Thu, 31 Jul 2003

Thanks to USS Clueless

Thanks are due to Steven Den Beste blogrolling the Angry Economist. He doesn't hand out blogrolls on a whim. Thanks, Mr. Den Beste!

Posted [17:15] [Filed in: economics] [permalink] [Google for the title] [digg this]

Wed, 30 Jul 2003

Why is he angry?

I've been publishing this for a few months now, and it's probably appropriate to talk about myself at this point. Why, oh why is the economist angry? Being angry, and publicly so, is a bit of a self-indulgence. Everybody and everything sucks to a certain degree, so why sustain anger about any one thing? Why go on and on for months about a single topic?

Answering my own question (Yes, I do ask a lot of rhetorical questions; bad habit I suppose), economics is important because it affects nearly everything we do. Humans are social animals. We do almost nothing on our own. Economics is the study of how people cooperate, collaborate, and trade. Lots of people think economics is about money, and that economists want to reduce everything to dollars and cents. That's wrong, wrong, wrong, and incorrect, too. Economists study the way in which people exchange resources, whether they be money, time, prestige, real estate, or ownership. A consequence of this definition is that everything falls under the purview of economists.

Marriage is an economic act. People enter into a marriage to trade love for love, sex for housing, children for protection. Marriage can be analyzed on economic terms. Takes all the romance out of it, no? Yes, no: the romance is still there, and it, too, is part of the analysis.

Economics is in some sense the imperial science. It claims to have all Human Action as its realm. There isn't much, well, human activity, that cannot be analyzed as a trade or exchange. People generally don't like to be analyzed, certainly don't want to be put under a microscope, and never want to be predictable. That is, though, exactly what economists do. They start from a set of assumptions about human behavior. From that they derive, a priori, what the implications of those assumptions are.

For example, one assumption that economists make is that people always prefer money now to money later. It's a reasonable assumption, but given human cussedness it's only an assumption. From this assumption you can derive the rate of originary interest. That is the name of the rate at which people discount money they don't yet have. Or, as Wimpey put it "I will gladly pay you Tuesday for a hamburger today.".

People have an intuitive sense of economics, which they should not apply to larger issues, because it doesn't apply. For example, it surely appears that the world is flat. It surely appears that the sun revolves around the earth. It surely appears as if a feather and a cannonball fall at different rates. It surely appears as if someone should be in charge of the economy.

This intuitive sense is mostly right. Every family has to have a single leader. I propose that a family with more than one leader has in fact no leader at all. Somebody makes the economic decisions for the family. This works for a family because by definition, everyone in the family is intimately familiar with everyone's circumstances. Prices, within a family, introduce a formalism which interferes with the smooth functioning.

In essence, every family is a centrally controlled marketless communist state. You can even paste together a group of families into a tribe or band, or cohousing group, and they can make economic decisions without markets or prices. Communism works, and works well within extremely small groups of <100 people. The trouble with communism is that people understand it intuitively and they like it. They want to share its benefits with everyone by forming a larger communism. That doesn't work.

Every science has to deal with the issue where the intuitive sense produces wrong results. Physicists have run experiments, e.g. dropping equally-shaped objects off the Leaning Tower of Pisa, that conclusively demonstrate that objects of different weight fall at the same rate. Multiple sciences have demonstrated that the world is not flat. There used to be a set of 7.5' topographic maps (twenty of them) over at Potsdam State. They were pasted together on a flat surface and at the edges, the maps could not be made to meet. They really should have made the surface slightly curved.

Here is where the economist gets angry. Economists have not been able to decisively and effectively communicate their results to the public. There are many economist jokes of the form "Lay a hundred economists on the ground end to end, and you'll have a hundred and one opinions." Economics is not about opinions. Opinions are what you have before you have results. Economics has lots of results, but people don't understand them even though they're quite simple results.

Take the example from above, about originary interest. People don't understand that a non-zero interest rate is natural. They think that all interest is profit, and so seek laws to interfere with the interest rate. If a law tries to set the interest rate below the originary interest, nobody will loan money. Nobody.

I want people to understand the basic results of economics. Anybody who doesn't, isn't fit to participate in the setting of public policy. Unfortunately, more often than not, lawmakers are lawyers and not economists. They pass laws which don't have the effect they desire. The only solution I see to that is to help everybody understand economics as best they can.

Posted [23:52] [Filed in: economics] [permalink] [Google for the title] [digg this]

Sun, 27 Jul 2003

Government "investments"

It's nearly impossible for a government to invest money. Quite a bald, bland statement. I hope to show you that it's true. What does it mean to invest money? Well, one reasonable definition is to spend money now with the hope and expectation of getting more money back later. It's not sufficient to get back the same money later (aka a zero-interest loan). Life is uncertain. Any reasonable person (and a few unreasonable such) prefers money now to money later. This preference is expressed in the interest rate you have to pay for even the most secure loan (with no risk of loss of capital).

Let me argue against myself. Let's say that a government is going to invest money in something. The Village of Potsdam recently considered putting in another water tower to the north of town. Various developers want to put stores on land out there. They were hoping that the village would annex the land and put in water and sewer services. The assumption is that it would be cheaper for the developers and the village since the village already has a source of clean water and has a water treatment plant. In order to do that, though, the village would have to put in a water tower, at a cost of millions of dollars.

The village made a reasonable profit and loss calculation, weighing the increased property taxes plus the price paid for water. They ended up deciding against putting in the water tower. Just not a profitable investment. Isn't that evidence against my thesis that a government cannot invest? (Hint to the unwary: I'm right, of course, so that even your best argument isn't going to work)

My thesis doesn't depend on that kind of evidence, even though you think it might. Let's say that the water tower would have been profitable. Isn't that now evidence that a government can invest? Nope, still not. The missing context is: where does the money come from to invest?

Where is the government going to get the money for this theoretically profitable investment?

It could borrow the money. It could get a commercial loan if the investment is short-term, or it could issue bonds. Either way, the money for both of those is consuming capital. In the first, the capital has already been invested in a bank for it to loan out. In the second, these new bonds are competing for the existing capital base. No new capital has been created, so when the government invests in this manner, they're causing something else to be devested. They're consuming capital -- to create capital?!? Perpetual motion machines don't exist, even if you use rotating magnets.

Some governments have the ability to print money. There's a bunch of different ways to print money apart from actually cranking up the printing press. It could change the rules on how much float on check payments are allowed, or how much reserve a bank needs to keep on hand. It could reduce interest on the money it loans to banks. Regardless of the details, these governments can cause the amount of money in circulation to change in such a manner that they spend the new money first.

Increasing the amount of money doesn't increase the amount of liquid wealth. It just scribbles out one number on the paper money and writes in a different number. Not all at once, though, so that the economy is irrevocably distorted by spending this new money. It's not real capital, it's just doing a negative-sum transfer from those who already own capital.

Finally, the government could just take the capital from someone. From the point of view of the investor, paying taxes is the same thing as consumption. How does an investor fund consumption? You got it -- by liquidating some of his capital. It's possible that an investor will curb consumption, and that the government will invest those taxes. Only in this rare circumstance can a government invest.

I want to mention that the presumption here is that the government is investing wisely. Look at the things your government spends money on. Are any of them investments or are they consumption? The vast majority of them are consumption. Some are investments. Only some are wise investments. The others, the foolish ones, must be treated as consumption, from an economics point of view.

Why is capital so important? Only one thing enables employers to pay employees more: when the employees produce more. Only one thing enables employees to be more productive: the use of capital. Anything that reduces the amount of capital in a society makes the society poorer in the long run. To a large extent, government spending is capital consumption.

Posted [23:42] [Filed in: economics] [permalink] [Google for the title] [digg this]

Fri, 25 Jul 2003

The 1998 ice storm

In 1998, Northern New York had an appreciable ice storm. Nearly everyone lost power, some for as much as a month. The power grid was lying on the ground, for the most part. We were lucky, as my wife insisted that I buy a generator before the power went out. We bought the last generator that Leberge and Curtis had in stock.

In any situation like this, where demand greatly exceeds supply, the price is going to rise. This is "duh" economics. But legislators (generally the villain in these writings) don't like this price rise. They call it "price gouging", as if the supplier were intentionally raising prices.

The reason the supplier raises the price is not to profit from anyone's distress. They raise the price for two reasons: because the thing they currently own is more valuable (so why shouldn't the price reflect the value?) and because the thing they currently own is more valuable (so why shouldn't it go to the person who values it the most?).

Given a limited supply of generators and too many people wanting them, how should Leberge and Curtis allocate them? Should they hold onto them, and only sell them to valued customers? Should they sell them at the usual price? Should they allow the price to rise to the market-clearing value? There must be some allocation system. Some people who want generators are going to have to go without. No allocation system is completely fair; welcome to reality.

I argue that the price should be allowed to rise. There are several sublime advantages to letting the free market do its thing.

Some people argue that it's not fair for one person to gain from another person's suffering. This is a ridiculous idea, of course. If you starved yourself all day long, so that you were suffering from extreme hunger when you went into a restaurant, should that entitle you to a discount? I don't see how it's any different just because you didn't choose to suffer. Life is full of vicissitudes.

Still, a lot of people accept that argument, and they insist that prices be controlled in a disaster situation. They say that naturally, helpful people will bring generators to the North Country. Sure. No question of that. Except that helpful people are probably already helping someone else. It's not like they're sitting around saying "Hmmmm.... there are no disasters right now, I think I won't be helpful to anyone." They need to be persuaded to drop what they're doing and go help someone else. The profit from the higher prices is the persuader. Only ... when the prices aren't allowed to rise, fewer helpful people help. This is the effect of marginal value.

Still, they're making unconsionable profits, aren't they? Well, maybe not. If the price shoots up very quickly, perhaps too many people will be spurred to action? In that case, there will be many generators, and generators will be real cheap. There's always risk in seeking profits. Sometimes you lose money, instead.

Still, let's say they are making these profits. Is there anything too terrible in allowing helpful people to have some extra money? Probably not, but what about the people who feel only greed? Shouldn't evil be punished? Only in cartoons is anybody wholly evil. Anybody who busts their butt driving a truckload of generators is going to be doing it for multiple reasons. One of them is profit, sure. The other is pride in helping stricken people. Profit, pride, profit, pride go the thoughts, round and round.

The faster the demand goes away, the better, from a public policy point of view. This isn't going to happen unless everybody who wants a generator gets one. The best way to make that happen is to allow prices to rise.

Posted [15:12] [Filed in: economics] [permalink] [Google for the title] [digg this]

Robotic Nation?

Sigh. Marshall Brain has no sense of historical perspective. We have been installing robots in our society for many, many decades now. Have we seen any systematic reduction in employment? No, of course not.

Let's take a very simple example: rugs. Used to be that rugs got dirty, and everybody accepted that. The rugs would be taken outdoors and beaten with sticks to get the worst of the dirt and sand out of them. Who would do this extremely unpleasant job? The children of the family, usually female children.

Some number of years ago, somebody invented a carpet sweeper. It had a pair of brushes attached to the wheels. When you pushed it back and forth, it would pick up the dirt. It was quick and easy to use, and allowed a homeowner to remove dirt before it became ground into the carpet. Did anybody become unemployed? Well, the children did, but everybody counts that as a benefit, including and especially the children.

In more time, somebody invented the electric vacuum cleaner. It was able to actually suck the particles out of the bottom of the rug. Did anybody become unemployed by this? No, instead what happened was that rugs got cleaner. People's standards increased as the cost of achieving that standard fell.

Nowadays, you can buy an actual robot to clean your carpets. It's not a very smart robot, doesn't have arms and legs, and is in no way humanoid. It's 4" tall, and because of that does something no humanoid robot can do: it can easily clean underneath things. It's also very cheap: $200.

People who predict the rise of humanoid robots simultaneously causing massive unemployment mistake the evidence of their eyes, and ignore economics. First, because nobody has created a humanoid robot which can do a job better than a specialized robot. Second, because a specialized robot will always be cheaper than a humanoid robot. Third because increases in the ability of tools to expand human effort has always resulted in just that: an expansion of human effort, not the elimination of it.

For the last five hundred years, one and only one thing has consistently become more valuable: human time. Anybody who wants to argue that that trend is going to reverse direction has to put forth an exemplary case. All the more so in the case of Robotic Nation since previous such arguments have all proven to be wrong.

For further reading: Jack Powelson's _Centuries of Economic Endeavour_.

Posted [15:08] [Filed in: economics] [permalink] [Google for the title] [digg this]

Tue, 15 Jul 2003

Space Exploration

Has anybody else noticed that the US is now running a state-owned socialistic space exploration program, and the Russians are running a free-market capitalistic, "You pay, you fly" space exploration program?

Posted [01:30] [Filed in: economics] [permalink] [Google for the title] [digg this]

Where is the Freedom?

A Friend points me to an article in Tikkun by Charles Derber. In this article he basically decries the way that the Bush administration is interfering in the economy. He's right, of course, but he doesn't understand why he's right.

He doesn't understand the problem. If you don't understand the problem, nothing you do is likely to solve it. It's like looking for something if you don't know what it is. You're just as likely to walk right past it as stop on it. The problem is not what Bush does to interfere in the economy. The problem is that Bush is interfering at all.

Charles thinks the problem is that Bush is interfering the wrong way. A lot of people feel the same way. Many people want Bush to interfere in different ways. Of course, other people agree with Bush, and like the way he interferes. They're wrong, all of them.

Religion was forever the cause of warfare between citizens. The citizens thought that the government of a country *had* to choose a religion and force it upon the citizens. When the government changed, so would the religion. We have proven, in the US, that that idea is wrong.

Similarly, people have the idea that a government must control the economic behavior of its citizens. This principle, which Charles clearly supports, is the direct cause of everything he decries. As long as he tries to solve the wrong problem (what the government does) he will never fix the right problem (how much the government does).

I don't want to go into all the details here, but for anything a government does, you can find a combination of private property and free markets which provides the same service at the same level of quality. Sometimes, alas, the service is poor. That's not a condemnation of free markets, but instead a recognition that the problem is hard to solve.

Realistically, free markets will solve some problems better, and some worse, than monopoly economies. Unfortunately, you have the perverse effect of people not noticing the improvement, but only the problems. People are naturally conservative (in the sense of wanting to continue with solutions which have worked before). It's hard to improve society by making changes.

I sometimes get depressed by how many people still think economic intervention is necessary, and not just a power play on the part of the influence-makers. Hopefully, as more people understand economics, they will tell their government "No, don't do that for me -- I can do it better for myself."

Posted [00:55] [Filed in: economics] [permalink] [Google for the title] [digg this]