Russell Roberts's Blog, page 1486

Bootleggers and Baptists, a footnote

Over dinner the other night I was explaining to my kids the bootlegger and baptist theory of regulation of Bruce Yandle–how Baptists want to ban liquor sales on Sunday because it's the Lord's day and how bootleggers want to ban liquor sales on Sunday because it's creates demand for illegal liquor. Before I could explain how the advocacy of the Baptists allows a politician to explain his support for banning liquor sales on Sundays without having to expose his love of bootleggers and their support for his candidacy, my eleven year old said:

Can't people buy their liquor on Saturday and keep it in the refrigerator until Sunday when they want to drink it?

Good point. Good economist in the making.

A thought experiment

For your dinner table conversation…

Suppose a new nation was discovered in the heart of Africa or South America in the middle of deep jungle. Somehow, it has existed in secret, millions of people going about their lives, doing the best they can to feed their families and enjoy life. This nation, let us call it Newland, is like many other nations–full of all kinds of people, rich and poor, educated and uneducated, industrious and not so industrious. Until now, Newland has been self-sufficient–the Newlanders only trade among themselves. Now that Newland has been discovered, the residents of Newland begin to trade with the rest of the world.

Now some discussion questions.

How does the discovery of Newland affect the rest of the world's economies? Is it good for the rest of the world or bad? Measured economic output for the world will increase because now there will be additional goods and services–the produced by Newland. Will the output of the rest of the world go down, offsetting some or all of the addition of Newland's output, or will it go up, because trade with Newland will make the world richer, overall?

What will be the impact of adding Newland to the world on any one country, say the United States? Suppose the population of Newland is about 300 million and the skills of its people are very similar to those of the United States? Would that be good or bad for the United States? How would your answer differ if you were considering the growth in the US population from 150 million to 300 million? Would the discovery of Newland be similar or different?

Instead of Newland, consider China. In recent decades, China has become more integrated with the world economy. Has that been a good thing or a bad thing? Has it been good for the United States or bad? Has it been good for some people in the United States and bad for others?

Demsetz on the Costs of Markets

One of the papers I've assigned to my Spring 2011 ECON 612 (Microeconomics II for Masters students) is Harold Demsetz's classic 1964 article, from the Journal of Law & Economics, "The Exchange and Enforcement of Property Rights."  (Only persons with access to JSTOR can gain full access to this article at this link.)  Demsetz is one of my all-time favorite scholars; he's an economist's economist – and it's a damn shame that he and his UCLA colleague Armen Alchian have not yet been awarded the Nobel Prize.

Here's a key passage from Demsetz's article, making a point that is still largely ignored in public-policy discussions about, say, the effects of industrialization on the environment.  (Just a tad bit of background for non-economists: A standard claim is that economic inefficiency results whenever markets fail to price some scarce good, such as a unit of cleaner air; the follow-up conclusion – one that is usually jumped to – is that government must intervene to correct this inefficiency either by regulating, taxing, or creating a market [think cap-and-trade] for the heretofore unpriced scarce good).  Now here's Demsetz:

But, this [standard welfare-economic] reasoning generally fails to take account of the fact that the provision of a market (for the side effect [e.g., smoke-stack emissions that fall on nearby houses]) is itself a valuable and costly service….  In asking the implications of the nonexistence of some markets, we seem to have forgotten the cost of providing market services or their government equivalent.  The existence of prices to facilitate exchange between affected parties has been too much taken for granted.  A price for every produced good or service is not a necessary condition for efficiency, so that the absence of a price does not imply that either market transactions are substitute government services are desirable.  If we insist either that all actions (services or commodities) be priced in the market or that the government intervene, we are insisting that we do not economize on the cost of producing exchanges or government services [emphasis added].

[This passage is from page 130 of the reprint of Demsetz's article in Tyler Cowen, ed., The Theory of Market Failure (Fairfax, VA: George Mason University Press, 1988), pp. 127-145.]

Too Loose! No, Wait: Too Tight!… No, Wait Again: Too Loose!….

Here's a letter to the New York Times:

Paul Krugman argues that the Chinese yuan is undervalued ("China Goes to Nixon," Jan. 21).  In paragraph four he explains why: "The root cause of China's muddle is its weak-currency policy, which is feeding an artificially large trade surplus."

In short, Beijing keeps the value of the yuan too low by buying dollars with newly created yuan – a policy that Mr. Krugman correctly recognizes to be inflationary.

But as we read on to paragraph ten, we find Mr. Krugman singing an altogether different dirge.  He there complains that Beijing now is "trying to control inflation by raising interest rates and restricting credit.  This is destructive from a global point of view: with much of the world economy still depressed, the last thing we need is major players pursuing tight-money policies."

If the "root cause" of the low value of the yuan is Beijing's inflationary monetary policy – and if this policy harms, as Mr. Krugman says, both China and the rest of the world – why does Mr. Krugman scold Beijing for tightening its monetary policy?

Sincerely,

Donald J. Boudreaux

Some Links

Bill Easterly ponders complexity and spontaneous order.

Paul Rubin reflects on deregulation.

The lessons to be learned from watching this marvelous six-minute video are too numerous to list.  (HT Roger Meiners)  For example: without the ability to outsource to Asia, how many companies that also operate factories in the U.S. would continue to operate factories in the U.S.?

Carpe Diem's Mark Perry has more data on U.S. manufacturing.

John Stossel is skeptical that the newly resurgent GOP will actually do much good on the budgetary front.

Protectionist Ian Fletcher argues – sparked by something that I wrote – that libertarians are anti-American.  It's an unintentionally hilarious essay.

Washington Post columnist Charles Krauthammer very cogently explains why it's sheer malarkey to believe that Obamacare is fiscally prudent.

Fans of Fibonacci

If you, like me, enjoy the Fibonacci numbers, you will enjoy this. And if you don't know what they are, you'll enjoy it anyway.

More background on the math, here.

Adam Smith on gouging, speculation, and political economy

Corn brings out the best in Adam Smith. These are all observations about corn, taken from Book IV, Chapter 5 of The Wealth of Nations

On gouging and price controls to prevent it:

When the government, in order to remedy the inconveniences of a dearth, orders all the dealers to sell their corn at what it supposes a reasonable price, it either hinders them from bringing it to market, which may sometimes produce a famine even in the beginning of the season; or if they bring it thither, it enables the people, and thereby encourages them to consume it so fast as must necessarily produce a famine before the end of the season. The unlimited, unrestrained freedom of the corn trade, as it is the only effectual preventative of the miseries of a famine, so it is the best palliative of the inconveniences of a dearth; for the inconveniences of a real scarcity cannot be remedied, they can only be palliated. No trade deserves more the full protection of the law, and no trade requires it so much, because no trade is so much exposed to popular odium.

On speculation:

But if a merchant ever buys up corn, either going to a particular market or in a particular market, in order to sell it again soon after in the same market, it must be because he judges that the market cannot be so liberally supplied through the whole season as upon that particular occasion, and that the price, therefore, must soon rise. If he judges wrong in this, and if the price does not rise, he not only loses the whole profit of the stock which he employs in this manner, but a part of the stock itself, by the expence and loss which necessarily attend the storing and keeping of corn. He hurts himself, therefore, much more essentially than he can hurt even the particular people whom he may hinder from supplying themselves upon that particular market day, because they may afterwards supply themselves just as cheap upon any other market day. If he judges right, instead of hurting the great body of the people, he renders them a most important service. By making them feel the inconveniencies of a dearth somewhat earlier than they otherwise might do, he prevents their feeling them afterwards so severely as they certainly would do, if the cheapness of price encouraged them to consume faster than suited the real scarcity of the season. When the scarcity is real, the best thing that can be done for the people is to divide the inconveniencies of it as equally as possible through all the different months, and weeks, and days of the year. The interest of the corn merchant makes him study to do this as exactly as he can: and as no other person can have either the same interest, or the same knowledge, or the same abilities to do it so exactly as he, this most important operation of commerce ought to be trusted entirely to him; or, in other words, the corn trade, so far at least as concerns the supply of the home market, ought to be left perfectly free.

On political economy and the myth of the rational voter:

The laws concerning corn may every-where be compared to the laws concerning religion. The people feel themselves so much interested in what relates either of their subsistence in this life, or to their happiness in a life to come, that government must yield to their prejudices, and, in order to preserve the public tranquillity, establish that system which they approve of. It is upon this account, perhaps, that we so seldom find a reasonable system established with regard to either of those two capital objects.

Autism and highways

Love the scientism of this article:

There are many reasons why living near a highway is undesirable — the noise, the poor air quality, the endless stream of lost tourists using your driveway to turn around. But a new study published in Environmental Health Perspectives offers another: children who lived near highways at birth had twice the risk of autism as those who live farther way.

Researchers interviewed and examined 304 children with autism and, as a control, 259 typically developing children in the Los Angeles, San Francisco and Sacramento metropolitan areas. Researchers found that children whose families lived within 1,000 feet from a freeway at birth — about 10% of the children in the study — were twice as likely to have autism as those who lived farther from a highway.

The link held up after controlling for other variables such as maternal age, parental education and smoking. Interestingly, however, the same effect did not apply to kids who lived near other heavily trafficked streets. The researchers theorized that the type and sheer quantity of chemicals distributed on highways are different from those on even the busiest city roadways.

"This study isn't saying exposure to air pollution or exposure to traffic causes autism," lead author Heather Volk, researcher at the Saban Research Institute of Children's Hospital Los Angeles, told the Los Angeles Times. "But it could be one of the factors that are contributing to its increase."

Or it could not be. Very hard to tell from this article or the study, which is here. To say that the link "held up" after controlling for a few variables is not much holding up. My favorite line from this story is this one:

The researchers theorized that the type and sheer quantity of chemicals distributed on highways are different from those on even the busiest city roadways.

Don't you love that word "theorized?" That is not the right word. There is no theory. In fact, the finding that living near busy city roads is uncorrelated with autism shows that the central claim of the study has been refuted. This is how the paragraph should have been written:

The researchers could only hope in desperation that the type and sheer quantity of chemicals distributed on highways are different from those on even the busiest city roadways. Otherwise, their finding is meaningless.

Austrian School Mascot

Owen Blank writes and asks me: if the Austrian School were an American University, what would be its mascot? Or maybe a nickname? I suggest the Fighting Friedrichs but I'm sure you can do better with nickname or mascot suggestions in the comments.

Deeply Deficient Trade Thinking

Here's a letter to a Chinese news agency:

Editor, English.Xinhuanet.com

Dear Editor:

I want to jab a chopstick into my eye when I read that "China is willing to work with the United States on the imbalance of bilateral trade through communication and cooperation" ("China, U.S. need cooperation to solve trade imbalance: Chinese minister," Jan. 20).

There is nothing to work on.  There's no meaningful "imbalance" requiring a "solution."  Rather than signaling a problem, a bilateral trade "imbalance" is as predictable as finding fish in the ocean.  Indeed, in this world of nearly 200 countries – and in which money can be invested as well as spent buying exports – it would be beyond freakishly odd if, month after month, the Chinese were to purchase exactly as many exports from America as Americans purchase from China.

I challenge anyone to find in any respected international-economics textbook or scholarly economics-journal article even the remotest hint that, in a world of multiple countries, trade between any two of them should be "balanced."

Sincerely,

Donald J. Boudreaux

For any economics reporter to take seriously such notions as "the imbalance of bilateral trade" is akin to a medical reporter taking seriously such notions as the healing powers of crystals.