The Corporations and the Communists

A couple of weeks ago, Russ Roberts interviewed Bruce Yandle who founded the regulation story of "the bootlegger and the Baptist." This actual alliance is forged from some good intentioned legistation: no selling the vile alcohol on Sundays (the moral high ground that Baptists take). But bootleggers like the law, too. They don't mind breaking the rules so they step up to meet the demand for drink and the law keeps competition out (and prices high). Both groups hate each other, but one has the ethical argument people will support and the other has the money to spread the word. The lawmaker becomes the go-between.

The story of the bootlegger and the Baptist illustrates that regulation has two parts: an ethical center and an economic justification. Knowing this, it is not surpising that in 2005, Wal-Mart called for a hike in the minimum wage. They strangely cited their desire for helping working class families. Strange because they don't need Congress's permission to pay their own employees more.

The bootlegger and the Baptist illustrate Wal-Mart's devious plan. Big businesses know they can afford higher wages while small mom-and-pop stores can't. Thus corporations can pick the pocket of the American people while cloaking themselves in the Baptist's morals. And the Baptists are fooled every time.

NetPrizes

NetFlix is offering one million dollars to the first person that can improve their system (which matches people to movies) by 10%. The company provides the contestants with a bunch of random data and a program that measures the attempt's accuracy. The contest is less than a year old but the leader is already at 6.75% improvement.

Here's the New York Times article which mentions two advantages to prizes: paying for results, not proposal (as grants do) and anyone--not just the usual experts--can try. I can think of two other advantages: allowing people to try whatever out-of-the-box idea they wish and creating a competitive atmosphere that demands constant progress.

Hat Tip to Donald Boudreaux.

iPrices & iPractices

A few days ago, my brother sent me this article critizing the new iPhone. The author--Adam Frucci--complains that Apple lost a golden opportunity to restructure how phones are sold in the US. Instead of selling the phone and letting people determine the carrier (as the practice in Europe), Apple sold the phone the conventional way: at a discount with a two year contract to a particular carrier. (Frucci thinks the iPhone wouldn't have a higher price if it didn't require a contract simply because half of retail price is profit. This is nonesense: the price is determined by what people are willing to pay, not by what the profit is.)

Frucci goes on to call the wireless industry "anticonsumer" and Apple's actions will lead to them "to start thinking they can rip us off even more." Most plans give people free phones, free services, free minutes, people you can talk to for free all the time and free text messaging. If Frucci thinks he's being "ripped off" he should switch to a land line.

Dream Tax

In 2005, Brian Emmett won a contest from Oracle Corp to travel into space--fulfilling a life-long dream--but it would cost him $25,000. This isn't for some hidden company fee or for bribes that allowed him to win, it's the taxes. To collect his winnings, he'd have to fork over to the IRS a quarter of a grand, a sum too much for this software consultant.

Emmett won't be traveling into space--the software consultant isn't willing to go into debt. As this fledgling private sector sets out into the final frontier, Emmett's story is a vivid reminder how government can still slow it down in the most unremarkable of ways.

Reichnomics

On Kudlow tonight, Robert Reich insisted that states should spend their growing surpluses on schools, roads and other infrastructure and not tax cuts. His justification is one needs to do this to keep the economy going well.

I'm not really sure what Reich thinks people do with the money they save because it doesn't go to taxes. Burns it, I suppose. But I do know what they actually do the money. They save it or spend it, creating the next economy or pushing this one to greater heights.

Lawyer Up

Mike--who's in law school now--and I got in a brief debate about the economics of lawyers. I told him that as society increases its number of lawyers, that tends to encourage the existence of more lawyers. He didn't buy it and he had to go before I could explain myself.

From any one person's perspective, one lawyer is often a substitute for another, just like apples, candles, cars and trips to Japan. However, from a macro perspective, each lawyer complements at least one other. If you and I are involved in a dispute and you get a lawyer, that makes me want a lawyer, too. (This sort of feedback happens a lot in divorces.)

The market for lawyers is similar to that of advertising. When Toyota puts more ads out, Ford has a greater incentive to secure more air time. However, since lawyers work with the law--which the state uses to take capital by force--I'd argue companies are even more careful about keeping their legal budgets up (in recessions, ad budgets are the first things to go but I doubt the legal department takes a big hit). So I claim lawyers breed more like rabbits than any other occupation.

The Nature of Property

In the new issue of Econ Journal Watch, Daniel Klein reports on a survey he's completed on why some economists support the minimum wage. Of the 644 economists (those who signed a petition supporting the minimum wage) he sent the survey to, 95 completed it. A handful refused to do the survey, among them was Henry J. Aaron of the Brookings Institute who sent this short letter. (The sentence Aaron is referring to says "In one manner of speaking, liberty is freedom from political or legal restrictions on one’s property or freedom of association.")

Aaron argues that "[p]roperty does not exist apart from political and legal restrictions on its use." This is a very strange definition of property. It says that the only private property that can exist within the realm of the state thus the moment the state legally changes the nature of property, that's all there is that can be said. While this might resonate with some, for me it's analogous to magic; saying these magic (legal) words redefines reality.

It would be more accurate to say that private property is mainly a social construct, not simply a legal one. People acknowledge that I and I alone own X. The law reinforces that sentiment and provides a structure for the few people who defy my property to be punished. In developing countries, people lay claim to things even though their ownership is not recognized by the state. Yet in the daily, practical sense of the word they own the item, be it a business, home or spoon.

Private property is also a philosophical construct in the sense that everyone owns their own body (this gets a little strange with children but let's stick to adults for now). If the state said all people of a certain religion are can be enslaved by others, I'm sure Aaron would recognize this as a violation of private property. A person owns their own body. Building on that philosophy, people also own things they build, assuming it doesn't contradict with existing property. If I own a pile of dirt (or no one owns it) and I turn that dirt into a mud hut, I own the hut even though the "dirt" doesn't exist any more. That claim can be backed by legal wording or not, but most reasonable people would agree I have a valid claim regardless.

There is no doubt that the state influence what is and is not private property but I have a hard time accepting that property is and always whatever the state says it is.

Rolling the Loaded Dice

While taking a break from the sudden list of eighty-three things I've had piling up, I watched a bit of a Star Trek: Enterprise episode, of which the Sci-Fi Channel has been rerunning. In the episode, the Captain decides to give the ship a major weapons overhaul instead of returning to Earth's solar system so they can better defend themselves against a virtually invincible foe.

Later, the Captain regrets a decision to rush this new ship out of space dock, before these weapon enhancements were complete. His chief engineer reminds him that he had to accept that risk because the reason it was rushed out was to complete an important mission. He finishes his little lecture by noting that other pioneers of space (notably the ones of our era) sat on millions of liters of rocket fuel--they took on great risks too. That's what it means to do amazing things.

He was clearly talking about NASA, which I found strange. There is no doubt that the astronauts are brave, but the risks they take are not the seat-of-your-pants, on the fly, kind of risks. Those are best left for true revolutionaries, like when the Enterprise left space dock incomplete. The risks NASA astronauts take are calculated risks. Extremely calculated. NASA astronauts are not some "space cowboys," living by their wits alone, bravely the blackness of space like a rugged invididual. They are arms of a bureaucracy. Risk takers? Yes. Legendary heroes? Not quite.

The Dangers of World Exclusion

Everybody has at least one thing, a critical issue that gets them excited and motivated. It can be of vital importance (human trafficking, free trade, the Iraq War) or trivial (celebrity gossip, video games) but it always lingers in the back of their minds. This sort of specialization can be valuble, just like specializing in a job is, but it can also prove dangerous because the person will gladly ignore all other considerations with barely a thought.

We see this all the time. Some people who don't like immigration will hold the country's feet to the fires of destitution with barely a second thought. Others are willing to risk the wellness of the whole of humanity to save a handful of rodents. There are even those that cite the Bible to justify hating homosexuals while blissfully ignoring the Good Book's doctrine of "love thy neighor as thyself."

These people--and others like them--refuse to even acknowledge the rest of society in pursuit of their personal ideals. The tendency for world exclusion sits in the very heart of the statist's mind for laws by their very nature pursue one goal over all other considerations. It is vile and ignorant and sloppy and is perhaps the one these all these disjointed interests have in common.

Falling Gas Prices

Recently David posted about gas prices. While gas prices have recently risen, they have actually decreased relative to wages. In other words income has risen faster than the price of gas over the past 80 years. The book Myths of Rich and Poor gives a good chart.

Year Minutes needed to work to purchase a gallon of gas
1920 32
1930 22
1940 17
1950 11
1960 8.3
1970 6.4
1980 10
1990 6.5
latest 5.7
(No year was given for the latest date, the book was published in 1999)

Follow the Sandwiches

For the past few days Steven M. Warshawsky from American Thinker engaged in a minimum wage debate with Cafe Hayek's Don Boudreaux and Russ Roberts. Since Mr. Warshawsky seems to have stopped posting on Cafe Hayek (though one has to admire how long he kept commenting to people who disagreed with him), I thought I'd quickly show why the minimum wage has a negative net impact on the economy.

Warshawsky doesn't think anyone can pull this off. In his post about the minimum wage, he said:

However, it is not obvious a priori that total welfare will go down as a result of a federal minimum wage increase from $5.15 to $7.25 per hour.

In other words, one cannot intuitively demonstrate that raising the minimum wage will make society worse off. But actually this is quite easy.

Consider fourteen people at McDonald's working for $5.15 an hour, each making Big Macs (it's a busy McDonald's). In total, it costs McDonald's $72.10 to employ them all. Now suppose the minimum wage rises to $7.25 and management responds by firing four Big Mac makers. In this new restaurant, there are ten people pouring the secret sauce, with total costs of about the same as before: $72.50 (do me a favor and ignore the forty-cent discrepency; it is not needed to understand the point I'm making).

At a glance, Warshawsky is completely correct. Four people get fired but ten people benefit. How can one tell if society is better off from this? It's a wash--money is merely transfered from some people to others. In the big picture, the world is the same.

But now take another look. In the $5.15 world, McDonald's made fourteen Big Macs. In the $7.25 world, it makes only ten. The movement of money is ambigious, but the number of Big Macs is not. Society is strictly poorer.

Now one could claim that people earning more would be more productive--we'd get eleven or twelve sandwichs, not ten. But that's still not as much as fourteen. What if in the $7.25 world, the ten workers made fifteen? Then society has gained, but in this world, a minimum wage hike is not needed; McDonald's would have every reason to raise wages on its own. This is what Henry Ford did on his assembly line when he raised the hourly rate: the increase in worker productively more than made up the extra expense. By definition, firms which raise wages because of the law would not raise them because doing so betters productivity.

This example can be applied to all sorts of scenarios. Maybe the company didn't fire any workers and the money came from the CEOs. That means they couldn't spend those dollars on more investment in the company or a trip to Paris or a donation to cancer research. Maybe the prices rise. That means consumers spend less on many other things: a notebook here, cell phone minutes there. From person to person it is merely a transfer, but net production decreases. Society as a whole is made worse off.

Q.E.D.

Moore Nano

Do you have a cell phone on you? Or an iPod? How about a PDA? Do me a favor and pull it out. Now take a good look at it because what you are holding in your hand is some of the most densely packed computing power the world has ever known. Even a simple pocket calculator--available for just a few dollars--would put to shame the military grade stuff used in the Vietnam War. Probably shame stuff a lot more recent, too.

In 1965 Gordon Moore, following current trends in technology, proposed that computing power would double every two years. This is better known as Moore's Law and unlike most projections, this one actually holds and it holds really well. Take a look:

Note how well--almost perfectly--the data matches with the projections and think for a minute how astounding the claim is: double every two years? If your income doubled every two years and you started out with one dollar, in forty-two years (how long the Law has been around) you'll be making an annual salary of $2,097,152. Doubling adds up at a break neck pace.

The numbers grow so quickly, some people think it can't possibly keep going like this for much longer but it looks like they are going to be proven wrong. Nanotechnology--or manufacturing at the atomic level--might just allow engineers to side step the nasty overheating and defect problems thought to be the Achilles' heel of the doubling pace. The new chips are due for release as early as 2010.

People sometimes put too little faith in the capacities of technology, thinking the best humanity can do is always right around the corner. But when it looks like even Moore's Law is going to hold out well into the next decade, one must consider these pessimists to be underestimating humanity's capacity for innovation rather than having a special insight into the human condition.

Chasing the Dream

Discussing Martin Luther King Jr. I heard an NPR commentator complain about people who "misuse" his words. Her example was the idea that people should be judged "not by the color of their skin but by the content of their character" being cited with arguments against affirmative action.

I'm not sure what Dr. King would think of affirmative action but I doubt he'd like it. The legislation lowers acceptance standards for people of certain races and necessarily crowds out more qualified people because they literally have the wrong color skin. This is not "positive discrimination;" this is racism.

There is no doubt that these policies are well intended, but that hardly matters. They are disastrous not only because they fail to accomplish what they set out to do, they sow animosity between peoples. This should come as no surprise. When the law elevates one group above another, such preferential treatment always breeds hatred. Growing up under Jim Crow (a more extreme example of inequality to be sure), Dr. King would have been acutely aware of this.

This is why he embraced non-violence. This is why he spoke about togetherness and equality. This is why his dream was "one day on the red hills of Georgia the sons of former slaves and the sons of former slave owners will be able to sit down together at a table of brotherhood." Affirmative action does not aid that dream.

Slippery Oil

As the NYSE closes for the week, crude oil prices continue to drop. Take a look at this chart I made at hawaiigasprices.com, covering three years of American average gas prices.

Note that while we experienced steep rises about ninth months ago, four months ago witnessed steep declines. And prices continue to fall (though the holidays made a slight bump). While there has been an overall real increase in price over the past few years, considering the rise of China and the growing economy elsewhere, the increase is rather mild.

It certainly dispells the "evil corporation" myth we heard not more than a year ago when prices were on the rise. Are Shell, Exxon Mobil and BP suddenly altruists because the prices have fallen? No, of course not. But it does back what the CEOs said when Congress hauled them in to testify: most of the profits go back into the company to expand capacity.

This is yet another reminder why people shouldn't make permanent laws in reaction to sudden market changes because those changes are almost always temporary.

Minimum Stage

The new Congress is well on their way to increasing the minimum wage and Mike mentioned briefly that he's had frustrating conversations about the subject with his peers at law school. They tend to focus on the person that will benefit from the rise of wages, a common (and incomplete) argument to defend the rising wages. I argue that his peers don't care about the arts. The logic is actually pretty straight forward (and hopefully I'm not missing any bits).

1) Pay more for people to work and a firm has less money to spend on other things. (For some reason that continues to be beyond me, some people have a hard time understanding this. I wonder how they stay in their budgets.)

2) There are very few artists who are critical to the success of a company; most can be fired--or be turned down for hiring--with relativity little pain.

3) With less money in their pockets, firms will hire fewer artists and, thus, society will have less art.

This basic idea is hard to directly observe because we live in such a vast and complicated economy, hence why the "mere" story is so critical. But the logic holds. People and firms tend to buy art (everything from advertising to paintings to theater) when they have disposal income. The minimum wage diminishes that income. If the populace has a difficult time understanding why the minimum wage hurts the economy as a whole, then perhaps economists will have an easier time explaining it if people see why it hurts this one section.

(A related argument against the minimum wage is the point that the higher the wage, the fewer employees firms are willing to hire but for some reason, people have an even harder time understanding this truth.)

Build A Baby

Suppose a pharmaceutical company created a fantastic new drug that could eliminate the chances that a fetus will suffer from birth defects. The usefulness of this miracle drug, however, commands a high price so only the very wealthy can afford. Despite that barrier, I doubt the average citizen would complain that the drug exists. Indeed, they would be far more likely to demand that the government subsidize the drug.

Contrast this with genetic engineering--for all intents and purposes a better version than this hypothetical drug. It is very possible that in the next ten or twenty years human beings will have the ability to genetically improve their offspring, transforming the average person into an athlete genius. In an episode of Law and Order: Criminal Intent I saw recently, the main characters encountered a suspect that was on his way to perfecting such a process. The characters actually complained that the technology would increase the gap between the rich and the poor thank to additional advantages the child would gain.

For some reason, people are very averse by genetically altering someone to make them better than average. They are fine with altering their biology to make them average and it is expected that parents do everything they can to elevate their children above average, but people can't stand the thought of starting that improvement process before birth. I am not sure why.

This little story exposes a disturbing reality about how people think about their relation to the economy. If science makes a person better than she would be otherwise it not merely a gain for that person and her family. It is a gain for the whole of society. The reason why the genetically improved would be richer is because more people than before would decide that this person betters their life. To conclude genetic engineering only benefits those who can afford it demonstrates a poor understanding of how the economy works.

The Pursuit of Pleasure

On Kudlow and Company today, Larry Kudlow and Art Laffer lamented at a Gallup report that claimed half of all Americans cite "getting rich" as a high priority goal (or the priority goal, I can't remember). "Only half?" they said. "That's horrible." Laffer thought it should be 100%.

Let's set aside the fact that people are diverse and some want to simply retire or raise a family or live a quiet life. Getting rich is expensive and is not a goal for everyone's tastes and lifestyles. Instead I want to point out the hidden success story in that poll.

If lots of people aren't focusing on getting rich, that means they don't see a need to get rich. They can live a happy life much easier than before. We are so wealthy, people can spend their time pursuing things they desire but cannot be bought. That's a sign of our economy's strength, not its weakness.

Not About Science Anymore

Tim Swanson today posted a nice article on the Mises Institute about NASA, noting that the opinion of the agency is over-rated. Some of its more popular invention credentials are urban myth, its PR celebrates what should be routine and, of course, there is always the lingering question of lost opportunity (see my recent post on the subject).

NASA is a strange animal when it comes to political agencies. Yes, it is subject to all the shameless politics and waste any government organization is prone to but it is also a brand. When a company produces something based on NASA technology, they proudly proclaim it, knowing it raises the profile of the product. Eagle Eye sunglasses cites the government origin of their technology on their website. Better yet, in the Temper-Pedic commericals (where that dorky-looking guy jumps up and down next to the wine glass on the mattress to show motion is not transferred) the NASA logo leaps on the screen.

People have a lot of faith in NASA and this makes it easier on the agency to get big budgets and political support. They can fail utterly and not be punished for it, sometimes not even politically. By trumping every event as a success, they maintain a high public opinion and thus only have to produce a trivial amount of expensive and minor accomplishments.

The space shuttle was supposed to be a reuseable space craft that could land like an airplane and, now over thirty years old, the design is still celebrated every time it doesn't crash. That cameras still gather to report the launch and landing of the shuttle demonstrates that the vehicle is a failure and exposes the agency not as a scientific haven but a typical bureaucracy with atypical public relations.

Hat tip to Jeremy Horpedahl for sending me the Mises article.

January's Most Random Wikipedia Page Is....

Species with "New World" in their name. Quite fitting for the new year, I think. Happy 2007 everyone.