Nth best, Posner-inspired

There are people out there who believe in this simple model:










This is a decision tree that says there are two choices: transactions with no problems -- no institutional failures, no externalities, a perfect market transaction -- and those that must be regulated. Of course, any regulation can be justified after the fact. If nothing else sticks, you can always invoke asymmetric or imperfect information, the last refuges of scoundrels.

But Posner makes an interesting point in Economic Analysis of Law that is rarely acknowledged by fans of regulation. He says,

Monopoly, pollution, fraud, mistake, mismanagement, and other unhappy by-products of the market are conventionally viewed as failures of the market's self-regulatory mechanisms and therefore as appropriate occasions for public regulation. This way of looking at the matter is misleading. The failure is ordinarily a failure of the market and of the rules of the market prescribed by the common law [emphasis added]. Pollution, for example, would not be considered a serious problem if the common law remedies, such as nuisance and trespass, were efficient methods of minimizing the costs of pollution. The choice is rarely between a free market and public regulation. It is between two methods of public control -- the common law system of privately enforced rights and the administrative system of direct public control -- and should depend upon a weighting of their strengths and weaknesses in particular contexts.

We can diagram this as:










But wait: it would be rare that a transaction would have a single institutional (market) failure, would it not? In fact, many if not most transactions are subject to multiple failures. The problem for the knee-jerk regulator is that they don't all work in the same direction. As I argued here, they may frequently cancel:

The state ownership of oil and the corresponding ease with which OPEC should be able to cartelize should raise the price, while externalities imply an artificially low price - which dominates? We know that the cost of our interventions in oil-producing regions is not accounted for in the price, but the risk premium brought about by the unstable regimes and regions that happen to possess the oil and our interventions in them is. Now add Hotelling into the calculus, and figure that the cartel members are going to cheat to drive prices downward, while federal taxes and regulations (not all of which are rational or efficient) raise the price.

So our decision tree now has four branches: no failure, self-canceling failures, common law, and regulation.









We can also add in the self-enforcing means open to private actors as suggested by Second Best Economist Dani Rodrik: repeated interaction, reputation, and collective punishment.













And since we're differentiating between types of self-enforcing agreements, why not differentiate between regulations? There are at least four; regulating inputs (as in the original Clean Air Act which mandated scrubbers), regulating outputs (as in mandating the use of MTBE in boutique fuels), taxation (alcohol) or user fees, and cap & trade (exemplified by sulfur dioxide markets created by the 1990 Clean Air Act).














This now looks like a rich spectrum of responses, many of which are open to private actors and therefore anarchists. I think it should be apparent now why I believe that regulations -- especially of the inputs or outputs -- are frequently a simplistic, unimaginative response to the particular class of institutional failures, real or perceived, known as market failures. True, not all are appropriate in a given situation, but it is rare to find a politician or state enthusiast who even recognizes that there are other options.

Promise of American Life (again)

In The Promise of American Life (part I here), Croly seems to accept the moral basis for socialism, but soundly rejects the Marxist formulas. Maybe this is what is meant by American exceptionalism?

In Socialism: Utopian and Scientific, Engels makes demands for gradual state takeover of private property. "In any case, with trusts or without, the official representative of capitalist society -- the state -- will ultimately have to undertake the direction of production. This necessity for conversion into State property is felt first in the great institutions for intercourse and communication -- the post office, the telegraphs, the railways." This nationalization was expected to lead to the whithering of the state:

Whilst the capitalist mode of production more and more completely transforms the great majority of the population into proletarians, it creates the power which, under penalty of its own destruction, is forced to accomplish this revolution. Whilst it forces on more and more of the transformation of the vast means of production, already socialized, into State property, it shows itself the way to accomplishing this revolution. The proletariat seizes political power and turns the means of production into State property.

But, in doing this, it abolishes itself as proletariat, abolishes all class distinction and class antagonisms, abolishes also the State as State. [1]

Croly would have nothing to do with that; in his estimation, the men (Hill, Harriman, Morgan) who built the great industrial concerns contributed to the national efficiency. Rather than banishing them, Croly wanted to harness them (and maybe control the amount of money they made [2]). His methods of regulating therefore consist of removing impediments to them, including the Sherman Act, and replacing it with a system of commissions who would review their decisions and make them more transparent. To what end? National efficiency, of course (the man had an efficiency fetish). But Croly was unsatisfied with the idea of a commission, since efficiency would normally require responsibility to be placed with one man; but by favoring national commissions, at least it gives him a way to preserve private property even as he expands the scope of the national government. Sounds like ... ?

The constructive idea behind a policy of the recognition of semi-monopolistic corporations is of course the idea that they can be converted into economic agents which will make unequivocally for the national economic interest; and it is natural that in the beginning legislators should propose to accomplish this result by rigid and comprehensive official supervision. But such supervision, while it would eradicate many actual and possible abuses, would be just as likely to damage the efficiency which has been no less characteristic of these corporate operations. The only reason for recognizing the large corporations as desirable economic institutions is just their supposed economic efficiency; and if the means taken to regulate them impair that efficiency, the government is merely adopting in a roundabout way a policy of destruction. Now, hitherto, their efficiency has been partly the product of the unusual freedom they have enjoyed. Unquestionably they cannot continue to enjoy any similar freedom hereafter; but in restricting it, care should be taken not to destroy with the freedom the essential condition of the efficiency. The essential condition of efficiency is always concentration of responsibility; and the decisive objection to government by commission as an efficient solution of the corporation problem is the implied substitution of a system of divided for a system of concentrated responsibility.

This objection will seem fanciful and far fetched to the enthusiastic advocates of reform by commission. They like to believe that under a system of administrative regulation abuses can be extirpated without any diminution of the advantages hitherto enjoyed under private management; but if such proves to be the case, American regulative commissions will establish a wholly new record of official good management. Such commissions, responsible as they are to an insistent and uninformed public opinion and possessed as they inevitably become of the peculiar official point of view, inevitably drift or are driven to incessant vexatious and finally harmful interference. The efficient conduct of any complicated business, be it manufacturing, transportation, or political, always involves the constant sacrifice of an occasional or a local interest for the benefit of the economic operation of the whole organization. But it is just such sacrifices of local and occasional to a comprehensive interest which official commissions are not allowed by public opinion to approve. Under their control, rates will be made chiefly for the benefit of clamorous local interests, and little by little the economic organization of the country, so far as affected by the action of commission government, would become the increasing rigid victim of routine management. The flexibility and enterprise characteristic of our existing national economic organization would slowly disappear, and American industrial leaders would lose the initiative and energy which has contributed so much to the efficiency of the national economic system. Such a result would of course only take place gradually, but it would none the less be the eventual result of any complete adoption of such a method of supervision. The friends of commission government who expect to discipline the big corporations severely without injuring their efficiency are merely the victims of an error as old as the human will. They "want it both ways." They want to eat their cake and to have it. They want to obtain from a system of minute official regulation and divided responsibility the same economic results as have been obtained from a system of almost complete freedom and absolutely concentrated responsibility.

This section of the book reminded me of those sections of Gabriel Kolko's Triumph of Conservatism, in which he traces Teddy Roosevelt's preference for regulating behavior by the Good Ol' Boy method. TR, the renowned trust-buster, didn't really like to bust trusts, but preferred to try to persuade the less civilized among them (read: non-Harvard men) to change their ways. Those who didn't go along, such as J. P. Morgan and (IIRC) John D. Rockfeller, felt his wrath and it was upon their necks that Roosevelt's mythological Trust-Buster reputation was built. Perhaps it was no coincidence that Croly expressed admiration for Roosevelt (one chapter features a comparison between Roosevelt, William Jennings Bryan, and William Hearst as reformers, with TR as the hero), and later, after the publication of TPoAL, Roosevelt based his New Nationalism upon some of Croly's ideas.

And it was much the same when discussing unions. First, the Sherman Act should be repealed, and second, unions should be recognized with a deal that brings their activities in line with the national efficiency. The highest accomplishment to which a man can aspire in the Crolyist world was to place his talents at the service of the nation. You know, for the sake of efficiency.

The alternative [preferred] policy would consist in a combination of conciliation and aggressive warfare. The spokesman of a constructive national policy in respect to the organization of labor would address the unions in some such words as these: "Yes. You are perfectly right in demanding recognition, and in demanding that none but union labor be employed in industrial work. That demand will be granted but only on definite terms. You should not expect an employer to recognize a union which establishes conditions and rules of labor inimical to a desirable measure of individual economic distinction and independence Your recognition that is must depend upon conformity to another set of conditions imposed in the interest of efficiency and individual economic independence. In this respect you will be treated precisely as large corporations are treated. The state will recognize the kind of union which in contributing to the interest of its members contributes also to the general economic interest. On the other hand it will not only refuse to recognize a union whose rules and methods are inimical to the public economic interest, but it will aggressively and relentlessly fight such unions. Employment will be denied to laborers who belong to unions of that character. In trades where such unions are dominant, counter-unions will be organized and the members of these counter unions alone will have any chance of obtaining work In this way the organization of labor like the organization of capital may gradually be fitted into a nationalized economic system.

...

[T]he union should have the right to demand a minimum wage and a minimum working day. This minimum would vary of course in different trades in different branches of the same trade and in different parts of the country and it might vary also at different industrial seasons. It would be reached by collective bargaining between the organizations of the employer and those of the employee. The unions would be expected to make the best terms that they could and under the circumstances they ought to be able to make terms as good as trade conditions would allow. These agreements would be absolute within the limits contained in the bond. The employer should not have to keep on his pay roll any man who in his opinion was not worth the money, but if any man was employed he could not be obliged to work for less than for a certain sum. On the other hand, in return for such a privileged position, the unions would have to abandon a number of rules upon which they now insist. Collective bargaining should establish the minimum amount of work and pay, but the maximum of work and pay should be left to individual arrangement. An employer should be able give a peculiarly able or energetic laborer as much more than the minimum wage as in his opinion the man was worth and men might be permitted to work over time provided they were paid for the over time one and one half or two times as much as they were paid for an ordinary working hour. The agreement between the employers and the union should also provide for the terms upon which men would be admitted into the union. The employer, if he employed only union men should have a right to demand that the supply of labor should not be artificially restricted, and that he could depend upon procuring as much labor as the growth of his business might require. Finally, in all skilled trades there should obviously be some connection between the unions and the trade schools, and it might be in this respect that the union would enter into closest relations with the state. The state would have a manifest interest in making the instruction in these schools of the very best and in furnishing it free to as many apprentices as the trade agreement permitted.

Translation: The state must control industry, preferably monopolies, and then control the labor that works in those monopolies. If the unions won't go along, we'll start state unions (where have we seen this?). And the state won't countenance any shenanigans from you workers: you can bargain for a minimum wage and then shut up. This isn't for you, it's for the nation.

I am reminded of Chris Nyland's article, "Taylorism and the Mutual Gains Strategy" (Industrial Relations, Vol. 37, No. 4, Oct 1998), in which he describes Taylor's attempts to reconcile with various labor unions and convince them that efficiency was something they ought to embrace. The alliance between the Taylorists and unionists is attributed to (among others) Louis Brandeis: close associate of Croly, the coiner of the term "scientific management", and the leading spark for the Efficiency Movement. One of those unionists, Sidney Hillman of the Amalgamated Clothing Workers Union, entered into collaboration with members of the Wisconsin school of industrial relations [3], but disagreed with them over the scope of union-management negotiations. The Wisconsinists believed that the scope should be limited to wages and hours, but the unionists believed the scope should include more, including investment, plant layout, and promotions.

These dalliances between labor and the Taylorists continued right through the 1920s and the Depression, during which the Wagner Act was passed. In 1940, the creation of a bargaining agreement between GM and the UAW was influenced by the back and forth between unionists, Taylorists, and the Wisconsin school. According to Nyland,

In 1940, George Taylor [not Frederick Winslow] was appointed umpire of the newly signed UAW-GM contract. At the time, this development must have appeared a great opportunity to extend the mutual-gains model. Optimism that the model would be extended was common not ony within SAM, the AFL, and the CIO but also in wider industrial relations circles. For example, Sumner Slichter in 1941 devoted some two hundred pages of Union Policies and Industrial management to an examination of the history of union-management cooperative schemes for increasing production, quality improvement, and cost reduction. Slichter was aware that such schemes tended to have a high mortality rate and had been embraced by only a small number of employers. [...]

The hope that unionization of the automobile industry would assist the growth of the mutual gains model was, of course, not realized. As in the 1920s, it tended to be small, unionized enterprises experiencing difficult times that took up the mutual-gains option. As Leichtenstein [...] notes, while GM took much from the bargaining model that George Taylor had helped develop in the garment industry, the company was very selective as to the parts of the garment program it adopted. As a consequence, the company institutionalized a form of union-management closer to the model advocated by the Wisconsin school than that favored by [the Society for the Advancement of Management, or SAM, the name the Taylorist Society had chosen when it absorbed the Society of Industrial Engineers], and it was this model that was subsequently widely emulated through industry. Leichtenstein [...] has explained why this was so:

General Motors had a very different conception of how the grievance system and umpire machinery might function. the company, which had closely observed the way in which [George] Taylor handled disputes in the hosiery industry, wanted to avoid the freewheeling, all-inclusive style pioneered there. The largest corporation in the world had no need for the kind of economic tutelage so often meted out by those industrial relations "fixers" who had pioneered in the economically chaotic clothing trade.

In short, GM rejected "joint management" and instead institutionalized that amalgam of work practices, formalized grievance procedures, limited seniority, and constrained bargaining that subsequently became known as "New Deal Industrial Relations."

So Croly and his friend Brandeis got their way after all, at least with regard to unions. The Wagner Act, far from being the labor success it is frequently claimed, was a means of restricting labor's control over their work environment. Those aspects of work that today we call Taylorist should have been called the GM-Wisconsin model. As I argued in this article, it was GM's size and an accident of history rather than any special power of efficient management that led the world to adopt their accounting system, and so it is with their labor control system. In both cases, the adoption has been assisted by the federal government: in the first case by its adoption as the GAAP and the SEC, in the second by Wagner and the NLRB.

--------------

[1] I guess I was wrong about the terminology of socialization and nationalization in this post, but the outcome is the same: fascists must have the state, Marxists seek to abolish it.

[2] At that time, they still naively believed that the Constitution had to be amended before you went off and assumed a power like taxing income. We have learned so much since then.

[3] Somewhere, I read that the ILGWU instituted the first Industrial Engineering program, but I don't recall where. I think Kevin Carson would suggest that the "mutual-gains strategy" will be effective right after the workers take ownership of the factory. But then it's a "worker-grains strategy," isn't it?

National vs. Social

As if you haven't noticed, I've been giving lots of attention to the Jonah Goldberg thingy. It happens to be an interest of mine.

One of his comments on the interview with Glenn and Helen Reynolds was something like "Nationalizing and socializing mean exactly the same thing: When we talk of socializing health care, we mean nationalizing, and when someone talks of nationalizing the oil industry, they mean socializing it."

Well, yes and no. Goldberg is right when he says the two are the same, but they shouldn't be and they weren't always.

This gets down to what Marx said and meant in theory, and how his theories have been taken up in practice. Marx saw the final stage, the one succeeding capitalism, as being a thoroughly democratic society in which institutions like private property would give way to community property. Thus, factories would be socialized, the opposite of privatized. However, he also saw that the state, the mechanism by which the capital-owning class controls the workers, would also whither away. Thus, socialized industry or socialized health care meant something completely different to him than what we mean by that today.

Today, socialization of an industry means ownership becoming controlled by the state, i.e. nationalization. Marx's successors have adopted his vision for everything except the state and have substituted the state for the community. And in this regard, we find that the state-loving left is the more nationalistic.[1]

Nationalism is frequently conflated with extreme patriotism or jingoism. When using the term to describe a characteristic of fascism, that's a red herring. A fascist's nationalism is not primarily about which state is better, it is about the proper scope of the state. Mussolini's prescription was, "All within the state, nothing outside the state, nothing against the state." And so it is when people speak of those things which are "too important to be left to the market," such as education, energy, health care, transportation, and so on. For each new field of endeavor into which the state enters, the state becomes that much stronger and more important (and the realization of Marx' state-free vision that much farther off). And as I have written in other contexts, no matter which party favors and clamors for the increase in state authority, the other is happy to exploit it for their own ends when they are in power. That is one reason it is a one-way ratchet. At some point, the scope of the state's authority will enter into every realm of personal life: that is what they meant by "totalitarian". For Mussolini, it was an explicit goal, enthusiastically sought; for today's neocons and takes-a-villagers, it is a "necessary evolution," driven by their concerns for physical and economic security, "market failure"[2], and the misfortune of "living in a second best world."

---------------------------------
[1] Yes, they are quick to blame America for the world's ills, but note how easily the left will forgive and forget their own when committing the same atrocities. The Blame America First tactic is merely cover for a Blame Republicans First strategy. World War I and II? Democrats. Viet Nam? Democrats. Only president to use a nuclear weapon? Democrat. President in power for both the first World Trade Center bombing and the initial planning for the second WTC bombing and thus responsible for America's poor image in the world? Democrat.

[2] Check it out: Quasibill catches the neocons explaining -- in terms of market failure -- why the state must pay for the economic security of Big Air under the guise of paying for the physical security of the passengers.

Wal-Mart and sustainability

UPDATE: In response to some thoughtful criticism I got from a container shipping industry executive, I edited a portion below. I had said that the state helped break transport unions, but in reality they are still a force in the industry. It would be more accurate that the state forced them to accept change.

I got interested in some of the responses on this post on Environmental Economics. If Wal-Mart had claimed altruistic motives for some of their policies, that would properly be called "greenwashing". However, they weren't. Tim Haab was basically pointing out a truism: Wal-Mart's interest in sustainable measures (including hawking CFLs, incorporating passive solar for lighting and active solar for electricity, and so on) is done for selfish reasons: to make money. Like any post involving Wal-Mart and sustainability, it became a lightning rod for people with definite policy agendas. Given that I am likely to either defend or attack Wal-Mart and sustainability, depending on the context, I have an opinion but no definite laundry list of policies I'd like to see enacted.

You could summarize the many variables and value judgements in truth table format with about 27 variations (3^3) and assign each to an ideology. The variables are Wal-Mart, sustainability, and planning/government, each of which people may label as good, bad, or benign/irrelevant. Wal-Mart good, sustainability irrelevant, government bad is the default position for the vulgar libertarian. Wal-Mart bad, sustainability good, planning good is the default position for the Progressive. W-M bad, sustainability irrelevant, gov't good is the default for the populist/conservative. W-M good, sustainability bad, gov't benign is the evangelical right (she drives an SUV and has 6 kids).

I think my entry in the table would be "Wal-Mart benign, sustainability good, planning/government bad". Wal-Mart doesn't "drive" the system the way both the Progressives and the vulgar libertarians say that it does. Rather, the system created Wal-Mart. Going by Chandler's Visible Hand, people responded 100 years ago to the first department stores (Marshall Field's) and then to the mail-order stores (Sears, Woolworth's) the same way they do to Wal-Mart today: by claiming they would eat away at local businesses. Well, if it wasn't Wal-Mart, it would be someone else.

So I tried to point this out and emphasize the fact that it is state capitalism that creates the unsustainability, of which Wal-Mart is just a delivery boy. Our system looks like a giant vacuum cleaner that hoovers up resources in the developing world and kicks them out back here; Wal-Mart is the least fancy exhaust portal. We the people continue to support policies which produce "efficient" systems for delivering products to us. Those systems are a combination of transportation, energy, and credit subsystems that interact with cultural values to both create the demand and impose costs on the use of alternatives.

For example, we have national energy policies that ensure the profitability of large electrical monopolies who generate from coal and natural gas. This will be defended as efficient because it is highly engineered to look that way from the standpoint of the producer and the consumer. However, from other standpoints, there are externalities that are not accounted for. Those externalities include both the pollution and the intangibles, including the isomorphism around the chosen system. This is still something I'm working out, but the isomorphism includes high voltage AC-based transmission and distribution (which increases the cost of using alternatives, like LEDs, or introducing alternative sources, like solar[1]), an emphasis on greater supply (rather than demand-based solutions such as increased insulation or more efficient motors), centralization (rather than distributed generation), and isolation (rather than integral with the users so that the externalities fall on them). When the design was established 100 years ago, AC was a brilliant improvement over DC, regulated monopolies were promoted as the only viable alternative for generating and distributing AC power, and the accumulated engineering successes within that political framework have been impressive. But nothing is so impressive as the socio-political engineering, including a nearly invincible cloaking device and a strong superstructure made of an alloy of the Edison Institute, politicians, populist regulation cheerleaders, discount rate receiving electricity-based industries (like electrical steel furnaces), coal miners unions, dividend receiving widows and pension funds, and soccer moms worried by the so-called de-regulation that is nothing of the kind. Given a different political framework, the counterfactual engineering successes would be just as impressive, but the overall social efficiency (including the external costs) could be much better.

We furthermore have policies that promote and protect the use of petroleum, including "free" taxpayer-supported road systems and the Carter Doctrine. We have policies that promote and subsidize long distance shipping of goods, including eminent domain and taxpayer support of railroads (mostly as a historical fact, not current policy, though the pension plans still receive special tax recognition and grade crossings are your problem, not the railroads') and container ships. The container shipping history is more recent and includes several very interesting factors. Not only did the state (including the federal government) help break [force] the longshore unions who opposed [to accept] the shift to container ships, but the cities, states, and federal government paid for the infrastructure, including the highway systems, harbor improvements, and dock facilities (cranes, rails, etc.). Today, taxpayers foot the operational costs, including infrastructure maintenance (harbors and roads) and cargo inspections (thanks to our interventionist foreign policies, the great transportation system that brings goods from the world is also a potential Trojan Horse for WMDs), but the investments are promoted as tax-yielding investments rather than the revenue consuming corporate welfare programs that they are.

All of this infrastructure, what W. W. Rostow would call social overhead capital, was put in place in the 60s and 70s, long before Wal-Mart became a force. And yet, having taken advantage of it, Wal-Mart is seen by some as the bad guy. Those who hold that view are mostly self-designated Progressives, the same people who favor central planning for efficient management of the economy. This is the main reason why the two groups -- those who see the infrastructure as the pinnacle of efficient engineering, Wal-Mart as benign, and sustainability as irrelevant, and those who see globalization as the evidence of Western greed, Wal-Mart as the embodiment of evil, and sustainability as the new religion -- talk past each other. One looks only at the engineering and sees none of the underlying political structure that brought it about (and perhaps even opposes any government interference with this "free market" system), and the other refuses to admit that their policy preferences are simply the most recent incarnation of the same policies that got us into this mess in the first place. They want another patch on the binding on the dressing on the bandage on the abrasion caused by the crutches they promoted for a fit patient in the first place.

And to top it all off, we have the same social engineers looking to solve the sustainability problem by imposing unsustainable, modern, Western values onto the undeveloped countries whose citizens are the victims of this system. For them, the real problem in the world is not Western-style consumerism, it's those other people who breed like flies because they're ignorant and poor. This obviously plays into biases some have against swarthy "others", but does not necessarily spring from those motives. And it seems to have escaped the attention of the planners that such lifestyles, having been practiced for millennia, are inherently sustainable.

But no, we're going to retrain them rather than us. First, as the story goes, we have to promote growth. In a recent post, Dani Rodrik says,

"What kind of a growth strategy should this [developing] country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run?"

He concludes the latter. But he isn't the first: Rostow explicitly proposed that strategy in his Stages of Growth: increase the efficiency of farming to free up and feed a substantial labor pool that can move to urban areas and work in heavy industry. You can do this by subsidizing cash crops (for export) instead of traditional crops (for consumption) and by providing social overhead capital (transportation). Diana Davis' history of the French colonization of Algeria in Resurrecting the Granary of Rome shows that they accomplished the former by several means: confiscate public lands used by nomadic herders, outlaw traditional farming methods (like using fire to clear scrub), and ban the payment of taxes with in-kind payment (force a switch to a cash economy). People who suddenly couldn't sustain themselves by traditional means and now needed to raise money to pay taxes migrated to the cities to look for jobs with French employers. Note how the preferred policies of modern social engineers are remarkably similar to the policies of colonial powers in an unenlightened age.

After claiming that "The joint stock company owes its existance [sic] to [increasing returns], not so much to state (or other) promotion," in response to which I pointed out the above, one of the commenters on the Env-Econ post, Reason, listed his favored set of policies to reduce population growth:

1. Increasing the duration of education which increases the costs of having children
2. Providing social security which reduces the benefits of having children
3. Better public health so that people can be confident their children will survive
4. Peace (same reason as above)

Having selected government policies to solve a problem, he found no opportunities for anarchism to solve the same, as if he had actually searched for any. I'm not going to defend outright anarchy in a world unused to anything but increasingly active states where force is the first resort, but I should think it obvious that smaller states are generally not pugnacious, so he was wrong about his fourth point not being addressed by anarchism. [2] More importantly, though, he failed to explain how 1, 2, and 3 were going to be funded in a pre-takeoff, sustainable society of the type found in the undeveloped world.

Such societies are marked by their traditional, subsistence farming practices, and their children are a necessary source of labor and the primary retirement pension for their parents. Trade is frequently made by in-kind payment. For example, Diana Davis notes the achaba property arrangement in which herders exchanged their labor for pasture rights in Algeria. In order to introduce education and social security systems to take away the parents' labor and pension incentives, there must first be a system of taxation and management. These emphasize the state rather than the community as a central cultural institution and establish the state as central collection and dispensation authority in addition to, or perhaps in place of, its role as night watchman. More importantly, however, it forces the people to abandon traditional methods of trade and agriculture and to switch to crops and methods or other uses of their labor which are easily traded for cash. That means that they must switch to crops or labor of value to people who have cash, i.e. the developed world. The cash crops must have an export value, or the labor must be in an export industry.

Now, just where do they think The Gap, Nike, and Wal-Mart get their labor, sweatshop or otherwise? This is exactly the point made by Ellenita Muetze Hellmer (about which I wrote here).

Given that the greatest advances in public health are typically made by applications of civil engineering rather than medical science, Reason's third point is the step which usually gets the state involved first in sewage projects, then in national transportation infrastructure (roads, rails, ports), and then in "other" engineering projects (oil field development, power facilities, civil defense, air bases, nuclear fuel processing). I know that's a very unconvincing linkage, but I predict that you could draw these direct lines if you only knew enough of the underlying history. After all, if you have the spontaneous creation of private engineering capability and a weak or decentralized state, those engineers won't go looking to develop a military capability because the politicians and bureaus won't exist or have the means to pay for it. Compare the early US -- where military facilities like Ft. McHenry were still conceived as defensive structures; the design and construction were ad hoc, Golden Carrot-type contracts (award a prize to the best designer); and community-based (the federal government granted money to local communities and provided the construction design) -- to modern US military-industrial arrangements where contractors conceptualize, design, build, and endlessly refine offensive weapons while the spin-offs are touted as beneficial to the public (the internet from DARPA, Tang from NASA, etc.). Or consider the military pedigree of modern quality control theory.

When people in the developing world are employed by consumer-oriented industries, what values are transmitted? The employees at Nike factories in Viet Nam first bought bicycles (sustainable) and then motorbikes and now look forward to moving up the consumer ladder to a car. In China, cars (especially with "foreigner" plates) are a highly desired commodity and the sustainable bicycle culture is all but dead. The developing world, with encouragement from the social engineers in the developed world, is building a sketchy replica of the type of economic system whose money they wish to attract. They believe they can attract that money by feeding the West's insatiable maw with container ships full of cargo. I called this (tongue-in-cheek) a Cargo Cult (which seemed to offend odograph, though I don't understand why). Unlike the actual Cargo Cults, it may succeed in attracting the money. For some people, for a while. However, it is not the road to sustainability and it is unlikely that 9 billion people will succeed in enjoying the lifestyle currently enjoyed in the West. The problem lies with us and our chosen means, not them and theirs. The solution lies with change in our society, not with them choosing our existing means.[3]

--------------------------------


[1] Yeah, I know: where would the LEDs and solar cells come from absent the system that provided the R&D resources to discover them? This is perhaps not as strong of a counterargument as you might think: Einstein theorized the photoelectric effect long before the R&D resources were available, and perhaps more would have gone into searching for practical applications it if the political support for large, central, coal-fired generation had not been as successful. No legal monopoly means higher cost and more awareness of the externalities because nobody could afford to build large, centralized systems. That in turn means more searching for alternatives. Also, it would be more feasible today to install a small solar or wind system (like many farmers had before the REA) because you would only be replacing or plugging into a decentralized subsystem.

[2] It is at least arguable that an unstable anarchy is potentially very violent - even David Friedman admits as much in noting that Saga Iceland collapsed in a series of blood feuds, albeit after 300 years of stability. But a stable anarchy can't raise the money or army to go looking for a fight.

[3] Yes, I'm also concerned about population issues. But I think that a less important problem compared to that of Western consumerism. I also think it foolish to believe that a proper list of policies and a certain amount of money is going to solve the former, or a sudden majority of libertarian politicians the latter. Solutions to both problems require wholesale changes in cultural attitudes and values; politics and economics only take you so far. Sometimes the state can lead cultural change, but not always. And not always for the better. Saying self-evident things like, "education of women is important to control population growth" doesn't mean much in Islamic or other traditionalist societies where women are relegated to second class status. I doubt you could fund or force anything which would work. Creating change in those climates requires something that operates on a more personal level than a United Nations program, something that flies under the states' radars, something that cannot be denounced by Imams.

Coase is not magic; neither are agencies

Given that my original response to Megan included a very tepid mention of Coase -- and that not even a central argument -- and that I tried to calm the overenthusiastic commenters on the first MR post, I don't think her post "Coase is not magic..." was aimed at me specifically. However, it is worth noting what is wrong with it. She says,

Coase requires low transaction costs, which is a stumbling block between two multi-party resource users, but maybe not insurmountable. It also requires perfect information. That is harder. But the real problem is that farmers are not profit-maximizers along every variable that they manage.
...
If your first sentence doesn't overcome the problem that farmers are not profit-maximizers in water use, DO NOT write a second sentence explaining a theory that depends on that assumption.

1) I reject Megan's premise: Coasian bargaining does not require profit maximizing farmers. If we were to accept these conditions for the operation of incentives, then there are many more policies we should reject.

One of my favorite measures of whether energy is too expensive is to note the presence of Christmas lights in poor neighborhoods. When they are on all night, electricity must be cheap. Likewise, when the local high school parking lot is filled with gas guzzlers which they use to drive 500 yards to Sonic, gasoline must be cheap. The people engaging in these and other behaviors (e.g. failure to install CFLs) are clearly not profit maximizers by Megan's definition (they are rejecting free methods for saving money on energy like turning off Christmas lights at bedtime, or not hanging them in the first place). So what good will it do to promise them a little more money to install solar or buy a Prius? If the rise in gasoline prices by $2 in a few years won't change their habits, what good will a little carbon tax do?

I doubt that Megan or for that matter anyone else is going to accept the idea that those people won't change their habits in the face of a tax or subsidy. The point is that people will change their behavior on the margin if not on average. This has nothing to do with their ability to maximize along every variable. It has much to do with their response to incentives.

Incidentally, I'm not convinced that farmers are as hard-headed or superstitious as implied. We have evidence that farmers are capable of quite sophisticated maximization and bargaining. Steven Cheung ("Fable of the Bees: An Economic Investigation") and David Johnson ("Meade, Bees, and Externalities") reported in 1973 that it had been common practice for nearly a century for farmers to pay bee keepers for pollination when they needed those services (to enhance yield), but for the keepers to pay to put their bees in a field in order to promote honey production in other seasons. I have also read that some farmers engage in fairly sophisticated hedging in the commodities markets using Scholes-Black option-pricing schemes.

2) Nor does Coasian bargaining require zero transaction costs or perfect information. These may be requirements of the "Coase Theory" as popularized by Stigler in his textbook, but I find no such argument made by Coase in the original article to which these discussions refer, "The Problem of Social Cost".

As Alex correctly points out, such conditions are sufficient for Coasian bargaining to yield an efficient result, but they are not necessary conditions. I doubt whether there are any markets in which there are zero transaction costs or perfect information, yet markets in general seem to work well. The best treatment of this subject, once again, is David Friedman's from Law's Order, webbed here (you'll want Chapter 4). He divides the explanation up into three parts: Nothing works, Everything works, It all depends.

Nothing Works is the explanation of the world in which the allocation of rights seem to be handed out in an arbitrary manner despite the fact that it is the presence of both parties that causes the problem. The polluter is as responsible -- but not more -- than the people living downstream because if they didn't live there, it wouldn't be called pollution. Then Coase introduces the part which Megan and Barkley Rosser (see his comments here) seem to have in mind: in the absence of transaction costs, you could give the property rights to either party and it would be negotiated to an equitable outcome (Everything Works). However, this only covers about one-third of the original essay, because Coase then moves on to relax the assumption about transaction costs. In the presence of transaction costs (the real world), it all depends on initial allocation of rights and the relative magnitude and direction of the transaction costs (which are not symmetrical).

At its heart, Coase's point (as distinguished from the Coase Theory) is about (a) property rights and especially (b) transaction costs and their interaction with both disputes and the regulatory/judicial environment. One-third of the way into the essay, Coase points out,

The argument has proceeded up to this point on the assumption that there were no costs involved in carrying out market transactions. This is, of course, a very unrealistic assumption.
...
Once the costs of carrying out market transactions are taken into account it is clear that such a rearrangement of rights will only be undertaken when the increase in the value of production consequent upon the rearrangement is greater than the costs which would be involved in bringing it about. When it is less, the granting of an injunction (or the knowledge that it would be granted) or the liability to pay damages may result in an activity being discontinued (or may prevent its being started) which would be undertaken if market transactions were costless. In these conditions the initial delimitation of legal rights does have an effect on the efficiency with which the economic system operates.

That seems a far cry from "requiring no [or low] transaction costs". It says that the bargaining will depend on the relative costs and the initial allocation, but Coase himself is at this point emphasizing the effect of transaction costs, not assuming it away.

3) In my original response, I was reacting to Megan's table-banging defense of bureaucrats (something Bernard Yomtov seems to have overlooked) by pointing out that (1) the state had created the problem by forgetting earlier agreements, (2) that all attempts to "balance competing needs" had been all-or-nothing, winner-takes-all decisions that disregarded earlier settlements, (3) the logic of politics and bureaucracy drove those decisions and serves to perpetuate the bureaucracy rather than creating solutions, and that (4) contra the so-called libertarians commenting on Megan's site, a libertarian response would almost certainly not favor the farmers. I listed several interesting arrangements that would inform a truly balanced, dynamic solution. Without saying it, I was implying that the required balance might be achieved by allocating the property rights to the fishermen and/or tribe. For one thing, this has the intuitive appeal that it restores the rights to the initial holders. I believe it also holds some promise for the situation. Curiously, the "Coasian" initial rights allocation assumed by Megan and many other commenters including the Coase cheerleaders have all been the same, and opposite to those I implied.

Under farmers' water, I agree with Megan that the farmers may be too conservative in selling and the fishermen too uncertain about how much to buy and how high to value it. However, under fishermen's water, while the fishermen might also be too conservative in selling water (resulting in the extreme in the outcome ESA advocates defend), the farmers ought to be able to calculate fairly precisely how much water to buy and how much it is worth. In reading about corn, cotton, and soy, I have found that there are fairly well-known relationships between local conditions (temperature), water, and crop yield. Undoubtedly, many farmers would choose not to farm at all under conditions in which they have to buy water at market (and hopefully they would have to buy electricity at market, too). Some farmers would buy the water at market and probably squander some of it. And some farmers would choose to farm under conditions in which they would maximize yield from every drop: this gets Megan the agribusinesses with Cadillac water systems she prefers.

As I noted in my first response, there is historic precedent for this arrangement. As Richard Stroup reports in the article to which I linked but I doubt anyone read,

In England and Scotland, for example, unlike in the United States, the right to fish for sport and commerce is a privately owned, transferable right. This means that owners of fishing rights can obtain damages and injunctions against polluters of streams. Owners of these rights vigorously defend them, even though the owners are often small anglers' clubs whose members have modest means. They have formed an association that is ready to go to court when their fishing rights are violated by polluters.

Although the US is normally associated with strong property rights protections, I find it interesting that we don't have such arrangements. There is probably a historical curiosity involved, but why haven't our legislators or bureaucrats noted the benefits of the arrangement and taken action to import it?

(What follows is conjecture that is relevant, but perhaps not entirely clear.)

I believe this issue illustrates a common problem: bureaucrats are too unimaginative. They think that by weighing lots of opinions and arriving Solomon-like at a decision that they are "balancing the needs" and that this is very creative. This isn't substantively more creative than what teenagers would do in adjudicating a schoolyard fight between pre-teens by picking their favorite and enforcing it through threat of violence. A really creative solution would be to figure out how to strengthen existing self-governing institutions or establish new ones that don't require the constant attention of some state agency.

I have a house and a yard; people rarely trespass. It isn't just because of the threat of police action; professional criminals know how to get in and out without getting caught and random break-ins are rarely solved. Besides, simple trespass (walking across my yard) could be accomplished without even my knowledge. The secret is that everyone knows, understands, and accepts the difference between that which is their property and that which isn't. The idea is self-enforcing and scales rather well.

In David Friedman's "A Positive Account of Property Rights", he explains how bilateral agreements to behave civilly may be described as a series of Schelling Points (Schelling Points all the way down, so to speak). Among them is arguably private property rights. I have conjectured that policy decisions (regulations) are not only Schelling Points, but because they generate similar ideas about how to proceed, they are Schelling Means (I think the literature would probably still call them Points). Regulations are a Schelling Means that generate additional Schelling Points that strengthen the state without intending to do so. In common usage, people are quick to say, "There ought to be a law..." because force is the first solution that comes to mind and the state sanctions force through legislation. Few people are happy with the results when the state grows out of control (fascism/communism) or comes under the control of less-than-stellar politicians (corruptarchy), but this is what happens when we rely on agency-enforced regulations for every problem, perceived or real.

Contrast those results with the institutions of civil society that generate Schelling Points that strengthen society. These would include property, trade unions, family, banking, mutual aid societies, education, money, agriculture, and common law. These are obviously not easy to create from whole cloth and doing so is an act of immense creativity. Forming voluntary associations to create institutions to address problems was a characteristic of Tocquevillian America, abandoned in the Progressive Era. Our goal should be to build Civil rather than State Schelling Means; we can expect a fight from those most interested in preserving or extending the State Schelling Means.

Running on glue and tar

My wife and I have been discussing where the world is going to go in the post-Peak Oil era. I for one am optimistic, but concerned about the transitional period. I think that we (humanity) will develop a variety of responses to the problem(s), and that we will be better off in the end, but I am concerned about the rate at which the transition will occur. There may be upheaval and pain in the interim, regardless of who is in the White House or what policies we follow to get there.

In the comments on Matthew Yglesias recent post on gouging, we see a response to higher fuel prices that I think is indicative of lazy, uncreative thinking. Simply keep piling on one supposed remedy after another. This is creative thinking in much the same way that fixing your mistakes after rushing through a job is productive work. (for my previous thoughts on gouging, see here, here, and here).

Some things seem to escape the attention of people who think like this. For example, the crimes committed by a gas station owner can be determined by looking at his prices compared to his competitors' as follows:

• higher: gouging
• lower: predatory intent
• equal: collusion

In this environment, it might be worthwhile to keep a lawyer on staff, nicht war? And since the laws are subject to change, a lobbyist might be useful. If everyone has to have lawyers and lobbyists, that creates a competitive advantage for larger businesses. I think I can assume that people who are against gouging are also against large businesses, so why don't they understand or acknowledge these problems?

---------------------------------

Then, I was reading about heterodoxy, Cowen, and Veblen, looked up Veblen, got side-tracked by Giffen Goods, and finally came across an essay in The Nation by Sasha Abramsky entitled, "Running on Fumes". He raises the idea that gasoline is a Giffen Good, one that poorer people will come to spend more on even as its price rises because they are locked into it.

Sasha says,

Indeed, the very fact that some commentators, such as the Cato Institute's Jerry Taylor, so glibly assume (or, at least, assumed pre-Katrina) that an oil price shock can be painlessly absorbed shows just how invisible the country's poor have become to much of its pundit class.

Since Taylor's offending comments are neither quoted nor referenced, I can only guess that Taylor said something like, "let the price mechanism work" in response to calls for price controls. The month prior to Abramsky's piece, Taylor wrote about fuel prices in NRO. I would recommend reading both before proceeding with the rest of this post.

Back?

It is of course debatable whether the price mechanism will work well with regards to energy. In the comments on James Hamilton's Peak Oil in America post, Stuart Staniford claims that recent empirical research indicates a short-term price elasticity of -0.05. An older survey indicates that the long term price elasticity is around -0.8 and the short term is around -0.2. In any case, this is for a general population, not the poor, so it is only indirectly relevant to the point. If these two articles can be taken as accurate, the indicated decrease in elasticity (magnitude) indicates that it will be harder to curtail gasoline use as price goes up than it was in 1979-1983; I would assume that it would be harder for the driving poor, but perhaps not so much for the urban poor who have access to other options. (I graph oil use vs. oil price here, but have not updated it since October 2005. Note how much reduction was achieved 1979-1983.)

Near his conclusion, Mr. Abramsky claims that the decline of the rural area about which he is writing is preventable, but

prevention involves the sort of innovation the Bush Administration, besotted as it is with laissez-faire triumphalism (not to mention oil-industry campaign cash), has been reluctant to embrace.

Did you just experience a self-administered lacto-nasal enema upon reading -- in a single sentence -- that the Bush Administration favors laissez-faire policies and that laissez-faire and oil-industry campaign cash are not mutually exclusive?

Indeed, this seems to be common in discussions of gouging, Peak Oil, current pricing, and related issues. Are Mr. Abramsky and the commenters on Matthew Yglesias' blog really claiming that the oil industry enjoys laissez-faire trade policy? That seems so absurd on its face that I cannot believe it needs rebuttal.

The oil industry came of age in the Progressive Era. Oil production had steadily increased and prices decreased for the entire history of the industry through the antitrust prosecution of Standard Oil. As the automobile caught on and demand heated up, Progressives were excited to be able to subsidize a competitor to railroads. Then, as the US got involved in World War I, businessmen eager to be freed from antitrust regulation jumped at the invitation to participate in the Commodities Section of the Petroleum War Services Committee and the Oil Division of the United States Fuel Administration. Dominick Armentano points out in Antitrust and Monopoly, that A. C. Bedford, president of Standard Oil of New Jersey, was appointed as chairman of the War Services Committee. Their experience of cooperation and "supervised competition", and the concurrent worldwide embrace of central planning (think about what was happening in Russia, Germany, Italy, and even England in the period between wars), paved the way to the corporative-creating National Industrial Recovery Act. When that was struck down, the Connally Hot Oil Act of 1935 was passed without hearings to maintain stability in the oil industry. It allocated state production quotas and provided a means to enforce restrictions on interstate transshipment in excess of those quotas.

The military has been tied in to oil production or at least the Middle East arguably since Eisenhower placed troops in Lebanon in 1958 and Kennedy defended Saudi interests in 1963. More recently, in 1980 Jimmy Carter announced the Carter Doctrine, stating that the US would defend its oil interests there. You have the obvious Bush wars since then, with Clinton lobbing a few bombs and establishing bases in Saudi Arabia in between.

In addition to regulatory and military support, we also have regulatory intervention and distortion. As James Hamilton has pointed out, one reason for the increase in gas prices during the tight markets in 2005 was the fact that the national market is segmented by EPA requirements and refineries cannot easily switch between the various boutique fuels favored by - you guessed it - Mr. Abramsky's fellow travelers. Finally, we have people who insist that we need to increase gas taxes so that we, like Eurotopia, will have gasoline prices near $10 per gallon.

Any guesses as to whether The Nation favors those higher fuel prices? I searched for "carbon tax" on their site and got 78 hits; the first one says, "A carbon tax would be simple --" The author goes on to add that

And as Charles Komanoff of the Carbon Tax Center argues, at least part of the proceeds of the tax could be rebated to poor and middle-income households through the income tax system, neutralizing any inequities. The unrebated balance could be used to subsidize alternative energy research and production. Given the historical successes of government funding of basic research in computing and medicine, there's every reason to believe the products of this work would be very promising.

Another two-fer: not only do we learn that the simple tax now has lots of other little simple ancillaries, like using the simple income tax system to rebate for gas, but we also discover that the government's funding of basic research has a proven track record. They don't explain exactly how we figure out the difference in rebates between subway-riding New Yorkers and rural Californians, so perhaps it is not as simple as they first insist. Nor do they actually compare the government's track record in conducting research to anything else, like privately funded applied research. Now, I think it's possible that government gives the private sector a good run in basic research, but recall that the human genome was first decoded by a private company in 1/10 the time and budget as that proposed by a government agency. But the private sector is much better at applied research, which is what was meant by "subsidize alternative energy research and production." So they call for applied research based on the government's track record in basic research? Nice sleight of hand.

--------------------------------------

A greater protest must be registered over Mr. Abramsky's nearly complete silence on the century of other Progressive policies that have pushed the poor out of town and into the oil-based lifestyle. Once again, we can refer to Gabriel Kolko's Railroads and Regulation and The Triumph of Conservatism for an understanding of the politics underlying regulation in the Progressive Era. The tongue-in-cheek, short version is that competition was largely working for everyone except the capitalists themselves. Competition was forcing costs down so far that they were all headed for bankruptcy, so they tried cooperative arrangements. When those failed, they turned to the federal government to act as the cartelizing agent. Though Kolko doesn't specifically address it, it is easy to see that the electric power industry faced the same logic of high capital costs, low marginal production costs, and the resulting expansion, competition, system building, bankruptcy, and "need" for regulatory intervention. This eliminated the "destructive competition" in rails & utilities by constraining competition and innovation. The whole point of regulatory oversight was not consumer protection, as the unsophisticated, narcissistic state-worshipper would have you think, but rather stabilization for the industries so they could go back to peace, quiet, and regular dividends. That is why deregulation and people like Craig McCaw and Michael Milken were so upsetting to AT&T in the 1970s and 1980s, and why electric utilities are so resistant to deregulation today.

The same public who first wanted to give land grants and rights of way to railroads and canals in order to get rid of private turnpikes, and then wanted to constrain railroads because the average voter didn't understand the logic of the capital-intensive industry they had spawned, and now didn't like the fact that their regulations created a de jure cartel, wanted roads. They joined the Good Roads movement and fought for public subsidies for bicycles and then cars. When Louis Brandeis brought Harrington Emerson to the stand in the 1910 Eastern Freight Rate Cases to argue that every industry could be rationalized with and every consumer benefited by Taylor's Scientific Management, the public caught the bug for the Efficiency Movement and Technocracy Movement. They wanted to centrally manage everything. The goal was, as Herbert Croly put it, to produce "Jeffersonian ends with Hamiltonian means".

As outlined above, the Progressives in WWI and FDR's cabinet in the Depression and WWII supported a state-industrial oil policy to further rationalize oil production and distribution. In conjunction with the Good Roads and subsidization of the automobile (which gave rise to the Golden Age of manufacture and its corresponding anomie and unionism which many Progressives yearn for), the stage was set for moving out of high density urban areas and to the suburbs.

The push to suburbia has also been helped over the years with some uniquely Progressive policies. Rent control in New York City, for example (I once read that poverty-stricken Walter Cronkite lives in a rent-controlled building). The aforementioned utility subsidization, including the TVA and REA, which replaced farmer-owned windmills with investor-owner utilities. More recently, to "preserve their character" (a euphemism for "preserve their property values"), many cities (bastions of Right Wingerdom, like San Francisco) have banned urban development, forcing people out of town to find affordable housing. To pay for a wide variety of programs, some of which used to be privately provided by the working classes for themselves, cities have raised property and sales taxes (Santa Fe, for example: there's a reason you need to make $10/hour to live there, and it mostly has to do with California millionaires moving into the City Different; most of them are not exactly Goldwater Republicans). While the upper and middle classes were leaving the city to live in clean, quiet neighborhoods, these policies were all pushing the poor even further out of town.

In the specific case Mr. Abramsky addresses in his essay, the size of those towns probably needs to be smaller. They were dependent on mineral extraction and timber, both repeatedly attacked by people like Mr. Abramsky, but probably not by Jerry Taylor. Indeed, it's probably a safe bet that when people like Jerry Taylor raised the issue about the impact of stopping resource extraction on the workers, people like Mr. Abramsky glibly dismissed it, saying that the economy could easily absorb the jobs lost. But I will go further than either of them and point out something both should agree to (if they want to be logically consistent with their probable core values): continuing to live in a non-agricultural rural area is inherently energy intensive, and we should not continue to subsidize it if we really think Peak Oil is a concern.

I recently came across a site (probably something on Gristmill dealing with global warming) that claimed all of the skeptics of (Kyoto?) never provide any suggested solutions of their own. Does Mr. Abramsky offer a suggested solution for the poor people he exploits for his article? He offers a vague mention of mass transit, a system that works well in high density areas like Europe and the Northeast Corridor, but probably not in Northern California. He seems to imply that George Bush is personally responsible for the lack of mass transit despite the fact that ridership is higher than it was under Clinton.

Abramsky makes a quick offer to help them pay for oil, thus furthering the addiction that has them in this situation in the first place, and contributing to a 150 year legacy of trapping people in a state-underwritten prison. The latest insult in that legacy has been the ethanol subsidy, a Carter-era program with bipartisan support for all the wrong reasons: it reduces imports, it supports "family farmers", and it is "renewable". First used to replace lead (Pb) and reduce pollution, it actually increases certain types of pollution. The subsidies for "family" corn farmers mostly end up in the pockets of ADM. And the renewability, touted by Progressives, is having growing implications for poor people. As I noted in my review of Joshua Tickell's From the Fryer to the Fuel Tank, "Some bio-cheerleaders ... claim that a large scale shift to biofuels won't affect food prices, but that is almost certainly wrong. The amount of land required to make a dent into our petro-fuel usage would easily require both the fallow fields and some land currently used for food production. Demand up, price up, QED." Given recent headlines, I'm going to claim prescience, but I think every clear-headed person could figure this out on their own. Even Noam Chomsky figured it out in hindsight.

Finally, Abramsky also mentions the possibility of subsidizing efficient vehicles, something that has been going on for several years with mixed results*. In other words, we get some paeans to Progressive programs and a demonstration of how much good Mr. Abramsky can do with other people's money to prove that he cares. Some of his explanations are wrong, some suggested solutions are demonstrable failures, and one at least will probably make things worse (subsidizing oil? Really?!). At no time does Abramsky recognize or even seem to be aware of the contribution of his intellectual predecessors to the creation of the problems of today's poor. Instead, he turns the tables, claiming that those problems were caused by people like Jerry Taylor and policies like laissez faire and implying that anyone who doesn't accept his vaguely defined solutions is responsible for the misery and possibly death of the poor. "Laissez faire means you don't care."

Now, Mr. Abramsky is correct to question the effect on the poor, but he has come to exactly the wrong conclusion. His essay is nothing but rhetorical sleight of hand intended to impugn Jerry Taylor and anyone who dares suggest that the price mechanism is a better mechanism than any other so far identified to coordinate oil supply with oil demand. Mr. Abramsky is like George Washington's doctors who kept letting his blood, and upon remarking how sick he appeared -- probably the result of too much blood letting -- tried more blood letting.

Note that I did not say the price mechanism is the best means. Again, thinking negatively (what is that? perhaps not what you think), there may be a solution of which I have not heard yet, but until then the price mechanism is the least worst solution. Price controls are predicted by theory to create shortages, and the theory is confirmed by empirical data. A shorthand way of explaining this is the gas lines in the 70s and in Baghdad today. Surely, if the poor need gasoline, then some at high prices is better than none at any price? Ridiculing the least worst answer, or insulting the person who acknowledges it, is like accusing your doctor of murder for informing you that you will inevitably die.

Furthermore, Mr. Abramsky never seriously looks at the total effect of the price mechanism. It not only curtails demand, but it stimulates supply. Note the implications of this chart in The Economist, from the article "Venture Capitals". Furthermore, note an idea from this episode of Nova: "If you look at companies, like SunEdison, who are helping retailers put up solar panels on their roofs, you're suddenly seeing a linkage of the capital markets -- which have traditionally been very reluctant to get into solar energy -- with the retail sector. That's how you do things in America. You link the technology to the capital, and that's where the rubber hits the road." In America, the capital markets respond to a problem, while in other countries, the politicians respond. The former have to spend their own or their clients' money and are held accountable, the latter not so much.

"So what", you might say, "I don't care who produces the solution, so long as there is one. And so long as it benefits the least well off."

Well, here's so what. I'm vaguely familiar with the theory of functionalism. It says that institutions exist because a society needs them; institutions serve a purpose, a function. When I first heard of it, I immediately thought that it seems circular and lacks a mechanism to describe change; this appears to be an ongoing criticism of the theory. In any case, proponents of this theory use it to justify the existence of government agencies: obviously we must need them if they exist. If you evil bastard libertarians abolish some of those agencies, people will suffer.

That is true as far as it goes. It doesn't go far enough, though. There are two problems with it.

First, I have always believed that there are two problems faced by people who desire change: one is describing a desirable and reasonably realistic future. That is what I like about Kirkpatrick Sale. The second is to describe the path, how to get from here to there. The problem with simply saying "abolish such-and-such program" is that it doesn't describe what we reasonably expect to replace the functionality of that program or how the private institution that replaces the program will spontaneously evolve. For one thing, we don't know what it will look like or how it will evolve: if we did, we'd be in favor of planning. For another, "spontaneous" does not mean "instantaneous", and "evolve" does not mean "appear out of thin air".** So they are right to think that people would suffer if all we were saying is "abolish such-and-such", but we aren't: we are saying, "abolish such-and-such and allow some time for a better solution to evolve." Clearly, though, we need to do a better job of understanding and then explaining how institutions evolve.

The second problem with the functionalist-statist analysis is that it is usually based on an ignorance of history. Remember, if the existence of an institution implies a need for it, what answered that need before the government agency? This is a problem with the change mechanism in functionalism - if the agency sprung from nothingness, either the need must not have existed before, or the agency didn't spring from nothingness. So how does functionalism account for how or why would such a change occur? No answer seems to be forthcoming (but I admittedly have only a kindergartener's view of functionalism). In many cases, though, the solution to the riddle is that a private institution answered the need until it was co-opted by the government. As David Beito has documented, that was the case with much social insurance. The victor (the government) also gets to write the history and teach it in the schools it owns, so few people know about institutional arrangements that probably haven't existed for generations.

Let me bring this full circle.

Sasha Abramsky and others are claiming that laissez faire is not the answer to the problems posed by high gasoline prices for poor people, they are claiming it is the problem. I'm going to consider this patently false until someone can successfully convince me that oil policy is and has been laissez faire. Even stipulating to that claim, though, their recommended solutions of subsidizing the addiction would only prolong the problem and -- given that agencies rarely die once created -- would make the problem worse if oil prices should fall. They are refusing to face the possible fact that this area of California, like the Corps of Engineers' New Orleans, should not be as heavily populated as they were in the cheap-energy past. However, had laissez faire actually been practiced instead of the heady policy brew we have endured for the past 100+ years - regulating railroads and utilities, protecting them against innovators, encouraging suburban expansion, promoting efficiency in energy production at the expense of efficiency in distribution, reliability, and end use, then perhaps the poor people described in Mr. Abramsky's story wouldn't be locked into the lifestyle they are. People like Mr. Abramsky spent taxpayer money on the system that got them into this mess, now he has 100 ideas on how to spend more to keep them in the manner they have come to expect: poor, dependent, and hopeless. Ecologists refer to this approach of endlessly proposing the same solutions to the unintended consequences caused by an earlier round of similar interventions as "parachuting cats."

Given the power to enact their vision, they would systematically destroy every last vestige of spontaneous, private order in an effort to build community values. But such governments have a tendency to collapse of their own weight. When they do, the survivors look around and note that the community was kept together only by the fear of the increasingly necessary police state. There is no community spirit in such a place. Look at what the inhabitants of Russia have been enduring after the collapse of their system. Listen to this article on NPR about the lack of community values in Albania. No, really, listen to it. Generations of socialist theory have wiped out everything they knew about civil society. In America, de Tocqueville marveled at the Association phenomena; in Russia, people wished for their neighbors' barns to burn down.

That is why I prefer private to public institutions. I don't believe in market "magic"; too often have I been a disappointed consumer. Private solutions may not be perfect, but neither are state institutions. Too often have I also stood in DMV lines.

Cooperatives and associations are more democratic than an agency run by career bureaucrats. Furthermore, even Hirschman now acknowledges that Voice works only when Exit is a viable option. As a result, on average, private institutions are flexible and responsive and will evolve; public agencies are rigid and arrogant and will stagnate.***

Nobody resents an association they neither belong to nor pay for, even when that institution stands for something they loathe, but everyone hates paying for those parts of the government they oppose (agriculture? military?). Those who oppose democracy distrust private organizations and vote to suppress them (think Red Scare, Alien and Sedition, Palmer Raids, Radio Caracas Television). Those who genuflect to democracy cannot understand why people would vote for what they would call "undemocratic" programs and politicians. To comfort themselves, they develop theories of conspiracy, brainwashing & propaganda, or false class consciousness. They then begin to support politicians who promise to thwart those poor demented creatures, the opposition; in the end, the democrats line up to vote for the fascists, who proceed to replace private institutions with state institutions. The democrats are surprised when the anti-democrats take control of the machine and use it in surprising ways, perhaps even contrary to its original intent.

A public policy and agency require no imagination or creativity; simply - and I mean simply - propose a blunt mechanism for addressing whatever problem vexes you, then either declare victory or ask for more money and authority. The clever politician does both at once. Opponents can always be demonized as unpatriotic, asocial, and dangerous. A private institution requires work, creativity, conviction, persuasion, and innovation. It promotes civic values. Think Wikipedia, an institution created by libertarians (yes, Virginia, Jimbo Wales is one of those people). That is why I think that government is the intellectually lazy man's solution, and why it endangers the poor man whom he seeks to save.



* Yes, the Prius is great, but I get 46+ mpg with my non-hybrid. Somehow, the powers that be decided that hybrid was better than diesel, even though diesel fuel can be made easily from waste oil and renewable oil. I would argue that this is rather short-sighted, but not atypical. Also, several years ago I remember reading about the skyrocketing price of Suburbans in Arizona due to a shortage of them; apparently, the state was subsidizing a version with an alternative fuel modification (LNG or propane), but you could still run it on gasoline, so people were driving in from out of state and taking ownership of a friggin' Suburban at taxpayer expense for the purpose of saving gas. Personally, I think that if there is a role for the government here, it is to fund an E-prize as Lovins et al describe in The Oil Endgame. Remember, however, that the E-prize is named after the Ansari X-prize, a privately funded prize that has been moderately successful.

** In case you think I'm exaggerating about the strawmen used by anti-libertarians, look at what this says about libertarianism: "Libertarians believe (like Marxists believed back when there actually were Marxists) that if the government just shriveled away, a paradise would naturally spring into existence." Spring? It took hundreds of years to kill some institutions that themselves had to evolve over hundreds of years; only a fool would think they could be replaced overnight. Similarly, only a fool would think that "stroke of the pen, law of the land" equates to "problem solved". They are generally surprised to find out about "unintended consequences". Other than that, Midas' claim that things claimed by libertarians have never existed exposes the breathtaking ignorance of actual history usually found in people who read only popular history books. He could try starting with Homage to Catalonia or The Machinery of Freedom and work his way up from there.

*** Size is also important: I will take a small, decentralized public institution to a large corporation. Centralization and the distance between the top of the hierarchy and the end users or customers are also factors.

Paternalist Slopes

I submit this in response to Glen Whitman's post by the same name. It's a topic that has had my interest lately.

I) There is a three step approach to policy-making:

1) Identify market failure (sometimes traditional, i.e. externality, but increasingly prevalently cognitive bias, bounded rationality, etc.)
2) Recommend and implement policy
3) Declare victory!

I first realized how badly the defenders of state action needed to be called on this approach in this exchange with Mike Huben. Mike thinks that state action in private, sexual matters is easily justifiable:

"Private sexual behavior has plenty of unintended consequences, most notably unwanted pregnancy and disease transmission. Both are important reasons for state action, although such action should be as little intrusive as possible. Thus, for example, we have sexual education requirements in schools. And required VD tests before marriage."

Unintended or not, these actions are not normally thought of as external. Assuming we are talking about normal adults, the actors know the risks for both, and the consequences will fall on them, not a third party. Absent an externality (I thought of at least two weak ones, but it isn't my job to provide Huben's argument), what is the real failure here? Yes, there is imperfect knowledge here, but that is true of *every* transaction, and hardly a compelling motivation since the authorities lack perfect knowledge themselves. There is also information asymmetry, but there are private means of addressing this: dating, gossip, reputation, etc. And even if we could identify a failure, do the policies address it? People have sex all the time without getting married and therefore entering the realm of VD test requirements. Further, some states don't require such tests, and others show their root in the legislative biases of bygone eras as they continue to test for syphilis but not AIDS. Despite increasingly common and frank discussions of sex in schools, teenage pregnancies remain high, much higher I believe than before the new openness (an era brought about, in part, by the pill). But no, merely identifying the problem and a policy that nominally addresses it seems to be enough. The 3-step process is a simplified but essentially correct version of what is formally known as Second Best Theory.

Why does the analysis of such policy go no further? We know that policy-makers (both legislators and the technical experts in the agencies directed to carry out policy) are subject to the same biases the rest of us are. Look at this history of marijuana laws presented by Charles Whitebread before the California Judges Association. At every step along the route, it was done for the benefit of the users themselves, but the evidence to support each piece of legislation was so flimsy as to defy rational explanation. Especially notable is the fact that at first, marijuana was demonized as being the drug morphine users would fall back on, and later the same people argued it was the gateway to heroin, without apparently blushing. Yet, here we are.

We also know that policies frequently have unintended consequences themselves; think of the effect of subsidizing sugar on the Everglades, or rent control on housing in NYC. We know government failure exists as surely as market failures do; rent seeking is as real as adverse selection, and bringing public good production under federal oversight does not make it less a public good. So it seems rational to me that instead of having, "3) Declare victory!", we should instead have an analysis of the policy, analysis of private alternatives to the policy, comparisons of the two, and a recognition that the least worst policy may be to fail to legislate proposals simply because we can create them without regard to their efficacy or the alternatives. As I wrote on the Becker-Posner Blog entry on Sunnstein and Thaler's Libertarian Paternalism, "The analysis rarely if ever proceeds to look for problems with the policy solution (both market and gov't failures may be present), possible secondary market solutions (e.g. Consumers Reports and Carfax in the case of lemons), or even whether the policy solution will actually address the failure rather than just intend to address it."

I do have reservations, however, about Whitman and Rizzo's vagueness argument: as I pointed out in my comment on Utilitarian Blindness (thanks to my wife for making me confront this), the simple fact that we cannot make all relevant calculations of utility does not mean we should not undertake a policy. I am here simply pointing out that perennial fans of policy-based solutions have not even identified all of the trade-offs, much less attempted to calculate and compare them.

II) There is also an implicit belief that people *should* be coldly and unrelentingly rational. Should they, really?

Despite Spock's faithful adherence to logic, Kirk could regularly beat him in contests. Who was the only successful Kobayashi Maru captain? This is entirely plausible because these were games of strategy where logic could either run you into an undesirable corner (think of the prisoner's dilemma) or fail to illuminate a potential successful but entirely non-linear direction (think Hofstatder's explanation of Godel's Theorem in Godel, Escher, Bach: an Eternal Golden Braid), and at very least fail to yield answers when they were needed because there were too many unknowns.

That last possibility is one which I think most important. When making time-dependent, strategic decisions, the information required to make a perfectly calculated, rational decision are frequently not available or not knowable. The human advantage is in having an evolved set of mechanisms for making decisions based on scant data, a process which we call, "gut feel", "instinct", or "intuitive". Think of Malcolm Gladwell's Blink. Over time, these abilities may be developed to a high degree - chess grandmasters, extraordinarily successful athletes, and polymath entrepreneurs use a combination of calculation and intuition.

That mechanism may fail us when researchers have set up a game and are watching. They know the "unknowable", and are specifically trying to trick the subject's mechanism into taking the wrong tact. I wonder, however, if anyone has ever tried analyzing what happens when they show participants the outcome and then run the experiment again? My guess is that participants get better at overcoming their biases. I would also guess that now that we humans have identified the phenomenon of cognitive bias, over time this information and strategies for avoiding its problems will disseminate to the public at large. Those who successfully incorporate this knowledge will be successful in life, possibly more successful at breeding, and thus we may breed cognitive bias out over millenia.

If people won't be cold, calculating, automatons, then it is the intent of scientific planners that government take over their decision-making for them. How can this be anything but a slippery slope? Where, in the Scientism of Comte and Croly, the Progressives and New Dealers, in the central planners, is there room for arational or even irrational behavior? If there is none, then I think we can safely assume their descent down the slippery slope even if they don't intend it; if not now, then later.

Random thoughts on minimum wages

Given that the minimum wage is going to be hiked soon, I was thinking about what other levers work in conjunction with it. Tyrone writes that the minimum wage is a good program that promotes self-help and therefore reduces the amount of transfer payments generally. I reply that almost every program could be justified on those grounds.

Rush Limbaugh is the annual generator of a couple of simplistic arguments:

1) If raising to $7.25 is good, why not raise it to $20? I'm not sure how clearcut the case is at $20, but let's tell Rush, heck, why not $100? At that point, we can clearly say, "because they aren't worth it. Nobody else is." Okay, now we have a negotiation: everyone can agree that even the laziest or least knowledgeable employee is worth between $0 and $100, so the answer is where exactly to draw the line. The economic theorist's answer is to set wages equal to marginal output. The problem there is that we really don't know what it is. Not knowing is not a good argument for either raising or standing pat.

2) Rush's other argument is that some jobs will be lost. That sounds good, and comes directly from Econ 101, but we generally learn by Econ 401 that a number of assumptions were made to arrive at many of Econ 101's lessons, assumptions that don't hold in the real world. Those include things like perfect knowledge and competition.

Still, people arguing for minimum wages must also acknowledge that many people are employed by small businesses (about 11% were employed by businesses with less than 10 employees in 2003 (15.9 million (census stats) of 146 million were employed that year (more) and 25% more in the range between 10 and 99 employees (referenced here)), and that some of those small businesses operate on razor thin margins (I think 2-3% profit is the norm for restaurants). Suddenly, you increase their major cost by 40%. That's a relative advantage to large employers, so don't let me hear you whine about Wal-mart taking jobs while simultaneously asking for yet another pro-large business policy.

But I think I spy another puzzle:

Given that only about 2-3% (the percentage varies) makes the minimum and about 2-3% more make wages between the current and proposed minimum wage (EPI says that 5% of the employed workforce makes less than $7.25/hr). That means that 97% of businesses pay more than the legally mandated minimum, proof enough that the overwhelming majority of businesses don't screw their employees, that they compete for employees and pay fair wages. Overnight, that number would drop from 97 to 95% (though most will obviously remain compliant by raising wages).

Of course, this says nothing about the number of people who want jobs but can't have them because their skills and the demand for them are such that they would earn less than minimum. They simply aren't allowed into the workforce, thus letting everyone in favor of a higher minimum wage pat themselves on the back for helping 5% of the workforce without having to acknowledge the anonymous unemployed that were harmed by the change. If you're first thought is not, "Oh, well, screw them," then perhaps we can agree that this is yet another argument against utilitarianism?

Some notes about the demographics of the minimum, i.e. wage vs. age: Do you think, as Rush does, that it's mostly teenagers making it? EPI says that 80% of those making minimum wage are adults (they define it as anyone over 20). I would be more interested in knowing how many of them are working their first job.

There is an argument in favor of the minimum wage that says that employers ought to hire people and then invest in training them (up-skilling) to make them worth (i.e., earn) that wage. However, there is no guarantee that they will ever get to that level of skill, or that they will stay on with the employer who trained them when they do (thus, the argument overlooks two market failures, which would be enough in some circles to doom it, but nobody scrutinizes policies for market failure-like mechanisms). Employers thus take a risk on inexperienced employees. How much will they risk? That depends on the potential cost. Given two employees, one who costs more to gamble and the other less, the employer will be more likely to gamble on the cheaper one. The same is true in time, too: today, recruits cost less to gamble on than they will after the minimum wage is increased.

The safety net here is that employers can let most of these workers go at will. That is, if the gamble is starting to look bad (remember: when they are first hired, they all look the same, but employers ought to be able to judge results within a few days or hours), they can fire them and try another one. If you remove that safety valve, employers will take even fewer chances, since this effectively increases the cost of the gamble (because you will be stuck with a bad employee until he quits).

Employers as law consumers are going to be willing to tolerate a mandate for either an increase in wages or an increase in job security, but not both. We have chosen wages over security.

Electric Utility economies of scale

I have been trying to get this right, so this may just be another unsatisfactory article in a series (others here and here).

Let's suppose that in the late 19th century, you are using kerosene to light and coal or some other fuel to heat your house. In comes Mr. Tesla and his alternating current and Mr. Edison with his electric lamp. Suddenly, you are able to get the same benefits at a lower price. In a complete analysis, we might have to account for the energy required to refine the kerosene, and the resources required to mine the coal and oil in order to get a complete comparison, including externalities, but they were probably roughly equivalent.

The big advantage there was the price, and that was made possible by economy of scale of using large generators and large distribution networks. By economy of scale, I mean that the cost of producing your consumption plus that of your neighbors was lower when using one large generator than each of you using a small generator. A small generator would cost you not only the fuel, but the upkeep and depreciation, both of which are buried in the price of retail electricity.

Over the intervening years, however, we began using the electricity for more than just the light and heat. The number of variety of appliances exploded; it is thought that the small electric motor was as important to the late industrial revolution as the steam engine was to the early revolution since it freed workers from the line and allowed them to be organized in different ways. Small appliances were thought to free people - especially women - from the drudgery of household work, since now machines could wash, dry, wash dishes, store large amounts of perishable food and eliminate the need for a daily trip to the grocery store, etc. The television became the primary form of entertainment, replacing the local pub, lodge, or club.

At some point, then, the economy of scale exploded to more than just a simple replacement of what had gone before (light and heat). Huge generation capacities were built and then overtaken, forcing utilities to build ever larger plants farther from the cities that use the power; transmission systems became intercity and then interstate; and the cost of electricity fell as never before as the utilities, with their high fixed cost of capital and low variable cost, sought to pay for the capacity rather than the actual marginal cost of power delivery.

At last, it has gotten to the point where the transmission facilities are sometimes several hundred miles away,