economics

Net neutrality? Mail neutrality?

Warren Gibson Economics , , , , , ,

“Net neutrality,” you surely know, is the notion that all internet traffic ought to be treated equally. All it takes is that one little word, “equal,” to send hoards of left-wing morons to the barricades. For those who care to think through the issue, I offer the following.

If net neutrality is a good idea, so is “mail neutrality.” The Post Office should treat all mail equally. No more Priority Mail, not even First Class Mail. Just mail.  No more commuter express lanes on the freeways.  No priority for anybody, anywhere.

Data sent over the internet, or any local network for that matter, is divided into packets which have header information indicating the destination of the packet followed by a block of bytes that is the digital form of the data, whether text, audio, or video; web traffic, email, or ftp. As far as I know there is no provision in the ethernet protocol for priority information, but that isn’t necessary to prioritize packets.

Why should they be prioritized? Because different kinds of traffic have different natural degrees of urgency. email messages are not terribly urgent, but packets of video are, because if the those packets don’t keep coming at a steady pace, the result is irritating pauses and that little spinning circular thingy. If consumers of video want good service, they should pay for it. If email users who are in no hurry are willing to wait a bit and pay less, that’s good too. Markets generally tend to segment in this fashion. Starbucks doesn’t practice coffee neutrality. They offer fancy drinks to those willing to pay for them and plain coffee for those of us who just want the caffeine.

What rules should be set for internet providers? None, except common law prohibition and prosecution of theft and fraud. Let the service providers set their own policies for use of their private property.  In the interests of their bottom line, they will seek out practices that best serve their customers.  The crucial requirement is that politicians and bureaucrats be kept away.

Unemployment is Completely Unnecessary

Fred Foldvary Economics , , , , , ,

In U.S. government statistics, a person is unemployed if he is 16 years of age or more, and that person is able and willing to work at prevailing wages. The labor force includes the employed and the unemployed. If one is not employed for wages because one does not wish to work or to seek work, that person is not in the labor force, and not counted as unemployed.

The unemployment rate in the USA is now about six percent, down from a peak of ten percent in 2009. About one percent of the labor force is in “frictional” unemployment, meaning that the worker is between jobs or recently graduated from school and engaged in job search, or about to be hired. When the economy is depressed, there is “cyclical” unemployment, those not working as firms reduce employment. There is also the “structural” unemployment of workers losing their jobs in declining industries, and the seasonal unemployment of those employed only during a season such as in resorts or during harvests.

An economy is in full employment when the only unemployment is frictional. The economic puzzle is why there is any other unemployment. Cyclical unemployment is no mystery, as firms have fewer sales as demand falls, and falling demands become a downward spiral as falling purchases by some become falling production by others. The recession ends when materials prices and real estate rentals have fallen so low that production becomes profitable again.

Since recessions are caused by monetary and fiscal subsidies, a pure market economy would have neither, so it would have no recessions and no cyclical unemployment. So the puzzle consists of chronic unemployment, those unable to obtain work even during prosperous times. Most of the unemployed have been out of work for months or years. Those long unemployed have even more difficulty finding employment, because employers wonder why that person can’t find any job.

Some economists consider idle labor to have a positive side. You car is not wasted when you don’t use it, because it provides the service of availability. Empty seats in a theater have value because the theater needs that capacity for popular shows. Likewise, in this viewpoint, idle labor provides workers when firms need to hire. Also, the unemployed need time to engage in job search, so they are busy even if unemployed. But one can be employed at least part time while looking for better work, and while idle labor may be good for employers, it is bad for workers who need the income, and for taxpayers who have to support those not working.

In a pure market economy, there would not be any unemployment at all. There would be no seasonal unemployment, because workers could find other jobs in other seasons. There would be no structural unemployment, because workers could shift to other industries, and work in temporary jobs while searching for full-time employment. Even workers in frictional unemployment would be able to work some of the time, since job search is not full-time.

One of the premises of economics is that human desires are unlimited. There is always a demand for something. That demand provides an opportunity for workers to be employed to satisfy that desire. In a pure market economy, one could also be easily self-employed. Any person who is not totally incapacitated would be able to offer some service at some wage. If the wage one can obtain is too low to bother with working, then that person would not wish to work, not be in the labor force, and not be unemployed.

Unemployment exists because there are barriers that prevent labor from having access to land and capital goods. If the cost of hiring a worker is greater than his productivity, he will not be hired. In a pure market, the wage would be set where the quantity of labor supplied by workers equals the quantity demanded by employers.

Government policy raises the cost of labor above the pure market wage. Minimum wage laws prevent employers from hiring the least productive workers. On top of the minimum wage are imposed costs: the employer’s share of payroll taxes, mandated medical insurance, worker accident insurance, and the unemployment compensation tax. The firm also has to withhold taxes from wages and send then to the government. There is also a litigation risk and cost of hiring labor, as labor laws promote excessive litigation to combat malpractice, discrimination and sexual harassment. Also, union labor monopolies, and laws favorable to unions, push up the wages of union workers at the expense of less employment. Finally, laws making it costly to fire workers raise the cost of hiring them, creating more unemployment.

In a full-employment economy, when firms seek to expand, they would pull workers away from other firms, or pulled into the labor force, by offering higher wages and better conditions. There is no need for idle labor.

The best policy for labor is full employment. Labor laws that seek to protect workers end up imposing barriers that prevent employment. Full employment requires hiring flexibility and the removal of government-imposed costs. Full employment requires the elimination of taxes on labor, exchange, production, and consumption. Public revenue from land rent or land value could replace all these labor-hampering taxes, while promoting the productive use of land which would further increase wages.

A shift in taxation from labor to land would both increase employment and increase wages, while letting the worker keep his wage. It is not unemployment that is a puzzle, but rather why workers are not demanding the abolition of their wage-tax burden.

The Concept of Profit

Fred Foldvary Economics , , ,

The basic concept of “profit” is simple: profit equals revenue minus costs. But “cost” is a complex concept, and “revenue” too is not all that simple, so the economic analysis of “profit” ends up being complicated.

A business typically calculates the appearance of profit rather than the economic reality. Most enterprises use money for purchases and sales, so for accounting, the appearance of profit is easy to understand. The revenue equals the proceeds from sales, and the costs are what is paid for the inputs: wages, rentals, interest, and materials. In economics, this is called “accounting profit,” which equals revenue minus the explicit costs, costs paid to others.

But the payments for inputs can include capital goods – inventory, buildings, machines and other tools – that last a long time. If an enterprise buys a machine that lasts for ten years, the cost is really spread out over the duration of the capital good. So in the accounting, rather than treat the purchase as a cost in the year purchased, the cost is the depreciation, the loss of value, in each year. For simplicity, the accounting can depreciate the tool in equal amounts each year, or, following tax laws, it could accelerate the depreciation, deducting more in the first years than the last years. The annual depreciation is an explicit cost, since the original purchase consists of funds paid to others.

This accounting convention ignores the effect of price inflation. Suppose a tool costs $100 and lasts for 20 years. Without inflation, the depreciation would be $5 per year. But if during that time, prices have doubled, it will cost $200 to replace the same tool. In the 20th year, the actual depreciation should be $10, but for the income tax in the USA, inflation is ignored, so the company has to record a $5 expense.

To get the real cost, we have to move from accounting profit, which only subtracts explicit nominal costs (not adjusted for inflation), to economic profit, which also subtracts the implicit costs, those which are not paid in money to others, but are nevertheless real.

The implicit costs include all the “opportunity costs,” the costs of giving up next-best opportunities. Suppose you are the sole owner of a business, and your accounting profit is $200,000 per year. Your next best opportunity would be to be employed at another firm for $80,000 per year. Since you give up a $80,000 wage by being self-employed, that is a cost of your business, and in effect you are paying yourself the $80,000 out of your accounting profit.

Suppose also that you own the real estate used by your firm. If you rented, the rental would be $60,000 per year. The opportunity cost of owing your business is the $60,000 you give up if you instead rented the place to a tenant. In effect, your business is paying you as property owner the $60,000 rent from your accounting profit.

Subtract $80,000 and $60,000 from your accounting profit, and your real gain is $60,000. That is the economic profit from your self-owned business.

The same concept applies to corporate profits. Suppose a corporation has an accounting profit of $10 million per year. It owns assets worth $100 million. If the assets were sold and converted into safe bonds, suppose the bonds would pay four percent interest, or $4 million annually. That foregone income is subtracted from the accounting profit, for an economic profit of $6 million. The firm obtains $4 million as an asset owner, and $6 million as an enterprise.

Another aspect of profit is honesty. If a thief steals $1000, this is not economic profit. True profit means that the gain came from voluntary enterprise and legitimately owned assets. Gains from force and fraud are not economic profit. From the viewpoint of the whole economy, profit also has to take into account costs imposed on others, such as from pollution. The absence of compensation for damages is really an implicit theft.

Accounting profit can include government subsidies. But since such subsidies are not from voluntary production, they are not included in economic profit, the real gain from production.

Profit can also consist of capital gains. If you buy shares of stock at $1000 and sell them later for $1500 (after paying the broker’s fee), the $500 capital gain is profit. If you instead had the $1000 in safe bonds and obtained $100 in interest, that would be the opportunity cost of the capital gain, so the economic profit from the asset is $400.

We can also look at opportunity cost from the point of view of society and the whole economy. The opportunity cost of government spending is what the taxpayers would have spent on. Land has an individual opportunity cost for the owner, but for the economy, land has no opportunity cost. The land is here by nature, and no more can be built or imported. Therefore, for the whole economy, all land rent is economic profit.

Economic profit has three origins. First there is entrepreneurial profit, the economic profit of an entrepreneur, due to his skills, insights, and talents. Second is monopoly profit, the economic profit that comes from a price greater than a competitive price, such as the profit from holding a patent. Third is the gains from asset appreciation.

Profit can be negative and zero. When an enterprise has costs greater than revenues, the loss constitutes negative profit. In a highly competitive industry, economic profits tend towards zero, as firms enter to gain profits and exit to avoid losses. But zero economic profit implies just enough accounting profit to pay for all costs, including normal returns on assets values.

If you want to be clear when talking about profits, you should not just say “profit” but indicate whether you mean accounting profit or economic profit. It gets a bit confusing, because when economists say “profit,” they mean economic profit, but when anyone else says “profit,” they mean accounting profit. It may be difficult to calculate economic profit, but we need to do it, because economic profit keeps it real.
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This article is also in http://www.progress.org/views/editorials/the-concept-of-profit/

Updates and Accolades

Brandon Christensen Current Events, Links , , , , ,

Hello loyal readers. I apologize for being so absent from this blog lately (not that most of you are here for me, but I digress). I’ve been hitchhiking around Colorado and Utah and trying to “suck out all the marrow of life,” as it were. I’ve been busy preparing for graduate school applications, and enjoying the company of my family.

First off, updates. LA Repucci, a guest blogger here at the consortium, has launched a project of his own, and I can’t wait to see what he comes up with. Please be sure to support his endeavor.

Second, I’ve been in talks with a number of scholars around the world and am pleased to announce that I suckered a number of them into participating in this experiment with spontaneous order. You may have noticed that the ‘Recommendations‘ section, for example, has been revamped and that the Fundación Instituto David Hume, based in Buenos Aires, Argentina, is now placed prominently alongside some of the other organizations with which Notewriters are associated with.

This is because Federico Sosa Valle and Eliana Santanatoglia – the founders and most prominent researchers for the institute – will soon be blogging with us, and mostly in Spanish to boot! Federico, if you’ll remember, has actually started already.

I’ve also managed to convince Lucas Freire, who works with Dr van de Haar on libertarianism and International Relations, to begin blogging with us in both English and Portuguese. Be sure to give him a warm, NOL-style welcome when he begins.

You’ve already met Dr Barry Stocker, but in any case here is his official profile page. Be sure to keep those ‘comments’ coming!

I’ve managed to pester two historians into contributing the blog, Andrei Znamenski and Jonathan Bean. Dr Znamenski already made his debut post and you can find out more about him on his profile page. Dr Bean is currently enjoying his summer but you can check out his most recent book, Race and Liberty in America, on the sidebar.

Last but certainly not least is Michelangelo Landgrave, an economics graduate student at Cal-State Long Beach. You can check out his profile page here, and here is some of his work at .Mic and more here at Open Borders. I’m very excited to have him on board.

Our work here at Notes On Liberty has recently been featured at RealClearMarkets and at Reason magazine’s Hit & Run blog. While this is nothing to the authors who were actually featured, Dr Foldvary and Dr Hummel respectively, it is always nice to know that your project – started from scratch – has gained such a prominent readership. We couldn’t have done it without your support and especially your comments. Have a great weekend!

Riding Coach through Atlas Shrugged: Chapter 2 – Whistling In the People’s Key.

Adam Magoon Books, Liberty, Philosophy , , , , , , ,

Part One

50th Anniversary edition pages 20-32

Chapter Summary – We are introduced to Dagny Taggart, brother of James, who reflects on neo-classical music, throws her family name around a bit, cuckolds her brother’s business, and smokes, also Kellogg turns down an offer he can’t refuse.

Dagny is one of the characters who I am somewhat familiar with due to cultural osmosis. Her strong willed antagonism, her intelligence and stubbornness, her anger, her misery, and her smoking. All things that I expected that were confirmed in her first chapter in Atlas Shrugged.

What I didn’t expect however was the amazing paragraphs about Richard Halley’s symphony.

“It was a symphony of triumph…”

the notes of the symphony

“spoke of rising and were the rising itself.”

Emphasis mine. The way Dagny is enveloped by the symphony, it consumes her, and just for a moment she can do nothing but feel when she hasn’t in so long.

Then it is revealed that she is merely hearing it being whistled from across the train car by some blond brakeman. If one man whistling one part of that symphony can fill Dagny with such joy then what effect would a full orchestra have on her, on the people, on society?

That feeling is the very thing I hope to gain from this project. The sense of wonder that Dagny is overwhelmed with and a reminder that

“[T]his is why the wheels have to be kept going, and this is where they’re going.”

The brakeman is interesting as well. Rand’s description of him as a worker with no loose muscles was very telling to me. This blue-collar laborer is the one carrying the tune that is Dagny’s hope. This is in stark contrast to the train conductor for example who doesn’t seem to care about the problems he faces and simply hopes everything will work out.

He jerked his head up at the red light. “I don’t think the signal is going to change. I think it is busted.”

“Then what are you doing?”

“Waiting for it to change.”

I almost wonder if this theme of hard working but uneducated versus apathetic educated middle class will continue. I always felt that Rand was somewhat anti-laborer, that those who were not entrepreneurs were merely leaches on the productive members of society but I am beginning to think that impression may have been unfounded.

Speaking of entrepreneurs there were two major economic principles stated in this chapter. First was Dagny exemplifying the attributes of an entrepreneur when she makes the call to use Rearden Metal for the new railroad tracks. When James protests the use of the new metal she tells him that she is making the call using her own judgment, knowledge, and personal experience. She is willing to assume the risk for this venture based on a gut feeling and her own personal belief that it will work. It is important to notice that she doesn’t deflect responsibility or assume some other person or entity will absorb any losses if she is wrong.

The second economic point was in regards to monopolies. A great exchange takes place between Dagny and James that goes as follows:

“It isn’t fair,” said James Taggart.

“What isn’t?”

“That we always give all our business to Rearden. It seems to me we should give somebody else a chance, too. Rearden doesn’t need us; he’s plenty big enough. We ought to help the smaller fellows to develop. Otherwise, we’re just encouraging a monopoly.”

“Don’t talk tripe, Jim,”

“Why do we always have to get things from Rearden?”

“Because we always get them.”

“I don’t like Henry Rearden.”

“I do. But what does that matter, one way or the other? We need rails and he’s the only one who can give them to us.”

“The human element is very important. You have no sense of the human element at all.”

“We’re talking about saving a railroad, Jim.”

“Yes, of course, of course, but still, you haven’t any sense of the human element.”

“No. I haven’t.”

This exchange exemplifies the free market vs anti-property positions on monopolies but misses one crucial point. This anti-monopoly activity is driven solely by the free choice of the individual. Taggart is perfectly able to restrict his business from any source he chooses for any reason he chooses and this is the pure libertarian position on the matter.

Now, don’t get me wrong, he is making a poor entrepreneurial choice since Associated Steel has repeatedly failed to deliver on the contract and from a purely economic standpoint Dagny is correct. From a libertarian standpoint however, both are correct.

James is totally justified running his business into the ground for any reason he chooses and Dagny has every right to seek out new opportunities. Assuming of course she owns part of the company or has been granted the authority to act in the company’s name. The latter is the case here as far as I can tell.

I would also like to point out that other non-humanistic arguments against monopolies are almost universally false. Predatory pricing for example has essentially never happened successfully even in the case that made it illegal.

Now for the negatives.

Primarily I feel like James is a bit too obvious as a villain, he is almost too petulant and whiny. I just don’t buy that anyone would follow him and that the board of directors would have kicked him off years ago. I suppose Rand is pushing the whole feudalism thing. How many nations have fallen because of a weak King or Queen?

Also, I just don’t know how to feel about Dagny yet. The quirkiness is what bothers me the most. Sitting on the arm of the chair, her snarkyness and her general self-importance. I am not sure how much I am going to like her character yet but there is plenty of book to go so we shall see.

Finally I have to give the last story beat in this chapter credit. The final conversation Dagny has with Kellogg was an amazing piece of the mystery that literally gave me chills of anticipation. Where are these people going? Why are the best and brightest suddenly missing but still creating? And most importantly…

Who is John Galt?

The Skyscraper Curse

Edwin van de Haar Liberty , , ,

The Skyscraper Curse

This is Thornton at his best!

Where the World’s Unsold Cars Go To Die [Zerohedge]

Adam Magoon Current Events, Economics , , , , , , ,

I don’t have time to comment a ton on this (Life has just been absurd lately) but wanted to make sure more people saw this.

The guys over at Zerohedge noticed a surprising sight on google maps in the city of Sheerness, United Kingdom. West coast, below the River Thames and next to River Medway. Left of A249, Brielle Way. A car lot full of unsold, brand new cars. Zerohedge claims these are all new cars that cannot fit on overcapacity dealer lots. If true this would be a prime example of malinvestment spurred on by government bailout and subsidies. Quite literally a textbook case of the Austrian Business Cycle.

Further research is needed since I do not know whether these lots are standard practice or a new feature of our post-2008 crash world. It is possible that these are merely staging grounds for cars before they ship to dealers but at first glance I tend to agree with Zerohedge’s conclusion that “There is proof that the worlds recession is still biting and wont let go. All around the world there are huge stockpiles of unsold cars and they are being added to every day. They have run out of space to park all of these brand new unsold cars and are having to buy acres and acres of land to store them.”  

Something to keep an eye on regardless.

Open Access Gary Becker papers, and a couple of thoughtful links on him

Brandon Christensen Current Events, Economics , , , , , , , , , , , ,

Nobel Prize-winning economist Gary Becker died Saturday. For those of you who don’t know about his work, go here. For the rest of you, economist Tyler Cowen has compiled a great list of articles by Becker that you can read:

    1. “Irrational Behavior and Economic Theory.”  Can the theorems of economics survive the assumption of irrational behavior? (hint: yes)
    2. “Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology.”  The title says it all, from 1976.
    3. “A Note on Restaurant Pricing and Other Examples of Social Influence on Price.”  Why don’t successful restaurants just raise the prices for Saturday night seatings?
    4. “The Quantity and Quality of Life and the Evolution of World Inequality” (with Philipson and Soares).  The causes and importance of converging lifespans.
    5. “Competition and Democracy.“  From 1958, but most people still ignore this basic point about why government very often does not improve on market outcomes.
    6. “The Challenge of Immigration: A Radical Solution.”  Auction off the right to enter this country.

Cowen also linked to sociologist Kieran Healy’s fascinating take on Michel Foucault’s thoughts about Gary Becker’s work over at Crooked Timber (and here is a pdf of Becker on Foucault on Becker).

And economist Mario Rizzo shares some short thoughts about Becker’s work in relation to the Austrian School of Economics (Becker is associated with the Chicago School of Economics). Rizzo’s account of the early 1960s debate on rationality between Becker and Kirzner is worth a look.

Update: Here is Gary Becker’s 1992 Nobel Prize lecture (pdf)

Physics in Human Action

Fred Foldvary Liberty , ,

Some Austrian-school economists dislike analogies from physics in economics, because they don’t regard economics as mechanical. But since human action is physical, we can understand economics better if we understand the basics of physics.

We begin with space. For human action, space encompasses distance in three dimensions. For economics, space constitutes the sites in which activity takes place. The economics of space includes three-dimensional volume as well as a location. For human purposes, spacial land is fixed relative to the earth. Space is not altered by use, but it is consumed by using its value, as reflected by its rent, over time. There is also another type of economic space in the electromagnetic spectrum, made up of frequencies that travel through three-dimensional space.

The second rudiment of the universe is time, which has two meanings, a moment and a duration. Time is not an input into production, but a dimension of all activity. An analysis that examines a phenomenon over a duration is called “dynamic,” in contrast to the static analysis of a moment.

The third universal rudiment is mass, or its synonym, matter. Mass is what takes up space and has inertia. Economics categorizes mass as land (natural resources), human beings, capital goods, and trash.

A fundamental law of physics is that of conservation, that matter (and its sibling energy) cannot be created or destroyed, but only changed in form. But there is no conservation of value. In economics, production is the creation of economic value, processing inputs to make them more desirable. Consumption is the using up of economic value. Capital goods are items that have been produced but not yet consumed.

Linear velocity is the rate of the motion of a mass object in some direction. In economics, activity has a velocity as a mass of inputs gets processed into outputs, or objects get transported. There is also angular velocity in the speed of rotation, including the velocity of money as its turnover as measured during a year. Momentum equals mass times velocity, including a velocity of zero. Human action has momentum when activity proceeds at a constant speed and direction.

However, economic dynamics involves changes in speed or direction, which is acceleration (including negative acceleration or deceleration). A fundamental equation in physics is F=MA, force equals mass times its acceleration, Newton’s second law of motion. Newton’s first law of motion is that of inertia, that a body will retain its momentum unless an external force is applied. Force makes mass objects accelerate. On earth, mass has a weight due to the force applied by gravity

In human action, force can mean either a physical action, as inputs are moved and combined, or else a coercive action by either criminals or governments. The initiation of coercive force alters what people would otherwise voluntarily do. Such forceful intervention imposes a net loss of value on society by accelerating the mass of human action into directions or speeds that reduce its net utility. The economy and society maximize well being with rules that prevent coercive force.

Newton’s third law of motion is that for every action there is an equal and opposite reaction. When one body exerts force on another body, the other body exerts an opposite force on the first body. This law is what propels a rocket, as the force of the ejected fuel makes the rocket go in the opposite direction. Economic action encounters resistance to motion, or friction, which is good if we want to walk (as without friction we would slide around), but is bad if the friction consists of obstacles imposed by coercive force.

In economics, energy is the generation of heat, light, and movement. There are many forms of energy. In physics, potential energy is mass that can be accelerated into motion, such as an object that can fall down, or molecules that can be combined to create heat and light. There is kinetic energy of motion, with the equation: e = ½ mv2. Einstein’s equation reflecting the convertibility of mass and energy is e = mc2, but that has no relevance in the human scale of action.

In physics, work is force times displacement. Applied to human action, work is done when a person applies force (human exertion and tools) to a mass to change its location or composition, even if the change is only of bits in a computer memory. Work can also be a change in the kinetic energy of a system.

Another physics concept that has been applied to economics is equilibrium, a state of constant momentum, including zero velocity, where there is no incentive or force for acceleration. In economics, equilibrium is the exhaustion of gains from trade. At the moment you pay for goods at a store, you are in equilibrium, as you do not wish to trade any more money for goods. But a moment later, you are in disequilibrium, as some goods now have more value than the money you exchange for them. Market prices and quantities move towards equilibrium to remove a shortage or surplus or to gain from extra production, consumption, and trade.

We can see that the application of physics to human action is not mechanistic, as people act on their subjective values and beliefs and psychological inclinations, but their physical action is necessarily subject to the laws and concepts of physics. F=MA applies to human action as it does to physical particles.

Australia may ban [more] boycotts…

Adam Magoon Economics, Liberty, Politics , , , , , , ,

Australia has been in the news quite often in the last year for its new Prime Minister’s controversial legislation that protest groups say put vast areas of Australian nature in threat of destruction.  Environmental issues are one of the more complex issues facing libertarians today.  The vast entanglement of property rights can make explaining those issues to non-libertarians quickly and clearly quite difficult.  Luckily for me the Australian government is currently attempting to assault a far more basic set of rights.  The right to organize, the right to persuade, and the right to spend your money and time how you wish.  We are, as the title implies discussing the right to organize a boycott of a product or products.

The Australian secretary of agriculture Richard Colbeck wants to “remove an exemption for environmental groups from the consumer law ban on so-called “secondary boycotts”.  These secondary boycotts are also illegal in the UK and the United States.  For clarification a secondary action “is industrial action by a trade union in support of a strike initiated by workers in another, separate enterprise”.  

Libertarians often find themselves on the wrong side of both environmental and union actions but it is important to remember that liberty also means the freedom to refuse to purchase a product for any reason you can imagine; whether it is because the company that makes the product is partaking in actions you disagree with or because their logo is yellow.

Even though libertarians disagree with the end goals of the hard-line environmentalist movements (namely government control of industry) we cannot forget to support situations like this on principle and also to remember that environmental issues are essentially property rights issues and thus core to libertarian ethics.

Institutions and the GDP

claudio Liberty ,

Just playing around with the MIT’s Pantheon and the Development Economics (click on it to enlarge the plot).

Well, I know correlation is not the end of the (hi)story. Maybe it’s just the starting point. The “lpib2000” is the log of the GDP in 2000 (used in several papers, I know) and the “panteon_rank” is just as it says.

So, if you think this is interesting, well, you saw it first here. ^_ ^

People: neither blithering idiots nor towering geniuses

Rick Weber Economics, Liberty , , , ,

Or is it that they’re both?

As a young libertarian first exposed to economics (actually it was my third exposure where it took) I was struck with an exciting proposition: people don’t need the government to look after them because (we’ve assumed that) they’re rational! In that case, government can almost only ever do harm. Add in some public choice and Austrian insights and you’ve got a water tight defense of liberty.

But actually you don’t. Because as it turns out, people might actually be complete morons. I’ll bet if you marketed a brand of bottled water as having never been warm–cleaned with pre-chilled filters made in iceland, and never poured into room temperature bottles–it would sell. But if that’s the case, the world should be a scary place. People would be doing ridiculous things and electing ridiculous politicians to help them act even more absurdly.

I’m an economist and I still do plenty of irrational things. But it turns out that first taste of economics was econ of a particular variety: the study of what is rational. Not the study of how people rationally act. That’s not to say it’s worthless. David Friedman put it well in Hidden Order: if people are rational some times and act randomly other times, then we can still make useful predictions about their behavior. But I don’t think that economics is some sort of half-science that assumes away randomness in order to study some portion of people’s actions.

Mostly, I think the study of rationality lays a foundation, and offers a puzzle, to allow further study of ecological rationality. The world is orderly and roughly follows the predictions we make when we assume individuals are rational. And yet people seem far from rational. What gives?!

It turns out we have to pay attention to institutions. These often hidden rules of the game direct our actions and embed our learning in social rules. Those crazy (probably imaginary) sociologists might have been on to something when they said that individuals’ actions are shaped by social forces. It’s not that people don’t have autonomy, it’s that people don’t exist in a vacuum.


Yes they are.

What’s my point? Learning a little bit of economics goes a long way to making good arguments for liberty, but it doesn’t go far enough. We live in an a much more interesting world than the one we learn about in econ 101.

Another example of double-speak: This is what happens when Time Warner Cable is forced to compete

Adam Magoon Current Events, Economics, Law, Liberty , , , , , , , , ,

This is what happens when Time Warner Cable is forced to compete

Such a laughable headline when government regulations are what caused the cable/telecom monopolies in the first place.

“This report admits that in the days when cable was challenging airwave broadcasters, regulators “did not hesitate to grant exclusive franchises to cable operators”4. It speaks specifically of a long history of successful regulatory lobbying by the cable industry. This report claims that lobbying of regulators resulted in a variety of tactics to deter competition (p. 35). It claims that regulators protected and favored cable incumbents for years. Licensing policies have directly or effectively barred competition in many local markets (p. 44). Such practices are no longer official, but cable companies still succeed in enlisting the help of regulators to bar direct competition (p. 44). Incumbent cable companies have also gotten regulators to use “level playing field laws” to increase the costs of entering the cable market (p. 45). Cable companies have also saddled new competitors with disproportionate shares of subsidies for public education and government programming (p. 45). The cable industry has also succeeded in getting the FCC to quash new competitors with prices for leased access no competitor “could pay and remain commercially viable” (p. 47).”

Much like the drug law argument I talked about last week this is another example of people lauding governments for solving problems that the government itself is responsible for.  We need to look beyond the double-speak and identify the underlying issues at hand.  In this case government privilege granted to favored corporations.

Italy overturns ‘absurd’ drug law equating marijuana and hard drugs

Adam Magoon Current Events, Liberty, Philosophy , , , , , , , ,

Italy overturns ‘absurd’ drug law equating marijuana and hard drugs

The title really gives all of the details. Libertarians are usually quick to celebrate these kinds of liberalizations of government authority but I always take these times to reiterate and oft forgotten fact.  Italy has not “given more rights to drug users”.  I hear this so often and strangely enough almost universally from more “left” policies such as gay marriage “Massachusetts has given the right to marry to homosexuals.”  This is a blatant misrepresentation of the truth.  The right of self-ownership is universal and each and every person already has the right to consume any drugs they please or to marry whomever they choose.  Government action has taken away those rights and them removing that restriction is not the same as giving away rights.  Rights cannot be granted, they are innate and inalienable.  Rights can only be removed by force.  Two forces in this world deny rights to others.  Criminals and the Government.  Most libertarians do not make a distinction between the two.

Risks Of Regulation

Adam Magoon Current Events, Economics, History, Law, Liberty, Politics , , , , , , , ,

A bit dated but still very relevant.

Regulation; the four letter word of the business world.  Many people see regulation as a protective shield from the ‘dangers’ of the businessman; a way to protect people, property and the environment.  The oil industry is one of the most heavily regulated enterprises in the United States.  Despite being intended to protect us; these regulations failed catastrophically on April 20th, 2010 when the Deep Water Horizon oil rig suffered a mechanical failure resulting in an explosion which sank the rig two days later(1).  Yet, when the disaster happened, we were met with pleas for more government oversight and more red tape.  The regulations on that industry, both in the Gulf Mexico and throughout the country, helped cause the Deepwater Horizon disaster and removing them would help prevent similar disasters in the future.

Regulations in the Gulf of Mexico begin with the Minerals Management Service (MMS).  Created in 1982 due to the Federal Oil and Gas Royalty Management Act the MMS “both regulates the [gulf oil drilling] industry and collects billions[of dollars] in royalties from it”(2, 3).  The MMS’s responsibility to regulate includes monthly inspections, issuing safety documentation, and issuing safety citations(3).  Royalty collection is based on number of barrels of oil removed and varies from well to well.  The MMA also provides  “royalty relief“ to a number of rigs based on previous legislation. Until November of 2000 the royalty relief was issued based on the Outer Continental Shelf Deep Water Royalty Relief Act of 1995, better known as DWRRA.  This act “relieves eligible leases from paying royalties on defined amount of deep-water production”.  At depths over 2,526 feet oil companies did not have to pay the United States royalties on 87.5 million barrels of oil, between 1,312 and 2,625 feet the relief was 52.5 million barrels and between 656 and 1,312 feet the relief was only 17.5 million barrels.  While this act expired in the year 2000 it was replaced by an incentive program that allowed royalty relief to be “specified at the discretion of the MMS”(4).  This incentive program provides more relief if a drilling site is “more expensive to access” even if it is at the same water depth as another rig receiving less relief (2).  The royalty relief system provides incentives for Oil Rigs to operate in deep waters, especially those classified as “Ultra-Deepwater” by reducing the royalties paid on those sites(5).

While not specific to the gulf, there are a variety of moratoria on drilling throughout the country.  These moratoria take two forms.  The first set, known as “leasing moratoria” are general bans on drilling in select areas , the second set are temporary bans due to specific incidents.  Since   the fiscal year 1982 congress has denied funds to the MMS to “conduct leasing for the specified Outer Continental Shelf areas”.  Currently there is a “blanket moritorium” on leasing in effect “through 2012” that covers a large portion of both the East and West coasts( 2).  One of the largest bans on drilling however exists in the Arctic National Wildlife Refuge(ANWR).  Located in the “northeast corner” of Alaska over ten million acres of land are off limits to drilling.  In this wildnerness it is estimated that there exists “between ten billion and sixteen trillion barrels of oil” that could supply twenty percent of U.S. demand for nearly thirty years(6).  The most recent temporary bans have been a result of the Deepwater Horizon disaster.  A “30-day pause in offshore drilling” followed the sinking of the Horizon rig(11).  This did not only cover BP’s rigs but all offshore drilling “based on water depth”(7).  That ban was removed by a federal court, but was replaced with a revised ban that will be in effect until November, 2010(7).

Beyond physical limitations on drilling there are also economic regulations.  There are a number of federal subsidies and tax breaks for the drilling industry.  David Kocieniewski says that “examination of the American tax code indicates that oil production is among the most heavily subsidized businesses”.  These tax breaks occur for a number of reasons.  Many are simply to lure oil companies to American shores, others were “born of international politics” or “date back nearly a century”(8).  Beyond that the United States government has put “Liability Limits” on drilling operations.  The Oil Pollution Act of 1990 limits an oil companies liability for damages to only $75 million dollars.  Any remaining damages, up to $1 billion, are payed through the Oil Spill Liability Trust Fund.  This fund is “financed primarily through a fee on imported oil”(1).  Senator Robert Menendez from New Jersey recently introduced bill, S. 3305 which would raise that cap to $10 billion(9).

All of these laws and regulations have one thing in common.  They increased the probability of a catastrophic oil spill in the Gulf of Mexico.  Each regulation increased the risk of such a spill in some way and when combined they resulted in the disaster that is causing massive destruction in the Gulf today.  The Minerals Management service was organized to be the overarching regulatory body for the Oil Industry.  Why did it fail in its duty?  Why did “spills from offshore oil rigs…in U.S. waters more than quadrupled this decade” despite the MMS’s oversight(10)?  This question was answered by economist Walter Block in his book The Privatization of Roads & Highways (12).  Quoting Cecil Mackey, former Assistant secretary of transportation, he says:

“As the more obvious regulatory actions are taken; as the process becomes more institutionalized; as new leaders on both sides  replace ones who were so personally involved as adversaries in  the initial phases, those who regulate will gradually come to reflect,     in large measure, points of view similar to those whom they regulate.”

Quite simply, the MMS adopted the views of the Oil Industry completely negating their ability to regulate it.  Congressman Nick J. Rahall confirms this saying “MMS has been asleep at the switch in terms of policing offshore rigs”.  Using numbers supplied by the MMS in the prior 64 months before the incident “25 percent of monthly inspections were not performed”(3).  Are we to believe another agency would be any more efficient?  Bureaucracy and corruption are not the only things to blame however; legislation played a vital role in this disaster as well.  DWRRA, for example, incentivized the risk to drill in deep waters.  Under DWRRA the greater the depth being drilled the greater the royalty relief amount.  These waters are inherently less safe to drill in.   It is easy to compare the difficulties in dealing with a site 5000 feet below the ocean against one 500 feet below the surface.  These incentives were made worse when DWRRA expired.  Under the new program “the most economically risky projects would receive the most relief”, safer projects on the other hand would receive “little or no relief”(4).

While acts like DWRRA incentivize the risk of deepwater drilling the greater incentive to drill in the Gulf of Mexico is simply that there are so few places to drill in the continental United States.  The United States Exclusive Economic Zone extends “200 nautical miles” from all of it’s shores(2).  Yet, much of this area is off limits to drilling.  The “blanket moratorium” issued by former President George H.W. Bush in 1990  restricts drilling in “all unleased areas offshore Northern and Central California, Southern California except for 87 tracts, Washington, Oregon, the North Atlantic coast, and the Eastern Gulf of Mexico coast”.  The Gulf of Mexico is the only economically viable offshore area left for them to drill.  This of course pales in comparison to the Arctic National Wildlife Refuge.  Most of the 10-million-acre area is not even adjacent to the ocean, surely drilling on land or in shallow water is much safer than drilling 5000 feet under the ocean(6).  Beyond helping to cause the spill in the first place the government is increasing the risk of future disasters.  The temporary ban issued in response to the Horizon spill “neither improves safety nor mitigates risk”(11).  By forcing drilling to stop you immediately cause a number of problems.  Reentering a location is as dangerous, if not more so, than the original drilling operation.  Experienced workers have been fired, laid off, or relocated and will need to be replaced with less experienced ones.  Equipment in worse quality will be all that remains when the moratorium ends(11).

The economic regulations were the proverbial straw that broke the camel’s back.  A single tax break for the Deepwater Horizon oil rig covered “70 percent of the rent” or “$225,000 a day”.  Or, as policy analyst Sima J Gandhi describes it “We’re giving tax breaks to highly profitable companies to do what they would be doing anyway”(8).  These breaks are not only an unfair advantage, they incite these companies to make riskier choices.  If the potential cost of the Deepwater Horizon rig wasn’t offset by these breaks it may not have been economically viable to drill in such a dangerous location.  On top of the lower cost of the initial operation; the Liability Caps ensured that any potential risk was marginalized by the government.  The $75 million limit that has been in effect since 1990 was a message to the industry to attempt increasingly risky drills(1).

The oil companies should be liable for the full cost of any damages done by their rigs.  The worry that “operators and nonoperators in the U.S. Gulf of Mexico will be unable to obtain adequate protection from insurance” is totally unjustified (1).  If the site is not economically viable then there is no reason to drill there.  If BP and Transocean knew they would have been liable for all damages they would not have received a citation for “not conducting well control drills as required and not performing ‘all operations in a safe and workmanlike manner'”(3).  There would have been an incentive to spend money on safety, training and equipment instead of the incentive to take risks knowing they would be protected.  Or as one lawyer explained the situation “arbitrary liability caps are just not reasonable.  You cannot decide the expense of a disaster before it happens.  Liability caps allow companies like BP to avoid bearing the responsibility for the full cost of the damage they inflict”(9).

The oil has stopped flowing from the bottom of the Gulf; for now.  The question remains: How can we prevent this from happening again?  There, of course, is no easy answer.  Accidents, mistakes, and disasters can never be guarded against completely.  We can however mitigate the risk involved in those dangerous operations that are needed for the sake of humanity.  The best way to increase the safety of the oil industry is to remove the regulations that incentivize the risks involved in their industry.  Preventing drilling in safer areas, tax breaks, royalty reductions, liability limits; all these things make an already dangerous prospect that much more perilous.  We need to neither help nor hinder these companies, they must succeed or fail on their own merits.

Sources available upon request.