Category Archives: Free markets

Break the Market, Blame It, Then Break It Some More

28 Sunday Nov 2021

Posted by in Energy, Environmental Fascism, Free markets, Uncategorized

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Much of what is labeled market failure is a consequence of government failure, or rather, failure caused by misguided public intervention, not just in individual markets but in the economy more generally. Misguided efforts to correct perceived excesses in pricing are often the problem, but there are myriad cases of regulatory overreach, ham-handed application of taxes and subsidies for various enterprises, and widespread cronyism. But it is often convenient for politicians to appear as if they are doing something, which makes activism and active blame of private enterprise a tempting path. The Biden Administration’s energy crisis offers a case in point. First, a digression on the efficiency of free markets. Skip the next two sections to get straight to Biden’s mess.

Behold the Bounty

I always spent part of the first class session teaching Principles of Economics on some incredible things that happen each and every day. Most college freshmen seem to take them for granted: the endless variety of goods that arrive on shelves each day; the ongoing flow of services, many appearing like magic at the flick of a switch; the high degree of coincidence between specific wants and all these fresh supplies; the variety and flow of raw materials and skills that are brought to bear; the fantastic array of sophisticated equipment deployed to assist in these efforts; and the massive social coordination necessary to accomplish all this. How does it all happen? Who collects all the information on what is wanted, and by whom? On the feasibility of actually producing and distributing various things? What miracle computer processes the vast set of information guiding these decisions and actions? Does some superior intelligence within an agency plan all this stuff?

The answer is simple. The seemingly infinite set of knowledge is marshaled, and all these tasks are performed, by the greatest institution of social cooperation to ever emerge: decentralized, free markets! Buying decisions are guided by individual needs and wants. Production and selling decisions are guided by resource availability and technology. And all sides react to evolving prices. Preferences, resources, and technology are in a constant state of flux, but prices react, signaling producers and consumers to make individual adjustments that correct larger imbalances. It is tempting to describe the process as the evolving solution to a gigantic set of dynamic equations.

The Impossible Conceit

No human planner or government agency is capable of solving this problem as seamlessly and efficiently as markets, nor can they hope to achieve the surplus welfare that redound to buyers and sellers in markets. Central planners or intervening authorities cannot possess the knowledge and coordinating power of the market mechanism. That doesn’t mean markets are “perfect”, of course. Things like external costs and benefits, dominant sellers, and asymmetric information can cause market outcomes to deviate from the competitive “ideal”. Inequities can arise from some of these imperfections as well.

What can be much worse is the damage to market performance caused by government policy. Usually the intent is to “correct” imperfections, and the rationale might be defensible. The knowledge to do it very well is often lacking, however. Taxes, subsidies, regulations, tariffs, quotas, capital controls, and manipulation of interest rates (and monetary and credit aggregates) are very general categories of distortion caused by the public sector. Then there is competition for resources via government procurement, which is frequently graft-ridden or price-insensitive.

Many public interventions create advantages for large sellers, leading to greater market concentration. This might best serve the private political power of the wealthy or might convey advantages to investments that happen to be in vogue among the political class. These are the true roots of fascism, which leverages coercive state power for the benefit of private interests.

Energy Vampires

Now we have the curious case of the Biden Administration and it’s purposeful disruption of energy markets in an effort to incentivize a hurried transition from fossil fuels to renewable energy. As I described in a recent post on stagflation,

“… Biden took several steps to hamstring the domestic fossil fuel industry at a time when the economy was still recovering from the pandemic. This included revoking permits for the Keystone pipeline, a ban on drilling on federal lands and federally-controlled waters in the Gulf, shutting down production on some private lands on the pretext of enforcing the Endangered Species Act, and capping methane emissions by oil and gas producers. And all that was apparently just a start.

As Mark Theisen notes, when you promise to destroy a particular industry, as Joe Biden has, by taxing and regulating it to death, who wants to invest in or even maintain production facilities? Some leftists with apparent influence on the administration are threatening penalties against the industry up to and including prosecution for ‘crimes against humanity’!”

In addition to killing Keystone, there remains a strong possibility that Biden will shut down the Line 5 pipeline in Michigan, and there are other pipelines currently under federal review. Biden’s EPA also conducted a purge of science advisors considered “too friendly” to oil and gas industry. This was intertwined with a “review” of new methane rules, which harm smaller, independent oil and gas drillers disproportionately.

Joe Biden’s “Build Back Better” (BBB) legislation, as clumsy in policy as it is in name, introduces a number of “Green New Deal” provisions that would further disadvantage the production and use of fossil fuels. Hart Energy provides descriptions of various tax changes that appeared in the Treasury’s so-called “Greenbook”, a collection of revenue proposals, many of which appear in the BBB legislation that recently passed in the House. These include rollbacks of various deductions for drilling costs, depletion allowances, and recovery rules, as well as hikes in certain excise taxes as well as taxes on foreign oil income. And all this while granting generous subsidies to intermittent and otherwise uneconomic technologies that happen to be in political favor. This is a fine payoff for cronies having invested significantly in these rent seeking opportunities. While the bill still faces an uphill fight in the Senate, apparently Biden has executive orders, held in abeyance, that would inflict more pain on consumers and producers of fossil fuels.

Biden’s energy policies are obviously intended to reduce supplies of oil, gas, and other fossil fuels. Prices have responded, as Green notes:

“Gas is up an average of 57% this year, with corresponding increases of 44% for diesel and a whopping 60% for fuel oil.”

The upward price pressure is not limited to petroleum: electricity rates are jumping as well. Consumers and shippers have noticed. In fact, while Biden crows about wanting “the rich” to pay for BBB, his energy policies are steeply regressive in their impact, as energy absorbs a much larger share of budgets among the poor than the rich. This is politically suicidal, but Biden’s advisors have chosen a most cynical tact as the reality has dawned on them.

Abusive Victim Blaming

Who to blame? After the predictable results of cramping domestic production and attacking fossil fuel producers, the Biden team naturally blames them for rising prices! “Price gouging” is a charge made by political opportunists and those who lack an understanding of how markets allocate scarce resources. More severe scarcity means that prices must rise to ration available quantities and to incentivize those capable of bringing forth additional product under difficult circumstances. That is how a market is supposed to function, and it mitigates scarcity!

But here comes the mendacious and Bumbling Buster Biden. He wants antitrust authorities at the FTC to investigate oil pricing. Again from Stephen Green:

“… the Biden Administration has decided to launch a vindictive legal campaign against oil producers in order to deflect blame for the results of Biden’s policies: Biden’s Solution to Rising Gas Prices Appears to Be Accusing Oil Companies of Price Gouging.”

There’s nothing quite like a threat to market participants to prevent the price mechanism from performing its proper social function. But a failure to price rationally is a prescription for more severe shortages.

Biden has also ordered the Strategic Petroleum Reserve (SPR) to release 50 million barrels of oil, a move that replaces a total of 2.75 days of monthly consumption in the U.S. The SPR is supposed to be drawn upon only in the case of emergencies like natural disasters, so this draw-down is as irresponsible as it is impotent. In fact, OPEC is prepared to offset the SPR release with a production cut. Biden has resorted to begging OPEC to increase production, which is pathetic because the U.S. was a net exporter of oil not long ago … until Biden took charge.

Conclusion

Properly stated, the challenge mounted against markets as an institution is not that they fall short of “perfection”. It is that some other system would lead to superior results in terms of efficiency and/or equity. Central planning, including the kind exercised by the Biden Administration in it’s hurried and foolish effort to tear down and remake the energy economy, is not even a serious candidate on either count.

Granted, there is a long history of subsidies to the oil and gas sector. I cannot defend those, but the development of the technology (even fracking) largely preceded the fruits of the industry’s rent seeking. At this point, green fuels receive far more subsidies (despite some claims to the contrary). Furthermore, the primacy of fossil fuels was not achieved by tearing down competing technologies and infrastructure. In contrast, the current round of central planning requires destruction of entire sectors of the economy that could otherwise produce efficiently for the foreseeable future, if left unmolested.

The Biden Administration has adopted the radical green agenda. Their playbook calls for a severe tilting of price incentives in favor uneconomic, renewable energy sources, despite the economy’s heretofore sensible reliance on plentiful fossil fuels. It’s no surprise that Biden’s policy is unpopular across the economic spectrum. His natural inclination is to blame a competitive industry victimized by his policy. It’s a futile attempt to avoid accountability, as if he thinks doubling down on the fascism will help convince the electorate that oil and gas producers dreamt up this new, nefarious strategy of overcharging customers. People aren’t that dumb, but it’s typical for the elitist Left presume otherwise.

A Funny Thing Happened On the Way to the Blobum

25 Thursday Feb 2021

Posted by in Architecture, Art & Politics, Free markets

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I like interesting “shapes” as much as the next guy, but I have to agree with this piece in Current Affairs: much about modern architecture has gone badly wrong. Brianna Rennix and Nathan J. Robinson’s (R&R) entertaining piece decries what they call “blobitecture”, among other errant aesthetic trends in the design of modern buildings. The article includes a number of great photos depicting very good and very bad architecture, along with a few amusing captions like the following:

“If It doesn’t make you feel desperately, crushingly alone, it’s probably not a piece of prize-winning contemporary architecture.”

“Oh my fucking God, just look at it. Look at it! Does this make you happy? Does it nourish your spirit? What’s with all the little random protrusions? Aaaaagghh.”

Calling of the Moderns

By “modern”, R&R really mean a philosophy of design having roots in the early twentieth century. “Form follows function” was the dictum set down by the famed architect Louis Sullivan. R&R quickly aver that Sullivan did not intend to condemn all ornamentation, but his statement was often interpreted as such. The misunderstanding was reinforced by Adolph Loos, who likened more austere designs to demonstrations of “spiritual strength”. So, modern design was not only superior from a practical perspective, but it was “honest”, imbued with a kind of valor and perhaps devine aspiration.

Form, and To Hell With Function

A delicious irony in R&R’s discussion is the fact that modern architecture has subverted its objectives in at least one fundamental respect. The utilitarian emphasis, with few or starkly simplified adornments, morphed into a celebration of asymmetry, then shape-shifted into a brave new world of three-dimensional manifolds. But buildings with unusual shapes can present difficulties in using the space effectively. So much for “form follows function”! As an illustration, R&R offer this vignette about Peter Eisenman:

“… one Eisenman-designed house so departed from the normal concept of a house that its owners actually wrote an entire book about the difficulties they experienced trying to live in it. For example, Eisenman split the master bedroom in two so the couple could not sleep together, installed a precarious staircase without a handrail, and initially refused to include bathrooms. In his violent opposition to the very idea that a real human being might actually attempt to live (and crap, and have sex) in one of his houses, Eisenman recalls the self-important German architect from Evelyn Waugh’s novel Decline and Fall, who becomes exasperated [by] the need to include a staircase between floors: ‘Why can’t the creatures stay in one place? The problem of architecture is the problem of all art: the elimination of the human element from the consideration of form. The only perfect building must be the factory, because that is built to house machines, not men.’”

But Sometimes It’s Okay

My tastes must be more eclectic than R&R’s, because when it comes to modern buildings, my opinion is “it all depends….” I’ve never liked the boxy international style that still dominates most skylines, but some modern buildings really are interesting. Sometimes I like asymmetry and sometimes I don’t. The shapes of buildings, whatever they are, might contribute to a city-scape in appealing ways. But it probably depends on the presence of certain things like surrounding greenery, which R&R value highly, or even a stylized nod to classical aesthetics. A building — the whole of a structure— can have an ornamental quality of its own, even if it lacks the kind of minutia R&R yearn for. Some skyscrapers, which R&R find so damnable, do indeed soar gracefully.

Cost, From Both Sides of the Mouth

One of the more interesting points made by R&R has to do with cost. They contend that architects are reluctant to propose ornamentation and aesthetic minutia because of the presumed addition to cost of the final design. And likewise, clients are presumed to view those elements as lacking a return on investment. But as R&R note, this logic does not always stand up to scrutiny: unusual structural elements can be extremely expensive to engineer. In the end, a more traditional structure with decorative elements might be far less costly.

Is Capitalism To Blame?

Finally, I take issue with a point R&R make more strongly toward the end of their essay: that capitalism is a primary driver of the ugliness of modern design. They seem to equate capitalism with the sort of corporatist fascism that relies so heavily on government for its viability. This is the meaning of capitalism only in the imagination of the Left, even as the Left increasingly embraces the state-dominated mechanics of corporatism.

The large private entities that thrive under such a regime might well be inclined to build the sort of stark monoliths assailed by R&R. An ancient, didactic finance professor once cautioned me against investing in companies that build glitzy offices, essentially monuments to themselves. He said it’s a sure sign of trouble ahead, of managerial waste. Fair enough, but today, in a world of “too big to fail”, it might be more symbolic of prospective bailouts from ravaged taxpayers. The problem is these corporate managers don’t pay enough attention to ROI precisely because they are protected from downside risks by public policy makers. So they bring on the monoliths!

In contrast, capitalism means truly private enterprise with no guarantee against failure. It relies on the sovereignty of individual actors in pursuit of their self-interest. Yes, costs matter, but they must be balanced against benefits in order to reach rational, efficient outcomes. In this sense, tastes guide decisions, including decisions about design. The abominations of modern architecture are not purely cost-driven, capitalist phenomena, independent of tastes. Whether it is an office, a storefront, or a home, tastes matter, not just costs. People and businesses are usually willing to pay more for things they find attractive. But again, there’s no accounting for tastes.

Of course, commercial developers can and sometimes do make bad design choices, but that’s hardly uniform. At the same time, to label better design choices “pastiche” or “Disneyfied” sounds like a bit of a cop-out when we’re entertaining thoughts of ornamentation and adornment. Perhaps it’s a thin line. But I find a great deal of variety in the design of residential and commercial construction today, and I quite like some of it.

Tyranny of the Critics

R&R give frequent nods to “democratic” ideals, as if some sort of majoritarian principle should guide design. The ideal is more closely approximated by the free market in which people can express their preferences through purchase decisions, whether those be residential or commercial structures, or even simple decisions about which stores to frequent. Sure, most people might hate contemporary architecture, but alternatives are available. I very much enjoyed R&R’s article and agree with many of their sentiments, but what they really crave is the hand of a central planner who thinks just like them.

Central Planning With AI Will Still Suck

23 Sunday Feb 2020

Posted by in Artificial Intelligence, Central Planning, Free markets

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Artificial intelligence (AI) or machine learning (ML) will never make central economic planning a successful reality. Jesús Fernández-Villaverde of the University of Pennsylvania has written a strong disavowal of AI’s promise in central planning, and on the general difficulty of using ML to design social and economic policies. His paper, “Simple Rules for a Complex World with Artificial Intelligence“, was linked last week by Tyler Cowen at Marginal Revolution. Note that the author isn’t saying “digital socialism” won’t be attempted. Judging by the attention it’s getting, and given the widespread acceptance of the scientism of central planning, there is no question that future efforts to collectivize will involve “data science” to one degree or another. But Fernández-Villaverde, who is otherwise an expert and proponent of ML in certain applications, is simply saying it won’t work as a curative for the failings of central economic planning — that the “simple rules” of the market will aways produce superior social outcomes.

The connection between central planning and socialism should be obvious. Central planning implies control over the use of resources, and therefore ownership by a central authority, whether or not certain rents are paid as a buy-off to the erstwhile owners of those resources. By “digital socialism”, Fernández-Villaverde means the use of ML to perform the complex tasks of central planning. The hope among its cheerleaders is that adaptive algorithms can discern the optimal allocation of resources within some “big data” representation of resource availability and demands, and that this is possible on an ongoing, dynamic basis.

Fernández-Villaverde makes the case against this fantasy on three fronts or barriers to the use of AI in policy applications: data requirements; the endogeneity of expectations and behavior; and the knowledge problem.

The Data Problem: ML requires large data sets to do anything. And impossibly large data sets are required for ML to perform the task of planning economic activity, even for a small portion of the economy. Today, those data sets do not exist except in certain lines of business. Can they exist more generally, capturing the details of all economic transactions? Can the data remain current? Only at great expense, and ML must be trained to recognize whether data should be discarded as it becomes stale over time due to shifting demographics, tastes, technologies, and other changes in the social and physical environment. 

Policy Change Often Makes the Past Irrelevant: Planning algorithms are subject to the so-called Lucas Critique, a well known principle in macroeconomics named after Nobel Prize winner Robert Lucas. The idea is that policy decisions based on observed behavior will change expectations, prompting responses that differ from the earlier observations under the former policy regime. A classic case involves the historical tradeoff between inflation and unemployment. Can this tradeoff be exploited by policy? That is, can unemployment be reduced by a policy that increases the rate of inflation (by printing money at a faster rate)? In this case, the Lucas Critique is that once agents expect a higher rate of inflation, they are unlikely to confuse higher prices with a more profitable business environment, so higher employment will not be sustained. If ML is used to “plan” certain outcomes desired by some authority, based on past relationships and transactions, the Lucas Critique implies that things are unlikely to go as planned.  

The Knowledge Problem: Not only are impossibly large data sets required for economic planning with ML, as noted above. To achieve the success of markets in satisfying unlimited wants given scarce resources, the required information is impossible to collect or even to know. This is what Friedrich Hayek called the “knowledge problem”. Just imagine the difficulty of arranging a data feed on the shifting preferences of many different individuals across a huge number of products,  services and they way preference orderings will change across the range of possible prices. The data must have immediacy, not simply a historical record. Add to this the required information on shifting supplies and opportunity costs of resources needed to produce those things. And the detailed technological relationships between production inputs and outputs, including time requirements, and the dynamics of investment in future productive capacity. And don’t forget to consider the variety of risks agents face, their degree of risk aversion, and the ways in which risks can be mitigated or hedged. Many of these things are simply unknowable to a central authority. The information is hopelessly dispersed. The task of collecting even the knowable pieces is massive beyond comprehension.

The market system, however, is able to process all of this information in real time, the knowable and the unknowable, in ways that balance preferences with the true scarcity of resources. No one actor or authority need know it all. It is the invisible hand. Among many other things, it ensures the deployment of ML only where it makes economic sense. Here is Fernández-Villaverde:

“The only reliable method we have found to aggregate those preferences, abilities, and efforts is the market because it aligns, through the price system, incentives with information revelation. The method is not perfect, and the outcomes that come from it are often unsatisfactory. Nevertheless, like democracy, all the other alternatives, including ‘digital socialism,’ are worse.”

Later, he says:

“… markets work when we implement simple rules, such as first possession, voluntary exchange, and pacta sunt servanda. This result is not a surprise. We did not come up with these simple rules thanks to an enlightened legislator (or nowadays, a blue-ribbon committee of academics ‘with a plan’). … The simple rules were the product of an evolutionary process. Roman law, the Common law, and Lex mercatoria were bodies of norms that appeared over centuries thanks to the decisions of thousands and thousands of agents.” 

These simple rules represent good private governance. Beyond reputational enforcement, the rules require only trust in the system of property rights and a private or public judicial authority. Successfully replacing private arrangements in favor of a central plan, however intricately calculated via ML, will remain a pipe dream. At best, it would suspend many economic relationships in amber, foregoing the rational adjustments private agents would make as conditions change. And ultimately, the relationships and activities that planning would sanction would be shaped by political whim. It’s a monstrous thing to contemplate — both fruitless and authoritarian.

Statism and Self-Harm

18 Tuesday Feb 2020

Posted by in Free markets, Government Failure, Uncategorized

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Some have a tendency to think their problems can be solved only through the intervention of some powerful, external force. That higher power might be God, but at a more temporal level, government is often presumed to be a force to fix all things that need fixing. “There oughta be a law” is a gut reaction to things we find injurious or that offend; government has the resources, or the coercive power to get the resources, to undertake big, appealing projects; and of course government has the coercive power to “rearrange the deck chairs” in ways that might satisfy anyone’s sense of justice and fairness, so long as they get their way. Whenever people perceive some need they believe to be beyond their private capacity, or mere convenience, government action is the default option, and that’s partly because many think it’s the only option.

That’s the appeal of “democratic socialism”, to use a name that unintentionally emphasizes a very real danger of democracy: the tyranny of the majority. It’s a dismal way station along the road to serfdom, to borrow a phrase from Hayek.

Government, however, repeatedly demonstrates it’s sheer incompetence and its expedience as a vehicle for graft. And it’s not as if these failures go unrecognized. Everyone knows it! This is nowhere more true than when the state interferes with private markets or attempts to steer the economy’s direction at either an aggregate or industry level. But here we have a dark irony, as told by Nick Gillespie at Reason:

“Again and again—and in countries all over the world—declines in trust of government correlate strongly with calls for more government regulation in more parts of our lives. ‘Individuals in low-trust countries want more government intervention even though they know the government is corrupt,’ explain the authors of a 2010 Quarterly Journal of Economics paper. That’s certainly the case in the United States, where the size, scope, and spending of government has vastly increased over exactly the same period in which trust and confidence in the government has cratered. In 2018, I talked with one of the paper’s authors, Andrei Shleifer, a Harvard economist who grew up in the Soviet Union before coming to America. Why do citizens ask a government they don’t believe in to bring order? ‘They want regulation,’ he said. ‘They want a dictator who will bring back order.'”

Against all historical evidence and forebodings, the wish for a benevolent dictator! As if it’ll be different this time! Are we all statists? Certainly not me, but the Left is full of them. One prominent example is columnist Tom Friedman of the New York Times, who has expressed the sometimes fashionable view that “things get done” under dictatorships:

“One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. … That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.”

Tell it to the interred Kazakh and Uighur Muslims undergoing “reeducation” in China. The Right has its share of statists as well, and it is typically expressed in desires for enforced social conservatism.

People seem to have a vague idea that everyone else must either be misbehaving or in misery. And despite the well-tested fallibility and lack of trust in government, people persist in believing that the public sector can conjure magic to solve their problems. But the state gets bigger and bigger while solving few problems and exacerbating others. In fact, as government grows, it makes rent seeking a more viable alternative to productive effort. Like the giant zero-sum game that it is, the expansion of government provides the very means to pick away at the wealth of others. When faced with these incentives, people most certainly will misbehave on small and large scales!

The truth is that individuals hold the most potent regulatory force in their own hands: the voluntary nature of trade. It protects against over-pricing, under-pricing, and inferior quality along many dimensions, but it demands discipline and a willingness to walk away. It also demands a willingness to put forth productive effort, rather than coveting the property of others, and taking from others via political action. To paraphrase P.J. O’Rourke, if you think things are expensive now, wait till they’re free!

April 22: Happy Human Achievement Day!

21 Sunday Apr 2019

Posted by in Free markets, Free Trade, Human Welfare, Uncategorized

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By way of celebrating human ingenuity, I’ll be driving 600 miles on Monday in a beautiful sedan powered by high-octane fuel. I’ll be clothed in incredibly comfortable fibers and have access to a great variety of listening amusements via satellite. The celebration will continue when I arrive home. I’ll enjoy the comfort of climate-control, electric power, modern plumbing, a refrigerator and pantry full of agricultural bounty, delicious wine, and even more incredible access to entertainment and intellectual pursuits. But it’s not just the goods and technology I’ll celebrate. I’ll also raise a glass to the fabulous, free-market institutions that have made all this possible, effectively allowing us to trade with specialized producers all around the world at low cost, and at prices that signal the true scarcities of resources… ill-considered tariffs aside.

In honor of mankind’s great achievements, I bring you additional testimony from Don Boudreaux, who provides some juicy tidbits to mark our progress. Here is more from Marion Tupy at humanprogess.org. And one more link is from Paul Driessen, who last Thanksgiving wrote of the the many developments since 1800 that have drastically improved human well being, including the ability to exploit fossil fuels that are extremely clean-burning and efficient relative to primitive energy sources.

What riches we enjoy today! Contrary to the claims of doomsayers, busybodies, and self-appointed enforcers of an austere existence, our prospects for continued improvement in human standards of living are excellent. The long arc of technological progress has made the effective abundance of resources greater and more sustainable than ever. As the many charts in Tupy’s article demonstrate, long-term trends in real incomes, poverty, literacy, longevity and the incidence of disease are quite favorable. We owe all that to the spread of human ingenuity, freedom, and voluntary exchange. That’s truly progressive!

The Abolition of Wealth

12 Tuesday Feb 2019

Posted by in Free markets, Redistribution, Taxes

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Few weep for the wealthy when they are attacked by redistributionists, but perhaps we should. Recent expressions of hatred for the so-called super-rich extend to the merely affluent, of course, but billionaires are much less likely to find sympathy. Those proposing to “abolish billionaires” by laying public claim to their assets and incomes have little reason to expect a popular backlash. Nevertheless, there are strong reasons to defend the wealthy and their right to control the riches they accumulate. Don Boudreaux has some words we should all take to heart:

“While exceptions no doubt exist, the people who get rich in our economy are overwhelmingly people who have made the rest of us richer.”

Boudreaux is correct in noting that “anti-billionaire” sentiment is marked in people who know little of the complexities of actually producing things. Wealth creation is a two-way street. On one end is a cadre of innovators and risk-takers whose rewards are often concentrated. On the other end are the many beneficiaries of those innovations: eager buyers of value-enhanced products whose rewards are relatively diffuse but very meaningful nonetheless. The same dynamic takes place in generating lower levels of wealth, among hard-working small entrepreneurs and savers. Eliminate one set of rewards and the other will vanish.

Redistributionists are aware of scarcity at a basic level, but it’s as if they take for granted that a certain quantity of product will be on the shelves irrespective of the policy environment, incentives, and basic guarantees of economic liberty. As Boudreaux says:

“If food, clothing, medical care, automobiles, houses, diamond rings, airplane seats, rolls of paper towels, and all other good and services were randomly rained down onto earth by some heavenly being, it would then be true that the more of these goodies that I manage to grab, the fewer are the goodies available for you to grab, and vice versa. … And so if through simple luck or sinister cunning I grab more than you grab, then the resulting inequality in our wealth has no good justification. If the government seizes from me a chunk of ‘my’ stuff and gives it to you, no ethical offense is committed.”

That’s not how it works in a world in which effort and resourcefulness are required to satisfy wants. Under a truly liberal order, such efforts are voluntary, motivated by the promise and prospect of secure rewards. And so, as consumers, we can possess the riches made possible through the efforts of innovators and risk-takers. If successful, their rewards are earned by producing value that not only exceeds their own costs, but exceeds the prices buyers are asked to pay. Today’s most prominent billionaires have brought to market products, services, and ways of transacting that we’d never have imagined even a few years prior to their introduction. Computer operating systems, smart phones, on-line retailing, and room- and ride-sharing are just a few examples.

Nick Gillespie makes much the same point in quoting Joseph Schumpeter:

“The capitalist engine is first and last an engine of mass production which unavoidably also means production for the masses. . . . It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as a rule improvements that would mean much to the rich man. Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls.”

Then there are the highly popular musicians and actors of the day, with wealth approaching (and in a few cases exceeding) $1 billion. Gillespie uses Paul McCartney as a case in point. Rather than “cheating” his way to wealth, McCartney’s fans would heartily agree that his talents are well worth the wealth he’s managed to accumulate. Would advocates of “abolishing” billionaires deny all this? They contend, in their own arbitrary judgment, that the market’s objective assessment cannot justify wealth of this magnitude.

Redistributionists also resent that anyone of wealth might have the gall to hold it or invest it rather than give it away. First, as noted above, secure rights provide the necessary incentives to create, produce, and take risks ex ante, which help enrich us all ex post. But those rights also must be secure ex post, and not subject to the whims of the next generation of socialist nitwits. In addition, as Gillespie says:

“Would there be less suffering in the world if [McCartney’s] money is expropriated and transferred to the wretched of the earth via higher taxes rather than through his own charitable donations and investments? Probably not, especially when you think about how much suffering, especially in the developing world, is the direct result of government action.”

Gillespie also marshals statistics on changes in measures of inequality that do not support the claims of redistributionists. In a separate post, Boudreaux makes that case here. Furthermore, the U.S. already has arguably the most progressive tax system in the developed world, even if transfers to the poor are not as generous as in some countries.

The sheer ignorance of many progressives is well illustrated by the “war against billionaires“. These critics of wealth demonstrate all the economic sophistication of preening high-school social studies students. Unfortunately, they are now coddled by certain established officeholders too eager to seek approval from the fringe left than to bother with responsible policy analysis.

It’s a short rhetorical step from condemning billionaires to condemning mere millionaires and sub-millionaires, and coveting their wealth. The victims here will ultimately include successful small business people and professionals who not only employ large segments of the population but also provide many of the services and wares we rely on in our day-to-day lives. Their success is not only well-earned: it is continuously exposed to risk from competitive forces. Rapacious politicians will never cease in their efforts to apply confiscatory taxes to the wealth of the very affluent. Soon enough, tax policy will reach farther down into the wealth distribution. These are games better suited to children or even vicious animals. Redistributionists think in zero-sum terms, with no appreciation for the positive-sum outcomes enabled by secure rights and free markets. Their failure to grasp the dynamics of free markets is at the root of their advocacy for disastrously negative-sum policies.

 

Economic Freedom and Mobility Reduce Poverty; Alms Are Impotent

02 Friday Nov 2018

Posted by in Free markets, Immigration, Property Rights

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It’s very difficult to lift people out of poverty via redistribution or philanthropy. Small gains in income can be expected at best, but there are far more powerful ways to improve well being. These have to do with expanding the fundamental freedoms, rights and rewards available to private individuals. Harvard’s Lant Pritchard divides these efforts into two broad categories: policies that improve labor mobility, and those that lead to gains in-place via economic growth. His working paper, “Alleviating Global Poverty: Labor Mobility, Direct Assistance, and Economic Growth”, is available here.

Economic Benefits of Migration 

Pritchard first explains that the freedom to migrate across borders in pursuit of economic opportunity allows workers from low-productivity countries to contribute much greater output in high productivity countries. In so doing, the workers gain far more than can be practically accomplished via direct aid, and according to Pritchard, at zero or little cost. So granting this freedom is a much more effective anti-poverty measure than aid payments.

Pritchard seems to imply that this is a persuasive economic argument for open borders. On that question, I take the position that countries are sovereign entities and that their citizens possess the right to determine the extent of immigration flows. And in fact, there are real costs of immigration flows that must be considered. Pritchard’s paper offers a powerful rationale for liberalizing immigration quotas, but here again, he dismisses certain issues that limit even that more narrow argument.

The prospective economic gains of the immigrants themselves are important, of course, but the economic needs of the destination country matter too. In the U.S., employers in many markets face a shortage of low-skilled labor, so immigration quotas bind on those markets. Making them less binding would certainly encourage economic growth. A greater influx of younger workers from abroad would also help America weather its demographic crisis, narrowing the shortfall in funding entitlement programs like Social Security and Medicare. Unfortunately, to those who do not already recognize these needs, Pritchard’s contribution is likely to carry little weight.

Still, Pritchard’s assertion that the cost of liberalized immigration is zero needs further examination. First, there are the very real costs of vetting and processing new immigrants. Second, unless all immigrants and employers are matched ex ante, which is virtually impossible, there will be adjustment costs that continue at least until the matching is complete. In the interim, and even post-employment, new immigrants might well require public aid to support themselves and their families. It is also quite likely that new tax revenue generated by immigrants will be insufficient to pay the full incremental costs of public resources consumed in providing marginal infrastructure, education, and other public subsidies.

Pritchard employs static calculations of the net benefits to be gained through greater labor mobility “at the margin”, but as the absorption of new immigrants into the workforce takes place, excess demands for low-skilled workers may turn into excess supplies, creating downward pressure on wages. In the presence of a minimum wage, that implies unemployment and a probable drain on public resources. So the source of the benefits discussed by Pritchard should not be viewed as limitless. He offers some mild rebuttals of this point and references one of his own papers in so doing, but the possibility cannot and should not be dismissed.

Economic Benefits of Economic Freedom

Pritchard’ second major point of emphasis involves the effectiveness of different kinds of private and public direct assistance, or “treatments”, in producing income gains over time. He offers evidence that the gains are relatively weak. He contrasts this with the potential gains from “growth accelerations” stemming from a variety of causes. The upside of a normal business cycle is one form, but that doesn’t really count if the gains are lost on the downside.

The most profound form of growth acceleration occurs upon the advent of a liberalized social order. This may accompany the downfall of an authoritarian government, the stabilization of a formerly unsound monetary regime, or as more sophisticated market institutions take hold in a formerly primitive economy. The main point is that there are fundamental social underpinnings of growth. These are the many dimensions of economic freedom: secure property rights, freedom of contract, minimal regulatory interference, low taxes, and competitive markets for goods and capital. These conditions are so straightforward that in developed economies we take many of them for granted, through they are threatened even there. But these conditions are sadly lacking in much of the under-developed world.

Conclusion

Allowing workers to migrate freely in search of the best opportunities is undoubtedly more powerful in improving their welfare than any form of direct assistance. That is a fundamental truth put forward by Lant Pritchard. However, in-migration can come with significant costs for the destination country. Therefore, immigration laws should allow sufficient flexibility with respect to flows to enable the capture of economic gains from immigration when they exist. Pritchard also emphasizes that economic freedom and the growth acceleration it makes possible do far more to reduce poverty than massive private and public efforts at direct assistance, however well-intentioned. Several earlier posts on Sacred Cow Chips have highlighted the impotency of redistribution for eliminating poverty. The Left has a tendency to dismiss such views as mere ideological assertion, but it is much more than that: it is the difference between penury and prosperity.

Success In The Enlightened West

08 Wednesday Aug 2018

Posted by in Free markets, Liberalism, Liberty

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The Left is engaged in a full attack on true liberalism and it is an attack on the rights of the individual: life, liberty, property, speech, due process of law, and other enumerated and unenumerated rights enshrined in the U.S. Constitution. These rights are themselves the very underpinnings of Western civilization and are together an unambiguous force for good in the world. Joe Lonsdale has written a declaration regarding the powerful legal, political, and economic philosophies that have served as the bases of Western civilization and its successes and which have, as a consequence, been adopted around the globe. Lonsdale, in his mid-30s, is an “American entrepreneur and technology investor” and founder of The Cicero Institute, an organization dedicated to encouraging “public-sector entrepreneurship to address America’s most pressing problems.”

I love Lonsdale’s full-throated advocacy for Western principles. Their articulation over three centuries ago by an enlightened “patriarchy” (as today’s social justice warriors might call them) managed to upset an entrenched and rapacious oligarchy, over time lifting whole populations out of subjugation and penury. Ultimately, this upheaval made possible the legal recognition of the same rights for all individuals, regardless of race and gender. Lonsdale’s insistence on the appropriate use of the word “liberal” is refreshing. It should (but won’t) serve as a corrective to the towering ignorance of those who accept “liberalism” when used as a cover for statism.

I’m going to quote “liberally” from Lonsdale’s piece because it speaks so well for itself, but if you’ve made it this far then you should read Lonsdale’s essay in its entirety.

“[John] Locke’s moral insight is ‘liberalism’, a principle of mutual restraint inspired by the inviolable rights of others to design their own lives. Freedom is life in accordance with reason; reason compels us to respect the freedoms of others. By respecting the rights of others, we guarantee our own.

This Enlightenment thinking was put into practice in the Glorious Revolution in 1688 in Britain, and especially in the founding of America, where Locke’s liberalism formed the backbone of the new republic. To be sure, in practice there were deep contradictions—the founders were simultaneously freedom fighters and slave-owners—but the institutional architecture was in place. The West’s new framework of property rights and political freedoms unleashed a surge of creative energy, enabling a three-century miracle of growth, prosperity and unimaginable wonders of innovation.

It didn’t have to happen that way. The natural order of things is for life to be ‘solitary, poor, nasty, brutish and short’ (in the words of Thomas Hobbes, a contemporary of Locke). Western civilisation is a great artifice: a liberal framework that enshrines property rights, allowing us to restrain most forms of tribalism, participate in free markets and prosper by serving others regardless of their identities.

These political rights of treating people equally and letting them get on with their business had a hugely beneficial effect on society and the economy. Consider that historically speaking, it is actually unnatural for the best ideas to dominate and spread, thus allowing entrepreneurs to displace incumbent, vested interests. More common is for force or hierarchy, not the meritocracy of ideas, to win. However, the West established a cultural and legal environment where a competition of clever ideas and activities could flourish. 

Lonsdale offers several examples of the malignant effects of forsaking these Western ideals. The hallmark of all these failures is an abandonment of the individual as the true and natural rights-holder and productive force. Here are Lonsdale’s  closing paragraphs:

“As pre-Enlightenment modes of value-signaling, tribalism and power-politics come to the fore on campus and social media, we must reaffirm our commitment to Western liberal values by actually putting them into practice. Only a rational order which enshrines individual rights to person and property, and expands opportunities for all, will create the stability and economic progress necessary to quell populist discontent.  

Unsurprisingly the anti-liberal, top-down parts of our society are experiencing cost-disease and decay. The West enabled a market order where the best ideas win, no matter whose idea it was. We need to remind ourselves of how unusual the miracle of our political economy is and enact its lessons. Only then can we save the concept of ‘Western civilisation’ and spread its benefits of freedom and prosperity—not just for people in the West, but for everyone.”

A Voluntary Redistribution of Sex

11 Friday May 2018

Posted by in Free markets, Prohibition, Redistribution, Uncategorized

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“Incels” have received plenty of bad publicity since the horrifying van attack in Toronto two weeks ago. It was preceded in 2014 by a killing rampage in California perpetrated by an individual with a similar profile. In case you haven’t heard, an incel is an involuntary celibate, either male or female, though male incels have garnered nearly all of the recent attention. Whatever their other characteristics, incels share a loneliness and an unmet desire for intimacy with other human beings.

Lux Alptraum shares her views about the differences between male and female incels. She blames “angry, straight men” and “toxic masculinity” for both the violence that’s recently come to be associated with incels and the relative inattention paid to the plight of female incels. I value her perspective on the issue of female incels. There are obviously extreme misogynists among males in the incel “community”. Some are so enraged by their plight that they engage in on-line bullying, and a plainly deranged segment of incels, including the perpetrators of the crimes mentioned above, have advocated violent retribution against those they deem responsible for their low sexual status. That means just about anyone who can find a partner.

Alptraum paints male incels with a very broad brush, however. Similarly, various leftist writers have categorized incels as predominantly “right wing” and even racist, but involuntary celibacy and misogyny do not lie conveniently along a two-dimensional political spectrum. Incels are present in many groups, crossing racial, religious, and political lines. There are incels among the transgendered and undoubtedly in the gay community. Gay individuals can exist in relative isolation in towns across America. Physical disabilities may condemn individuals to involuntary celibacy. And not all incels are “ugly”; instead, they may suffer from severe social awkwardness. But there are bound to be incels who live quiet lives, unhappy, but adjusted to their circumstances, more or less.

The recent focus on incels has prompted some interesting questions. Ross Douthat’s opinion piece in The New York Times asks whether anyone has a “right to sex”, as some incels have asserted. Robin Hanson discusses the idea of a “redistribution of sex“, noting in a follow-up post that governments throughout history have influenced the distribution of sex through policies enforcing monogamy, for example, or banning prostitution. Voluntary agreements to exchange sex for remuneration are one way to alter the distribution. In fact, to demonstrate the lengths to which a government could go to redistribute sex and intervene against “sex inequality”, Hanson mentions policies of cash redistribution, funded by taxpayers, to compensate incels for the services of prostitutes. There are examples of such benefits for the disabled. Here is Alex Tabarrok on that subject:

“In the UK charities exist to help match sex workers with the disabled. Similar services are available in Denmark and in the Netherlands and in those countries (limited) taxpayer funds can be used to pay for sexual disability services.”

Subsidies and charity aside, it’s easy to understand why prohibition of sexual services for hire would be seen as an injustice by those unable to find partners willing to grant sexual benefits. From a libertarian perspective, trade in sex should be regarded as a natural right, like the freedom to engage in any other mutually beneficial transaction, so long as it does no harm to third parties. One’s body is one’s own property, and it should not be for government — or others — to decide how it will be used.

Laws against prostitution do great harm to society and to the individuals involved in the sex business. Forget about ending prostitution. That will never happen. According to  Abigail Hall, there are about 1 million prostitutes working in the U.S. They almost all work underground, with the exception of those operating in legal brothels in Nevada. Prohibition keeps the price up, but the workers capture a low share of those returns. Their bosses are harsh masters relative to those in legal businesses. These workers cannot report crimes against them, so they are often subject to the worst kinds of abuse. Illegality usually means they don’t have access to good health care, which places customers at greater risk. Legalizing (or decriminalizing) prostitution would reduce or eliminate these problems. From Hall:

“By legalizing the sex trade, we would allow those involved in the sex trade to come out from the shadows, use legitimate business practices and legal channels, and decrease the likelihood that women will be trafficked by violent groups of criminals. … As prostitution becomes a legitimate profession, it allows for prostitutes to be more open with their doctors about their sexual history and seek treatment for STIs and other problems.”

Many object that prostitution exploits women, legal or not, and that it exploits low-income women disproportionately. But there will be voluntary sellers as long as there is a market, again, legal or not. And there will be a market. As for a disparate impact on the poor, Hall says:

“The fact that those who select prostitution as a profession may be poor is inconsequential…. It may be true that some women who work as prostitutes would strongly prefer another profession. Even if this is the case, women who voluntarily choose prostitution as a means of income should be allowed to practice their profession in the safest environment possible.”

The ongoing development of “sex robots” offers an avenue through which incels might enjoy activity that approximates sex with a human being. These robots are becoming increasingly realistic, and their costs are likely to decline dramatically in coming years. For incels with a congenital inability to interact with other human beings, this option might be far preferable to hiring the services of a prostitute. And the introduction of both male and female sex robots into senior care facilities might reduce the likelihood that sexually aggressive residents will abuse others. It happens.

Free markets are amazing in their ability to maximize the well being of both consumers and producers of a good or service. Trades are mutually beneficial and therefore are voluntary, and price signals redirect resources to their most valued uses. The prohibition on prostitution, however, has made it a very dangerous business for practitioners and customers alike. Prohibition has led to dominance by organized crime interests and local strong-men and -women. It has also thickened the intersection of prostitution with other prohibited activities, such as the drug trade. This creates a toxic criminal environment within which women are trapped and abused. Legalizing prostitution would liberate these individuals and create safer conditions for them and their customers. Private solutions would still be available to those who wish to keep prostitution out of their buildings or neighborhoods. And legalization is one way that sex could be made safely and voluntarily accessible to incels. Perhaps, one day soon, the availability of sex robots will help incels satisfy their desires as well. Some incels will still harbor strong resentment toward those for whom sex is not out of reach. Nevertheless, it is reasonable to ask whether such a “voluntary redistribution of sex” would not produce unambiguous social benefits. To deny these benefits to groups like the disabled, or really to anyone with a physical or emotional inability to find a willing partner, and to insist that sex workers be exposed to danger and abuse, is not just priggish, but cruel.