Let’s add this to the curriculum

(HT: The Last Embassy)

I wish this video of the Tommy Lee Jones look-alike would have been part of the curriculum when I was in high school.

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Getting cause and effect backwards

This post at The Pretense of Knowledge about the cognitive dissonance anti-consumerist supporters of Keynesian stimulus (i.e. college hippies), reminds me of an often misunderstood cause and effect in our economy.

The underlying belief of government stimulus spending is that spending itself is wealth.

But, the cause and effect go the other way. Spending does not cause wealth, wealth causes spending. 

Before my early ancestor, Unk, initiated the first trade with your early ancestor Puhg, Unk had to first create something that Puhg wanted. Likewise for Pugh.

So, while Unk got really good at gathering apples (investing), enough so that he had more than he needed at the moment (savings), Pugh was honing his skills catching fish (investing again), more than he needed. Unk trade a few of his extra apples, that he valued less, with Pugh for some fish, which he valued a bit more.  Likewise for Pugh.

In the trade value was created for both Unk and Pugh.

Now supporters of Keynesian stimulus will tell me that government stimulus “spending” is really “investment”, just like the investment Unk made in improving his apple gathering productivity. The government “investment” improves “our” productivity.

And, in some cases, that may be true. However, I noticed on a recent trip through several states that many of the shiniest and most architecturally adventurous new buildings, many adorned with art, happened to be government buildings.

I noticed some new private buildings, too. They were more conventional, less flashy. Maybe government knows something the private building owners don’t. Perhaps they know that groundbreaking architecture and public art adds to productivity. Certainly there are some private buildings like that as well.  But, I wondered how “we’ve” become more productive with such an elaborate edifice for a public works building, in one case.

What is wealth and where does it come from?

David Mamet corroborates my previous post on pp. 42 and 43 of his book, The Secret Knowledge:

The Left (as Thomas Sowell points out in Intellectuals and Society) believing in what it calls “social justice,” believes that wealth should be “shared,” but enters the discussion in its middle.  For wealth may or may not be shared (in fact, it is shared, as efficiently as possible, through trade), but the a priori question, to the Left, is unasked and unanswered: Where did it come from?

Where does wealth come from?  Great question.  So rarely is it asked and even more rare it answered.  Get ready.  Here’s the answer (in bold):

It was not, again, quoting from Professor Sowell, descended from heaven, like manna, and spread evenly over the ground.  It was created by individual expenditure of effort and individual willingness to undertake risk.

As my generation did not live through the Depression, World War II, and the agony of the immigrants who are our grandparents and great-grandparents; as we were raised in the greatest plenty the world has ever known and in the most just of societies, we have grown lazy and entitled (not unlike Marx, who lived as a parasite upon Engels, and never worked a day in his life).  The baby boomer generation, my own, is content, if of the Left, to live out our remaining years upon the work and upon the entitlements created by our parents, and to entail the costs upon our children–to tax industry out of the country, to tax wealth away from its historical role and use as the funder of innovation.

Risk taking and trial-and-error innovation.  That’s where wealth comes from.

It doesn’t come from laws or legislation.  It doesn’t come from taxes.  It doesn’t come government.

And, let me be clear on what wealth is.  Most people view it the state of being a rich person.  Here, I mean it to be our standard of living.

Wealth is what separates us from our hunter-gatherer ancestors.

They had the same 24 hours in the day that we have (plus a few microseconds).  But, they only managed to use those hours to eek out a sustenance standard of living or get just enough calories to keep from starving.

Most of us aren’t worried about starving.  We spend a fraction of the time getting more than enough calories and we spend the rest of the time doing lots of other stuff.  And we have a lot more time to do lots of other stuff, because we live longer than they did.  We survive illnesses that they didn’t.

All that separates us from the hunter-gatherer lifestyle is wealth.

That wealth resulted from innovation that was made sometime between then and now.

Those innovations resulted from encouragement individuals found in trading with each other and discovering that finding better ways to do things would enable them to move even further away from the life of hunter-gatherer grandpa.

Take a look at the products around you right now that make your life better than a hunter-gatherer.  Your carpet, phone, house, furnace, refrigerator, food in the pantry, the pantry, floor joists, electric wire and so on.

Consider that all of those resulted from an experiment — a risk someone took at some point in time.  It may have been an accidental risk.  It may have been planned.  But, it was a risk no less, because nothing is guaranteed to work or to be wanted.  Someone had to think of it and give it a try.  Very few of them came from a government project.  And even the ones that did were usually accidents that found an unintended purpose and what they have become had nothing to do with government.

When I drive around, I like to ask, “where did all these buildings come from?”  Each of those were a risk.  An individual or a group of individuals decided building that building would be a good idea. What things are in this world because you decided it would be a good idea?  How have those things improved your life or the lives of others?

Understanding what wealth is and where it comes from is important if you’re interested in continuing to improve everyone’s standard of living.

What is a market? What is government?

We often speak in terms of markets and government without really understanding what we’re saying.

What is a market?  Individuals interacting voluntarily with each other through prices.

What is government?  Individuals interacting with each other through political power.

There are many other ways individuals interact.  A family is one example.  Our friend network is another.  Churches, home owners associations, PTA, work groups, trade groups, the drivers in the group of cars around us on the freeway are still more examples.

I think it’s useful to understand what motivates and facilitates our interactions in these various  structures.  As mentioned above, in markets prices are the coordinating medium.  There are other factors too, but prices are the linchpin.

That’s why markets work well for getting people in the extended order, that is the billions of people we don’t personally know in the world, to cooperate on so many of the things we use daily to improve our lives.  This is the meaning of the Adam Smith’s famous quote:

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own self interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

The coordinating medium in government is different than markets.  It’s driven by elections, the structure for government decision-making (i.e. the constitution and/or generally accepted norms) and force.

Markets in Everything and Incentives Matter

Markets in Everything

I was intrigued on Memorial Day weekend by a show on the Discovery and Science channels called Oddities.  The half-hour show features the owners, Mike Zohn and Evan Michelson, of an “antiques and oddities” shop in New York City called Obscura as they haggle with buyers and sellers of some mighty strange stuff.  Mighty strange.  I thought bloggers were strange.

Belly lint art.  Rotting teeth.  Articulated animal skeletons.  Diseased brain cross sections.  You name it.

A number of times sellers walked into the store with some strange thing and I thought, they’ll never want that.  But then the owners offer pretty good sums of money for it.

If they don’t know what it is, they call in experts who usually “are really into this stuff” to get a better opinion on the going market rate for such oddities.

It’s interesting to watch.  I appreciate getting the insight into the haggling process.  For example, a sideshow performer worked Zohn and Michelson down on the price of a bed-of-nails sandwich (performer lies on his back on one bed-of-nails and then places another bed-of-nails, tips to nips, on his chest for people to stand on) from an old Coney Island sideshow by laying on the bed of nails and letting  Zohn and Michelson stand on top of him while he was in the sandwich.

Generally the sellers seem to be folks who have somehow acquired something strange from an inheritance, garage sale or something like that, and don’t really know what it is.  The buyers generally seem to be artists, performers and very specific collectors.

Incentives matter

One artist, who specializes in art from body functions and parts, was looking for something new.  Zohn pulled a large glass jar filled with rotting teeth from a top shelf.  He explained that dentists donated teeth that they pulled from patients to dental schools so dentists-in-training could practice filling cavities.  Somehow they came across this jar.

The artist loved it.  She and I both thought they would be happy to get rid of the whole jar for a price.  While hugging the jar she asked, “How much for this?”

Apparently there is a healthy market for rotting teeth.  “We sell those by the tooth.  You can pick out five or six teeth for $100 or so.”

This made me think back to Russell Roberts’ book the Price of Everything.  After an earthquake, one big box retailer raised prices on flashlights.  Some consumers saw this as price gouging.

But, the other side of the story is the higher prices caused better resource allocation.

Stores that didn’t raise prices were sold out of flashlights soon after the earthquake.  The value of flashlights had increased, but prices hadn’t, so the first few customers bought out the entire stock whether they really needed them or not, leaving no flashlights for customers that came in later.  The flashlights were allocated on a first-come, first-serve basis with all the spoils going to those who got to the store first.  People who came in later and really needed a flashlight could feel good that the store didn’t raise prices on flashlights, but they still wouldn’t be able to to buy a flashlight.

When the big box retailer raised prices, it caused people to more carefully consider their purchase, resulting in some people who may have already had flashlights, to pass on the flashlight purchase leaving more flashlights on the shelves for those who truly needed them.

Apparently, the same principle was at work on the rotting teeth.

“I can turn this $100 bill into 100 pennies!”*

In their book From Poverty to Prosperity, Arnold Kling and Nick Schulz examine a few natural experiments of side-by-side countries with varying economic “software” or economic systems.

I think this nicely sums the results of these experiments (p. 135):

Another dramatic example of the effect of bugs in the software layer [their term for economic systems and institutions] is the difference between Communist and non-Communist countries.  In the aftermath of World War II, some countries, notably Germany and Korea, became divided along ideological lines.  North Korea and East Germany were Communist.  South Korea and West Germany were capitalist.

The results of this “natural experiment” were striking.  By 1997, North Korea’s GDP per capita was $700, while South Korea’s was $13,590, or nearly 20 times as high.

They then quote the work of Jaap Sleifer which showed that East Germany’s per capita income was 103% of West Germany’s before World War II and shrunk to 31% by 1991.

That should be sobering to anyone who holds romantic notions for a centralized economy.  The opportunity cost in living standards is enormous.

They go on:

Another telling phenomena is the immigration of workers from Latin America to the United States.  Crossing the border appears to make the productivity of a low-skilled worker ten to twenty times higher, based on the wage differential for low-skilled workers in Mexico or Central America and the United States.

These natural experiments are good to keep in mind as some folks encourage centralization of large swaths of our economy.  Years down the road it will be difficult to know how much improvement we traded away, but the outcomes of these natural experiments should give you an idea.

If you have a tough time imagining these differences in living standards in terms of numbers, then imagine it in terms of time periods.  A low-skilled worker crossing the border from Mexico to the U.S. is similar to someone from around 1900 to 1930 America being transported to around the year 2000.

If you still have a tough time imagining this, watch Back to Future III, where Marty McFly journeys back to 1880s Hill Valley.  While eating dinner with his great-great grandad, he’s shocked when he discovers that the meat he’s eating contains buckshot from the fresh kill and his water looked fresh from a mud puddle.  I liked this scene because it’s little improvements like that that we never think about and we take for granted.

*The title of the post is a quote from the television series Arrested Development.  Gob impressed the Board of Directors with this magic trick.  His brother, Michael, pointed out that the Board didn’t realize that Gob’s magic just cost them $99.  Similarly, folks who hold grand visions of centralized planning never seem to realize how much those truly cost when implemented.