What came first, supply or demand?

Neither. First came innovation, then comparative advantage.

I think.

Being Human

What differentiates humans from other animals?

While driving in our minivan once we stopped and waited for a deer family to cross the road.  A five-year-old in the van asked where the deer were going.  We joked how they were on their way to the deer bank to pick up money before going to the deer grocery story to get dinner.  The five-year-old was skeptical.  Where’s the deer grocery store?

We eventually got to a better answer.  They are probably on their way to forage for food or find a safe place to bunk for the night.

While reading Matt Ridley’s book, The Rational Optimist: How Prosperity Evolves (I highly recommend it based on what I have read so far), I was pleasantly surprised to come across an answer to what differentiates us from animals that perhaps explained the 5-year-old’s skepticism (p. 58):

…after millions of years of indulging in reciprocal back-scratching of gradually increasing intensity, one species, and one species alone, stumbled upon an entirely different trick.  Adam gave Oz an object in exchange for a different object.  This is not the same as Adam scratching Oz’s back now and Oz scratching Adam’s back later, or Adam giving Oz some spare food now and Oz giving Adam some spare food tomorrow.  The extraordinary promise of this event was Adam potentially now had access to objects he did not know how to make or find; and so did Oz.  And the more they did it, the more valuable it became.  For whatever reason, no other animal species ever stumbled upon this trick–at least between unrelated individuals.

At the time of the minivan conversation, I knew that humans had these things and deer did not.  I hadn’t yet made the connection that the reason for this is that we can trade one object for a different object, as Adam and Oz does in Ridley’s example.

It’s that difference that has led to our better living standard so that we don’t just spend our days foraging and looking for a safe place to bunk for the night.

We Should Expect Better for WSJ and Gates

Last weekend the Wall Street Journal ran the type of feature that I enjoy very much.  It was a debate-style format between Bill Gates and Matt Ridley, author of The Rational Optimist.

Gates’ portion of the debate can be found here.   Ridley’s here.

The debate covered several areas and focused on global warming and improvement in Africa.

I’m disappointed that so much of the debate relied on misunderstanding the opponent’s position.  It seems we could have much more productive discussions if we get better at recognizing when our view of the opponent’s position is flawed.

Quite frankly, I don’t believe the following portion of debate should have made it to print.

Gates writes this about Ridley:

In discussing Africa, Mr. Ridley relies on critics who say, essentially, “Aid doesn’t work, hasn’t worked and won’t work.”

Ridley responds:

Far from saying that aid “doesn’t work, hasn’t worked and won’t work,” I actually say this in my book: “Some of the most urgent needs of Africa can surely be met by increased aid from the rich world. Aid can save lives, reduce hunger, deliver a medicine, a mosquito net, a meal or a metalled road.”

I go on to say that “statistics, anecdotes and case histories all demonstrate that the one thing aid cannot reliably do is to start or accelerate economic growth.” Now here I admit that Mr. Gates does have a point. Unintentionally, I have given him and perhaps other readers the impression that, in my view, combating malaria or AIDS does not pay economic dividends. It does.

What I do take issue with is economic aid designed to stimulate economic growth. For example, a 2006 study by Simeon Djankov of the World Bank (now deputy prime minister of Bulgaria) and his colleagues concluded that “foreign aid has a negative impact on the democratic stance of developing countries and on economic growth by reducing investment and increasing government consumption.” Economic aid diverts resources into projects that fail, puts money into the pockets of corrupt government officials and crowds out the efforts of entrepreneurs. In one example, only 13% of educational aid to Uganda reached schools; the rest was siphoned off by rent-seeking officials.

Nice Video on Wealth Creation

Bill Whittle asks for 10 minutes of your time in the following video to explain how conservatives view wealth and where it comes from:

I like the central premise that liberals tend to view wealth as a fixed pie to be split among people, while conservatives tend to view it as something that derives from win-win trades.

To illustrate, I liked the graphics he showed of LA in the 1800’s and today.  Bill asks how it LA changed so much if wealth was a fixed amount?

My favorite part of the video starts at 4:16 where Whittle does an excellent job of explaining how he created a little bit of value as an office temp making $7.50 per hour for an insurance company by cross-checking a list of customers with a list of checks sent.

I made that insurance company just a little bit wealthier.  By confirming those check mailings, I was reducing loss of customers due to frustration and error.  I was reducing the amount of time that higher level, more valuable employees would need to spend undoing the damage caused by unsent checks and all the rest.

A cross-checked and confirmed list was more valuable than one that wasn’t.

To me, this example is easier to identify with than the examples often given by econ professors, and given by Whittle later in the video about trade between primitive tribes.

I know few people who can adequately explain the value they produce in their job for their employers or the value they find in the stuff they purchase on a daily basis.

I also enjoyed the final few seconds of the video.  “I would be much more impressed with your moral outrage…”  Great line.

What value do you produce for your employer or your customers?  Why are you worth more than what they pay you?

Unfair Trade Practices

Don Boudreaux of Cafe Hayek wrote a letter to the Milwaukee Journal-Sentinal about Senator Russ Feingold’ statement that “unfair” trade practices have led to the destruction of 64,000 jobs in Wisconsin.

Nobody thinks 64,000 people losing jobs is great.  But, what people like Feingold don’t consider is that there’s a positive offset to that which is much greater.  The problem with the offset is that it’s unseen, while a worker losing his or her job is easy to visualize.

What if Feingold said we have lost 64,000 jobs in the buggy-whip industry because we have allowed folks to purchase automobiles?

While this statement is essentially the same as Fiengold’s statement, it wouldn’t carry nearly as much punch for two reasons.

First, my statement identifies the workers as buggy-whip makers.  Second, it identifies the benefit as something people can clearly see as a positive trade-off.  We get cars at the expense of the of a few buggy-whip making jobs?  I feel bad, but I’ll take the car, thank you.

Boudreaux does an excellent job at identifying the workers and making folks think about the unseen effects that offset the 64,000 lost jobs in the last paragraph of his letter:

So Sen. Feingold’s accusation that freer trade is “unfair” simply because freer trade results in some workers losing particular jobs means that he must also regard as “unfair,” say, anti-smoking campaigns.  After all, such campaigns tempt consumers away from buying cigarettes and, sadly, result in job losses among tobacco-industry workers.

I would have changed “anti-smoking campaigns” to “anti-smoking laws”, which I think are more analogous to “unfair” trade practices.

Similar to the buggy-whip example, most people intuitively make the trade-off when presented with more information, even those with what Thomas Sowell calls the unconstrained vision.  Oh.  If we have to give up a few tobacco industry jobs to save a few lives, so be it.

Trade

A lesson that Econ Professors Russ Roberts and Don Boudreaux have taught me on their site, Cafe Hayek, is that voluntary trade results in improved standards of living.

Some commenters to a recent post at the Cafe expressed skepticism that protectionist policy does not help improve the standard of living.

Protectionist policy is where government interferes in international trade for any any number of reasons.  A popular reason is to protect an industry and its workers from foreign competition.  To do this, government might impose tariffs (a surcharge) on imports to make consumer price of a foreign produced good higher than the domestic product.

One particular commenter by the name JHeim777 asked:

Are you making the case that if China were to remove tariffs (i.e. allow its currency to appreciate) that it would be growing even faster?

I think that’s the wrong question.

We all know that economic growth in China is happening fast.  Media repeats this often and its true.  But, I think there’s a mistake in comparing the growth of a country like the U.S. to the growth of China.

Media doesn’t often make it clear that when talking about China’s economic growth, we’re really talking about moving the standard of living from about the level it was in the U.S. in 1960 to about 1963, and we’re probably not talking about a distribution in the standard of living that is not nearly as equitable as it was in the U.S. in the 60s.

I think the better question is why isn’t the standard of living in China about the same as in the U.S. now?

The answer is that government imposed trade restrictions, both past and present, have prevented that.

Now, thinking of a China that has an average standard of living scares some people.  It shouldn’t.