Quotation of the Day…

by Don Boudreaux on April 30, 2016

in Myths and Fallacies

… is from page 173 of the 1991 Liberty Fund edition of Bruno Leoni’s pioneering 1961 volume, Freedom and the Law:

What is characteristic of the socialistic solution of the so-called social problem is not the end of promoting public welfare and eliminating, as far as possible, poverty, ignorance, and squalor, for this end is not only perfectly compatible with individual freedom, but may also be considered as complementary to it.  The very core of the socialist solution is the peculiar way its supporters propose to reach that end, namely, by resorting to a host of officials acting in the name of the state and limiting accordingly, if not suppressing altogether, private initiative in economics as well as in several other fields that are inextricably connected with the economic domain.

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This weekend I’m in Tucson attending a Liberty Fund conference on law, legislation, and property rights – particularly as these relate to water.  My fellow conferees include a number of world-class thinkers, including Gerard Alexander, Terry Anderson, Peter Coclanis, Pierre Desrochers, Jay Dow, Jim Huffman, Gary Libecap, and Roger Meiners.  (I list only the more senior members of the group.)

During the second session this morning Terry Anderson expressed his unhappiness with the concept of what economists call “pecuniary externalities.”  Terry argues that this term and the concept to which it refers are hopelessly confused and confusing.  He is correct.

Economists commonly use the term “pecuniary externalities” to describe reductions in the price (and, hence, in the income) that Smith the Seller suffers when consumers, discovering better deals elsewhere, choose to buy less of Smiths’ product.  Pecuniary externalities are distinguished from “technological externalities,” which are the physical effects on Smith’s property caused by Jones without Smith’s permission.  (Of course, both sorts of “externalities” can be “positive” as well as “negative.”  My short descriptions here are of negative pecuniary and technological externalities.)

In a later post I will explain Terry Anderson’s proposed solution to the gross confusion caused by the concept “pecuniary externality.”  It is a solution that I endorse.  But for now – and being short on time – I want merely to register the observation that most, and perhaps all, of what are called “pecuniary externalities” are not externalities at all.

Any possible effects that a market participant does, or has good reason to, take account of in his or her choices and actions is not an externality even though these effects are caused by the actions and choices of other people without that market participant’s permission.  All such effects, being anticipated (or being anticipated by the ‘reasonable person’) are internalized on the market participant.*

Therefore, in a competitive market economy no seller – whether she be a merchant selling wares to consumers or a worker selling labor to employers – suffers a negative externality when consumers voluntarily shift their patronage away from her.  The reason is that this seller anticipated, or reasonably ought to have anticipated, the possibility that consumers will one day shift their patronage away from her.  (As Terry Anderson puts it, “No seller has a ‘right’ in a price.”  That is, no seller has a right to receive at least some minimum price or to sell some minimum quantity.)  Having thus internalized today the possibility that tomorrow’s demand for her product or her labor will be lower than it is today, if and when the actual reduction in consumer demand occurs, no external loss is imposed on this seller.  No ‘unbargained-for’ loss is imposed on this seller.

While the seller’s loss is real in the sense that she is made worse off by the actions of consumers – worse off, that is, compared to how she would have been had these consumers not shifted their demands away from her – it is a loss that has already been internalized on her.

While sellers often complain of being undeserving victims of wrong-doing – that is, of suffering negative pecuniary externalities when consumers voluntarily shift their demands away from them – sellers almost never proclaim themselves to be undeserving beneficiaries of unearned largess when consumers voluntarily shift their demands to them.

Put differently, if a loss of consumer patronage (and of the income that that loss entails) is a negative externality suffered by sellers, then the earlier gain of consumer patronage (and of the income that that gain made possible) is a positive externality enjoyed by sellers.  And, therefore, the earlier gain is the compensation for the later losses.

There’s no such thing as a pecuniary externality.  Or, at least, most of the price effects that are typically described as “pecuniary externalities” – including reductions in the value of capital equipment of or human capital caused by voluntary changes in consumers’ spending patterns – are not externalities at all.


* I’m aware of the possible, and legitimate, question: “What if Jones anticipates, say, the government seizing Jones’s factory or anticipates an upstream producer polluting Jones’s drinking water?”  Such actions nevertheless are indeed often negative technological externalities, but I’ve no time now to write more.  I’ll do so in later posts.

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Machine Politics

by Don Boudreaux on April 29, 2016

in Myths and Fallacies, Seen and Unseen, Work

Avinash Mulye sent to me this description of a “minimum-wage machine.”  3050324-poster-p-1-this-pointless-machine-allows-anyone-to-work-for-minimum-wageIt seems to be written by one David Ruccio:

This machine allows anyone to work for minimum wage for as long as they like. Turning the crank on the side releases one penny every 4.97 seconds, for a total of $7.25 per hour. This corresponds to minimum wage for a person in New York. This piece is brilliant on multiple levels, particularly as social commentary. Without a doubt, most people who started operating the machine for fun would quickly grow disheartened and stop when realizing just how little they’re earning by turning this mindless crank. A person would then conceivably realize that this is what nearly two million people in the United States do every day…at much harder jobs than turning a crank. This turns the piece into a simple, yet effective argument for raising the minimum wage.

So here’s a challenge for Cafe Hayek readers.  In the comments section name all that is mistaken or misleading about this notion of the minimum wage (or of wage-earning generally).  Such as “Earning wages in a market economy is not akin to extracting already-produced wealth from some device called a ‘job’ or an ’employer.’  Instead, earning wages involves the production by the worker of some amount of output for an employer who then compensates the worker according to the value of that worker’s output.”

Don’t hesitate to repeat a point made by other commenters if your point is expressed in a different and illuminating way.

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Quotation of the Day…

by Don Boudreaux on April 29, 2016

in Crony Capitalism

… is from page 243 of David Friedman’s excellent 1996 book, Hidden Order:

The term “monopoly” originated in just this context – to describe otherwise competitive industries, such as the sale of salt, where one producer had bought from the government the right to exclude all others.

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Bonus Quotation of the Day…

by Don Boudreaux on April 28, 2016

in Competition, Other People's Money

… is from page 328 of Arnold Kling‘s superb 2004 book, Learning Economics:

Ultimately, it is people who make decisions in markets and in government.  People are fallible in both settings.  The difference is that in a market setting mistakes are corrected more quickly than in a government setting.  Thus, even if markets were wrong 9 times out of 10 and government were right 9 times out of 10, over time markets would achieve better outcomes.

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Quotation of the Day…

by Don Boudreaux on April 28, 2016

in Growth, Inequality

… is from page 72 of Deirdre McCloskey’s pioneering 2010 volume, Bourgeois Dignity:

Economic historians agree that the poor have benefited the most from modern economic growth.

And, therefore, it is probable that those who would put economic growth at risk – because they fret without warrant about growth’s effects on the environment, or because they prefer more equal income or wealth ‘distribution’ over higher growth, or because they simply do not take the time to understand economics – are enemies of the poorest.  That they are unwitting enemies is irrelevant.

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A regular Cafe Hayek patron asked, in a message over Facebook, my opinion of a universal basic income (UBI) – that is, a minimum annual income that the government guarantees to every citizen.  My correspondent correctly notes that this idea has the support of some prominent libertarians, many of whom I respect deeply.

I hope to write in more detail on this issue later, but here, very quickly, let me register my stance: I oppose any universal basic income.  I do so principally because I oppose the confiscation of private property regardless of the purpose, the motive, or the identity of the confiscator(s).

I’m aware that some libertarian support for the UBI is premised on the belief that it will lead to less such confiscation overall.  That’s an outcome that I would applaud.  And I agree that, as a purely prudential matter, a reasonable case can be made for a UBI.  Given a choice between two evils, I prefer the lesser to the greater.  But I do not believe that as a practical matter a UBI would make society freer or more prosperous.  I believe that it would not substitute for a greater evil but, instead, be an additional evil piled atop the evils that already plague us.

UPDATE: In the comments, David Henderson offers this contribution:

Many of the advocates don’t talk about what size UBI they favor. One who does give a number, $10K per adult, is Matt Zwolinski. I show in my Independent Review piece that one that size would raise federal spending by 30% and taxes by almost 50 percent.

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Some Links

by Don Boudreaux on April 27, 2016

in Competition, Health, Politics, Trade, Video

John Tamny gets to the heart of Donald Trump’s (and Bernie Sanders’s – and their fans’) unmitigated ignorance about international trade.  A slice:

Thanks to free trade within these fifty states, the companies that fail to best serve the needs of their customers don’t last very long. That trade is wholly free within the U.S. is precisely what attracts a great deal of job-creating domestic and foreign investment, simply because lousy business concepts are allowed to fail so that good businesses can quickly replace them. In short, it’s the constant destruction of jobs in the U.S. that enables the fast creation of much better ones.

Applied to the foreign competition that Trump decries, the happy fact that the U.S. is largely open to foreign production is similarly what makes the U.S. such an attractive destination for investment. Figure foreign competition, just like domestic, forces the very economic evolution that appeals so much to investors. Absent foreign trade, the U.S. economy would be quite a bit more depressed as a result of many more proverbial Blockbusters existing at the expense of more capable replacements like Netflix.

So often we hear about Americans “battered” by “foreign trade,” but the certain truth about imports – whether from across the street or from around the world – is that they’re the surest sign of a growing economy. As logic dictates, the fact that so many businesses – domestic and foreign – compete to serve U.S. consumers is the best indicator that open trade has been brilliant for the American people. If it weren’t, we Americans wouldn’t have the world’s talented so aggressively working to serve our needs.

Speaking of trade, in my latest column in the Pittsburgh Tribune-Review I attempt to tackle yet another misunderstanding about trade.  A slice:

“Fair trade” is code for “unfree trade.”

Of course, no one endorses trade that is genuinely unfair. The crucial questions, however, are just what is unfair trade and what is the best way to deal with it. Protectionists in America want you to think that any imports whose producers receive any assistance at all from foreign governments are unfair. They want you also to uncritically accept their assumption that the best way to deal with unfair trade is for Uncle Sam to raise tariffs — that is, taxes — on American consumers.

Never mind the hypocrisy at work when Uncle Sam — itself a major subsidizer of many U.S. exporters, such as Boeing and Dow Chemical — uses charges of “unfair trade” as an excuse to punitively tax Americans who purchase imports.

I can pick two or three nits with Alan Blinder’s recent essay in the Wall Street Journal about trade, but overall it’s very good.  A slice:

Trade is more about efficiency—and hence wages—than about the number of jobs. You probably don’t sew your own clothes or grow your own food. Instead, you buy these things from others, using the wages you earn doing something you do better. Imagine how much lower your standard of living would be if you had to sew your own clothes, grow your own food . . . and a thousand other things.

The case for international trade is no different. It’s not mainly about creating or destroying jobs. It’s about using labor more efficiently, which is one key to higher wages.

Mark Perry offers us a fascinating trade visual.

My colleague Pete Boettke introduces us to Tyler Cowen’s recent conversation with Camille Paglia.

I agree with Bob Higgs (as I almost always do).  And I agree with my colleague Bryan Caplan (as I almost always do).

John Stossel writes about his lung cancer and about free markets.  (Needless to say – but I’ll say it anyway – Russ and I wish John a full, speedy, and lasting recovery from his illness.  He’s a unique talent, one that all friends of liberty should treasure.)

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Quotation of the Day…

by Don Boudreaux on April 27, 2016

in Hayek, Inequality, Myths and Fallacies

… is from page 196 of the 2011 Definitive Edition (Ronald Hamowy, ed.) of F.A. Hayek’s 1960 volume, The Constitution of Liberty:

It is one of the great tragedies of our time that the masses have come to believe that they have reached their high standard of material welfare as a result of having pulled down the wealthy, and to fear that the preservation or emergence of such a class would deprive them of something they would otherwise get and which they regard as their due.

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… is from page 76 of the Second Edition (1999) of R.W. Grant’s The Incredible Bread Machine:

The politician dispenses wealth which other men have produced, and we say he is “compassionate,” while the businessman who produces the wealth is dismissed as “greedy” and “materialistic.”

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