and political systems.

Wrong about Rights

The most damning and least supported claim in Parham’s article was that it is wrong for a Christian to value other people’s property rights:

“[L]ibertarian morality values property rights over human rights. For a Christian, that’s bad moral theology.”

I beg to differ. What Parham leaves unexplained is how human rights are to exist absent property rights. Private property is not some sacred dogma for its own sake; it is important because there is no other method of peacefully settling competing demands for limited resources. Such resources include food, water, shelter and other necessities of life. Common definitions or human rights include the right to be free from hunger. How can you have this right if you have no right to the very food you need to survive?

If Parham means by human rights the right to food, shelter, health care and other positive rights, this poses an incurable conundrum. Positive rights are a logical and practical impossibility. They cannot coexist with negative rights, or even with other positive rights.

A positive right is a right to something. A negative right is a right from something. A positive right obligates another person to take action. A negative right prohibits another person from taking action. A right to life, liberty or property is a negative right. You are free to live and act and justly acquire property, and no one can prohibit that so long as you are not violating their rights. A right to health care is a positive right. If you have the right to receive health care, someone else has an obligation to give it to you. If I am a doctor and you say you need my services, I am obligated to assist you in a world of positive rights. But what if at the same time I am hungry and need to eat rather than assist you in order to maintain good health? Our positive rights to health care cannot both be fulfilled, and in order for one of us to fulfill them we’d have to violate the other’s negative right to liberty and property.

Indeed, it is not possible to have any moral theology whatsoever without an acceptance of private property. One cannot give generously what one does not own, and one cannot help another by stealing from him.

Means and Ends

To sum up the argument, the author couldn’t imagine church and charity doing a task to his satisfaction, so his response was to ask men with guns to take money from people who presumably wouldn’t part with it voluntarily, and give it to causes he valued. Everything government does is backed by threat of force. Indeed, that is the only thing that distinguishes government from all other institutions. Let’s remove the intermediary agents (IRS, law enforcement) and revisit the argument with the author as the principal actor:

Churches and charities can’t or won’t do as much to help the poor as Parham wants, so he threatens, “donate or else.”

That’s clearly a barbaric and inhumane way to a more civilized and humane world. Yet voting for people, who will appoint people, who will hire people, who will send threatening to extort money to give to some bureaucrats to spend on social causes is no different in moral terms.

Appealing to Christian ethics is an odd tactic to justify a redistributive state.  Jesus made it pretty clear that the methods of the kingdom of God are service, sacrifice, grace and love. The means of all earthy kingdoms are brute force and the threat of it.

When the rich man refused to sell all his possessions and give the proceeds to the poor, Jesus did not send the disciples after him to extract a percentage on threat of imprisonment. He let him walk away. Christians are supposed to do the same.

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?

Luxury and Voluntary Redistribution

Watching Mr. Selfridge with my wife last night I was reminded of an under-appreciated feature of free-markets.  The wealthy subsidize beauty for the less well-off by patronizing luxury retailers.

Selfridge’s, a pioneer in the development of department stores, is a purveyor of fine goods.  The upper crust are its clientele.  Yet one of the things that made the store famous is available to the general public for free: it’s beautiful and dramatic window displays.  The sale of expensive goods to wealthier individuals is the goal, but thanks to the dollars from those customers and the desire to get more of their business, the store goes to great lengths to display their wares in an appealing and provocative way.  The result is a positive externality for every passerby on the streets of London.

Other luxury items have the same effect.  If you can overcome the urge to envy, you notice that high-end cars and buildings make the world around us more beautiful and enchanting.  Market detractors often fret about negative externalities in a free world, but how often do they account for the immense richness experienced by all, thanks to the wealth of some?

Our sense of life is made up of many things, including the aesthetic environment in which we dwell.  The seemingly extravagant expenditures of the wealthy can create surroundings overflowing with creativity and elegant design.  If you’ve never enjoyed the art of a neighborhood full of houses you couldn’t afford and landscaping you’d never dream of, I recommend taking a drive through one.  Put prejudice aside and let the sensory magnificence seep in.  Humans are amazing creatures who can shape our environs in amazing ways – I’ll be damned if I’m going to let those with nice stuff be the only ones to take pleasure in it!

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.

Commerce is Better Than Education

I’ve recently read several essays on education by some of the American Founders.  These writings have in common a belief that good education will promote civility, manners, advances in agriculture, manufacturing, and morality.  It seems to me effect is confused with cause.

It’s not education – at least not formal education or schooling – that produces industriousness and social cooperation, but social cooperation and industriousness that increases knowledge and education.  Commerce is the great civilizing force in the world.  The greater and freer the extent of trade, the more scope individuals have to exercise and explore their abilities and the greater the incentive to obtain knowledge of value to them.

When people are free to reap the rewards or pay the costs of their endeavors, they have every incentive to improve.  This incentive leads to advances in industry, arts, and even culture and values.  Peaceful, mutually beneficial transactions bring the greatest returns, and these require knowledge and respect for other cultures, proficiency with products and processes, and constant adaptation and learning.

When commerce happens, the incentive exists to become educated.  No one need impose an educational plan on their neighbor, and no one has the ability to know what kinds of knowledge their neighbor needs.  We over-estimate the role that education plays in determining the kind of world we live in.  In reality, markets do most of the heavy lifting, and education follows and fills in the well-worn paths etched by exchange.  You could expend all the energy in the world trying to ensure more young people learn your favorite subject.  But if the market signals excellent returns in a different field, people will flock their despite what they’ve been trained in.

We needn’t fret so much about what kind of educational systems exist around us.  We do need to do everything we can to ensure free exchange is unhampered, and myriad educational opportunities will flower as a result.

Marketing Creates Value

Near the end of the classic movie “It’s a Wonderful Life,” George Bailey saw reality in a whole new light. He glimpsed a world in which he was never born and realized just how important he was to those around him. This experience instantly and dramatically changed George’s outlook on life. In a matter of minutes, he transitioned from attempted suicide to pure joy at the fact of his own existence. No material facts changed. George Bailey was still stuck in Bedford Falls. He was still hard of hearing. He was still in deep legal and financial trouble. The angelic Clarence did nothing to improve the external condition of Mr. Bailey’s life, but he saved it nonetheless. He saved it with marketing.

Marketing is often criticized as being deceptive, slimy or at least economically wasteful. How could anyone justify a $2 million dollar Super Bowl ad about a bottle of Coke? Skepticism of marketing springs from an overly narrow and simplistic view of value. In the real world, the line between the real and perceived characteristics of an economic good is all but nonexistent. Our knowledge of and beliefs about goods are just as much a part of their value as anything that can be weighed or measured.

Economists have long understood that value (in the economic sense) is subjective. There is no universal formula to determine how much a good or service or experience is worth, because each person has different tastes, preferences and needs, and each will value things differently with changing circumstances. This means that how we feel about a good and what the good is made of are equally important in determining its value to us—i.e. how much satisfaction it brings. If making a better mousetrap can make lives better, so too can making people feel more confident in their mousetrap. This is not trickery; it’s value creation. Confidence in my mouse trap might help me sleep better at night and enhance my quality of life in a very real way.

We’ve all seen news stories about blind taste tests. They are meant to reveal consumer stupidity and branding smoke and mirrors. I recall reading about customers given a cheap beer and told it was a more expensive brand. They reported that it tasted much better than what they were told was the cheap beer, but was in reality the more costly. When they were told the opposite, the results reversed.

The report was framed as some kind of “gotcha” moment, as if a great hoax had been revealed. Why should these results be surprising? If you’ve ever picked up a glass of milk, thinking it was water, and taken a swig, you’ll understand. Even if you like milk you are likely to spit it out. Your beliefs about what you are consuming prepare your brain and your taste buds for a certain experience. The knowledge you have about what you ingest literally changes the experience of consumption. Try smoking a good cigar while stressed or in a hurry and see if it tastes even remotely similar to the same cigar when you have an hour to kill with nothing on the mind.

They say marketing is all about the sizzle, not so much about the steak. Why shouldn’t it be? Steak without sizzle is little more than raw meat; carrion fit for vultures and wild dogs. Steak beautifully plated and garnished creates more value for the person consuming it. Sight, sound, smell and taste are all part of the experience, and the brain is the crucial interface. Even if you have a purely utilitarian approach to eating and care only for the sustenance, you can’t ignore the mind. What you believe about your food actually affects how much it satisfies you.

My father suffered a closed head injury many years ago which affected, among other things, the communication channel between his brain and his digestive system. His brain always tells him he is hungry, no matter how much he eats. It is a near full-time job to convince him that he is full and doesn’t need any more food—that’s some serious marketing. In fact a great many people without head injuries resort to all kinds of tricks and techniques to convince themselves of the same thing in order to stay trim.

I recall talking to a friend who had no taste for coffee. I convinced her to try a sip only after closing her eyes and letting me describe step-by-step the growth, cultivation, harvesting and roasting process. She admitted that, while she still didn’t love it, she began to enjoy the taste a good bit more and understood why I love it so much. I know of people who can no longer stand the taste of meat because they observed the operations of a meat-packing factory. The meat did not change, yet its taste changed with their knowledge and feelings about it. The value of the product radically shifted with a change in perception.

If marketing makes us love a product more, and therefore makes us happier, it has indeed created value. Love for a new car comes not only because it is red, weighs 2,500 pounds and has four doors—all things that can be measured objectively—but also because it is safe, one-of-a kind, and edgy, all subjective to the person experiencing it. The purely informational role of an advertisement is no more valuable than its ability to make us proud of what we purchase. But how valuable is it?

We can get a rough idea of the minimum value created by marketing in dollars and cents. This does not, of course, measure the subjective value to each consumer, but it reveals how much value consumers placed on the marketing in money terms. If a marketing campaign costs $10 million and it results in an additional $11 million of revenue, we know that it has created more than $1 million in value, as judged by those who willingly spent money on the product. If the campaign made the product more valuable to more people and induced them to buy more or buy at a higher price, that is a reflection of the fact that the consumers felt the product and associated satisfaction created by marketing was worth more than the money they gave up to get it. Real value was created. If it was not, people would not have willingly parted with their money in exchange for the good. Better marketing can often be a cheaper and more effective way of improving a good and making people happier than altering the product itself.

Goods and the knowledge and feelings that come with them cannot be separated. New tile floors and soft lighting may be just as important as variety and good service at a clothing store. An inspiring ad campaign may bring just as much happiness as new features on a smartphone. This is no scandal, but a fact of the human experience of reality.

Rather than denigrate it as some kind of fraud or waste, we should applaud good marketing. Not only does it enhance the value of the products we buy, it enhances our quality of life even when we don’t buy the products being marketed. TV ads are often funny and entertaining. Billboards and magazine ads are sometimes works of art. Good marketing is a free gift to all, and it makes all our lives better. A world without marketing would be dull and far less fulfilling.

Altering our perceptions of reality is one of the best ways of improving our quality of life. It’s powerful stuff. Clarence saved George Bailey’s life with a recasting of the facts, and set him out with a full heart ready to take on the world. The creative efforts of marketers everywhere have the same power to make our lives richer and better.

Originally posted here.

Ask Where Things Come From

Yesterday, I came across this quote:

“America: Less than 5% of the world’s population, consumes over 25% of the world‟s resources.”

This is meant to shock and shame.  How selfish of the people living within this geographical area to consume so much!  That sentiment may be warranted if life were some kind of reality TV show with everyone stuck in a house with a fixed pool of resources, but it’s not.  If we really want to understand the world, we need to ask a key question: where do those resources come from?

They come from production and trade.  Everything that is consumed must first be produced.  There ain’t no such thing as a free lunch.  In order for people in the borders of America to consume stuff, they must obtain it.  They can produce it themselves or trade something else they have produced for it.  In a free market, every exchange is voluntary.  In order for both parties to agree to trade, both must consider themselves better off after than before.  Because economic value is subjective, both walk away wealthier than before because they gave up something they valued less than what they got.

Now that we know some basic economics, what does the statistic about consumption tell us?  It tells us that, in order to consume a lot, American’s must have produced a lot.  It means what they produce must be more valuable to their trading partners than what they consume.  In other words, it means they are creating value for the world.

There is an exception to the rule that more consumption happens after more value creation.  Consumption can also happen after resources are taken by force, outside the operations of the market.  This fact is illustrated by another quote I came across yesterday on a list of common economic fallacies.  The commenter said a common fallacy is,

“Not asking where ‘G’ comes from.”

In macroeconomics, wealth is often measured (somewhat dubiously) in GDP.  The typical formula for measuring a nation’s GDP is: C+I+G+(X-M).  In this equation, C means private consumption, I is investment, G is government spending, X is exports and M is imports.

There are plenty of problems with this formulation, but leaving those aside, the math tells you that increasing any of these addends increases total wealth.  This is what leads many to advocate for increased government spending as a way to grow the economy.  To the true believers, any spending will do.  John Maynard Keynes famously suggested that the Treasury should stuff jars with bank notes and bury them in abandoned coal mines to be dug up again.

But where does G come from?  Government produces nothing, it only takes.  Every penny in the G category was taken from C or I.  This would not seem problematic at first for the economy as a whole, much as individual taxpayers may not like it, because the sum would remain unchanged.  Except that, as we have been reminded, economic value is subjective.

A dollar taken from someone and spent on her behalf is less valuable to her than keeping that dollar.  If this were not so, she would have given it up voluntarily.  People put their resources to their highest valued use, according to their own scale of value.  Any time resources are taken by force, value is destroyed.  Further, the choices people would have made would send signals rippling through the economy, telling entrepreneurs and producers what to produce more and better of.  When government puts resources to their uses, it signals entrepreneurs and producers to create more of what government wants, which diverts production and innovation away from the areas most valued by the citizenry.

The common problem in both scenarios – assuming the a high rate of US consumption means less for everyone else; and assuming an increase in government consumption means more for everyone else – is a failure to examine causal connections.  Static snapshots of data – whether a percentage of world consumption or GDP – tell us nothing about the ongoing relationships in our world.

These relationships have patterns and feedback and adaptations.  The data comes from somewhere, and it’s more than a simple path; it’s the result of a complex and constant churning of causes producing effects.  Freezing this dynamic process in time and measuring where a bunch of stuff is can’t tell you whether the process is just or efficient, or what the results will be over time.

Before you make data-based judgments about systems in the world, understand where the data come from.  What does the process look like that produced it?  What are the causal relationships?  What happens to the data through time?  Citing a lot data might make you feel smart, but if you accept data alone as proof of cause, it’s only a feeling.

Bad Arguments Against Immigration

Originally posted here.

The Economic Argument
Arguments against immigration on economic grounds basically boil down to “They took our jobs!”. Some feel that allowing people to freely cross borders will result in a flood of low-wage labor that will “steal” jobs from natural born citizens. Labor is a factor of production, just like raw materials or financial capital. Restricting the flow of capital and labor will always decrease economic prosperity. Access to more resources – human or otherwise – always increases wealth and opportunity. If this does not make sense to you, I recommend Frederic Bastiat’s “What is Seen and What is Unseen”, chapter 7, as well as his brilliantly satirical “Candle Maker’s Petition”

The Culture Argument
Others argue that immigration must be restricted in order to protect the nation’s unique cultural heritage. I submit to you that any culture which must be maintained by force is not an authentic culture and is probably a bad one. Cultures freely arise because they provide benefits to those who participate in them. Cultures are always changing. Getting government in the business of protecting culture is dangerous and counter-productive. First, who gets to define what constitutes culture? Bureaucrats don’t have the best track record in such matters. Second, do we really want to live in a culture that is forced upon us by government prohibitions, restrictions and mandates?

The Welfare Argument
Advocates of limited government sometimes argue against immigration on the grounds that immigrants make use of the welfare state and increase the cost of government. State-sponsored welfare programs are a problem. Stopping immigration because immigrants might use welfare programs treats one tiny symptom, not the problem itself. If you routinely tossed open cans of tuna on your front lawn and found the neighbor’s cats hanging around your property, would you try to ban cats or would you clean the up the fish?

Though I think the vast majority of immigrants immigrate for jobs, freedom and opportunity, I’m sure some come and make use of government handouts (though less than U.S. Citizens, and likely less than they pay in taxes). The handouts are an attractive nuisance and should be addressed on their own merits, not by attempting to ban the free movement of people.

The Safety Argument
Some argue that allowing easy immigration will bring bands of criminals into their country and make them less safe. First, if something is a crime it is already, by definition, illegal. Threats to life and property are already supposed to be addressed via the existing police and justice system. Putting up a wall and stopping anyone from crossing it on the grounds that some of them may be criminals is ludicrous. By this logic, governments should perpetually engage in random home searches because they might discover criminal activity.

Closed borders probably don’t stop criminals, but let’s pretend that they could; if we could keep foreign criminals out by keeping out anyone foreign, what would we gain? We’d have spent tons of resources keeping out foreigners, most of whom aren’t criminals, and we’d have that many fewer resources to fight domestic crime. Banning people from movement because some of them may be criminals is even dumber than banning gun ownership because some people may use them for crime.

A Better Argument
Freedom to immigrate can be defended from several angles, but I believe the most important argument is based on rights. Imagine you and I have pieces of property that share a border. You wish to traverse my property and I wish to let you, but lawmakers prohibit it. What business do they have dictating whether we can make decisions about our own property? Sure, they were democratically elected, but what business do others have of voting to determine how you and I peacefully use our property?

What if government issued a decree that business owners were prohibited from hiring anyone born on a Tuesday? It’s no different when they prohibit hiring anyone born in another country. Shouldn’t the business owner be free to hire whom he wishes? If an individual wishes to travel, work, buy, or sell peacefully and all other parties involved agree, why should government prohibit it?

When you think up other arguments against immigration, ask yourself why they should not also be applied in state to state immigration? City to city? Home to home?

At bottom, I think much anti-immigration sentiment comes from a fear of people unlike us. I support anyone’s right to be prejudiced, or to associate only with those of like culture. But putting that attitude into public policy not only hampers wealth and progress, it violates my right to associate peacefully with whom I choose.

Obey the Law (of Demand)

The fact that walls and violence are needed to slow the flow of immigrants into this country is proof that more immigrants are economically beneficial.

If immigrants did not create wealth, they would have little incentive to come here.  In a market of voluntary exchanges, both parties benefit from trade.  For every immigrant who can command a higher wage in the US than elsewhere, there is an employer on the other side of that transaction, who benefits more from hiring the worker than not.  Wealth is created.

How much wealth is being left on the table by restricting immigration?  The evidence suggests quite a lot.  If immigrants consider it worthwhile to spend days sneaking through the dessert to avoid border patrol agents and face the very real threat of dehydration and death, the potential payout must be pretty significant.  That means a lot of value for both parties to the exchange.  Despite all the policies and restrictions passed, markets continually push towards equilibrium.

What’s odd about all of this is how revealing it is of our capacity for self-deception.  Americans push for laws that restrict immigration.  Many say that their preference is for fewer.  Yet when they take action in the market place, they reveal that what they really find valuable is just the opposite.  While the laws of the land say fewer immigrants, the laws of economics, reflecting preferences, beg for more through the price signalling mechanism.  Imagine a robot fluent in both English and the price “language” of economics, programmed to interpret the desires of Americans.  Americans would be screaming, “Don’t come here” with words, and begging, “Give me your tired!” with dollars.  I think we’re more honest in the face of trade-offs.  I’d program it to obey actions, not words.

We see the same double-mindedness with bans on box stores, import restrictions, drug prohibition, and a slew of other regulations.  Black markets are evidence of what people value.  If you have to use force to stop something, it’s because people really like that something and opportunities for mutual gain exist.  The more force required, the bigger the potential win-win being squelched.

If you want to know what people value, not just what they claim to value, the law of demand is a better indicator than the law of the land.  Those who follow this law, despite what the rules say, are listening to the true desires of consumers and taking on huge entrepreneurial risk to satisfy them.  How much wealthier we would be if we’d get the state out of the way and let these win-wins occur unencumbered.

You Can’t Have Free Markets without Free People

I’ve run a trading game at seminars and in classrooms where, by the end, all the students agree that free trade creates wealth and restrictions reduce it.  I give out trinkets, ask students to rank how much they value them, then allow them to trade for a few rounds, each with a larger segment of the room.  At the end of each round we tally up the value they place on the goods they have after trading.  As the movement of goods opens up, each person’s wealth in trinkets goes up.  Without producing a single new good, the total value of the goods in the room (measured subjectively by the owners) increases dramatically between the initial dispensation and the few rounds of trading.  Trade creates wealth.

This provides a nice segue into a short talk about the benefits of trade, comparative advantage, specialization, and why trade restrictions make us worse off.  I see several eureka moments as students understand from this simple exercise that freedom to move goods allows resources to go to their highest valued use.  Then I throw in a twist just before Q&A;

“Just as restricting the free movement of goods unnecessarily reduces wealth, so does restricting the free movement of labor; otherwise known as immigration restrictions.”

Hands shoot up.  Despite nearly an hour spent demonstrating and discussing free trade in goods, this single line at the end attracts 100% of the Q&A attention.  Inevitably, well over half the class has a reason why the laws of economics they just learned cannot possibly apply to human resources the way they do to goods and services.  Within the first few questions, every one of these objections withers.  What’s left are objections that have nothing to do with immigration per se, but are problems with the welfare state or the warfare state, and immigration is sought as a scapegoat.

The economic case for the free movement of people is incredibly clear and not hard to make.  Yet those opposed to freedom of movement tend still to cloak their arguments in economic rhetoric.  Even though it’s unsure footing, it is perhaps more comfortable than talking about the moral implications of barring people from interaction and exchange across arbitrary borders.  When you get down to it, it’s one of the most inhumane policies around.  Anyone who talks about helping the world’s poor should start by advocating open borders.

Here’s a great article to get started.