Thu, 16 Oct 2003
The War on Drugs
An economist would be irresponsible not to decry the war on drugs.
There are a number of economic problems with the war on drugs. I'll
go through them paragraph by paragraph.
Economists have known for some time that it's very difficult to
stop willing buyers from buying from willing sellers. Whenever you
try to do this, you end up with a black market. The trouble with a
black market is that they are not efficient. Competition is reduced.
Transaction costs increase. Advertising is impossible (one might as
reasonably put the handcuffs on oneself).
We are told that illegal drugs are addictive, so that there are no
drug users, only drug addicts. If this is true, then the demand for
drugs will not be sensitive to price. We are also told that one of
the reasons to make drug possession and use illegal is to drive up the
price to discourage people from using drugs. Well duh, this conflicts
with the very principle of price insensitivity. Either people are
addicted and will pay whatever is necessary, or else people will
reduce their drug use in the face of higher prices. Somebody's lying
to us about drugs.
Prosecuting drug distribution causes the job to have two sources of
profit: buying drugs at wholesale prices and selling them at retail
prices (same as any other business), and accepting a business risk.
The risk, of course, is that one's business will be destroyed by the
county prosecutor. People have to be compensated for taking a risk,
otherwise they won't take the risk. As a consequence, being a drug
dealer is quite a profitable business. When a county prosecutor
destroys one drug business, those profits seek other vendors. Jailing
a drug dealer doesn't reduce the supply of drugs -- it just creates a
The courts will use the violence of the state to enforce private
property rights. It's illegal to steal, rob, or burgle. If someone
commits such a crime against you, you can go to the court and seek
recourse. There are also civil offenses. If you have a contract with
someone to supply a service, and they break that contract, you can sue
them in the public courts. This only works for legal goods.
Obviously, if you're selling something which is illegal, the courts
will not enforce the law.
Fortunately, the violence of the state is used many more times in
theory than in practice. Not so for drug dealers. Because they
cannot use the proxy violence of the state to enforce their property
rights, they must use actual violence. If they make an agreement with
a drug wholesaler, and that agreement is broken, they have no choice
but to use their guns to decide the issue.
Illegal drug use is what is called a "victimless crime". That
doesn't mean that people are not victimized; merely that they do so to
themselves. Society has no specific source of income to address
victimless crimes. The victim has no incentive to pay to stop
themselves because they chose that harm. Therefore, stopping
victimless crimes must be paid for by a tax on the general public.
If, on the other hand, drugs were legal, they could be taxed, and
those taxes used to pay for those people who were truly addicted and
needed help to stop.
For all these reasons, and others, economists won't like the war on
Posted [00:57] [Filed in: economics
[Google for the title
] [digg this
Sun, 12 Oct 2003
Arnold Kling writes An Open Letter
to Paul Krugman. Definitely worth reading. He points out that
there are two types of argumentation: against the argument, and
against the man. He calls them type C (for consequences) and type M
(for motivations). He takes Paul Krugman to task for making too many
type M arguments. This isn't a new observation. The Latin term
"ad-hominem" means: against the man. An honest argumentor (ispell and
google insist that it's not a word; if it wasn't before, it is now)
will avoid ad-hominem
argumentation. Who says something, or why they say it, has nothing to
do with the correctness of that said.
His last two paragraphs are especially near and dear to my heart.
50% of what is wrong with economics is not the results of economics,
but instead how we *present* the results of economics. When we use
type M arguments we give people the idea that economics is not a
science; it's just the opinions of people who call themselves
economists; that being an economist is just a matter of having studied
all the previous opinions; and that therefore nobody's opinions about
economics can be wrong (not "are wrong" but "can be wrong") because
they're all just opinions.
I knew I didn't like Paul Krugman. Now I know why.
Addendum: I heard Paul being interviewed on by Scott Simon. He
used mostly type C arguments until the end where he used a type M
argument ("crony capitalism").
Posted [01:39] [Filed in: economics
[Google for the title
] [digg this
Sat, 11 Oct 2003
Tax cuts for the wealthy
Numerous people are decrying tax cuts for the wealthy. Google
points to many
of them. They are misled, or seek to mislead, for one primary
reason: the wealthy are more likely to invest the money. They would
have the tax cuts be uneven: weighted towards the middle-class. The
thought is that middle-class people will spend the money immediately.
This will result in more economic activity and more jobs. Simple,
right? No, simple, wrong. It's not that obvious.
Why do people spend, or not spend money? Simply enough, because
they prefer money to the goods that money would buy. Money is just
another good, and a person can have a desire for money itself beyond
what they can trade for it. Why can this be? Because money is the
"universal good" which can be traded for all other goods. A primary
reason for preferring money to goods is because of uncertainty over
which good to buy. If you're not sure what you'll need money for in
the future, you won't spend your money now. The middle-class doesn't
automatically spend every dollar it gets its hand on. One thing you
can count on is that the people have a better handle on their own
interests than the pundits do.
The assumption here is that the wealthy already have "enough", and
won't spend their tax cut. Instead they'll spend some and the
rest they'll dump in the bank or the stock market or bonds.
That's probably true, but it's not true enough (it doesn't elucide, it
Money that is invested rather than being spent does not disappear.
It does not become unavailable to the economy. Even if the money is
held as cash in a mattress, the economy will react to its absence and
increase the value of the remaining money. Realistically, a LOT of
cash would have to be stored in mattresses for this effect to be
noticeable. Even though it's hard to measure, pulling cash out of the
economy will result in everyone's cash becoming more valuable.
Money that is invested in a bank goes two places. A fraction of it
(the fractional reserve) is kept on the chance that the account holder
will want his money back. The rest of it becomes available to
customers of the bank. The bank takes deposits and loans them out at
a profit. That's how the bank pays for its expenses. What do the
customers do? Without fail, they spend the money. When a wealthy
person deposits their tax cut in their bank account, it gets spent,
probably within a day or two.
Money that is invested in the stock market, the bond market, a
mutual fund, or privately also results in spending. The reason a
company sells stock is to raise capital. They trade a portion of the
ownership of their company for money. They spend that money (or put
it in a bank account; see previous paragraph). They do so with the
full intention of being able to recover that money and more to pay
back the investor and make a profit.
So far, these examples are ignoring the effect of new investment
dollars. What happens when money becomes available to banks, or
companies, or the bond market? You have more supply. Increase the
supply of something, and what happens to the price? It falls.
Capital becomes cheaper, which serves as a signal. Entrepreneurs see
that people are dissatisfied with the current mix of goods they could
purchase, and that they want different goods. They use this cheaper
capital to create new products and new jobs.
The existing tax cuts just cut taxes evenly. Everyone who objects
to tax cuts for the wealthy are really asking for taxes to be lowered
for everyone BUT the wealthy. This just serves to force the wealthy
to subsidize other people. Historically, that's what they've done (Google
for Carnegie library) anyway. What moral benefit is to be had
from forcing them to?
Posted [01:40] [Filed in: economics
[Google for the title
] [digg this
Mon, 06 Oct 2003
Den Beste is applying his microscope to the Tragedy of the
Commons. Garrett Hardin points out, in his book of the same name,
that the real problem are unmanaged commons. The management can
happen in any number of ways: through societal norms; through
government action; or through conversion to private property.
Steven disagrees with this last, because he thinks it doesn't work.
One of the reasons he refuses to be labelled with the term
'libertarian' is because of libertarians propensity to stick by
principles even if doing so has negative effects. Libertarians love
to solve commons problems by converting them to private property. He
compares that to the government solution, which has been tuned over
centuries, and which he admits is only a "good enough for government
work" solution. Libertarians solutions haven't been tried and tuned
simply because government solutions are thought to work well
In this, Steve is committing a logical error: comparing the best
that one system can do against proposed solutions underneath another
system. The whole reason why free markets are better than controlled
markets is because of better information flows. As the Cluetrain
folks keep saying, a market is a conversation. If you could get a
bunch of smart people (e.g. libertarians) in one room, and have them
design a political system in full (e.g. Libertarianism), then you
wouldn't need free markets. You would just design markets to work well.
Instead, what is expected to happen is that Libertarian solutions
which don't work will be discarded and replaced by ones that do
So, specifically, if you give people a property right to the air
above their land, how might that work out? Steve anticipates that
people who want clean air will sue everybody upwind of him, and
prevent them from doing anything. "the entire nation would grind to a
halt." he says. This only works if everybody is stupid. Fortunately,
this is not the case. We *do* have some smart people who can fix
things. For example, the legal system might not accept a lawsuit
unless the damages exceeded the cost of adjudicating the lawsuit.
What that would mean is that if you were damaged to the tune of $1,
and a lawsuit cost $500 (a guess based on the fee that the American
Arbitration Association charges), you would have to get 500 people
What would likely happen in the case of clean air property rights
is that you would sell them to a consolidator. That company would
either pay you, if your air was being polluted, or else you would pay
it to defend your clean air. We would end up with a solution similar
to what we have now, except that instead of having a monopoly
enforcer, who enforces one rule for everyone all over the USA, there
would be competitive enforcers.
Leftists would no doubt object to this by saying "But! But! It's
clear that only poor people would be willing to sell their clean air."
They are quite right. Said poor people already have polluted air.
The difference between the current system and the libertarian system I
propose (which I must reiterate may be nothing like what would
actually happen) is that under the current system, government workers
are bribed (and I include politicians here; call the bribes "campaign
contributions" if you want) to ignore laws which prohibit pollution.
It would be an improvement if the poor people were actually paid
The other objection that Steve has to private property solutions is
that not every private property owner has an interest in protecting
the property. He points out that the present value of destroying a
resource may exceed the total future value (as brought into the
present). This may result in the resource, otherwise sustainable,
Steve has just discovered an important result of economics, which
is that sustainability is not infinitely valuable. Sometimes
something is best when used up. On the other hand, the example he
gave is one in which the market is not completely free. I'm not an
expert on the market for redwood trees; it may be that the market is
hardly free. You can't use an example of how a controlled market
works to describe how a free market will work. When controlled
markets don't work well, you can't use that as evidence that free
markets won't work well and conclude that one must control
In a free market, interests are represented by purchases. If you
have an interest in protecting redwood stands, you purchase the land.
If the land is owned by a company and the company refuses to sell, you
buy the company (or a portion thereof). Sometimes there's just no way
to have your interest represented. This is not worse than our current
system, where someone's interests as a California citizen are not
represented by the state of Nevada.
People who have a belief in sustainability as a good unto itself
have an interest in protecting redwood stands which might otherwise be
harvested into extinction. They can express that belief by purchasing
companies whose corporate charter (difficult to change) includes a
committment to sustainable harvesting of redwood trees. Maybe there
aren't enough of such people to have enough of an effect on the
marketplace? If not, then there wouldn't be enough voters to affect
the political process, so government is no solution for them.
This issue comes up again and again. People who dislike
libertarianism because it's so market-driven don't see that markets
express popular interest just as much as politics. Markets express
interest better than politics, because political systems are often
all-or-nothing. Either every redwood tree is protected, or none of
Steven points out a commons where there is no ownership to
concentrate: vaccinations. It may simply be that a libertarian
government would not be perfect; that some problems currently solved
would go unsolved. Other problems would be solved better, however.
The question really is not whether libertarianism would be better in
every respect than a coercion-based government. The question is
whether it would be better overall. Those of us who count themselves
as libertarian believe it will be better overall.
I need to say something about transaction costs, technology, and
government, because they are strongly related to what a government can
do efficiently. I'll leave that for another day, though.
Posted [13:27] [Filed in: economics
[Google for the title
] [digg this