Russell Roberts's Blog, page 1459

Coddled

Entering the economics department today I saw the following notice on the front door of the building:

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When I first saw it, I noticed that it was referencing a test of the fire alarm system. I presumed that meant there would be some alarms going off and not to worry–it's just a test. But then I looked more closely. The sign was saying that there would be tests of the fire alarm system and during the three day period of the testing process, there would be no alarms available. So in case there was a fire, be sure to get the heck out of the building. EVACUATE THE AREA! Good idea. In other words, don't wait for an alarm, there isn't going to be one.

At first glance, this seems like a remarkably paternalistic and condescending instruction. In the event of fire, flee! Did the designers of the sign think that I would smell smoke or see flames and think, well, I don't hear an alarm, so there must not be a fire? How stupid do they think I am? But maybe it wasn't so insulting. Maybe after your sensitivity is deadened by constant coddling, you need signs like this.

I remember being in Chile and having a miserable cold or flu, I went into a drugstore in search of something to make me feel better. As I struggled with trying to read the labels, I realized that Chile's FDA, if there was one, was probably not like the American FDA. In America, the problem with the stuff you can buy in the drugstore without a prescription is so benign, the problem is whether it will have any impact on you. Anything other than Tums or aspirin requires a prescription. In another country, however, there could be some pretty powerful drugs available over the counter. Having been coddled by the FDA, I was unprepared for the exciting but scary world of potentially real drugs that I could choose freely.

Similarly, I hear people say that were we to privatize social security or better, eliminate it, most people (meaning people other than the person speaking) would not have the financial sophistication to invest their own money. Could be true. For someone with very little discretionary income (a problem partly caused by a payroll tax of over 15% to fund other people's social security and medicare) why should they develop any financial sophistication. Give them the opportunity to invest their own money and they will have an incentive to get educated.

We have a natural incentive to take care of ourselves. But if someone takes care of us, our impulse toward self-preservation lapses and gets rusty. Pay for my losses and I'll be less prudent. Cleanse the drugstore of anything remotely likely to have a side effect and I'll be less prudent. Get rid of the alarm system and maybe I'll hesitate to run from fire. Well, not really on that last one. But maybe I'll smell smoke and assume that if the alarm hasn't gone off, it must be someone misusing the microwave. So maybe it's not a bad idea to let people know the alarm system is on vacation.

Snow Domes and Baseball Caps

Must-see t.v.: this Reason.tv video pitting the misguided protectionist Sen. Bernie Sanders against Cato's eloquent and informed Sallie James.

Economics and Non-Pecuniary Values

Here's a letter to the Baltimore Sun:

Describing University of Maryland economists' efforts to devise a sensible system for use by the state government to buy back dormant commercial crabbing licenses, you write "Economists acknowledge that while money matters to watermen, there are some factors, such as the desire to work on the water, that their models can't capture" ("A new theory of 'crabonomics'," April 6).

Yes and no.  Even the best economic models fail to capture many (one hopes economically insignificant) aspects of reality.  But the most foundational of all economic models – supply and demand – in fact does capture many non-monetary human sentiments, such as "the desire to work on the water," that non-economists wrongly assume are missed by economics.

The non-monetary pleasure that watermen enjoy from working on the water makes the supply of waterman higher because, at any given wage, more people are willing to work at pleasant jobs than at unpleasant ones.  So, as a result, the model of supply and demand predicts that watermen's monetary pay is lower than it would be if working on the water were less pleasant.  Part of watermen's pay comes in the form of the non-monetary pleasures they derive from their jobs.

In reality the economy is certainly not all about money, and economics – when done properly – captures this reality.

Sincerely,

Donald J. Boudreaux

P.S. Should the watermen's non-pecuniary pleasures be added to their pecuniary incomes when calculating their taxable incomes?  What about when calculating figures on income 'distribution'?

Show me a good economist and I'll show you someone who never supposes that money, money prices, and monetary wealth are all that matter – in fact, someone who understands that, at the end of the day, money is never (save in the psychopathic cases of misers) what ultimately matters to anyone.

Some Links

George Selgin ably and eloquently defends his and others' (such as my colleague Larry White's) research on free banking against those who do more than quibble with that research's theoretical and historical foundations.

Here's Richard Rahn on the responsible, the timid, and the ugly in Washington.

Here's Robert McGee on the law and economics of Bastiat.

Speaking of Bastiat, Liberty Fund has just released the first volume – The Man and the Statesman: The Correspondence and Articles on Politics – in its six-volume published series of The Collected Works of Frederic Bastiat.

CEI's Sam Kazman, writing in Cigar Magazine, beautifully exposes the green pollution – ranging from the obnoxiously annoying to the maddeningly counterproductive – emitted from Washington.  (Talk about negative externalities!)

Talk About the Bourgeoisie

Deirdre McCloskey's book Bourgeois Dignity inspired this most recent column of mine in the Pittsburgh Tribune-Review.

UPDATE: This January 2010 column of mine reveals my recognition that economic development depends upon culture.  What this earlier column misses is the role of rhetoric.

Predatory Pricing

Yesterday in my Masters-level microecon-theory course I discussed with my students the theory and practice of "predatory pricing."

Here's a summary of my views on that unicorn.

Study Questions for The Price of Everything

Steve Horwitz uses my book, The Price of Everything in his class as an opportunity for extra credit. With his permission, here are the questions he uses with students. Feel free to use them if you find them useful.

1. At the end of chapter 2, Ruth insists that despite the fact that companies have bosses, "no one is in charge" and that no one sets the price of goods and services. Explain what she might mean by that and how it relates to our discussions in class.

2. In chapter 4, Ruth claims that the flock of birds as a whole is smarter than the smartest bird in the flock. What's the equivalent claim about how markets work? Give an example.

3. At the end of chapter 4, Ruth engages the class in a discussion about "price gouging" and price controls. Use supply and demand curves to illustrate her point about gas prices after Hurricane Katrina.

4. In chapter 6 (p. 73) Ramon says "But I want a world where flashlights are both cheap and available! Why can't we have both?…You're the economist. Tell me why we can't do better." How would you answer Ramon?

5. Explain the distinction between "pro-business" and "pro-market" that Ruth invokes in chapter 9 (p. 123). Why do you think people confuse those two ideas? What do you think of Ruth's answer to Ramon?

6. On p. 135 in chapter 10, Ruth analogizes economic evolution to biological evolution, but she's careful to note that unlike genetic mutation, "economic evolution isn't random." Why isn't it? What makes it possible for individual humans, firms, and households to engage in economic behavior that isn't random? How is it that even as they are all very "purposeful," the outcome of their actions reflects none of their intentions?

7. Later in chapter 10, Ruth says "As we destroy jobs, we get wealthier." What does that mean? Give an example other than the ones Ruth provides.

8. Who or what is the "weaver of dreams?" Explain your answer.

9. What did you think of the book overall? Did you like it or not? Did it help you understand the course material? What worked and what didn't?

10. Do you think the book was valuable enough to be required reading the next time I teach the course? Why or why not?

11. BONUS QUESTION: on p. 156, Ruth struggles with a crossword puzzle clue. What's the right answer that she can't get? Why is this absolutely the funniest moment in the book?

Getting the Point of Economics

Cafe patron Stephen Schmalhofer sent this e-mail to me today.  I post it here in full, with Steve's generous permission.

I hated freshman economics at Yale.  It was the only C I ever received. Taught in a massive lecture hall, the professor posted endless equations and formulas.  It wasn't real.   My father was the CEO of a poultry company in rural Pennsylvania.  I wandered the plant as a child and saw chickens raised in Pennsylvania, fed soybeans from Brazil, transported by trucks assembled in Detroit and Kentucky, processed by special machinery built in the Netherlands and operated by workers from Mexico, Honduras, Guatemala and finally shipped around the world.  (Even the feet were sold to China)  This is economics and it isn't boring!  It's gorgeous, like the spontaneously coordinating steps of a couple on the dance floor, a flock of birds or a school of fish.  It's the delightfully humanizing marketplace- that virtual site of exchange where a man from Chile trades with a woman from France as though they are neighbors.

I've often annoyed friends by repeating my view that "Prices are beautiful."  We have a tendency to view prices as deception, a trick played on consumers to scam us into paying more than we like.  Prices are information.  Like ants tracing pheremones, prices provide signals for the billions of buyers and sellers that we call "the market."  These prices guide our savings, our production and our consumption.  Isn't it marvelous how we can use a price to evaluate all 3 of those functions?  Prices are like a universal language!  (But far superior to Esperanto)

Our preferences conflict as multiple people want the same item.  How do we resolve this?  You could take it by force.  You could plead your case before a judge.  You could lobby a Senator for a favor.  You could stand in line and submit a request to a bureaucrat.  Or you could express your desire for the good directly to the person selling the item you desire.  The seller can then compare the intensity of your desire to that of other interested buyers.  We express the intensity of our desires (and our willingness to sell) with little tags of information called Prices!

Why study economics?  Ask someone in Times Square and he might say: "To learn how to build a business."  Curiously, the study of economics reveals the opposite:  we learn how little we can create.   Economics will humble you.  Think you're smart?

You cannot even make a pencil.

Just some thoughts,

Stephen

Recommended:  Russ Roberts on The Price of Everything: A Parable of Prosperity and Possibility.

Very well-said, Stephen.

I am unfailingly saddened when I reflect on how principles of economics is generally taught today – taught as if gaining an understanding of the mathematics of equations and graphs that feature variables with economics-sounding names such as "price," "quantity," "utility," and "imports" is to gain an understanding of the logic of the operation of real-world economies.

Now I myself, in my principles-of-economics courses, use graphs and some equations.  These can be useful – indeed, in the case of supply-and-demand graphs, damn near indispensable.  But to make them useful requires that they be always related to real-world phenomena, and related deeply and compellingly with stories, anecdotes, metaphores, examples.

Progress

Great post from StormDriver comparing the first mobile computing device, the Osborne I to the iPad 2 (HT: Hacker News 20). Read the whole article, but here's a set of summary charts. The iPad 2 is a little cheaper and a little more powerful. Thirty years of progress.

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BTW, the price is corrected for inflation in some way. The nominal price of the Osborne 1 was $1795.

Study questions for The Price of Everything

Are you a teacher using my book, The Price of Everything in your class? If you are and you have study or review questions that you use with students, please send them my way (roberts at gmu dot edu) and I'll post them here for others to use. Thanks.