Behold Our Riches! Quality, Prices, Income, and the Purchasing Power of Labor

12 Tuesday Sep 2017

Posted by pnuetz in Human Welfare, Markets

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Affordability, Consumer Surplus, Don Boudreaux, Human Progress, Income Statistics, John D. Rockefeller, Marian Tupy, Martin Feldstein, Measures of Economic Welfare, Middle Class Stagnation, Non-Wage Benefits, Quality Adjustment, Wage Stagnation

coffeemaker

A steady refrain among pundits is that the American middle class can’t get ahead. The standard of living of average Americans has stagnated over the past 30 years, according to this view. It’s bolstered by government measures of average wage growth relative to consumer prices. But Martin Feldstein describes the flaws in constructing these measures; he says they may have led to an understatement of real income growth of more than 2% per year! Here is a link to Feldstein’s piece in the Wall Street Journal: “We’re Richer Than We Realize“. (If the link doesn’t work, an ungated link can be found on the WSJ Facebook page, posted at 10:30 a.m. on Saturday, Sept. 9th.)

Here are some of Feldstein’s observations:

“If there is no increase in the cost of production, the government concludes that there has been no increase in quality. And if the manufacturer reports an increase in the cost of production, the government assumes that the value of the product to consumers has increased in the same proportion.

That’s a very narrow—and incorrect—way to measure quality change. In reality companies improve products in ways that don’t cost more to produce and may even cost less. That’s been true over the years for familiar products like television sets and audio speakers. The government therefore doesn’t really measure the value to consumers of the improved product, only the cost of the increased inputs. The same approach, based on measuring the cost of inputs rather than the value of output, is also used for services.

The official estimates of quality change are therefore mislabeled and misinterpreted. When it comes to quality change, what is called the growth of real output is really the growth of real inputs. The result is a major underestimation of the increase in real output and in the growth of real incomes that occurs through quality improvements.

The other source of underestimation of growth is the failure to capture the benefit of new goods and services. Here’s how the current procedure works: When a new product is developed and sold to the public, its market value enters into nominal gross domestic product. But there is no attempt to take into account the full value to consumers created by the new product per se.“

It goes well beyond that, however, as great swaths of consumer value are completely ignored by government statistics:

“A basic government rule of GDP measurement is to count only goods and services that are sold in the market. Services like Google and Facebook are therefore excluded from GDP even though they are of substantial value to households. The increasing importance of such free services implies a further understatement of real income growth.“

Some of these criticisms are unfair to the extent that income statistics correspond to what consumers can purchase in terms of market value. That is a fundamentally different concept than the total value consumers assign to goods and services (market value plus consumer surplus). Nevertheless, there are efforts to adjust for quality in these statistics, but they fall far short of their objective. Also, GDP and income statistics purport to be measures of economic welfare, though it’s well known that they fall short of that ideal. It might be more fair to say that that official income statistics are reliable in tracking short-term changes in well being, but not so much over long periods of time.

The graphic at the top of this post is taken from Marian L. Tupy’s “Cost of Living and Wage Stagnation in the United States, 1979-2015“, on the CATO Institute‘s web site:

“… many, perhaps most, big-ticket items used by a typical American family on a daily basis have decreased in price. Over at Human Progress, we have been comparing the prices of common household items as advertised in the 1979 Sears catalog and prices of common household items as sold by Walmart in 2015.

We have divided the 1979 nominal prices by 1979 average nominal hourly wages and 2015 nominal prices by 2015 average nominal hourly wages, to calculate the “time cost” of common household items in each year (i.e., the number of hours the average American would have to work to earn enough money to purchase various household items at the nominal prices). Thus, the ‘time cost’ of a 13 Cu. Ft. refrigerator fell by 52 percent in terms of the hours of work required at the average hourly nominal wage, etc.“

Tupy’s post also covers the huge increases in non-wage benefits enjoyed by many workers over the past several decades, which are not captured in average wage statistics.

It’s clear that standard measures of income growth are distorted by the failure to properly account for changes in the quality of goods and services at our disposal. The narrative of middle class stagnation is flawed in that respect. As Don Boudreaux has said, most ordinary Americans are richer today than John D. Rockefeller was a century ago. The availability and quality of goods and many services today, affordable to ordinary Americans, are vastly superior to what Rockefeller had then or could even imagine. And many of those advancements occurred since the 1970s.

Lighten Up For Human Achievement Hour!

25 Saturday Mar 2017

Posted by pnuetz in Human Welfare, Free markets

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Human Achievement Hour, Earth Hour, Competitive Enterprise Institute, Free Markets, HumanProgress.org, Human Ingenuity, Chelsea Follett, Fracking, Lowering Emissions

idea-light-bulb

Tonight, Saturday March 25th from 8:30 to 9:30, I’ll be doing my part to celebrate humankind’s ascendence over the bare subsistence and misery that was ubiquitous until just the last few centuries. Human Achievement Hour is sponsored by the Competitive Enterprise Institute (CEI) to celebrate the incredible technological miracles brought forth by human ingenuity and free markets:

“Originally launched as the counter argument to the World Wide Fund for Nature’s Earth Hour, where participants renounce the environmental impacts of modern technology by turning off their lights for an hour, Human Achievement Hour challenges people to look forward rather than back to the dark ages.

Symbolically or not, Earth Hour is a misguided effort that completely ignores how modern technology allows societies to develop new and more sustainable practices, like helping people around the world be more eco-friendly and better conserve our natural resources.

While Earth Hour supporters may suggest rolling brown-outs in India are desirable, we respectfully disagree. Instead of sitting in the dark, Human Achievement Hour promotes new ideas and celebrates the technology and innovation that will help solve the world’s environmental challenges.”

The following are suggestions from CEI as to how you can participate in the celebration. I’ll take them up on the third and sixth items on this list, just as I have for the past several years.

Use your phone or computer to connect with friends and family
Watch a movie or your favorite television show
Drink a beer or cocktail
Drive a car or take a ride-sharing service
Take a hot shower
Or, in true CEI fashion, celebrate reliable electricity that has saved lives, by bringing heat and air conditioning to people around the world, and keep your lights on for an hour

Light up the night! Here are a couple of links with information on the worldwide progress in improving human living conditions:

The Human Progress Blog

Thank Fracking For Reduced Emissions

We are winning the war against starvation, disease and poverty around the globe, though progress can seem frustratingly gradual in real time. Nevertheless, over the sweep of history, we are winning the battle in a dramatic way.

May You Live For a Thousand Years

27 Tuesday Sep 2016

Posted by pnuetz in Human Welfare, Life Extension, Progressivism

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Alex Tabarrok, Ayn Rand, City Journal, Cyborgization, Glenn Reynolds, Human Ingenuity, Human Progress, Jemima Lewis, Julian Simon, Larry Ellison, Life Extension, Marian Tupy, Mark Zuckerberg, Peter Theil, Priscilla Chan, quality of life, Robert Malthus, The Club of Rome, The Limits to Growth, The Telegraph

What if human life expectancy doubles over the next 50 years? Triples? Mark Zuckerberg and many others with money to spend, such as Peter Theil and Larry Ellison, want to accomplish that and more. For example, Zuckerberg and his wife Priscilla Chan have pledged $3 billion over the next decade to “rid the world of disease”. The implications are fascinating to ponder. In developed countries, most of the life extension would come from reducing mortality in adulthood and late in life, simply because childhood mortality has already reached very low levels. Assuming that the additional years are healthful, the dynamics of population growth and the labor force would change. Family structure could take new directions, especially if extended fertility takes place along with life extension. The coexistence of six, nine, or more generations might make one’s descendants virtual strangers. And it might be possible for an individual to have children who are younger than the great-grandchildren of progeny conceived early in one’s adulthood. For love or money, your great-grandchild might couple with an individual a generation or more ahead of you. Scandalous!

Some pundits foresee dark implications for humanity. Alex Tabarrok comments on some musings in The Telegraph by Jemima Lewis, providing the following Lewis quote:

“We’d better hope they don’t succeed. What would it do to the human race if we were granted eternal health, and therefore life? Without any deaths to offset all the births, we would have to make room on earth for an extra 208,400 people a day, or 76,066,000 a year – and that’s before those babies grow old enough to reproduce themselves.

Within a month of Mr Zuckerberg curing mortality, the first wars over water resources would break out. Within a year, the World Health Organisation would be embarking on an emergency sterilisation programme. Give it a decade and we’d all be dead from starvation, apart from a handful of straggle-bearded tech billionaires, living in well-stocked bunkers under San Francisco.“

Of course, people will still die in accidents and from some illnesses that cannot be anticipated; some people will always engage in self-destructive behavior; and there will always be natural calamities that will take human life, such as earthquakes and hurricanes. Nevertheless, life-extending technologies will increase the human population, all else equal. I say bring it on! But Lewis’ attitude is that increasing life expectancy is a bad thing, contrary to our almost uniformly positive experience with longer lives thus far, including improvements in the quality of life for aging seniors. More fundamentally, her view is that people are a liability, a collection of helpless gobblers, rather than valuable resources with the promise of providing themselves with an increasingly rich existence.

Lewis’ article demonstrates a special brand of ignorance, now common to many on the left, going back at least to the time of Robert Malthus, at about the turn of the 19th century. Malthus’ pessimism about the world’s ability to provide for the needs of an expanding population is well known, and wrong. The Club of Rome‘s report “The Limits To Growth“, published in 1972, pretty much continued in the Malthusian tradition. That report predicted increasing shortages and mass starvation. Of course, the Club erred both empirically and theoretically, as Julian Simon forcefully argued in the 1980s and 1990s. The crux of Simon’s argument was the existence of a renewable resource of vast promise: human ingenuity:

“Because of increases in knowledge, the earth’s ‘carrying capacity’ has been increasing throughout the decades and centuries and millennia to such an extent that the term ‘carrying capacity’ has by now no useful meaning. These trends strongly suggest a progressive improvement and enrichment of the earth’s natural resource base, and of mankind’s lot on earth.“

There are certain conditions that must be in place for the planet to provide for ongoing advances in human well-being. Markets must be operative in order for prices to provide accurate signals about the relative scarcity of different resources. When particular resources become more scarce, their prices provide an incentive to use existing substitutes and innovative alternatives. Competition facilitates and helps perfect this process, as new producers continuously seek to introduce innovations. Needless to say, the more restrictions imposed by government, and the more the state gets involved in picking favorites and protecting incumbents, the less effective this process becomes.

From a global perspective, the human race has done quite well in eliminating poverty during the industrial era. Impressive measures of progress across many dimensions are chronicled at the Human Progress blog, where Marian Tupy writes of “Looking Forward To the Future“. These improvements fly in the face of predictions from the environmental left, and they demonstrate that humanity is likely to find many ways in which extended lifespans can be both enjoyed and contribute to the world’s productive potential.

Extended lifespans will bring changes in the way we think about our working years and retirement. Both parts of our lives are likely to be extended. Job experience utilizing incumbent technologies will become less scarce, and will thus command a lower premium. Continuing education will increase in importance with new waves of technology. There will be changes in the time patterns of saving and investment and the design of retirement benefits offered by employers, but long periods of compounding might reduce the pressure to save aggressively. Bequest motives would almost surely change. Mechanisms like family endowments benefitting members of an extended family via education funding, medical technology and end-of-life care might become common.

There will have to be many changes in our physical makeup to ensure that life extension buys mostly “quality time”. For example, it’s probably not possible for many parts of the human body to function reliably after a century of use. The technologies of skeletal, organ and muscle replacement, or rejuvenation, will have to advance significantly to ensure a reasonable quality of life in an older population. The bodies of older humans will either be cyborgized or freshly regenerated as life extension becomes a reality.

As more radical life extension begins in earnest, it’s likely to begin as the exclusive province of the rich. However, like everything else, the technologies and benefits will eventually diffuse to the broader population as long as competitive pressures are present in the relevant markets. It will be a matter of choice, and perhaps the most unhappy among us will choose to forego these opportunities. However, such technologies, to the extent that they become a reality, would have the potential to improve the physical well- being of almost anyone.

Dramatically extending the human life span will bring dramatic change and many social challenges, but ending disease is a worthy goal, and one that most certainly will benefit mankind. Tabarrok casts Jenima Lewis as an Ayn Rand villain, though he must realize that she is simply ignorant of the forces that create growth and an improving existence. Unfortunately, she is one of many on the left enamored with a perspective that is “anti-mind, anti-man, anti-life” (to quote Tabarrok quoting Rand).

For additional reading on the left’s anti-human agenda, see this Fred Siegel piece in the City Journal, “Progressives Against Progress” (HT: Glenn Reynolds).

Warm, Contented Civilizations

26 Sunday Jun 2016

Posted by pnuetz in Global Warming, Human Welfare

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AGW, Andy May, Carbon Concentration, Human Civilization, Ice Core Data, Little Ice Age, Minoan Warm Period, Perihelion, Roman Warm Period, Temperature Proxy, Viking Civilization, Watt's Up With That?

Human civilizations have experienced many of their worst trials during periods of cooling and cold temperatures over the past 8,000 – 10,000 years. These were episodes associated with droughts as well. Conversely, civilizations have tended to prosper during warm, wet periods. These associations between human progress and the natural environment are discussed in a pair of articles by Andy May: “Climate and Human Civilization Over the Past 18,000 Years“, and “Climate and Human Civilization for the Past 4,000 Years“. The articles are part climate science, part history, and part anthropology, with many fascinating details.

May presents large charts that can be downloaded, and they are especially interesting to ponder. He uses historical temperature proxies from Antarctica and Greenland to construct the charts, along with more recent data on measured surface temperatures in Greenland. According to May, the proxies are highly correlated with other proxy data from less extreme latitudes. Several important takeaways are the following:

Warm periods in the historical record are associated with wet conditions, and cold periods are associated with dry conditions. This is intuitive, as warm air holds more moisture than cold air.
There are estimates of temperatures going back more than 800 million years; apparent cyclical regularities in temperatures have lasted as long 150 million years. Cycles within cycles are evident: a 100,000 year cycle is prominent as well as a 25,000 year cycle (see #4 below).
Today’s temperatures are not as high as those prevailing during about 200 years of the so-called Roman Warm Period, or during a span of similar length in the so-called Minoan Warm Period, about 3,300 years ago. Today’s temperatures are much lower than estimates for much of the earth’s pre-human history.
The southern hemisphere has more volatile temperatures than the northern hemisphere due to the tilt of the earth’s axis at perihelion in January, when the earth is closest to the sun. That means the southern hemisphere tends to have warmer summers and colder winters. That will reverse over the next 10,000 years, and then it will reverse again. There is more land mass in the north, however, so it’s not clear that less extreme weather in the north helps explain the hugely lopsided distribution of development and population in that hemisphere.
Recent increases in sea levels have been small relative to the years following the Little Ice Age. Projected increases over the next 50 years are of a magnitude that should be easily manageable for most coastal areas.
Atmospheric carbon concentration seems to lag major increases in temperatures by about 800 years, raising a question of causality. Today’s carbon concentration is low relative to earlier epochs; it has been increasing for thousands of years, clearly independent of human activity, and is now near 400,000 year highs.
Civilizations have blossomed with warm temperatures and they have collapsed or hit extended periods of retarded progress with declines in temperatures. Human agriculture was born as temperatures rose out of the depths of a glacial period about 10,000-12,000 years ago. Rome flourished during a warm cycle and collapsed as it waned. The Vikings settled in Greenland and Newfoundland during the Medieval Warm Period and were eliminated by the Little Ice Age. May cites a number of other examples of temperature cycles bringing on major shifts in the course of human progress. There are many possible explanations for the decline of past civilizations, but extremely low temperatures, droughts, and lengthy periods of weather inhospitable to agriculture have been important.

The fashion today is to insist that only dramatic changes in our use of energy can avert a global warming catastrophe. It is not clear that any effort by humans to manipulate global temperatures can overcome the natural forces that are always driving temperature change. For that matter, it is not clear that carbon dioxide is a bad thing, or that diverting vast quantities of resources to reduce it would be wise. CO2 is certainly not a pollutant in the normal sense of the word. Here is an excerpt from May’s conclusion in his “4,000 years” article, which speaks volumes:

“First, there is no perfect temperature. Man, even in pre-industrial times, adapted to a variety of temperatures and he has always done better in warm times and worse in cold times. Second, why would anyone want to go back to the pre-industrial climate? The Washington Post says the goal of the Paris Climate Conference was get the world to agree to limit global warming to less than two degrees above pre-industrial temperatures. Pre-industrial times? That’s the Little Ice Age, when it snowed in July, a time of endless war, famine and plague. According to the Greenland ice core proxy data, temperatures 180 years ago were nearly the coldest seen since the end of the last glacial period 10,000 years ago! Why measure our success in combating anthropogenic warming, if there is any such thing, from such an unusually cold time?“

Tonight! Let It Shine For Human Achievement Hour

19 Saturday Mar 2016

Posted by pnuetz in Capitalism, Environment, Human Welfare

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Earth Hour, Human Achievement Hour, Malthus

Tonight, Saturday March 19th, celebrate Human Achievement Hour (HAH). From 8:30 to 9:30 p.m., let all of your lights burn brightly to commemorate the great victory of human ingenuity, liberty and capitalism over darkness, discomfort, poverty, pestilence, disease and early mortality.

Yes, HAH coincides with Earth Hour, when hard-core Malthusians collectively demonstrate their guilt and inner goodness by sitting in darkness in crude emulation of the conditions suffered by their primitive forebears. Needless to say, I haven’t the slightest guilt about thumbing my nose at the bogus spirituality and economic ignorance embodied in Earth Hour. Better to maintain an accurate perspective on the amazing extent of human progress. We should celebrate! And so I say: hooray for HAH!

Horizons Lost To Coercive Intervention

27 Wednesday Jan 2016

Posted by pnuetz in Human Welfare, Price Controls, Regulation

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Allocation of Resources, Don Boudreaux, Foregone Alternatives, Frederic Bastiat, Luddites, Minimum Wage, Opportunity Costs, Price Ceilings, Price Controls, Price floors, Rent Control, Scientism, Unintended Consequences, What is Not Seen

ceiling prices

Every action has a cost. When you’re on the hook, major decisions are obviously worth pondering. But major societal decisions are often made by agents who are not on the hook, with little if any accountability for long-term consequences. They have every incentive to discount potential downside effects, especially in the distant future. Following Frederic Bastiat, Don Boudreaux writes of three levels of “What Is Not Seen” as a consequence of human decisions, which I summarize here:

Immediate foregone alternatives: Possession, use and enjoyment of X is not seen if you buy Y.
Resources not directed to foregone alternatives: The reduction in X inventory is not seen, compensating production of X is not seen, and extra worker hours, capital use and flow of raw materials needed for X production are not seen.
The future implied by foregone alternatives: Future impacts can take many forms. X might have been a safer or healthier alternative, but those benefits are unseen. X might have been lower quality, so the potential frustration and repairs are unseen. X might have been less expensive, but the future benefits of the money saved are unseen. All of these “unseens” have implications for the future world experienced by the decision-maker and others.

These effects take on much more significance in multiples, but (2) and (3) constitute extended unseen implications for society at large. In multiples, the lost (unseen) X production and X labor-hours, capital and raw materials are more obvious to the losers in the X industry than the winners in the Y industry, but they matter. In the future, no vibrant X industry will not be seen; the resources diverted to meet Y demand won’t be seen at new or even old X factories. X might well vanish, leaving only nontransformable detritus as a token of its existence.

Changes in private preferences or in production technologies create waves in the course of the “seen” reality and the “unseen” world foregone. Those differences are caused by voluntary, private choice, so gains are expected to outweigh losses relative to the “road not traveled”. That’s not a given, however, when decisions are imposed by external authorities with incentives unaligned with those in their thrall. For that reason, awareness of the unseen is of great importance in policy analysis, which is really Boudreaux’s point. Here is an extreme example he offers in addressing the far-reaching implications of government intrusions:

“Suppose that Uncle Sam in the early 20th century had, with a hypothetical Ludd Act, effectively prohibited the electrification of American farms, businesses, and homes. That such a policy would have had a large not-seen element is evident even to fans of Bernie Sanders. But the details of this not-seen element would have been impossible today even to guess at with any reliability. Attempting to quantify it econometrically would be an exercise in utter futility. No one in a 2015 America that had never been electrified could guess with any sense what the Ludd Act had cost Americans (and non-Americans as well). The not-seen would, in such a case, loom so large and be so disconnected to any known reality that it would be completely mysterious.“

Price regulation provides more familiar examples. Rent controls intended to “protect” the public from landlords have enormous “unintended” consequences. Like any price regulation, rent controls stifle exchange, reducing the supply and quality of housing. Renters are given an incentive to remain in their units, and property owners have little incentive to maintain or upgrade their properties. Deterioration is inevitable, and ultimately displacement of renters. The unseen, lost world would have included more housing, better housing, more stable neighborhoods and probably less crime.

A price floor covered by Boudreaux is the minimum wage. The fully predictable but unintended consequences include immediate losses in some combination of jobs, hours, benefits, and working conditions by the least-skilled class of workers. Higher paid workers feel the impact too, as they are asked to perform more (and less complex) tasks or are victimized by more widespread substitution of capital for labor. Consumers also feel some of the pain in higher prices. The net effect is a reduction in mutually beneficial trade that continues and may compound with time:

“As the time span over which obstructions to certain economic exchanges lengthens, the exchanges that would have, but didn’t, take place accumulate. The businesses that would have been created absent a minimum wage – but which, because of the minimum wage, are never created – grow in number and variety. The instances of on-the-job worker training that would have occurred – but, because of the minimum wage, didn’t occur – stack up increasingly over time.“

Regulation and taxation of all forms have such destructive consequences, but policy makers seldom place a heavy weight on the unobserved counterfactual. Boudreaux emphasizes the futility of quantifying the “unseen” effects these policies:

“… those who insist that only that which can be measured and quantified with numerical data is real must deny, as a matter of their crabbed and blinding scientism, that such long-term effects … are not only not-seen but also, because they are not-seen, not real.“

The trade and welfare losses of coercive interventions of all types are not hypothetical. They are as real as the losses caused by destruction of property by vandals. Never again can the owners enjoy the property as they once had. Future pleasures are lost and cannot be observed or measured objectively. Even worse, when government disrupts economic activity, the cumulative losses condemn the public to a backward world that they will find difficult to recognize as such.

Climate Summit Success? Let’s Talk In Five Years

02 Wednesday Dec 2015

Posted by pnuetz in Global Warming, Human Welfare

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AGW, Benny Peisner, Carbon Emissions, Carbon Verification, Climate Alarmism, Climate and Terrorism, Climate Hysteria, Climate Summit, COP 21, global warming, IPCC, Joel Kotkin, Matt Ridley, Regressive Climate Policy

Misplaced priorities are on full display in Paris for the next ten days at the climate conference known as COP-21 (“Conference of the Parties”). Joel Kotkin makes note of the hysteria in evidence among climate activists fostered by political opportunists, economic illiteracy and fraudulent climate research. Of course, climate alarmism offers handsome rewards for politician-cronyists and rent-seeking corporatists. With that seemingly in mind, President Barack Obama is playing the role of opportunist-in-chief, claiming that climate change is the biggest threat to U.S. security while blithely asserting that the climate is responsible for the growing danger from terrorism. Here is Kotkin on such tenuous claims:

“… this reflects the growing tendency among climate change activists to promote their cause with sometimes questionable assertions. Generally level-headed accounts, such as in the Economist and in harder-edge publications like the Daily Telegraph, have demonstrated that many claims of climate change activists have already been disproven or are somewhat exaggerated.“

“Somewhat exaggerated” is an understatement, given the scandals that have erupted in the climate research community, the miserable predictive record of carbon forcing models, and the questionable practices employed by NASA and NOAA researchers in adjusting surface temperature data (see below for links). When it comes to climate activism, the Orwellian aspect of Groupthink is palpable:

“Rather than address possible shortcomings in their models, climate change activists increasingly tend to discredit critics as dishonest and tools of the oil companies. There is even a move to subject skeptics to criminal prosecution for deceiving the public.“

This is thoroughly contrary to the spirit of scientific inquiry, to say nothing of free speech. As if to parody their questionable approach to an issue of science, climate-change devotees have come out in full force to attack the excellent Matt Ridley, a sure sign that they find his message threatening to the power of their mantra. Ridley and Benny Peiser have an op-ed in the Wall Street Journal this week entitled “Your Complete Guide to the Climate Debate” (should be ungated for now). The authors discuss the weakness of the scientific case for anthropomorphic global warming (AGW); the fact that they use findings of the Intergovernmental Panel on Climate Change (IPCC) to make this critique must be particularly galling to the alarmists. Ridley and Peisner cover the correspondingly flimsy case for draconian environmental policies to deal with the perceived threat of AGW. Also, they emphasize the regressive nature of the demands made by the environmental left, who are either ignorant or unfazed by the following truths:

“… there are a billion people with no grid electricity whose lives could be radically improved—and whose ability to cope with the effects of weather and climate change could be greatly enhanced—with the access to the concentrated power of coal, gas or oil that the rich world enjoys. Aid for such projects has already been constrained by Western institutions in the interest of not putting the climate at risk. So climate policy is hurting the poor.“

Finally, Ridley and Peisner explain the economic incentives that are likely to undermine any meaningful international agreement in Paris. Less developed countries have been asked to reduce their carbon emissions, which they can ill afford, and to agree to a verification framework. Those parties might agree if they view the framework as sufficiently easy to game (and it will be), and if they are compensated handsomely by the developed world. The latter will represent an insurmountable political challenge for the U.S. and other developed countries, who are already attempting to promulgate costly new restrictions on carbon emissions.

“Concerned about the loss of industrial competitiveness, the Obama administration is demanding an international transparency-and-review mechanism that can verify whether voluntary pledges are met by all countries. Developing countries, however, oppose any outside body reviewing their energy and industrial activities and carbon-dioxide emissions on the grounds that such efforts would violate their sovereignty.

… China, India and the ‘Like-Minded Developing Countries’ group are countering Western pressure by demanding a legally binding compensation package of $100 billion a year of dedicated climate funds, as promised by President Obama at the U.N. climate conference in Copenhagen in 2009.

However, developing nations are only too aware that the $100 billion per annum funding pledge is never going to materialize, not least because the U.S. Congress would never agree to such an astronomical wealth transfer. This failure to deliver is inevitable, but it will give developing nations the perfect excuse not to comply with their own national pledges.“

These conflicting positions may mean that the strongest point of accord at the Paris conference will be to meet again down the road.

“Expect an agreement that is sufficiently vague and noncommittal for all countries to sign and claim victory. Such an agreement will also have to camouflage deep and unbridgeable divisions while ensuring that all countries are liberated from legally binding targets a la Kyoto.“

This morning, an apparently sleepy and deluded President Obama spoke at the Paris conference before heading back to the U.S. He insisted again that the agreement he expects to come out of Paris will be a “powerful rebuke” to terrorists. Yeah, that’ll show ’em! Even a feeble agreement will be trumpeted as a great victory by the conference parties; Obama and the Left will attempt to wield it as a political cudgel, a brave accomplishment if it succeeds in any way, and a vehicle for blame if it is blocked by the principled opponents of climate alarmism. The media will play along without considering scientific evidence running contrary to the hysterical global warming narrative. Meanwhile, the frailty of the agreement will represent something of a win for humanity.

Here are some links to previous posts on this topic from Sacred Cow Chips:

Climate Negotiators To Discuss Economic Cannibalism

A Cooked Up Climate Consensus

Fitting Data To Models At NOAA

Carbon Farce Meets Negative Forcings

Subsidized Waste: The Renewable Irony

Manipulating Temperatures, People & Policy

Record Hot Baloney

Alluring Apocalypse Keeps Failing To Materialize

The Stench of Green Desperation

Cut CO2, But What About the Environment?

Live Long and Prosper With Fossil Fuels

Divesting of Human Well-Being

Artwork or Art Work? Effort or Value?

21 Wednesday Oct 2015

Posted by pnuetz in Human Welfare, Liberty

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Carl Menger, Karl Marx, Labor Theory of Value, Liberty.me, Marginal Product, Michael Bunch, Mises Wire, Ryan McMaken Frederic Bastiat, Value Creation

I know a talented artist who refuses to sell his paintings for less than he values the hours spent rendering them. His work is vibrant and arresting, but he doesn’t sell many paintings, which frustrates him greatly. I know very little about marketing artwork, but I do know that his pricing rationale is foolish. For one thing, the hours expended on a particular work are a sunk cost that he should forget if he wants to sell. And he doesn’t know this, but his opinion on pricing is an implication of Karl Marx’s labor theory of value, the flawed proposition that all value derives from the labor necessary to produce it.

Of course, value is in the eye of the beholder. In any potential exchange, value is determined in the first instance by the subjective assessment of a prospective buyer. Their willingness to pay is based on the enjoyment or utility they expect to gain from the transaction. There is no deal if the seller is unwilling to trade at that price; no one benefits unless the seller is thrilled to do the work without compensation, happy to consume or enjoy their own output, or gratified to simply hold it in inventory. My artist friend isn’t happy with that outcome, but his valuation has not passed a market test. Exactly where is the economic value of his labor? This is a cruel reality to those who scrape by in pursuits that often fail market tests, but it’s a reality that allows resources to be guided into uses that are most highly-valued and that satisfy wants most effectively.

It is surprising to me that the labor theory of value is so thoroughly embedded in the public’s thinking. Ryan McMaken at Mises Wire addresses this point in “Nobody Cares How Hard You Work“. Employers and employees often mistake hours worked and even effort for economic value. Working hard is thought to be admirable, but it is not always consistent with value creation:

“… too many workplaces still subtly communicate to employees the idea that intense effort, usually in the form of long hours, is the best route to a promotion. In fact, though, if you can do your job brilliantly and still leave at 3 p.m. each day, a really good boss shouldn’t object. And by the same token, you shouldn’t cite all the effort you put in when making your case for a raise. Why should a results-focused boss even care?“

At Liberty.me, Michael Bunch’s “A Misunderstanding of Labor and Value” offers some excellent quotes on the distinction, including this from Carl Menger:

“Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men.“

Ignoring the contribution of existing capital to production is an obvious error made by proponents of the labor theory of value, who argue that all value creation should be returned to labor as a reward. Bunch quotes Frederic Bastiat on this topic:

“Without these things [i.e., capital], the labor of man would be unproductive, and almost void; yet these very things have required much work, especially at first. This is the reason that so much value has been attached to the possession of them, and also that it is perfectly lawful to exchange and to sell them, to make a profit of them if used, to gain remuneration from them if lent.“

Yes, capital is man-made wealth, and labor plays an obvious role in its creation. Once extant, however, capital is a productive asset that enhances the productivity of labor as well. As property, its owners must be rewarded at least its marginal product, just as labor must be rewarded at least its marginal product. If the total product is deemed of sufficient value by buyers, then the activity will continue to the benefit of all concerned.

Bunch’s real intent is a bit off-topic: he seeks to refute the notion that patriarchy in the U.S. is active in assigning under-compensated roles to women. I’m not convinced that it’s necessary to debunk the labor theory of value to make that point.

Is the labor theory of value irrational? Yes! Behavioral economists agree, as the links above point out. There are certainly times when the theory drives the subjective market valuations of buyers. Some behavioral economists use this as a rationale for government intrusion, but there is every reason to believe that an external authority would produce more distorted valuations and allocate resources less efficiently than the flawed market participants. And after all, in a free society, it is not incumbent on an authority to second guess private decisions. A good outcome is whatever floats your boat.

Anti-Capitalists Prescribe Third-World Phlebotomy

12 Monday Oct 2015

Posted by pnuetz in Free Trade, Human Welfare

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Benjamin Powell, Economic Development, Fair Trade, Huffington Post, International Food Policy Research Institute, James Bovard, Johan Norberg, Penn Jillette, Protectionism, Sweatshops, Texas Tech University, The Freeman, Third-World Wages, World Bank

Working conditions and wages in the third-world usually look so undesirable to observers in developed countries that we commonly use the term “sweatshops” to describe production facilities serving global markets in developing countries. Those facilities, however, are relatively modern by their domestic standards. The wages and working conditions are far superior to traditional opportunities available to the workers, offering them a rare opportunity to get out of poverty. But it is not uncommon to hear a narrow view that these workers are “exploited”, as if shutting down those operations was a better alternative. Calls for boycotts and other measures to punish firms with ties to those facilities are a common refrain from the Left, but if successful, the real victims of such activists would be the very workers whose interests they claim to represent.

Johan Norberg makes this all too clear in the Huffington Post, in “How Your T-Shirt Saves the World“, citing reports from the World Bank and the International Food Policy Research Institute:

“The number of extremely poor in Bangladesh fell from 44 to 26 million between 2000 and 2010, despite the population growing by 15 million. Since 2004, the level of poverty in Cambodia has more than halved, from 52 to just over 20 percent. It is ‘one of the best performers in poverty reduction worldwide’, according to the World Bank.

This is a stunning success in the countries that need it the most, and the export sector has been instrumental in bringing it about. It increases the workers’ productivity, and therefore also their wages and working conditions, which has been especially important for women. In a study from the International Food Policy Research Institute, the researchers show that the increase in Bangladeshi wages from the garment sector ‘dwarfed’ the rise attributed to government programs. …

Obviously even the best jobs in very poor countries look bad compared to what we are used to in Europe and America, but that is not the alternative in an economy at a low level of capital and education. As a worker I interviewed in Vietnam once put it, the main complaint to management was that she wanted the factories to expand so that her relatives could get the same kinds of jobs.“

This is a very basic lesson in the process of economic development, and no one pretends that it’s easy. In this interview of Professor Benjamin Powell of Texas Tech University in The Freeman, he quotes Penn Jillette of Penn & Teller:

“The way Penn … put it once when he interviewed me is that ‘it’s better than tilling the soil with Grandpa’s femur.’ That is a bit crass . . . but true. Wishing away reality doesn’t give these workers better alternatives. Workers choose to work in sweatshops because it is their best available option. Sweatshops, however, are better than just the least bad option. They bring with them the proximate causes of economic development (capital, technology, the opportunity to build human capital) that lead to greater productivity—which eventually raises pay, shortens working hours, and improves working conditions.“

When you hear anyone talk about “exploitation” of workers in the third world by capitalists, ask them what alternatives they have in mind for lifting those workers out of poverty. Chances are they will pretend that firms can offer pay at levels far exceeding the current productivity of the workers — a prescription for closing the operations. Or they might offer naive suggestions that rely heavily on government as a benefactor, which are unlikely to succeed in ending poverty. They might even advocate for “fair trade”, which is leftist ear-candy code for protectionism. Nothing could be worse for first-world consumers or more harmful to the cause of economic development in the third world. As Norberg says of the so-called “sweatshops”: “The world needs more jobs like these, not fewer.“

Capitalism Is The Bounce In Nature’s Rebound

04 Friday Sep 2015

Posted by pnuetz in Free markets, Human Welfare, Technology

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Agricultural productivity, CropMobster, Dematerialization, Elon Musk, External costs and benefits, Fish Farms, Food Cowboy, Forest plantations, Global Greening, Hydrogen production, Hyperloop, Jesse H. Ausubel, Luxury public goods, Peak use, Property Rights, Reforestation, Rewilding

What forces account for the great shift toward “rewilding” now taking place in our world? Is it green activism and government action? Not from the looks of the photo above, which shows a giant field of solar panels powering an airport in India. Hailed as a great accomplishment by greens, the view from above provides a clue to the absurdity of absorbing vast resources to replace cheap, traditional power sources with politically-favored solar for just a few buildings. Fry the birds, burn the taxpayers! That’s certainly not rewilding, nor will it get us there. Neither will a cluttered landscape of giant, noisy windmills that slice up avian life, provide only intermittent power, and are left to decay once taxpayer subsidies go away.

Rather, the world is returning to nature via many forms of technology, resource productivity and capitalism. How is that possible? Here is a monograph by Jesse H. Ausubel on “rewilding”, the rebound of nature taking place around the globe. It might make you feel more optimistic about prospects for human prosperity and the joint survival of mankind and planet Earth. There is no question that the changes he describes are primarily driven by powerful private incentives. However, Ausubel’s positions are largely technical, not oriented toward a particular social or economic philosophy. He presents compelling graphical evidence and references to support his technical claims. In what follows, I’ll try to summarize some of the most salient points he makes in the report. Some [bracketed comments] in the bullet points are my own thoughts:

Land once used in agriculture is being returned to nature as “acreage and yield [have] decoupled. Since about 1940 American farmers have quintupled corn while using the same or even less land.” The same is true in other parts of the world. “The great reversal of land use that I am describing is not only a forecast, it is a present reality in Russia and Poland as well as Pennsylvania and Michigan.” Moreover, there is no cap in sight for farm yields. He credits “precision agriculture, in which we use more bits, not more kilowatts or gallons.“
Even more impressive is the fact that “rising yields have not required more tons of fertilizer or other inputs. The inputs to agriculture have plateaued and then fallen, not just cropland but nitrogen, phosphates, potash, and even water.“
A tremendous quantity of food is wasted, but Ausubel cites new web-enabled initiatives such as Food Cowboy and CropMobster that hold great promise in rerouting wasted surplus to areas of need. “The 800 million or so hungry humans worldwide are not hungry because of inadequate production.” [Well, production might be inadequate in their vicinity. And “waste” is relative, so to speak. It is typically uneconomic to avoid all wastage, and social pockets of hunger exist for many reasons unrelated to the operation of markets in food. But improvements in technology can make it feasible to reduce wastage at little cost.]
“If we keep lifting average yields toward the demonstrated levels …, stop feeding corn to cars [corn ethanol – another activity subsidized by government], restrain our diets lightly, and reduce waste, then an area the size of India or the USA east of the Mississippi could be released globally from agriculture over the next 50 years or so.“
Land released from agriculture contributes to reforestation, a process that is underway in a number of countries. “In the USA, the forest transition began around 1900, when states such as Connecticut had almost no forest, and now encompasses dozens of states. The thick green cover of New England, Pennsylvania, and New York today would be unrecognizable to Teddy Roosevelt, who knew them as wheat fields, pastures mown by sheep, and hillsides denuded by logging.“
Our demand for forest products is in decline, which also contributes to reforestation. Forest plantations (accounting for about 1/3 of wood production) are much more productive than harvesting wood from natural forests. Land devoted to wood plantations can displace the harvesting of a much larger area of natural forest.
Carbon dioxide (as well as nitrogen) is adding to “global greening“, which according to Ausubel is “the most important ecological trend on Earth today. The biosphere on land is getting bigger, year by year, by 2 billion tons or even more.” [Importantly, this greening provides an important offset to any tendency for human greenhouse gas emissions to warm the environment.]
“Dematerialization”: After the 1970s “…a surprising thing happened, even as our population kept growing. The intensity of use of the resources began to fall. For each new dollar in the economy, we used less copper and steel than we had used before.” Ausubel and some colleagues studied the use of 100 commodities in the U.S. over time. “… we found that 36 have peaked in absolute use; … Good riddance to asbestos and cadmium. … 53 commodities we consider poised to fall. These include not only cropland and nitrogen, … but even electricity and water…. Only 11 of the 100 commodities are still growing in both relative and absolute use in America.“
Ausubel shows that certain emissions in the U.S. have decreased in relative terms, and sometimes in absolute terms. [The latter were mostly induced by public demands for pollution control regulation, but relative declines also reflect the ability of the private economy to generate growth. However, the value of certain regulations is questionable from both a public finance and a public health perspective.]
He is very high on maglev technology and especially the “hyperloop”, Elon Musk’s proposed tube for high-speed maglev travel between LA and San Francisco. [I do not share his enthusiasm for some of the reasons discussed in “High-Speed Third Rail For Taxpayers“. Large-scale, publicly-subsidized infrastructure projects often fail in terms of costs vs. benefits. However, the economics of the hyperloop might prove more compelling.]
Fertility has been in decline throughout the world for decades. Slower population growth obviously complements technological advance in providing for material human welfare.
Oceans and aquatic life are an area of real concern, in Ausubel’s view. “Fish biomass in intensively exploited fisheries appears to be about one-tenth the level of the fish in those seas a few decades or hundred [of] years ago.” [This is a classic tragedy of the commons in which no property rights are defined until the catch is in.] Fish farming is a promising alternative that can reduce the strain on wild fish populations.
A final section on potential changes in the human diet is provocative. Ausubel discusses the promise of hydrogen supplies in creating proteins for our diet. “A single spherical fermenter of 100 yards diameter could produce the primary food for the 30 million inhabitants of Mexico City. The foods would, of course, be formatted before arriving at the consumer. Grimacing gourmets should observe that our most sophisticated foods, such as cheese and wine, are the product of sophisticated elaboration by microorganisms of simple feedstocks such as milk and grape juice. … Globally, such a food system would allow humanity to release 90 percent of the land and sea now exploited for food.“

In concluding his monograph, Ausubel addresses whether his optimism is misplaced, having focused so much on positive trends in the developed world and relatively little on less developed countries. Here is his response:

“My view is that the patterns described are not exceptional to the US and that within a few decades, the same patterns, already evident in Europe and Japan, will be evident in many more places.“

None of this is to deny the existence of external costs and benefits to the natural environment, which private parties might ignore in cases of ill-defined property rights or difficulties in litigating damages. Regulation may be a reasonable alternative for internalizing obvious external costs and benefits, but even then, markets can play a valuable role in fashioning the most efficient regulatory approach. In fact, with advances in environmental consciousness, private parties often find it in their best interest to internalize obvious external costs.

Having achieved a sufficient level of prosperity, a society may decide to convert some of the gains into public benefits through various forms of regulation or other public initiatives. In essence, these may be characterized as “luxury public goods”. The danger lies in the mistakes government often makes in the imposition of costly measures, and in allowing excessive taxes and regulation to subvert the very market processes giving rise to prosperity. This is particularly dangerous to welfare and growth in the underdeveloped world, as illustrated by opposition from environmentalists to efficient fossil fuels. That leaves the poor no alternative but to continue to burn wood indoors for heating and cooking.

It’s worth emphasizing that the nature rebound already taking place in the developed world is largely a product of free market capitalism and the growth in wealth and technology they have made possible. A great benefit of secure property rights for society, and for the environment, is that owners have powerful incentives to husband their resources. Likewise, the profit motive gives producers strong incentives to reduce waste and improve productivity. As economic development becomes more widespread, these incentives are promoting a healthier balance between man and nature. Greenies: capitalism can be your friend!