Two fine points

A few weeks ago, I wrote about a fine point made by Thomas Sowell regarding Obama’s “You didn’t build that” comment and, in general, the idea the we always owe something to “society” or “government” because government provides a plethora of infrastructure.

Sowell wrote:

Did the taxpayers, including business taxpayers, not pay for that road when it was built? Why should they have to pay for it twice?

Don Boudreaux adds to Sowell’s fine point in his column this week in the Pittsburgh Tribune-Review (bold mine).

Sure, Wal-Mart uses government-built highways to speed its inventories to its stores. But the fact that Wal-Mart would be unable to operate without the highway system doesn’t make those highways a uniquely special input to which Wal-Mart owes all, or even much, of its success.

Wal-Mart would be equally unable to operate without farmers to grow food to feed its truck drivers — or without textile producers to supply clothes for those drivers — or without oil companies to fuel its fleet of trucks.

Would Obama therefore conclude that Wal-Mart owes some special, open-ended obligation to oil companies? Would he insist that, if oil companies now squander their revenues, Wal-Mart and other retailers are morally compelled to chip in to help oil companies get back into the black?

Does Wal-Mart owe a special, open-ended obligation to oil companies?

If an oil company exec gave a speech suggesting that the oil his company provides is so valuable that they should be able to come along after someone has bought and used oil to make a profit and charge them again, that exec would be laughed off stage. Most people have a sense that oil has a price and once price has been paid, there’s no further obligation to the oil company.

So, why wasn’t Obama laughed off stage? Why have I only heard two economists point out that the folks using the services provided by government have already paid for the use of those services?

Boudreaux goes on to make another fine point, often overlooked or treated with much skepticism by folks who don’t give this a lot of thought:

Among the kinds of infrastructure that have, in fact, been supplied successfully by private businesses are city streets, highways, sewage systems, formal education, policing, money and commercial law. Government provision of such infrastructure, therefore, cannot be read as evidence that government’s role on this front is necessary.

If government failed to build highways to connect, say, Atlanta to Pittsburgh, private firms almost certainly would. (It’s easy to collect tolls from drivers who use highways.) And likewise for nearly any other pair of cities in America. So in what way is any actual, government-built highway necessary for any private entrepreneur’s economic success? None — if (as is likely) private enterprise would have done what government instead did by crowding out private efforts.

BINGO

I agree with Randall Holcombe on the JP Morgan loss (HT: Don Boudreaux of Cafe Hayek). He had me at:

The correct argument, which Krugman acknowledges, is that the loss was entirely borne by JPM and their shareholders. They took the risk; they took the loss. That’s how markets are supposed to work.

He goes on…

…to add that unless people take risks, economic progress will come to a halt. So the fact that people are willing to take risks is good for the economy, and the fact that in this case the bad outcome for the risk takers involved only their loss sends a signal to others to weigh carefully the risk against the return. The bottom line is that risk-taking is beneficial to the economy, and the incentives are correct in cases like this when losses are borne entirely by those who took on the risk.

As Milton Friedman said, capitalism is a system of profit and loss. Profits encourage risk-taking (and that’s risk-taking to find things that improve our lives, by the way). Losses encourage prudence.

A private company losing money because of a boneheaded decision that is entirely borne by the shareholders of that company should not be an example for more regulation. That is foolish because it will only lead to less prudence.

Two Open Letters

First, from Laurence Reed to people who think we need more government to solve problems: Say when (H/T: Speedmaster). Here’s the opening paragraph:

At the start of the 1900s, government at all levels in America claimed about 5 percent of personal income. A hundred years later, it takes more than 40 percent—up by a factor of eight. So my first questions to you are these: Why is this not enough? How much do you want? Fifty percent? Seventy percent? Do you want all of it? To what extent do you believe a person is entitled to what he (or she) has earned? I want specifics.

I like to think of government as a partner in the prosperity of its citizens. The more prosperous the citizens, the better this partner does. If you had a similar partnership with someone and you kept demanding more from him as if you were entitled to the produce of his talents, at what point to you think he would say enough is enough?

Second, from Don Boudreaux to the would-be lords of our manor:

Dear Sen. Casey and Sen. Schumer:

Irked that Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship, you propose, with your “Ex-Patriot Act,” to punitively tax and to permanently bar from ever again entering America men and women who, to reduce their tax liabilities, renounce their citizenship in the U.S.

The very fact that sitting U.S. senators issue such a proposal – the sick reality that representatives of an allegedly free people act as if individuals are serfs bound to a master – the noxious yet proudly paraded assumption by American government officials that a peaceful man’s or woman’s freedom of movement can properly be restricted by a government jealous that it misses the opportunity to seize a huge chunk of that man’s or woman’s earnings – does nothing other than to confirm the wisdom and justice of Mr. Saverin’s decision.

The forgotten viewpoint

Mark Perry, at Carpe Diem, reminds us of some good advice from French economist, Frederic Bastiat:

Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.

Let’s apply this advice to some common situations.

Minimum wage.  Here’s a good story about how consumers pay for higher minimum wages (HT: Don Boudreaux, Cafe Hayek). The costs to the consumer includes higher prices and fewer options. Some of the cost is also born by low-skilled workers who will have fewer employment opportunities.

Credit card regulations: Don Boudreaux does a nice job in his Pittsburgh Tribune column, Help That Hurts, of looking at the credit card regulations from the viewpoint of consumers.  Here’s an excerpt:

Congress, the White House and most of the news media describe CARD [Credit Card Accountability, Responsibility and Disclosure Act of 2009] as “pro-consumer.” At first glance this description seems accurate. After all, don’t consumers benefit when the fees and interest rates they must pay are reduced?

Although the answer to this question is “yes,” this isn’t the correct question.

The correct question is, “Don’t consumers prefer to have the option of paying higher fees and interest rates if the alternative is having no access to credit at all?”

Not everyone is financially careful or responsible. Traditionally, credit-card issuers dealt with this fact not by refusing to lend to consumers with poor credit scores but, instead, by using an ingenious approach that helps both those consumers with poor credit scores as well as the banks that lend to them. That approach is to charge delinquent customers significant fees for late payments and to raise interest rates on delinquent balances.

Here are a couple more things where the consumer viewpoint is usually ignored:

  • Foreign trade – Who would be hurt by restricting access to foreign goods? Consumers.
  • Labor unions – Who funds the generous wages and benefit packages of unions? Consumers.

I’ve added a new category to my blog, Consumer Viewpoint, to remind me to continue to apply Bastiat’s advice as I encounter various situations.

I could be wrong

Don Boudreaux, George Mason University economist, gets annoyed when non-economists make economic pronouncements.  Boudreaux writes in his Pittsburgh Tribune column:

Economics — unlike chemistry, electrical engineering and almost any other subject matter you can name — is a discipline that people routinely opine on even if they have zero formal exposure to it. No taxi driver or movie star offers, for example, his opinion on the molecular structure of radium or the process by which the magnetron led to the development of microwave ovens. On such matters, that person defers to trained chemists and engineers.

But that same cabbie or movie star is often eager to give his opinion on matters such as the causes and consequences of expanded international trade, the effect of minimum-wage legislation and the appropriateness or inappropriateness of the salaries of professional sports stars.

I’m embarrassed to confess that I often get annoyed at non-economists making pronouncements on economics.

Later in the column he softens his credentialism a bit:

Please don’t mistake me as saying that someone must have a degree in economics to offer worthwhile opinions on economics. I don’t believe for a second that that task requires formal training in economics.

What is necessary is at least some exposure to serious, formal economics — for example, taking a good course in principles of economics or reading at least two or three of the many good books on the market today that aim to introduce non-economists to the economic way of thinking. (Superb examples of such books include my colleague Russell Roberts’ “The Invisible Heart” and James Gwartney’s, Richard Stroup’s and Dwight Lee’s “Common Sense Economics.”)

I happen to think that Boudreaux is wrong about folks not opining on chemistry or electrical engineering.  I don’t think he pays as close attention to those fields.

Folks may not opine on the molecular structure of radium, but as a former electrical engineer, none of my friends or family who make pronouncements about the potential of solar or wind energy or electric vehicles ever ask for my opinion on the matter.

I also see plenty of non-chemists make pronouncements on the effects of chemicals and substances in our air, ground and water.

I also think Boudreaux does an injustice by singling out ‘non-economists’.

I get annoyed at anybody who makes pronouncements on any subject without considering that they might be wrong.  Economics is a wide field with plenty of different specialties and  economists can stretch their resumes and make dumb economic pronouncements on subjects they know little about too.

In my groups of peeps I try to gently enforce an informal rule.  If someone makes a pronouncement, I may ask them to explain to me how they arrived at their position.  Then I listen. I also request that they listen if I think they missed something in their thought process.

If they are unwilling to participate, I kindly request that they refrain from making such pronouncements unless they are willing to discuss.  It seems to work.

Now, everybody, let’s practice. Take a deep breath. Count to 3 and repeat after me.  1…2…3: I could be wrong.

It really doesn’t hurt that much to say it. Once you feel comfortable saying it, you open yourself to learning, teaching and seeing the world differently. But, of course, I could be wrong.

I use to have a tough time saying this.  Many of my family and friends have a tough time saying it. I still struggle with it at times.  But, I’m better now, and when I find it tough to say, I usually get over it quickly.

When you can say it, it’s amazing how disarming it can be.

Libertarians do not lack compassion

Don Boudreaux and Steve Horwitz rebut this part of Jeffrey Sachs’ critique against liberty:

Libertarians hold that individual liberty should never be sacrificed in the pursuit of other values or causes.  Compassion, justice, civic responsibility, honesty, decency, humility, respect, and even survival of the poor, weak, and vulnerable – all are to take a back seat.

Both rebuttals are worth a read.  Here’s a sample from Boudreaux:

…libertarians argue that these other values and causes are best promoted by individual liberty, and that too many people who insist that achieving these other values requires the suppression of liberty are cynically seeking convenient cover for their own self-aggrandizement.

Horwitz makes the same point (though I can’t see that site now because of the Sopa protest).

Why do you stop at red lights?

I recently asked a co-worker this question when we were talking about law.  It went something like:

Me:  Why do you stop at red lights?

Her:  Because it’s the law.

Me:  You mean the law as in the rules on the books?

Her:  Of course.

Me:  Do you drive the speed limit?

Her:  Well close to it.

Me: But over it, right?

Her:  Well, yeah, doesn’t everybody?

Me:  Okay. Are you still sure that you stop at red lights because it’s a rule that’s written down?  You just admitted that you don’t follow another written down rule.

Her:  Not really.  So, why do I stop at red lights?

Me:  I’m going to give you a choice.  I can give you the answer and the way you look at the world may change.  Or, I will not give you the answer and you can go on believing the world around you behaves in a way that it does not.

Her:  Okay, quit the Matrix b.s. and tell me for crying out loud.

Me:  Well.  There’s a couple reasons you stop at a red light.  One is your own safety.  You know that you don’t stop at green lights.  And you know that nobody else does either.  So, if you ran red lights, the direct consequences could be great and you could do you and others serious harm.  The main reason you stop at red lights is because it pays off well for you to do so.

Her:  Okay.

Me:  Another reason is that at some point in time, the color red became associated with stopping in traffic.  No central body sat around and said red lights will be the standard for that.  It emerged somewhere as a practice and stuck.  As far as I know, most traffic laws are passed by city and state governments.  Yet, somehow, without a centralized standards committee on traffic signaling, red emerged as the signal for stopping and green for go.  And it’s just not in the U.S.  It’s pretty much everywhere there’s traffic — other countries, railroads, airport runways, boats and so forth.  So, that’s why you stop at the color red.  (This website claims that the traffic signal was adapted from the railroad by an innovative officer in Michigan).

Her: Okay.  So what’s your point?

Me:  My point is that you, like most people, think you stop at red lights because “it’s the law”.  It is in a sense, but not the sense you are thinking.  You are thinking of legislation, or the law that some governing body has written down on paper.

However, if we investigated all legislation, we’d probably find many “laws” that we break.

You stop at red lights because “it’s the law” in the sense that it’s an evolved social norm.  This norm evolved to help keep us safe.  And it works.  Do you know how I know it works?

Her: I bet you’re going to tell me.

Me: Because we still practice it and it more or less keeps hundreds of millions, if not billions of people safe.  I’m guessing if we looked into history, we might find that there were other things tried, but they didn’t work as effectively.

Roundabouts and cloverleafs, for example, also seem to be effective ways to handle intersections in traffic, the real estate and additional construction cost probably doesn’t make them as cost effective as traffic signals.

Laws are really developed in the crucibles of human interactions and emerge as social norms, customs and practices.

They rarely emerge from legislators or judges, even though most people think that’s exactly where they come from.

Her:  Gee.

This conversation was inspired by this lecture from Don Boudreaux:

The video is worth your time.  If you don’t have that kind of time to sit at the computer, then you can also download an EconTalk podcast from 2006 that’s essentially the same material.

Listen to it if you want to escape the Matrix.

What’s a libertarian?

In this post at Cafe Hayek, Don Boudreaux points us to a 1 and a half minute long video of himself describing why he is a Libertarian.

He cites two reasons:

1) The way he was raised — don’t be envious, make no excuses, be responsible for yourself.

2) His exposure to economics — Supply and demand curves showed him how the government imposition of price ceilings on oil caused him to have to wait in long lines at gas stations in the 70s.

If these two things led naturally to libertarianism, like Boudreaux indicates in the video, I would expect there to be many more libertarians out there.  I would especially expect there to be more libertarian economists.

A self-described “left-of-center” commenter made the observation that he could agree with almost everything Don said in the video, but not be libertarian.

I tend to agree with this commenter.  Maybe Don is trying to get the point across that libertarians aren’t extremist hermits.  That most anyone right of “left of center” have a great deal in common with libertarians.  Perhaps, even if they were to take a blind political challenge that many would fall out as libertarians — and they don’t now because of branding (libertarianism isn’t cool) or misunderstanding (libertarianism doesn’t mean an ‘on your own society’).

But, I do think that Don leaves out a key element of what causes one to appreciate liberty.  I think there are many good reasons for liberty.  It seems morally right.  It also generally results in better outcomes than other things.

But, the key difference I see in libertarians and others is when they feel the use of force is warranted.

Libertarians (though they come in many flavors) tend to think the use of force is warranted only to prevent someone from infringing on the liberty of others.

Ron Paul is not an isolationist

Rarely do I defend politicians.  I’m not sure this is a defense.

It’s more of a correction, or maybe clarification on one distinction between conservative and libertarian thinking.

I’ve often heard Ron Paul’s “foreign policy” referred to by conservatives as “isolationist“.   My local conservative talk show hosts are guilty of this charge.  I’ve heard Dennis Miller do it repeatedly — even though he often interviews Ron and Rand Paul on his show and each time Miller calls Paul an isolationist, they correct him.

I’ve heard that exchange now three or four times in the past year, with the latest being Miller’s interview with Rand just before the Iowa debates (I believe it was around August 10, available on iTunes).  I listened to it today.

Miller said:

He’s a little isolationist for me, but on everything else he makes a lot of sense.

Rand Paul replied:

The foreign policy isn’t isolationism, it’s just that we should not go to war without declaring it formally, you know, like the Constitution intended.

I’ve also heard Ron tell Miller that he is not isolationist.  He said he support individuals trading with other individuals in other countries.  He just doesn’t think we ought to use our military beyond what it was meant to do — defend us.

I’m waiting for Miller to stop the flow of the show for a minute or two and ask one of them, Okay, maybe I have it wrong.  Can you explain to me how it is that you are not isolationist?  I’m not sure that has occurred to him to do that yet.  I’m also not sure it has occurred to Miller that perhaps he doesn’t know what isolationism is.

I’ve heard others do it. (Full disclosure: I might have done it a few years ago).

I think part of it is the conservative way to discount Paul and distance themselves from appearing to agree with a fringe candidate (we had this same struggle with identity when we went from liberal to conservative).

I think another part of it is, like Miller, conservatives don’t know what isolationism is and they haven’t thought much about when we should use our military and what the Constitution says about that.

Miller, and other conservatives, would do themselves a big favor if they read a blog post from George Mason University economist Don Boudreaux entitled, A Conflict of Visions Different than the one Sowell Identified, from March of this year.    The post is a copy of a letter Boudreaux sent to the Washington Post in response to George Will’s Column, Is it America’s duty to intervene wherever regime change is needed?

Here are Boudreaux’s key paragraphs:

Most modern “liberals” believe that domestic economic problems are caused chiefly by unsavory characters – “business people” – who impose their destructive rule on masses of innocent workers and consumers yearning for more prosperity, and that the best solution to these problems is government force deployed using armies of regulators to subdue these bad guys and to keep close watch over them and their successors.  Failure to intervene is immoral.  These same “liberals,” though, believe that foreign problems are typically the result of complex forces that can be understood only poorly by American-government officials; it is naïve to suppose that even well-intentioned foreign intervention by Uncle Sam will not have regrettable unintended consequences.

Most modern conservatives believe that domestic economic problems are typically the result of complex forces that can be understood only poorly by government officials; it is naïve to suppose that even well-intentioned economic intervention by Uncle Sam will not have regrettable unintended consequences.  These same conservatives, though, believe that problems in foreign countries are caused chiefly by unsavory characters – “dictators” or “tyrants” – who impose their destructive rule on masses of innocent people yearning for more democracy, and that the best solution to these problems is government force deployed with armies of soldiers to subdue these bad guys and to keep close watch over them and their successors.  Failure to intervene is immoral.

Can we all agree?

This and this from Don Boudreaux at Cafe Hayek are must reads for anyone who has mistaken skepticism for government solutions with lack of compassion or ignorance of a greater good.

The second link is a response to a person who charged Boudreaux with not giving enough priority to “public morals”.   Here’s a key paragraph:

Where do the “public morals” that you so admire come from?  Isn’t it true that the very reason you support the welfare state is that your own private moral code tells you that helping needy people is the right thing to do?  I don’t see how you can casually cast aside one “private moral” (namely, that it’s wrong to take other people’s stuff just because you fancy that you’ve found better uses for it) in order to clear your way to justify the state acting to satisfy another of your private morals (namely, that it’s right for those of us who ‘have’ to give to people who ‘have not’).

Exactly.

If you happen to agree with the “public morals,” great.  Everything is just fine and you don’t usually question your own legitimacy in overriding the rights of others to fulfill your desired ends.

It’s usually not until such a person runs into a situation where they disagree with the “public morals” that they begin to understand that there may be errors in their thinking.