Russ Nelson

People don't get paid what they deserve. Nobody does. People get paid an amount of money equal to or less than the value they create for other people. If that value is less than the minimum wage, then that person is not legally employable. I know that you want to raise the minimum wage, but how many livelihoods do you want to destroy at the same time?

As a mental exercise, let's raise the minimum wage to $100/hour. What about all the people who cannot supply that much value? They will either 1) starve, 2) go on public assistance, or 3) work illegally. Starving is obviously a problem. Working illegally is also a problem because a worker has no recourse under the law for anything. Let's wipe out all the gains produced by workman's compensation, workplace discrimination, health and safety laws. So they'll go on public assistance, but who is paying the taxes? Those very few people who are allowed under the law to be productive.

Now, let's go the other way and get rid of those pernicious effects. In order to get rid of all of them, we have to reduce the minimum wage below the value producible by any person. That is probably zero.

The effect of the minimum wage law is to destroy some people's jobs, and take their pay and distribute it to the remaining workers. Don't kid yourself into thinking that workers deserve a minimum wage. Nobody deserves to have their job destroyed.

33.17 km 108820.22 feet 20.61 mi 10308.00 seconds 171.80 minutes 2.86 hours 7.20 mi/hr

Today was supposed to be clear in the morning, with showers and thunderstorms in the afternoon. I overheard a woman say "If this is rain, I want more of it." It's been broken clouds all afternoon. Decided to go for a relatively short ride across the Racquette River, down Pig Street Rd. (sic), back into town and then home again. Only got dripped on once or twice. Stopped by St. Lawrence Nurseries to visit with Bill MacKentley, the owner. He's got a nifty wireless Internet setup. Roadrunner into his house to Linksys #1, WDS up his windmill tower to Linksys #2, WDS up the hill to a 24dBi dish connected to Linksys #3 in his equipment shed where his summer bedroom is, and thence down to a laptop with a wlan card. Amazingly, it all works.

Qigong is, literally translated from the Chinese, Qi-study, or Qi-practice. The Chinese suffix -gong is very similar to the Greek suffix -ology. Qi is, or at least seems to be, the practice of manipulating bio-electricity flows within the body. Quakerism is the religious practices of Quakers, or members of the Religious Society of Friends, or simply "Friends" for short. Quakerism is a mystical branch of Christianity.

My taiji (and thus qigong) teacher, Tom, related an incident at his school where the Qi level was so high that he "couldn't stop shaking". That struck me so strongly of the description of some Quaker meetings that I have to wonder if Quaker and Qigong practices weren't closer together hundreds of years ago. Why do you hear about "gathered meetings" so seldom anymore? Why don't Quakers quake?

No answers; just questions.

23.43 km 76876.86 feet 14.56 mi 6306.00 seconds 105.10 minutes 1.75 hours 8.31 mi/hr

Not a very pretty day out there. Been showering on and off all day. There was a break with some blue sky after dinner, so I took a chance and went for a ride. Got back about ten minutes before the next shower started. Saw a pair of ducks and three ducklings in a wetland (of which we have many in St. Lawrence County). Saw two deer cross the road in front of me, but that's a non-event hardly worth of writing down. Saw a red fox on our front lawn two days ago.

Paid more attention to the position of my heels. Obviously, when clipped in, the balls of my feet cannot move. However, I can move my heels to change the angle of my feet. By fiddling around a bit, moving my heels 1/4" one way or the other, I was able to eliminate the knee pain. So it's not just keeping the knees over the toes; it's also keeping the heels in the right position as well.

18.80 km 61691.73 feet 11.68 mi 3706.00 seconds 61.77 minutes 1.03 hours 11.35 mi/hr

Just a little ride after dinner. Left knee hurting a little. Might be because I pushed up a hill. Might also be that I'm not keeping my knees aligned with my toes.

I took this photo while flying from Newark to Ottawa in early April. I was actually over West 145th Street and Amsterdam Avenue when I took this picture, but at that height, you see a few miles off your flight path even if you look "straight down". You can see Central Park in the center-right of the photo. The large building in the center-left of the park is the Metropolitan Museum of Art.

From north to south (in the photo, from lower left to upper middle), you can see the south end of Ward Island (and the foot bridge connecting it to midtown Manhattan, the Triborough Bridge, Roosevelt (formerly Welfare) Island (long thin island in the East River), the Queensboro Bridge also known as the 59th Street Bridge, subject of my favorite Simon and Garfunkel tune, The 59th Street Bridge Song (Feelin Groovy)(first 10 seconds) and the rest is lost in the haze of that day.

If you have NASA World Wind installed, you can see the same view.

42.71 km 140119.99 feet 26.54 mi 10478.00 seconds 174.63 minutes 2.91 hours 9.12 mi/hr

Longest ride of the season. Drove to Winthrop and parked in the town office parking lot. Crossed the rivers, and hopped on the Rutland Trail. Unfortunately, the bridge is out, so you have to cross on the highway bridge, and the fellow who owns the next section has it posted with a grumpy "Police Take Notice! Property is being trespassed upon!" and a posted notice below it. Not a real big deal, since you can go no more than 1/2 mile down the road to the next intersection.

Since I last rode this way, the Kraft Foods (now CoolBrands) cheese plant has both ends of their section of the trail gated and posted. A mile or so detour to the next road gets you back on the trail, however. Other than those two closures, the trail is open and ridable all the way to Moira. There are a few puddles that I portaged around rather than get my shoes wet, but only a few.

Saw a dead snapping turtle, and a dead snake. I know that some ATV riders really are environmentalists, but clearly some are not. Then again, I stepped on a snake while hiking down Azure, and I nearly hit two snapping turtles today; one on the Rutland and one on the road.

31.71 km 104050.21 feet 19.71 mi 6210.00 seconds 103.50 minutes 1.73 hours 11.42 mi/hr

Brrrrr..... Bit of a cool day. No more than 55 degrees when I started. Legs were chilly the whole time, even though I was working reasonably hard.

There is this widely-held theory that big companies can use their size to out-compete small companies by engaging in predatory pricing. They use size and profitability in other (usually monopolized) markets to outlast a smaller, specialized competitor in a niche market by writing off the losses in this small market which the competitor cannot afford to.

Back in reality, it turns out that companies that try to maintain a monopoly in this manner (predatory pricing) have a hard time making money using this tactic. It costs them more to maintain their monopoly than they can ever recoup through higher prices. Let's say that they lower their prices by ten cents for a year, and drive somebody out of the business. In order to make back that money, they need to raise their prices by ten cents over their original monopoly price. But the party that they put out of business went into business precisely because they saw a way to suck off excess profits by competing with the monopoly. Now the market price is ten cents higher, and the profits are even more attractive to a new entrant. So somebody else goes into the business, and the monopoly can't even go back to their old price. They have to go back to the old "lose ten cents per" price, because that's what's necessary to drive the competition out of business.

Predatory pricing doesn't work according to the standard theory.

Update 5/17: Adam writes to point out another problem with the theory. When the price gets lowered by the "predator", that increases demand, so the company has to sell more. When they raise prices again, that reduces the demand and makes it harder to recoup their loss.

Update 8/7: Cathal writes to say that predatory pricing can work under certain market conditions if you also know something your competitor does not (asymmetric information).

Only a black PhD economist could get away with saying that there is such a thing as a Black Redneck.

This morning I heard on NCPR (the local NPR affiliate) a story about military base closings. The story ended with the note "[These bases] generate more than $2 billion of economic activity."

This short note is economically wrong in three ways. First, taxation does not generate anything. In fact taxation replaces private spending with public spending. Thus, a more accurate note would be "[These bases] spend more than $2B in New York State."

Second, taxation only transfers money from being spent on one thing to being spent on another[1]. Thus, when the public taxes money away from private entities, it also destroys the thing that the public would have spent the money on. Taxation also costs money: directly in the expenses of the operation of coercing taxes, and indirectly in the actions taken by citizens to reduce their taxes. Thus, an even more accurate note would be "[These bases] spend more than $2B in New York State, and destroy even more spending all over America."

Third, the whole point of trade in a free-market economy is to create value, not just activity. Economic activity includes digging a hole, and filling it in again. Unless some value was created by that activity, it was a complete and utter waste of money. Economic ignoramuses may say "ahhhh, but the workers got paid!" I say "ahhhh, but they would have been paid to do something else, productively." For one particular set of workers, that's not necessarily true. If you make the economy inefficient enough because you concentrate on activity and not value, it becomes so highly probable that it becomes truth.

So, the most accurate note would be "If the military doesn't need the bases, they wasted more than $2B spent in New York State, and destroyed a greater amount of spending all over America."

[1] Even if the money is just put in the bank, the bank will loan the money to someone, who will then spend it. Even if the money is put in a mattress, the economy will notice that that money isn't circulating anymore and will adjust the value of the remaining money higher.

You will very often hear leftists (by which I mean non-economists; leftists who understand economics become libertarians) complain about growth. Growth is bad for the environment, they say. This is not necessarily true. There are two different types of growth. Extensive growth is simply more of the same. A lumber company that cuts down twice as many trees would be growing extensively.

Intensive growth is different. With intensive growth, you have companies doing more with less. Lumber companies used to just cut down trees, then slice the trees up into lumber. They have grown intensively by using more of the same tree. The limbs get chipped and turned into chipboard. The parts of the tree which are too twisted to become lumber get turned into flakeboard. The sawdust is reused rather than treated as a waste product. The sawblades are thinner so less wood is turned into sawdust. The saw is computer-controlled so the sawyer uses his judgement to grade the cuts, then the sawmill automatically cuts the boards. More products are being made from the same amount of trees.

So when you hear somebody complain "Oh, growth is bad for Mother Earth", ask them "What kind of growth?"

I think that we should add a little bit of cynicism to everything we write. Whenever we mention an incontrovertible fact, like 2 times 5 is ten, add to it "or thirteen if Congress passes a special law." The point, expressed humorously and repetitively, is that some laws are discovered rather than legislated. These laws can be found in the area of economics as well, e.g. if you pay your employees more than you can afford, you'll go out of business, unless Congress passes a special law.

Donald J. Boudreaux is the editor of The Freeman, and also blogs at Cafe Hayek. His article in the current issue, unfortunately only available in PDF form, not HTML, deals with Price Gouging. It's very well written, but he misses a point about the justice of higher profits for producers and distributors of in-demand goods. He says that those profits could be donated to a relief effort. I say not.

When a shop-keeper in an area in emergency conditions raises his prices, he profits more. This seems to be a side effect of the more important aspect of higher prices signalling higher demand. It isn't. Emergency conditions are predictable. Where I live, the typical emergency is an ice storm. The kinds of goods that are needed to survive an ice storm are predictable: generators, fuel, food, and bottled water. Those shop-keepers who stock extra of these items during times of higher risk of ice storms will profit more. That's not unfair, that's just the reward for good speculation.

We should set the rules of a market society so that rationality is rewarded, and the seven deadly sins are punished. When a shop-keeper plans ahead wisely, if an emergency hits, he will make higher profits. This serves as an incentive to be wise. It is exactly this attribute which makes free market societies function so well. The prudent are rewarded. That is how it should be.

You will often hear the left say "The rich get richer and the poor get poorer". They believe this both as a fact and as an ethical judgement. They think that the poor really do get poorer in a market economy. This goes back to the usual "fixed pie" theory of economics. "If you get something, you must have gotten it to my disadvantage." It takes very little examination to see that the "poor" in more-free market societies are much better-off than the poor in societies with less-free markets. Unfortunately leftists are never willing to open their eyes.

The left also mean the first part ("The rich get richer") as an ethical judgement. Even if the poor got richer as well, the left would still believe it wrong that the rich get richer. While you can make any ethical judgement you want, you should be aware of the effects of your judgement. Ethical judgements (for the worse) are intended to reduce the amount of the thing judged. That is, the left believe the world would be better if the rich didn't get richer.

But the rich should get richer in a free market society. There is no way to get rich in a free market society except by convincing people that you have something they want. Thus, people who have learned to be helpful should be encouraged to continue to be helpful. There's plenty of evidence that, having created valuable goods once, they will do so again in the future. Thus, the rich ought to get richer.

Note for the unwary: the USA is not a terribly free market society in an absolute sense. It is merely much more free than most. Thus, if you want to look for examples of non-freeness in which private parties gain from political manipulation, you will find many of them in the USA. Some people are rich not because they were helpful, but because they were skillful at manipulating politics. That doesn't invalidate the idea of free markets. Rather, it endorses the idea of reducing the centralization of power. Power can be used for good or evil, but it's usually used for evil. Better not to concentrate it.

I've been having a conversation with Robert Pirillo, who runs Roberts Honing & Gundrilling. He has, alas, fallen prey to a purveyor of junkware which searches for webpages containing the search terms, locates any email addresses on the page (or in the whois for the domain, or whatever), and sends advertising email. He doesn't view this as spamming, unfortunately. I fully suspect that most providers will, though, because it's unsolicited, it's bulk, and it's email.

So he thinks that this would get attention to his business, saying "Isn't that what's great about the Internet?" Well, yeah, but it's also what's horrible about it. There's at least 60,000 small businesses in the US, and what if ten of them sent you one email a day? 6,000 days later, you'd have gotten a steady stream of ten spams a day. But that's only 16 years.

No, the way to sell your business over the Internet is to give away information to your potential customers that shows that you know your business. Don't just list your services. Instead, explain how hydraulic cylinders work (or don't work), tell people how to evaluate the health of their hydraulic cylinders, and say how to fix them. Don't pay for someone to write a fancy website. Instead, give your readers a tutorial which contains pure information neutrally presented, and at the bottom says "Copyright 2005, Roberts Honing & Gundrilling". It doesn't matter if it has a few speling erorrs, or if the graphics look hokey. The important part is to make it clear that you know your shit better than anybody else. Your competition isn't going to steal your website (because you can sue them for actual damages, or triple damages if it's a registered copyright), and your customers will know exactly where to get reliable expert service.

Sign onto a mailing list of people who are likely to have the problems your company solves. When they have questions, answer them. They'll see that you're an expert, and when they want a job done right, they'll know to come to you.

That is what's great about the Internet. Not the ability to force yourself on unwilling listeners, but to participate in a conversation with potential customers.

Wow! I've been aiming at having very readable articles. I've succeeded! The Gunning Fog Index is 7.63, which makes it easier than Reader's Digest. The Flesch Reading Ease is 71.70 (out of 100, where 100 is easiest). The Flesch-Kincaid Grade is 4.69. As in "fifth grade".

Let's say that you want to create a new job. Where are you going to get the employee to fill it? There are basically four ways: grow a new one (but that takes 20 years), import one from another country, buy an employee who already has a job, or export the job to another country.

I'm sure that by this time (only three sentences) any labor unionist is seething under the collar. Union organizers maintain that there are never enough jobs to go around (yes, people have actually said that; 8 times, if you believe Google). This is utter and complete nonsense, which you can immediately understand by asking this question: "If you could hire as many people you wanted for a penny a day, how many would you hire?" Clearly, then, the problem is not a lack of jobs. The capitalist system ensures that there are always enough jobs to go around, even if the government acts to make the market-clearing wage illegal.

The only reason unemployment exists in a free market is because information takes time to propagate, and because of human nature. People are reasonably cautious at accepting the first offer for anything. We like to compare offers before we decide.

So, when you create a new job, you have to buy an employee who already has a job, or persuade an employee who has no job that yours is the best job for them. But what if somebody else has out-competed you, and bought that employee away from you? The job doesn't cease to exist. Somebody needs to do it. You have to go back to the list in the first paragraph to try to find an employee to fill the job. No one of these methods harms employees in this country! If you could find an employee at the wage you're willing to pay, you would have.

It's inevitable that a growing economy needs more workers. Nobody is harmed when employers pierce country boundaries to find workers. From the point of view of the workers, the more growth, the more employers seeking employees, the better the wages.

UPDATE: I thought of another reason why unemployment exists in a free market: rising expectations. Most people get better at doing stuff as they get older. Most people expect higher pay for more value. When they switch jobs (whether by quitting or being fired), they'll be looking for more pay rather than less. Also, free markets are always creating new value, so the same job can, over time, earn more and more money. This leads an employee to want more pay rather than settling for the first job they find and lower pay.

Attention leftists, socialists, communists, communitarians, and anarchists of all anti-property stripes! Do you want to destroy capitalism (and throw yourself and everyone else back into the poverty that is usual for mankind)? It's simple: extend the notion of liability for harm in a very small way. If I burn down your store, I am liable for the harm, of course. If I out-compete you and destroy your store that way, I am not liable. If you want to destroy capitalism, simply extend liability to the harm caused by competition. In short order, everyone who is better at anything will have to pay compensation to anybody who is worse at it. Soon, nobody will bother to become better at anything, 90% of the people in the world will die off, we'll be back to only 600 million people, we won't be putting pressure on the bugs and bunnies anymore, there will be plenty of resources for everyone, and Malthus will come back to life to direct us all in this Nirvana.

Does HTML have a <sarcasm> tag?

I saw someone write this on a mailing list:

As a self-described left-libertarian (which means that I see human liberty and human cooperation as compatible, which the right-libertarians do not),"

There is no such thing as a left-libertarian OR a right-libertarian. Whoever wrote this is confused about libertarianism. Of course so-called right-libertarians believe that human liberty and voluntary human cooperation are compatible. If you believe in voluntary cooperation, then you are a libertarian, whether left, right, middle, top, or bottom. If you believe in any use of violence other than to prevent greater violence, then you aren't a libertarian. So-called left-libertarians believe in coercing desired behavior from peaceful people.

I think there's a larger issue here. "Liberal" used to mean the philosophy which is called in the US "libertarian", and which is still called "liberal" in some other countries. Since this philosophy generally promotes happiness and distributes power, people who seek power object to it. Since the philosophy is hard to understand and is counter-intuitive, it only takes a little bit of effort to undermine it. For example, you can introduce only beneficial coercion, bringing the philosophy leftwards. Thus, the "Liberal" is now applied in the US to the leftist trade-union high-taxes consumer-protection philosophy. By using the term left-libertarian, these people seek to convince people that libertarians believe in coercion. Left-libertarians are just ordinary leftists and socialists looking for cover. You can see this in the Wikipedia article on libertarian socialism. Fortunately, real libertarians are loudly objecting to their usurption of the term.

The standard "wisdom" is that Americans have not gotten wealthier in the past twenty-five years. Lots of people believe this, even extremely intelligent people like Richard Stallman. And yet, I must believe the converse when I look at the parking situation at the local colleges. Clarkson University built a new parking lot in front of Cubley-Reynolds(1) and expanded the Hamlin-Powers(6) parking lot. SUNY Potsdam built a whole new lot out behind Bowman South(not even on the map yet).

The demographics are such that student population is down from when I attended Clarkson. At the time, we had involuntary triples, and single occupancy dorm rooms were only available to seniors in the New Dorms (which, by the way, they still call the New Dorms). Potsdam State still requires freshmen and sophomores to live on campus in order to keep the dorms at full occupancy. They didn't when I was in college. So, there are no more students, and substantially more cars. The kind of students who attend Clarkson and SUNY Potsdam have not changed as far as I can tell.

The only explanation is that Americans have indeed gotten wealthier, and that is reflected in more students who can afford cars. Cars have not exactly gotten cheaper either. They have more safety equipment, and more luxury equipment. When I was a child, only a Cadillac had window washers and electric windows. Now all cars have them, or very nearly.

Some people want corporations to be socially responsible. That is, they want corporations to have to be responsible not just to the owners of the business, but to "stakeholders". A stakeholder is anybody too cheap to buy a portion of the business, but who wants to be able to benefit from, and participate in, the operation of the business.

A union is organized as a corporation, no?

Thus, I claim that I am a stakeholder of the Communications Workers of America (just to pick on one of them), and the next time they vote on a union contract, I get to vote on it too.

You can compel schooling, but you cannot compel learning. You can compel attendance at church, but you cannot compel belief. We are risking our eternal souls by separating religion and state. Nonetheless, America is one of the most religious countries in the world. By analogy, separating school and state would result in America being one of the most educated countries in the world. school

Warren Meyer blogs on the effects of the minimum wage on his campground business at Coyote Blog. I have my own opinion about minimum wages.

Howard L. Hunt said "If this country is worth saving, it's worth saving at a profit." It seems like a somewhat cynical thing to say. It seems to put profit before people; a usual complaint of the humane leftists. The more hopeful thing to say might be "If this country is worth saving, people will donate their time to save it."

Profit is important. Profit is the measure that you are succeeding at doing something. You can created something that people want to buy. Profit simply means that your revenues exceed your expenses. You are producing more than you are costing. There is nothing intrinsically worthwhile about a non-profit (non-taxable) or not-for-profit (taxable) entity. Any entity can eliminate its profits simply by donating all of its profits to charity. This would not be sufficient to make the enterprise worthwhile in many people's eyes.

Profit has two pleasant characteristics. First is that profit attracts capital investment. If a company is making money, then more people are going to enter into the business. If the business of the company is saving the world, then the world will be saved all the faster. Second, profit tells you that you are actually helping people. Take, for example, the case of Christian missionaries who teach people how to read....the Bible. While the ability to read is surely a good thing, it's not clear that the people who now know how to read the Bible are better off. A primary tenet of profits in a free market is that everyone who trades is better off. Somebody who runs around a third world country teaching people how to use contraception because their country is overpopulated is not clearly doing them a favor.

Charity surely has its place, but profits are better than charity, always.

Our own Russell Roberts was just on NPR's Morning Edition, posed against Barry Schwartz, on the topic, more or less, of whether people should be allowed to choose how their retirement is invested, or whether the federal government should choose it by spending social security taxes in their name.

Barry, predictably, came out against choice. I say "predictably" because of his book The Paradox of Choice, which he has been trotting out whenever possible. The point that (unfortunately) Russell didn't push very hard, and which Barry cannot defend against, is that the choices that Barry dislikes all exist as possibilities. If the spectrum of choices is to be narrowed for the sake of people's mental health, who is to choose which possibilities will go and which will remain?

If we are to have fewer choices, those possibilities will have to not exist. Somebody will have to choose which possibilities don't exist. Who will that be? Barry Schwartz, Master Chooser? What makes him so smart? What makes him so mentally stable, so able to resist the pressure of all those choices, that he will be able to choose when I cannot? I agree with Barry that choices are hard to make, but I learned this very early on in life: if you find a choice hard, then you don't know enough to distinguish between the choices. You should either learn more about the choices, or else decide that the cost of learning exceeds the value of the choice, pick one of the choices that all appear the same, and move on. Regrets? They're foolish, silly, and immature. Move on. Mistakes? Inevitable; you're a human; that's what we do. Move on.

In essence, Barry is arguing for the infantilization of American society. We protect our children from many choices because they lack the knowledge necessary to choose. That's foolish. Teach your children to choose! That's why you exist, as a parent, and your goal should be to stop being a parent as soon as reasonable. We don't want a society of children, we want a society of clear-thinking, responsible adults.

A note for the unwary: the following post is sarcasm. No, really, it is.

Economists Don Boudreaux and Russell Roberts just don't get it, do they? They think that when the government pays for something, people "overconsume". What they don't understand is that it's not people like you or I who pay most taxes. It's the rich people. Providing all these services by government expenditures is just a way to "even up the score". To create some justice. To make sure that the rich people "give back".

Doc Searls has a deep understanding of economics:

Chill, folks. Markets are public places where makers and vendors offer users and customers lots of choice. Not coliseums where gladiators kick and stab each other to death while the rest of us cheer over bruises and blood.

Markets are not games, and game theory has limited applicability to economics.

Cross-posted between my old Angry-Economist blog and my new Russ Nelson blog.

James Maxwell did a lot of work on thermodynamics. One of the things he proposed was a violation of the second law of thermodynamics by a kind of entity with the finite ability to separate energetic molecules from less energetic ones. This entity is called Maxwell's Demon. There are lots of reasons why it fails in the real world; for example sensation requires sampling, and sampling requires destruction of a portion of what is sampled.

You could also posit a kind of Political Demon, which would serve to ensure that good laws are passed and bad laws are not passed. The trouble with this idea is that we already have one such: the president. His function, with his veto power, is to require that Congress only send him good laws, as he will veto the bad laws. You can see how well that has worked in reality. Just like there is a second law of thermodynamics, which dictates the behavior of physical entities, so there is a nature of political action, which dictates the behavior of political entities.

You can see various people attempt to create a Political Demon. You see inveterate attempts to reform government schools. The idea is that without changing the fundamentally coercive nature of government schools, you can have a Political Demon which sorts amongst the characteristics of government schools, eliminating the bad ones and keeping the good ones. Similarly you see attempts at campaign finance reform, or health care reform. I'm starting to see a common characteristic here. Whenever a futile attempt at change is made, it's called "reform", as if the thing under consideration was formed perfectly at one time, has been ruined by the political system, and will now be reformed back into its perfect nature.

[nelson@desk nelson]$ grep -i steroids Constitution 
[nelson@desk nelson]$ 

Whenever you create something, it requires a mix of inputs. Perhaps you're just whittling a stick into a shape. You'll need a stick and a knife, but you'll also need a person's time. Some combination of sticks, knives, and time will generate the most shaped sticks. That's obvious for something simple. Try creating a pencil. There are hundreds of steps involved requiring at least seven inputs: brass and rubber for the eraser, wood, graphite, glue, and paint for the pencil, plus varying amounts of labor.

These inputs do not come in infinitely varying quantities. Labor only comes in one-person chunks. You can hire people part-time of course, but they need to be trained. Wood comes in some definite length, width, and height related to the size tree it came from. Glue and paint come in pots. Graphite is malleable and is shaped to fit the size pencil being made. It would seem to be an exception, but no doubt you have to buy graphite in certain discrete amounts, e.g. a ton at a time.

Everyone is familiar with the fact that hot dogs come ten to a package, but hot dog buns come just eight to a package. These are the inputs to a hot dog. You can make yourself one hot dog, but you'll end up with nine dogs and seven buns. Another one gets you eight dogs and six buns. Keep going and you'll have two dogs left over. Optimal mix is forty hot dogs: four packages of dogs, and five packages of buns.

This implies that the larger the enterprise, the easier time it will have balancing its inputs. The larger the enterprise, however, the larger its communication and coordination costs. Bigness has its advantages pushing companies larger and its disadvantages pushing them smaller.

Right now, if you attempt to purchase labor for a price lower than the minimum wage, that is illegal. Interestingly, though, if you attempt to sell labor for a price lower than the minimum wage, that is not illegal. Contrast this with drugs, where both buyer and seller are at risk.

There is another comment on that blog page that points out that the minimum wage is racist. The jobs that the minimum wage eliminates are disproportionately minority jobs. Why? Well, given the fact of racist employers, the minimum wage makes it possible for them to hire their preferred white employees with no penalty. Absent the minimum wage, another employer could pay blacks a lower wage. This would let them out-compete the racist employers. While one can regret the fact that racism incents even non-racists to pay blacks less, the mechanism which naturally causes harm to racists is broken by the minimum wage law.

I always thought that the quip "Marxism is dead everywhere but on the American college campus" was a cheap shot, but apparently not.

Imagine if mathematicians were taught to understand mathematics in terms of the history of math. In order to discern that 1+2 is 3 and that 2+1 is equally 3, you would have to look at the history of it. Has this relation been true in the past? If so, the historical mathematician thusly concludes that it is a relation that will continue in the future.

Sounds like nonsense, doesn't it? It is. Now imagine a branch of economics that does the same thing, called historical economics. It would be nonsense, and since it actually exists, it is nonsense.

Tradestation is a service which allows individuals to trade stocks on the market by entering orders under the control of a program. The program has access to all the prices of the stock sampled at five minute intervals going back years, and daily intervals before that. Using an appropriate program, you may create a theory about the market. You can test your theory against the historical prices by running your program in test mode, to see how it would have traded.

This, too, is nonsense. Prices on the market are determined by a large number of factors. These factors will not be the same in the future as they were in the past. People's opinions change, their trading method changes, companies change, industries change, and economies change. When you're writing a Tradestation program for the past, that is all that it will reliably succeed at.

This does not mean that Tradestation is useless, or harmful. It can be used to test theories about the market, but those theories must be tested using new data, not past data. Otherwise you're just fitting your theory to the shape of the curve-that-used-to-be.

So how do you trade using Tradestation successfully? You trade on the fundamentals of a stock. You build on what previous traders learned; for example Ben Graham, or Warren Buffett. You look for special situations: a stock that is undervalued by the market.

This is also what the successful economist does: creates a theory about some economic principle based on what other economists have learned; for example Ludwig von Mises, Freidrick Hayek, Ronald Coase, etc. Then she looks to see what people actually do. If she is right, then the theory is a good one. If she is wrong, she goes back to square one with a new theory.

While I intend to continue blogging on the subject of economics, I find that single focus too limiting. As I'm now the President of the Open Source Initiative, I want to blog on opensource as well. And on railroads. And on bicycling. And on mapping. And on rowing. So I've established a general interest blog at blog.russnelson.com. Everything in the economics topic of that blog will also appear on angry-economist.russnelson.com.

In case you're wondering how I'm doing this, it's very simple. I moved the angry-economist pyblosxom directory into the blog/economics directory, edited the config.py file, and told apache about the new document root.

I expect that everyone has heard the "Blacks are lazy" slander. I think a single economic principle has two aspects that may explain its genesis: if everything else is the same, people will prefer leisure to work. In other words, everyone is lazy. So why do blacks get picked on? Two reasons: First, racism rewards blacks less for work, giving them less incentive to work hard. Second, that the difference between the work output of a slave versus the same person as a freedman could be perceived as laziness. Even the smallest effect would be picked up by a racist looking for reasons to hate blacks.

It is a fact that blacks are paid less for the same work as whites. Black unemployment is also higher than white unemployment. Racists no doubt think there is one and only one explanation: that blacks work less hard, create less value, and their continued employment can only be justified by less pay. It's much more likely that racism is the cause of "blacks are lazy".

Anecdotal evidence is always suspect, but it can be useful for what it does not show. I, myself, know of no blacks who could remotely be called lazy. A 60-hour work week, a house on the North Shore, and daughters in Princeton and Williams is not evidence of laziness.

I cannot recall where I read this, but freed slaves worked less hard upon receiving their freedom. This is predictable since a slave owner puts the highest value on the work output of a slave, whereas the slave values leisure highest (if all else is the same). Of course, all else was not the same. The slave-holder was free to use violence and imprisonment against the slave, whereas the slave only had underwork and escape.

Note that I'm not saying that blacks actually are lazy. I'm saying that people pre-disposed to find differences between themselves and others based on race (that is, racists) are comforted by the perception that blacks are lazy. It would take very little evidence to convince them of anything bad about blacks, and very large evidence to convince them of anything good. For example, a racist will generalize from a single black person resting on his shovel to thinking that all blacks are lazy. And once a racist starts believing bad of blacks, those blacks get paid less, those blacks want to work less, and you have a vicious cycle. Even if the effect is small in time, space, or magnitude, a racist will pick it up and continue to believe that blacks are lazy.

Rather than end on that depressing note, I'll end on an even more depressing note: I don't think there's anything to be done about it other than to wait for racists to die out.

Power corrupts; absolute power corrupts absolutely -- Lord Acton.

Trying to overwhelm the concentrated power of a corporation by concentrating power in government is wrong. When a large company misuses its power, your action should be to make it smaller by buying from its competition. Even monopolies (e.g. Microsoft) have competition (e.g. Macintosh and Linux). I happen to believe that no government function is necessary, but I recognize that that is not a mainstream view. Most people support the idea of governments. How do you get away from having a monopoly government, though? How can you have competitive governments?

I believe that the United States was set up to be a collection of competitive governments: the states. If you read the Constitution with that in mind, you see that the federal government was strictly limited in what it could do. Everything else was left to the states to decide. Some things are obviously better if the states cooperate, and cooperate they do. There is no Federal Department of Driving, which ensures that driver's licenses have identical requirements, or that laws relating to driving are identical. The competition between states causes the states to end up having nearly identical laws. A state that differed wildly from its neighbors would have fewer people able to enter into it.

Why don't we have that situation anymore? I think that some time shortly after the Civil War, people became convinced of the advantages of bigness; of centralization. This was the period of the first really large companies: railroads. The centralization of a business, however, is not the same as the centralization of a government. A business has to earn money. That is its ultimate test for efficiency. If it cannot do that, it cannot survive. A government, however, does not need to make money. It can be wasteful with taxpayer dollars without suffering. Even if it does suffer, the suffering is used as a justification for spending more taxpayer dollars. "Oh, we're educating our children badly; we need smaller classes and more teachers."

So, companies that have grown too large get cut back in size. AT&T sold off NCR; it was a mistake to ever get that large. How can we cut back the federal government in size? That's what George Bush is trying to do. Whether his method will be successful or not can only be answered by the historians.

Everybody who seeks to make a profit has a mixture of inputs to their operation. You need a mix of skills, tools, and materials. The exact mix chosen depends on the price and value of those things. A radical change in the price of any one component will make the current mix double-plus ungood (thank you, Don Lancaster). The proportions of the mix will change, with more of the cheaper input being used.

In other words, free software means that the efficiency of the IT industry has greatly increased. IT products have become cheaper. This will result in MORE total IT spending. More programmers will be needed in the future, not less. RMS got the economics completely wrong in his manifesto. We recently had a discussion about economics that ended up in me purchasing him a copy of Economics in One Lesson.

I think that with widespread Internet access, we're seeing a chanage in the nature of companies. It used to go like this: someone would: have an idea for something people would want to buy, find some capitalists, hire some people with their money, make the product, sell the product hopefully at a profit, pay back the capitalists, and start over again. You have producers selling to consumers.

Notice the long feedback loop there? That's the risk, you see. Companies profits are partially earned for taking risk. Consumers don't necessarily want to purchase the goods that were made. If they don't, and the company cannot cover the cost of that risk, then it goes out of business. The company's goods get liquidated and the capitalists suffer a loss (notice, though, that the workers are not at risk of losing their earnings -- so much for Marx's exploitation of workers).

Also notice that the feedback loop consists solely of consumers buying the products of producers? In essence, the consumers play zero role in the creation of the product. I think that this is what is changing. I notice it specifically in The Lego Group (TLG). They have been producing high-quality plastic toys for almost the entire duration of the plastic age. Their core product, the Lego(tm) brick, has remained unchanged for my entire lifetime. The bricks from my childhood still merge with brand-new bricks.

Up until the creation of their Robotics Invention System, and its RCX microcontroller, TLG operated in the mode I've described above. TLG was very insular and didn't take much feedback from its consumers other than sales figures. At the time the RIS was created, it was far and away the most expensive Lego kit ever created. I'm confident that they were doubtful of its success, but they were wrong. It was successful beyond their wildest dreams, and it opened their eyes. They discovered the Adult Fans Of Lego (AFOL) community. They thought they were selling mostly to children, and that only a few mutant freak adults played with children's toys. Fully half their sales of the RIS were to adults.

TLG gingerly put out some feelers into the community. They found out that these AFOLs were creating models equally as ambitious as Lego's Master Builders, and that they were buying thousands of dollars worth of Lego products. They have now added a fan-created kit to their lineup. They've added bulk bricks to their online store. They are slowly learning to work with their consumers. As they do so, they turn consumers into customers. This tightens the feedback loop and reduces the business risk.

Fast forward to the present. Steve Hassenplug with a few cohorts, have in essence created a whole new genre of Lego designs: The Great Ball Contraption. It's a very simple and sublime idea: define a standard for interconnecting Lego constructions so that a module accepts Lego soccer balls into an input bin, and then transports them into the next module's input bin. It's a great theme for an existing Lego club to pursue, or around which to start a new one.

TLG could use this idea to tighten the feedback loop further. Right now, the only way to accumulate a significant number of Lego soccer balls is to purchase many soccer games. TLG could put together a GBC club kit. This kit would consist of the GBC standard, and several hundred soccer balls. Somebody who wanted to start a GBC club would purchase the kit, split up the balls, copy the GBC spec and get their friends together.

Consumers just buy things. Customers help design products, and help sell them. This is radical.

Many well-intentioned people think that it's possible to remove the influence of money from politics. A coin has two faces: on one face you have the influence of money on politics, and on the other face you have the influence of politics on money. What would a coin with only one side look like? How can politics possibly control companies without companies wanting to control politics?

As long as the people give politicians the power to control companies, companies are going to try to control politicians. If the people don't give politicians that power, politicians have no influence to peddle. Without influence to peddle, companies have two choices: waste money buying politicians who can't help them, or spend the money competing harder with other companies.

There is one and only one way to successfully take money out of politics: to take politics out of money. As long as corrupt politicians have influence to sell, there will be corrupt businessmen to buy it. The problem here is not corrupt politicians or corrupt businessmen. The problem is that the people have chosen to give up their market power over corporations. They have turned that power into political power and concentrated it in politicians. This is wrong. Until this is fixed, no other change will help matters. If you have a screen door on your submarine, running your pump faster or slower, or diving higher or lower will not help you.

In order to take the politics out of money, you need a general agreement in society that market regulation of companies is sufficient. We don't have that now. Many people think that corporations are evil and need to be controlled. They do, but the profit motive is sufficient. Let's take an example from the initial URL. He lays the blame for obese americans on cheap high-calorie food, and says that corporations sell this food because it's profitable. This is all true. It's only profitable because people want to buy it. He doesn't say so, but I think that he is convinced that people are willing to put up with obesity to get cheap food. This seems like a ridiculous notion given the number of people seeking to lose weight. Instead of railing against corporations, he needs to start his own corporation to sell food that tastes good, and uses the more expensive ingredients that won't make you fat.

Only in America could you find a market for low-fat cheese.

"Public" (that is, publicly-funded, not open to the public) schools generate large amounts of angst. It is obvious that our method of schooling our children is not particularly effective. There's a lot of ignorant smart people out there. Where were they in public school? How do we solve this problem? Democrats are influenced by the left when they call for more public control of schools. Republicans are influenced by the right when they call for school vouchers.

The problem, it seems to me, is the public education is "free". That's what socialists want: for everything to be free of market considerations. If something has no price, it cannot be controlled by the market. According to socialist arguments, market control is the problem; replacing it by political control solves the problem. But not everybody is propelled by socialist arguments. Many want public schooling for two reasons: first, because it's injust for a child to have parents who don't value schooling, and second, because educated citizens create an externality. If people around you are better able to run their lives, they'll create benefits that fall on other people.

The first argument is easily disposed of. If public schools exist to save children from bad parents, then why does public schooling start at age five? Why not start immediately after birth? A child's basic personality is set by age three. If public funding of schooling is to achieve the goal, then public funding of parenting should start as soon as a child is born. Children should be taught to walk, talk, and use a toilet by trained educators. Reductio ad absurdum -- at least I hope that everyone agrees that that is absurd!

The second argument -- that externalities justify public funding of education -- is more interesting. I see two problems with it.

First, the existance of positive externalities of an action is not evidence that the action needs to be publicly funded. If political priorities were set rationally (which they are not -- for all that behavioral economists claim that people do not make rational decisions, their alternative is not particularly rational either), then something would be publicly funded ONLY if the public gain exceeded the public cost AND if the private cost exceeded the private gain. If individuals gain a benefit from educating themselves, then they'll be willing to pay for it.

Secondly, look at the incentives. If taxpayers fund public education because of externalities, then funding it beyond the value of the externalities is irrational. If you happen to have children in school at the time, then you'll be willing to pay more. These two effects guarantee that public schooling will never have sufficient money.

We will never have the best schools, much less adequate schools, until we separate school and state.

If you talk to people who are opposed to solving problems via the market, some of them will bring up an odd objection. They'll say that you only get optimum resource allocation in a completely free market, with so many buyers and sellers that no one could influence the market, and with "perfect information". Two examples: David C. Korten, and John E. Ikerd.

If those conditions do not exist -- if there is not perfect competition -- then these people think the case for government intervention is proven. This is foolish. When choosing between two possibilities, you do not compare one against perfection and if it's found lacking, choose the other. You compare the two choices against each other.

Many people think that government control of monopolies eliminates the problem of monopolies. This is foolish. They compare how monopolies would behave without government control against how monopolies would behave when controlled perfectly by government. They're making a very simple logical error. Government is itself a monopoly! All that they're doing is substituting the need to control multiple monopolies with the need to control one monopoly.

Many businesses are regulated by one agency or another. For example, the Bureau of Alcohol, Tobacco, and Firearms. Or another, the Federal Communications Commission. Or another, the Food & Drug Administration.

The trouble with any of these regulatory agencies is that they have two basic choices: regulate from a position of ignorance, or regulate using experts (or any point between). If they choose ignorance, then the business may well get away with things it shouldn't, or be prevented from doing things that cause no harm. If they choose experts, well, where do those experts come from? They come from the industry, in which case you have to wonder if they'll be willing to regulate their former employer. Or, they come from academia. The trouble is that, once hired by the regulatory agency, there is a huge incentive for the regulated company to bribe the employee with the offer of a higher-paying job once they've influenced legislation in the company's favor.

Obviously, regulation is still possible, and goes on every day. I suggest that that regulation is not as successful as the creators of the regulation promised it would be.

The Chenango Canal connected Utica and Binghampton in New York State from 1837 to 1878. The Canal was first seriously proposed in 1826. It was thought even then that a role of government was to help businesses, so the promoters of the Canal introduced a bill in the New York State legislature for seven years, until in 1833 the amount of $1,000,000 was authorized for the building of the canal.

The frequent reader of this blog will not be surprised to find that the canal cost over $2,500,000 to complete. Moreover, counting the cost of operation, interest on the bonds, plus a failed bid to extend the canal by 33 miles, the total cost of the Canal was $6,871,209. The total amount returned in tolls? $744,021. The difference of $6,127,188 had to be made up by state revenues from the Erie Canal.

The Canal lost money. It lost a lot of money. Were it run by a private company, everyone would of course say that this was a disaster. Because it was run by the State of New York, some people try to dismiss any need for profit. They will tell you "governments are not supposed to make a profit." or "It's the government's job to invest in things that won't turn a profit." This is foolishness, though.

Resources are limited; even and especially government resources. So what should a government spend its citizens money on? Why, those things that create the most benefit, of course. And how do you measure that benefit? Why, by profit, of course. The trouble is that governments forget this. They listen to the promoters of projects, and they believe the wild-eyed description of the potential benefits. For the Chenango Canal, it was all the businesses that would spring up along the route of the canal, exploiting the resources of the region, bringing coal from the hills into the city.

This is not a history lesson, of course. Governments still work the same way, foolishly believing the inflated benefits of this project or that project. In my own part of New York State, there is no four-lane limited access highway. This, we are promised, is what is holding back development of the North Country. "Build it and they will come" I actually heard the Jefferson County economic developer say. Listen to the story for yourself.

What keeps them making these mistakes is support from citizens who think these unproductive investments are good. When your government wants to spend money, say "No thanks! I know better how to spend my own money."

Edward Hasbrouck (left, above) is an outspoken leftist. Perry Metzger (right, above) is a propertarian anarchist. Yet in a posting to Dave Farber's Interesting People list, Hasbrouck defends private property while Metzger explains how and why ownership of intellectual property in time reverts to "the people".

Stunning, absolutely stunning. I never fail to be amazed by the universe at least once every day.

When you write a piece of software, you always have in mind a certain set of assumptions. You are thinking about a certain speed of CPU, a certain amount of memory, and a certain amount of storage. Those assumptions condition the structure of the program. For example, I wrote (with Patrick Naughton) Painter's Apprentice back in 1983. The program was written to be a clone of MacPaint. In order to make it work as well as MacPaint, I assumed monochrome graphics from the beginning. That assumption worked its way into every bit of the code of that program. The algorithms chosen, the amount of memory consumed, and the file formats for storing the images, were all a part and parcel of the program. It would not have been possible to write the program to the same effect without making those assumptions. In fact, assuming that I didn't have to make those assumptions is itself an assumption. No magic wand.

Similarly, our public schooling system has an assumption built into it: that every child will go through the school system. I've written about the failure of this system of compulsion one, two, and three times before. Vouchers will not work to improve the school system as long as school is compulsory. There is no magic wand.

Lots of people have proposed the idea that spam is simply an economic problem: If people have to pay to send each spam, they would send less. This is not a correct idea. I say this so flatly because people can already ask strangers to send them email with a monetary attachment. When they get email from a stranger, they autorespond to it with a message that says "Hi. Thanks for sending me email. I've never gotten email from you before, so I want you to pay me $1.17 to read your email. All you have to do is sign up for paypal, and send me $1.17 via paypal. When I get it, I'll know which email to read." The $1.17 is a key that points them to the specific email that was sent.

Nobody does this. Why? Because it doesn't work. Do you think I'm wrong? No problem! Just send $1.17 to my paypal address and include your message in Paypal's comment field. If you have too much to say, end with "to be continued...", and send the continuation to my main address.

Politicians usually brag about how they created X jobs during their rein. I wonder how many New York politicians are going to brag about having destroyed jobs? That is, after all, what they did by signing the minimum wage bill into law. Nobody knows exactly how many people will be thrown out of work by this bill. And yet we economists can say without any doubt that some people will be thrown out of work.

I've blogged about this before:

Public Choice economics is a theory that says that people in government operate from the same selfish incentives as anybody else. Surprisingly that theory has not convinced all economists yet. That must be interpreted as proof that some economists are dunderheads, because the following pair of cartoons written by Wiley Miller make it completely obviously true.

A week ago, Elliot Spitzer, New York State's current Attorney General and Governor-elect (in his dreams), put out a press release explaining how he was saving New Yorkers from being able to borrow money. He didn't put it that way, but I do. He thinks that he's saving New Yorkers from high interest rate (payday) loans.

I don't think Elliot understands interest. There is a competitive market for loaning money to people with no capital. It is a very competitive market, because the product being rented is absolutely identical. You don't have to take the money to the shop to have a mechanic examine it for defects. You know that $500 at 150% interest is cheaper than $500 at 200%.

In a competitive market, holders of capital wish to earn a fair rate of interest on it. Ahhhh, but what is "fair"? Consumers decide what is fair. A business makes an offer, another business makes another offer, and yet another another. The consumer chooses the offer that is best for them. This keeps the businesses honest and fair. Businesses that aren't honest and fair are competed out of business.

Or, rather, there would be a competitive market, except that New York State chooses to interfere in it. New York State caps the interest rate for payday loans to 16% per annum. This doesn't make the market go away, it just sends the market over to the Mafia. No doubt Elliot Spitzer thinks that he's fighting organized crime. So odd, then, that he takes actions which create new profits for the Mafia!

The nature of interest is such that you cannot dictate the value of it. If you try to cap interest rates, you can only have two effects: people who need money won't get it, or they'll get it illegally. Either way, no positive effect is created from this law. If Elliot Spitzer were an honest man (but alas, he is a politician), he would refuse to enforce this law. Certainly there are more than enough laws that he can pick and choose among the ones he wishes to enforce. Too bad for the citizens of New York State that he has chosen to enforce this one.

UPDATE: TM Lutas points out that people are desirous of usury laws, and that consequently we need to pander to that desire. Nope. People also desire to commit suicide. Does that mean we should hand them a gun? Of course not. People need to learn that interest is a characteristic of the world, just like 32ft/sec/sec. If you step off a cliff, you're going to get hurt. If you want to borrow money and you have no or worse credit, you're going to have to pay a lot of money. Would I that it were otherwise? Of course, but neither do I think that everyone should have to walk around covered with foam rubber so they don't get hurt from falling. If we did that to children, they would never learn to avoid falling, because falling wouldn't hurt. They would be handicapped relative to a normal adult. We shouldn't treat adults like children.

I fear that I may have misled some people in my earlier posting on Political vs. Economic power. I got a response from someone suggesting that political power derives from the use of physical force. Not true! What about, say, the Knights of Columbus, or the Rotary, or the Shriners, or any other voluntary organization? They change the world by cooperating with each other towards a goal. This is political power.

Governments use political power, but they do not create it.

A government is unique among organizations because it has, or at least tries to have, a monopoly on force in a certain physical area. The United States Government is different than most governments because its citizens reserve the right to keep and bear arms, and because it is comprised of states, each of which maintains its own National Guard troops. The U.S. Government is a well regulated monopoly, controlled by a well regulated militia. Or, at least, it was designed to be a well regulated monopoly. Lately, the regulators have been falling down on the job.

A lot of people don't appreciate this. I suspect that you, gentle reader do.

My correspondent further deponeth that consumers don't regulate, because that would require the use of political power, or the legal right to use force. That's also not true. A voltage regulator controls the level of voltage in your computer. No law gives it the power to regulate, and yet regulate it does.

I'm not a big believer in the concept of "deregulation". First, because most of what is called "deregulation" is actually just a different kind of government regulations. Second, because the real way to deregulate something is to give it monopoly status with no government oversight. That is, you have to remove consumer choice, because consumer choice regulates corporate actions.

Let's look at some monopolies to see if they're truly deregulated:

Gas, Water, Electric, Sewage, Cable TV

These are often supplied by a government entity, or else under a franchise agreement. While the actual people runnning the service may not be elected, ultimately they are answerable to someone who is.

Telephone

Every state has a Public Utility Commission, which controls telephone service.

Copyright

Copyright expires eventually, in theory. In practice, nothing owned by a corporation has gone into the public domain since WWI, and nothing owned by an individual since WWII. So, my theory predicts that copyrights are effectively unregulated, with copyright owners taking advantage of purchasers. Doesn't quite work out that way, because while company FOO has a monopoly on artist BAR's work, they're competing against all other companies in the market for the fan's dollars. Consumers still have some regulating power here.

Patents

Patents expire after 20 years, so you should expect to see a decreasing amount of abuse as a patent nears the end of its life, and consumers gain the power to regulate.

Political power comes from a willingness of one person to cooperate with another simply because they agree on a goal. Economic power comes from someone having a sufficient quantity of resources that they can trade with other people to achieve a goal they may not agree on. These two types of power are fundamentally different. Economic power can be consumed. Political power cannot. Economic power is created by the slow process of wealth creation. Political power can be created in a moment by the action of a mob.

A wealthy person does not automatically have economic power. Simply buying something is not expressing one's economic power. You have to buy something whose value others do not agree with. For example, if you build an ordinary house in an ordinary location, you are simply buying a house. If you hire Frank Lloyd Wright to create Fallingwater, you are using your economic power to create something that perhaps nobody values but you.

If you believe, as I do, that the best society is created when power (of all stripes) is widely distributed, then you'll prefer economic power to political power. The process of exercizing economic power acts to redistribute it. Political power, however, tends to become concentrated. Look at the USA. Its Constitution was designed to specifically prevent the federal government from becoming a concentration of power, and yet it happened anyway.

There seems to be only one way to disperse political power: splitting up.

One reason why some people don't like free markets is because of the waste that they engender. People are allowed to create products that nobody will buy. People are allowed to put huge amounts of resources into creating a product that isn't as good as an existing product. If you had a really smart person in charge of the economy, they could get rid of that waste, and only make the good stuff that people want to buy.

Apart from the difficulty, nay, impossibility of finding anybody that smart, and the pressure that person would face to pick his friends' products, you also have the fallibility of humans. If you have a single entity in charge, which has the ability to coerce everyone into following their plan, then you have a problem. You see, ninety-nine out of a hundred times their decision will be correct, or at least better than a free market. That hundredth time, though, they'll be so wrong as to completely destroy the economy.

A free market does many things that are wrong, but it never does just one thing. Because it never does just one thing, and often does many things, it's extremely unlikely that everyone will do the wrong thing at the same time. Because of this, free markets are robust. They are not subject to a system-wide failure.

Earlier I wrote about Fair Trade. Don Boudreaux expands on the idea I suggest in my first two paragraphs -- that Fair Trade is not particularly fair -- and adds that it's probably not economically efficient either. You'd think that would make him angry, but since he ends with "Oh well...." he seems more resigned than angry.

A friend comments on "Are poor people stupid?":

Housing codes don't belong in the list. Substandard houses are a public bad, like drunk drivers and clogged sewers. It makes sense to prohibit them, rather than letting a fire in the substandard house burn down your house as well, while the judgement-proof owner walks away. (Several people were killed a year or two ago in my neighborhood thanks to collapsing buildings.)

The trouble here is that he's not being a good economist. He's saying "bad things happen, let's prohibit the cause." That's fine enough, but what else happens when you do that? He also doesn't ask what happens when you don't enact laws. So let's go down those roads that my friend didn't.

Once you've established a principle that something should be regulated, the next question becomes: exactly how? The theory here is that everyone sits down and decides how to mitigate the harm. What must be prohibited so that the harm does not occur. Let's say that you want to make a building more resistant to electrical fires. Perhaps some fires are caused by overloaded extension cords. Well, you can require that there be an outlet every 8 feet along the wall, you can specify a minimum wire size, you can specify a maximum number of outlets per circuit breaker, etc.

The problem here is that the regulators have been given discretionary power that they didn't have before. They could greatly benefit a copper wire manufacturer by requiring one gauge thicker wire. They could benefit outlet manufacturers by requiring more outlets per foot of wall. Perhaps that power relationship gets expressed through out-and-out bribery, when a manufacturer pays money to a legislator. Perhaps it's expressed at re-election time, when a manufacturer donates to the legislator's re-election fund. Perhaps it's expressed through the legislator of a district with a big copper wire manufacturer saying "I'll vote for a bill that you want if you add in a requirement for thicker wire."

There are many ways in which this power relationship can be expressed. It's naive to think that legislators won't use that power. Assume that a legislator does not have a corrupt bone in their body. They were elected into office by making promises to the citizens of their district. From their perspective, they have been asked to make good on those promises. Other legislators have the same problem to solve, so they each trade on fulfilling promises. From their non-corrupt point of view, nobody is hurt (much) by being protected a little more than necessary.

The trouble here is that even with perfect people in office, you still have legislators doing unnecessary things for people. Even with no corruption, you still get waste. Where does the trouble come from? By citizens asking their legislators to do too much.

What happens if citizens start with the principle that laws exist to stop people from doing violence to each other, and that all other relationships between people must be voluntary? In other words, what if the people agree that there will be no building codes?

You have the usual problem that people have when spending lots of money on something they cannot necessarily evaluate themselves. How do you find out what gauge wire was used when it's hidden behind the walls? The answer is through the use of certification marks, and careful purchasing. Right now, you can purchase any old kind of extension cord with any gauge wire, and plug it in. Perfectly legal. Nobody makes unsafe ones, though. Why? Because they can't get UL to certify their extension cord unless it uses a reasonable gauge wire for its length and current capacity. UL is a private party which sells access to its certification mark. A building can come with a certification mark that it meets certain requirements.

That handles the case where people need to worry about their own building. What about the case where people need to worry about their neighbor's building burning down? Very simply, they can ask to see their neighbor's building's certification. And their neighbor's and so on. You would have a meta-certification for a building which stated that not only was it certified, but all buildings within reach of fire were also certified.

What if somebody's building lost its certification? You would think that their building would lose all its value, so that keeping up the certification would be identical to having power, water, or sewer. What if somebody built a new building without certification? Again, who would be willing to occupy such a building? A lot on a block where all the other buildings would be expensive, simply because of the value of all the other certified buildings. It wouldn't make sense to build a building without certification. Surely the rents would be that much lower.

I've made several hand-waving assertions here about the costs of things, and creating new companies from nothing. It takes money to do those, money that is not obviously spent with our existing building code regulations. What you must recognize, as a good economist, is that these regulations are costing us money right now. They're costing us money in the form of deadweight: all the little trade-offs that our theoretically incorruptible legislators have made to get the laws their citizens want. They also cost money because of the cost of complying with the law. It's the same idea as the transaction cost of purchasing the certification for the building.

I believe that it's poor economics to ignore those costs and say "Well, we must have regulations because a free market solution costs money." A free market solution is not impossible, but is instead simply more or less expensive than the regulated solution if all costs are tallied up. From my perspective as a pacifist, the expense of using the violence of the state to coerce peaceful people into creating a purported societal benefit is too high a price to pay. Since all evil has fraud or force at its root, I think that the shortest path to good is taken by avoiding the use of violence or lying, even when done to create something good.

Are poor people stupid? Obviously a lot of people think so. They mean to protect the poor by denying them the ability to work for a low wage (minimum wage laws), or to live in a frugally-built house (building codes), or to force them to educate their children (compulsory schooling), and to compel everyone to pay for the education of the poor (school taxes).

If poor people really are stupid, then a different set of policies is needed than if poor people were merely poor for the moment. If poor people are stupid, then you would expect them to remain poor because of their stupidity. This could be discovered by tracking a sample of poor people, to see if they stay poor. That's been done, though, and only a small minority of poor people are poor from year to year.

The majority of poor people drift in and out of poverty. Sometimes they're young people just getting started. Can't afford a house, maybe can't even afford a car. Don't have much work experience, so they have to work at "starter" jobs. Other people might be able to earn a higher income, but are prevented by their life situation. Perhaps they're single parents, perhaps they're on probation and tied to a location with a poor job market. Perhaps they're divorced and sharing custody? Other people might have lost their old job and are temporarily poor while retraining themselves for a new career.

Policies which assume that these people are poor because they're stupid are not just philosophically wrong, they're actively harmful. A person of ordinary intelligence must be presumed to be able to make the best of their choices. If we remove choices because we don't want them to make stupid choices, we make it harder for them to pick the best choices. For example, if we force all new houses to be of a fixed minimum quality (building codes), then we force these people to live in older housing not covered by building codes. It's very presumptious to say that that's best for them. We should allow everyone the most freedom to choose, even the minority of poor people who are actually stupid. Controlling the actions of adults degrades their judgement and turns them into moral infants.

Brad Templeton points out that by-mail absentee ballots are subject to vote selling. Our secret ballots keep the secret from the vote counters, yes, but they also keep your vote secret from everyone else. That means that nobody can verify how you voted. That means that nobody would reasonably buy your vote because you have no way to prove the vote that you sold. Unless, that is, you voted using an absentee ballot by mail.

The presumption here is that selling your vote is a bad thing. Let's look at it from the other direction. A vote in favor of their candidate is worth money to them. They could buy your vote if they could trust you to the vote you sold. We have worked hard to make that impossible, and yet the desire to buy a vote is still there. They will seek to buy your vote in other ways. They will blanket you with appeals to vote their way. They will have the candidate promise to vote for things you want (do you remember what he promised last time? Did he deliver?)

Vote-buying has two good effects. One, it recognizes the reality that commercial interests stand to benefit from your vote, and why shouldn't you share in the gain? Two, it forces the party buying the votes to actually expend money. Once that money is spent, it's gone. So, they have to think very hard about the value of your vote to them. Perhaps they would do better to spend that money on something else.

UPDATE 11/7: TM Lutas points out that if vote buying were legal, then the cheapest way to take over a country would be to simply buy the votes needed. No war or coup needed. Of course, politicians are currently legally buying our votes using OUR OWN TAX DOLLARS. "Vote for me and I'll do X, Y, and Z for you!" Yeah, right, you and what bank?

I would argue that our government has already been taken over by a hostile power in exactly the manner TM Lutas fears, and worse, they used our own money to do it.

If you travel to India, one of the first things you see are women sweeping the streets. They use a little "corn" broom which is about three inches in diameter, and two feet long. It's about as inefficient as you can get short of sweeping with your bare hands.

No doubt the reason they don't use more efficient brooms (e.g. put it on a stick and weave the broom wider) is because that would put some sweepers out of work. There is, after all, only a certain amount of street to sweep. I think that India is, in general, under the thrall of an economic misconception. It's not just India, of course, but world-wide. It's not an old misconception, like the flat earth theory. It's a current misconception.

It's the idea that there is a fixed amount of work.

I believe that Ashutosh Sheshabalaya in his book Rising Elephant is falling prey to the same misconception. He somehow thinks that there is a fixed amount of work, a fixed amount of jobs, a fixed amount of wealth, and if India becomes wealthy, that the US must suffer. Even if a job disappears in the US, and an equivalent job appears in India, that does not mean that the US economy is harmed in any way. First, we're getting the same job done for less money. Second, we've freed up someone to do a new job, a better job, a more highly-paid job.

You want our jobs, India? You can have them. We have plenty to share. We'll just make more.

Update, 11/3: Got a reply from Tosh Sheshabalaya. This is very good, because it shows that he's not just interested in throwing an opinion out there. He's seeking to close the loop between reader and writer. Rather than a lecture, he's looking for a conversation. Good job, Tosh!

He repudiates the idea of a fixed amount of work, and attributes that to the reviews. His main point seems to be that India is doing very well, and stands to do much better. He's right! But that doesn't mean that we'll do poorly just because India is doing well.

Various people, David Isenberg among them, seem to think that a monopoly has market power. It uses that power to dominate its market. By dominating its market, it is able to restrict its output and raise prices, creating profit margins that are only accessible to monopolies.

That would seem to be obvious, wouldn't it? No, as I've written before. In a free market, you will sometimes have market conditions that allow a single firm to out-compete everyone else. Perhaps the firm is incredibly flexible, has some really smart employees, has a first-mover advantage, or was simply surrounded by morons. They have managed to put everyone else out of business. By the definition, they have a monopoly.

They have gotten their monopoly by being successful. We want to reward success, so we should not get in the way of monopoly formation. "But won't they create monopoly pricing?", you ask. Not necessarily. Perhaps they have achieved their monopoly by lowering their prices so low that nobody else could compete. They are a monopoly, they are dominating the market, and they have the market power to exclude competitors. Yet none of these have any negative consequences. It is monopoly prices that are the negative consequences. I must mention here that nobody tries to do this anymore, because these days a monopoly is presumed to have the power to charge monopoly prices.

What matters more than anything else is whether a monopoly has the ability to restrict entrants. Clearly any business has the ability to *offer* monopoly pricing to their customers. If they can restrict competitors while offering monopoly pricing, then market intervention can be justified. In no other case does it make sense.

On the other hand, perhaps you have a market which is already being interfered with. Let's say that some infrastructure was created under one set of laws which benefits an existing company. Now the laws have been changed to make that infrastructure harder to create. This may have the side effect of restricting entry into the market, giving the company a monopoly and