That's so weird!

The government of Venezuela being boldly progressive has, over the past several years, taken greater and greater control over various economic sectors, among these the energy sector.

They have used all of their progressive skill & acumen, all of their socially-just compassion to provide low-cost power so the poor could finally enjoy a decent standard of living.

What was the result of these nobly-envisioned price controls?

Rampant shortages.(fn1)

If only there had been some way of foreseeing the possibility of this outcome. But, alas, this must be chalked up as an odd aberration, the root causes of which may never be fully known. At any rate, the solution is clearly more direct involvement by the government in energy production and, increasingly, consumption.

Because when the government sets out to provide something good for the people and, inevitably, destroys what was already there, the blame is never on the good-hearted, hard-working progressive overlords, but on the venal people greedily using too much. Thus Chavez has taken to berating his citizens for taking showers over 3 minutes and getting fat.

Don't worry, there are no lessons here for our own impending government takeover of health care. As I say, this is a weird, totally unpredictable one-off kind of event with no generalizable lessons. When our own well-intentioned, very smart & compassionate progressive overlords redesign a massive chunk of our economy for the betterment of the poor & everyone else it will be smooth sailing with no unintended consequences or highly predictable economic ill-effects. None.

fn1: I'd add that the NY Times is, predictably, completely flummoxed by this odd appearance of shortages in the wake of price controls. I'd point out this might be their ideology once again blinding them to reality but pointing out their manifold failings gets tiresome even for me at times.

Your daily dose of Capitalism, Socialism and Democracy...

As a matter of fact, capitalist economy is not and cannot be stationary.  Nor is it merely expanding in a steady manner.  It is incessantly being revolutionized from within by new enterprise, i.e., by the intrusion of new commodities or new methods of production or new commercial opportunities into the industrial structure as it exists at any moment.  Any existing structures and all the conditions of doing business are always in a process of change.  Every situation is being upset before it has had time to work itself out.  Economic progress, in capitalist society, means turmoil.

(italics in the original)

And then this bit from later in the same paragraph:

Possibilities of gains to be reaped by producing new things or by producing old things more cheaply are constantly materializing and calling for new investments.  These new products and new methods compete with the old products and old methods not on equal terms but at a decisive advantage that may mean death to the latter.  This is how "progress" comes about in capitalist society.

It might be dangerous to say it this early in the book, but from my (admittedly cursory) knowledge of the work, this is the nut graph.

Holiday Reading

So over my little Christmas break, I'm reading Capitalism, Socialism and Democracy, the seminal economic classic by Joseph Schumpeter.

Now, as everybody no doubt already knows, the thumbnail takeaway of this book is "creative destruction" which is Schumpeter's description of how capitalism progresses: the old and less efficient is swept aside by the new and more efficient.  This can be an unpleasant process for those being swept away but ultimately benefits everyone with a better use of inputs and thus increased prosperity.  (fn1)

At any rate, I figured it would behoove me as an economic dilettante to at least take the measure of those classics that I have not read and decided that Schumpeter was as good a place to start as any.

All of this is by way of saying that I'm on vacation and so posting will be light.  And what little posting there is will most likely be observations of and from Capitalism, Socialism and Democracy.

In his (unnecessarily long, in retrospect) discussion of Marx, I've found my lines of the day:

The masses have not always felt themselves to be frustrated and exploited.  But the intellectuals that formulated their views for them have always told them that they were, without necessarily meaning by it anything precise.

True.

fn1 One of the earliest examples of this unpleasantness was the luddite uprisings against the new mechanized weaving industry at the very dawn of the industrial revolution.

A little bit better, every day...

I noticed this article in the Wash. Post last week about how the killers employed by Mexican drug cartels have been getting much more sophisticated and thought it was interesting. Not only because hired assassins are always going to be kind of inherently interesting, but also for the way it illustrates a universal economic point: people get better through experience.

Even with all kinds of book learnin', the best way to make yourself a more valuable employee is to hold down a job for a while. You'll learn the ins-and-outs of the job and get better at it. And, of course, as you get better at it, you are more valuable and thus, barring some unfortunate problem, better able to command a higher wage.


The fact that this is just as true -- if not more so -- at the bottom end of human capital as at the top end is why minimum wage laws are another one of those classic governmental programs that seem to straightforwardly advance one interest, raising the wages of poor folk, but actually work exactly to the opposite effect.

The goal seems to be unambiguously good: help poor people make more money. And the means couldn't be any more straightforward: force employers to pay them more.

But here's the problem: if you are not capable of producing value to employers that's worth more to them than the minimum wage, you will not be hired. So, right off the bat you're taking the least able members of society and locking them out of the job market entirely. (fn1)

This is bad for the obvious reason of them not having a job but you might think that this is okay in our modern welfare world. After all, if these people are that low on human capital, perhaps it's best that society take care of them through social safety nets and the like.

Ah, but here's the rub. If you can't ever get that first job, get your foot in the door even for what some rich person might find an appalling wage, you never begin the process of bettering yourself through experience. You are thus permanently less well-off not only monetarily but in terms of personal development.

You see folk who get uber-low paying jobs (yes, the minimum wage ones now, but it would be true of sub-minimum wage employment too, were that allowed to function) by and large do not keep those jobs forever. As they learn their job and develop skills, they move up the income ladder. Perhaps not very far but they do move. If you lock them out of the bottom, you lock them out of the growth.

As an aside, this is also why the selling of minimum wage increases is always so economically illiterate. The number of people who have earned minimum wage over some lengthy period is trotted out and talk about how awful it is that these folk have gone so long (since the last minimum wage hike) without a raise is tossed around. But this is wrong. They are not the same people, most people move on from minimum wage quite quickly and v. few stay at it forever.(fn2)

And that's before considering any shrinkage in the minimum wage workforce that happens as employers trim their employees to avoid paying folk who are not worth the new wage.

Coincidentally, as I was noodling this post I happened across this recent economics paper showing that minimum wage laws do, in fact, have all of these bad effects:

Based on their comprehensive reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

fn1: Interestingly, this lock-out was considered a feature not a bug of minimum wage laws when they were first suggested in the U.S. The people doing the suggesting back then were concerned about the huge migration of unskilled black labor from the South to the North. So they conceived of minimum wage laws as a way of locking those black folks out of the labor market. Ah progressivism. One wonders if the folk who like to use it as a label now-a-days would be as comfortable with it if they actually took the time to learn its history. But that's just crazy-talk, progressives are all about the future and the benighted past has nothing to teach us, right?

fn2: Note that this is a problem with reporting on "quintile" or other strata of earnings more generally. They tend to look at the distribution of income among quintiles in one year and compare it to another year without acknowledging that you are not talking about the same people in both years. For example, young people make less money, on average, than old people. Thus, over a lifetime, people tend to move from lower quintiles into higher quintiles. Obv. there is movement the other way as well, as people retire or scale back their workload or what-not. And, of course, there are lots of other things going on. But when you read a news story about how the income of the lowest quintile hasn't increased in 30 years or whatever, do take a moment to realize that the seemingly obvious conclusion: "OMG! 20% of people have been living on the same income for 30 years!" is flat wrong.

Jocking my style.

No doubt noticing the explosive growth in my readership numbers, the NY Times Freakonomics blog has decided to crib my prostitution-economics nexus with a post discussing why prostitution is not a Giffen good.

Economics and prostitution, you saw it here first.

The discussion of Giffen goods in the post is quite good, though fairly useless as there has only ever been one found in the wild: rice among desperately poor peasants in China.

The two effects that work together to create a Giffen Good, the substitution effect and the income effect, are very useful indeed, however.

I can still remember the first time I used the income effect to explain an observed behavior. It was way back in college when Miller Lite was in the middle of a particularly fantastic run of advertising. I read an article in the Journal about how Miller was upset because despite this critically acclaimed and v. popular advertising push their product was not selling any better.

Of course, this was during the late 90's tech boom. My conjecture was that Miller Lite is an inferior product(fn1), that is people would prefer to drink some better beer if they can afford it. And in a boom everybody feels like they can afford it so Miller sales stall. And no amount of advertising was likely to change that.

fn1: I feel I should note that I do not personally view Miller Lite as all that inferior in the everyday sense. I prefer it to Bud Light or Coors Light. That said, they are all inferior in that I tend to buy nicer beers. But for certain uses, they are the best. Sports watching, for example, goes well with light beer, not so much with Guinness or Bass.

New Guns for Criminals Program

Caught a story on NY1 last night about the expansion to Manhattan of a gun buyback program that has apparently been running in Brooklyn for a little while.

I'd just like to point out that gun buyback programs are indisputably stupid. They are a classic example of having good intentions and designing a government program that seems to straightforwardly advance those intentions but actually works precisely to undermine them.

When you buy guns you are enlarging the demand for guns. This increases the value of guns. This will increase the amount of guns supplied. Period.

Imagine it for any other non-gun thing and you will immediately see that it's true. In this excellent post an economist makes exactly this point using sneakers as the example. If the government decided to buy back sneakers, would we expect to see fewer people wearing sneakers afterwards? Or would we expect people to take the chance to sell their old, crappy sneakers and use the money to buy new, nice sneakers?

Why would we expect the same program targeting guns to have any different result?

The best part is that the success of this lunacy is judged based on how many guns they manage to buy. Awesome. You are tallying up the number of people who like to buy guns to whom you have given money to upgrade their gun. Well done.

Look at me being all socially redeeming and all...

So via this post at Ross Douthat's blog at The Atlantic, I came across this post at the NYTimes Paper Cuts blog (which is, as the subtitle kindly points out, a blog about books). The post is about the insanely high prices you can find for certain not-that-old, not-that-special-seeming used paperbacks on services that allow you to sell used books, Amazon being a primary culprit according to the post.

Because most people are economically illiterate and Times readers are not as different from ordinary people as their egos would suggest, the common thread in the comments immediately seized upon "greed" as the reason for these high observed prices.

So I offered the following comment, in response to the first commenter who had suggested "greed" as the reason for the high prices (and who was, as my theory of economic illiteracy would suggest, the very first commenter):

quisqualis - As a general rule, greed is a tremendously unsatisfactory explanation of any price set in a market, as a moment’s thought will reveal.

While it may well be true that the seller is the very picture of greed, in a free market no one is compelled to buy their product and, in the case at hand, certainly no one is compelled to buy paperback books.

So while that greedy, greedy seller might well set the price at absurd heights and then cackle in delight when thinking of all the marvelous lucre they will get — they will not actually get anything unless someone decides to pay that price.

The person who decides to pay the price may well feel that it is too high, but in actually paying the price they clearly feel that the benefit they will get from the purchase exceeds even that high price, otherwise they would not buy it.

This is the crux of free-market transactions. Both parties must feel that the transaction adds to their well-being in some way or they would not pay it.

Personally, I do not like coffee and feel that at even a nickle a cup it is way, way overpriced, so I am shocked to see people shelling out 100 times that every day at Starbucks. But to the Starbucks shopper, the coffee (and perhaps the experience or whatever else makes up a part of the transaction from their standpoint) is worth more to them than the $5. From Starbuck’s point of view, the $5 is worth more than the coffee. So the coffee is sold for what to me seems an unreasonable price and both parties are better off.

Even if they are both greedy. In fact, BECAUSE, they are both greedy. If they didn’t see any benefit to be had from making the transaction, it would not be made.

Thus greed, while no doubt present in alarming amounts among most everyone, is not a good explanation for prices that we feel are outrageous.

— Posted by blighter

I thought that my habit of occassionally dropping comments on the odd blog here or there was totally unredeeming. After all, as the old saw has it: "Arguing on the Internet is like running in the special Olympics: even if you win, it's still retarded."

But low and behold, look what a later commenter dropped on the blog:

Appreciated ‘Blighter’s’ economic analysis (greed/ well-being) I had never thought of it quite in those terms but it sounds right. However one occasionally sees irrational prices that dealers are asking, sometimes 100 times the market value. I guess the explanation here is mania, delusion and temporary insanity. However one cannot help feel that it is initially provoked by greed. How do you explain the dealer who wants $9000 for a signed edition of 1000 of Galsworthy’s Plays, available at less than $100 all over the web? It has been for sale for 4 years to my knowledge.
— Posted by Laker

If I have helped even one person finally realize that free market transactions require both parties to be better off to become actual transactions, I have done the world a service. Even if they cling to their stupid love of "greed" as an explanation for other prices they feel are absurd.

So I think this counts as my good deed for the day week month.

The result has been the largest decline in America's global economic influence since the 1970s.

Interesting editorial from the WSJ.