Patterico's Pontifications


“Human Action” and Robert Murphy’s “Choice,” Part 3: Theory vs. History

Filed under: Economics,General,Human Action and Choice — Patterico @ 12:05 am

This is Part 3 of my ongoing series of posts summarizing Bob Murphy’s excellent book Choice: Cooperation, Enterprise, and Human Action — which itself is a summary of Ludwig von Mises’s classic treatise “Human Action.” The idea of this series of posts is to popularize and spread the word about Austrian economics and educate the public. Part 1 is here. Part 2 is here. Feel free to read them first if you’re just getting started. They’re actually very simple posts, making very simple points — as we are still in foundational mode.

Also, I have created a category for all these posts, called “Human Action and Choice,” so that all these posts can be read (in reverse order) with a single click. Also, let me be clear: any errors in these summaries are mine and not Murphy’s. I am restating his points in my language, and that opens up the possibility of inaccuracy. Should that happen, blame me, not him.

One of the things that the Paul Krugmans of the world mock about Austrian economics is that they claim it is too abstract and has no relationship to the real world. After all, as I explained in previous posts, Mises sees economics as a discipline that derives universal truths from deductive reasoning that has nothing to do with experimentation. Mises tells us that everything we need to know about economics is within us. All we need to do is think about these principles and understand what logically follows from our conclusions. How can that teach us anything about the real world (the Krugman types ask)?!?!

Here, Murphy makes the analogy to geometry. We do not derive the Pythagorean theorem by building 500 right triangles and measuring the angles and the sides. The proof of the theorem does not depend on experimentation. The proof is within us — it is simply a logical chain of thoughts that we need to reflect on.

How can economics be compared to that?? Isn’t economics a discipline depending on endlessly random and changing variables that can never be predicted?

Mises says that’s wrong. According to Mises, there are certain laws of human action that we can derive logically — just as we logically derived yesterday that human action requires a mind, preferences that are ordinal and not cardinal, and a desire to affect the future.

Economics is not physics. Economics does not set up a hypothesis about what will happen in reality if one conducts a controlled experiment in which x does specified action y to object z. In economics, as conceived by Mises, there is nothing to “test.” It is an a priori discipline. Mises did not reject the study of data. But he did reject the notion that principles of economics depend upon on the outcome of data from controlled experiments.

Murphy, in his book, offers a compelling defense of this approach, by challenging the hypothetical classical economist to come up with precepts that demonstrate what it means to “think like an economist.” Murphy quite rationally guesses that even a classical economist would say things like this:

  • “There’s no such thing as a free lunch.”
  • “People make decisions on the margin.” [Editor’s note: we’ll get into what this means in a future post. The simplest way to illustrate the concept for now is with this observation: the hundredth bite of steak may not be as appealing as the first bite.]
  • “Trade is a positive-sum game.” [Editor’s note: socialists and Democrats forget this one all. the. time.]

Pretty much every honest economist would agree with these concepts. But why? Because 100,000 controlled experiments have been run to demonstrate whether free lunches exist? No. These are not observations we think are true because we conduct experiments. They are simply inherent in the process of “thinking like an economist.” These are truths that we know, from being a human being and reflecting on the nature of humans and how they act.

Also important is to distinguish economics — an analysis of human action — from economic history, which is a very different discipline. Again: Mises did not reject the concept of collecting economic data per se. Murphy notes that Mises and his student Friedrich Hayek founded the Austrian Institute for Business Cycle Research in 1927. (Mises predicted that the monetary expansion of the 1920s was going to result in a giant crash, just as followers of Austrian economics like Ron Paul predicted, in the early 2000s, a huge crash from the Fed’s cutting of interest rates — while folks like Paul Krugman were explicitly calling for a housing bubble; no joke!). So: no, Mises did not reject the study of economic data. He just refused to call it “economics.” He just believed that study fell under the category of “economic history.”

So if you think geometry is irrelevant to the “real world” because its truths do not depend on empirical observations or experimental verification, feel free to reject Austrian economics on the same basis. Otherwise, you are compelled to grapple with each grippingly inescapable conclusion on its own . . . even as it follows inexorably from the previous one.

Murphy rounds out the chapter with this observation:

“Subjective Value Theory” Is an Objective Theorem in Misesian Economics

Other than learning the building blocks of Austrian economics, one of the main concepts you might learn from this post (if you are unfamiliar with the concept, which many people are) is the concept of “subjective value theory.” The idea here is that the market price of any good, or service (or stock, or bond) does not depend upon anything objective. The price simply reflects the subjective perspective of consumers in the market. This is not a uniquely Austrian insight, as far as I know; I believe it is universally accepted by all honest economists these days.

And I think the insight is very valuable. I once had someone say to me: “I heard the stock market lost hundreds of millions of dollars in value yesterday. My question is: where did it go?” Before I learned “subjective value theory” I was utterly at a loss. Where had it gone? I had no idea.

Now I know: it didn’t go anywhere. Yesterday, all the people forming the consumers in the stock market collectively thought these stocks were worth x. Today, they think it’s worth x . . . minus a few hundred million dollars. It’s completely subjective.

Again (and I could be wrong here), but while this is a core Austrian concept — and was discovered by the earliest known major Austrian economist, Carl Menger — it was also discovered by others at about the same time . . . and is now (I believe) fairly well universally recognized by all economists, both Austrian and classical.

The point made by Murphy is not to explicate the concept (which is, I submit, an important concept), but rather to note that, within Mises’s framework, this “theory” is not really a “theory” in the way we typically use the term. It’s more like an objective theorem, the way the Pythagorean theorem is a truism and not a “theory.”

Again: economic truths like these just are. They can’t be proven right or wrong by experimentation. They are just there: truths to be discovered through reflection.

Enough for today. Tomorrow we’ll define some more concepts and get into the concepts of diminishing marginal utility (a core economic concept) as well as the central role that time plays in the Austrian vision.

I hope you’re enjoying this. Real economics is one of the most important disciplines you can learn.


“Human Action” and Robert Murphy’s “Choice,” Part 2: What Is Action?

Filed under: Economics,General,Human Action and Choice — Patterico @ 10:31 am

This is Part 2 of my ongoing series of posts summarizing Bob Murphy’s excellent book Choice: Cooperation, Enterprise, and Human Action. The idea is to popularize and spread the word about Austrian economics and educate the public. Part 1 is here.

So what do we mean when we say economists study “human action”? First, the action must be purposeful behavior; reflex actions do not count, for example. It can even be inaction. Rush fans will recognize the quote: “if you choose not to decide, you still have made a choice.” Right?

Remember yesterday, I said: “Mises thought of economics as a deductive discipline, in which one divines, through analysis and reflection, the fundamentals of why humans act, and derives the necessary logical implications of these fundamentals using a deductive and logical chain of reasoning.” So what can we deduce from purposeful behavior?

Well, some of these are going to seem obvious. But it’s still necessary to state them — because it’s all foundational for what comes in the future.

First, obviously, if there is human action, then there must be a mind behind it. Human action is different from the mindless falling of a rock that we see in physics. Second, the actor must have goals, or preferences, in taking an action.

So far, pretty obvious. Here is another implication that is perhaps less obvious, but is very important: preferences are subjective and not objective. A related concept is that preferences are ordinal and not cardinal.

OK, I’m going to have to explain this one.

Cardinal numbers are “counting numbers” that measure things in units. In the equation 2+2=4, the numbers two and four are cardinal numbers.

“Ordinal” numbers arrange things in a series. Joe is first in line. Chocolate is my 4th favorite flavor of ice cream. (It’s actually my favorite; this is a theoretical discussion!) These preferences can’t be measured in units. I can say chocolate is my fourth favorite flavor, and vanilla is my third favorite. But I can’t measure the difference between these preferences in units. I can’t coherently say I prefer vanilla three times as much as chocolate. More importantly, there is no way to compare, in units, one person’s preference to another’s. You can’t say “Murray likes Buicks twice as much as Joe does.” (You can say Murray is willing to spend twice as much on a Buick as Joe is, but that’s a separate discussion for a separate day.)

The bottom line is: preferences are ordinal and not cardinal. You prefer one good or service to another, but — just like Frank is a better friend to you than Pete — this can’t be expressed in units (cardinal numbers).

Finally, an acting man believes he can influence the future. This is a better way of expressing the concept at issue than saying “man acts rationally” — because the word “rational” is a term that is loaded with connotations not used by Mises. For example, Murphy argues that to Mises, a rain dance is a “rational” act. Why? Because the person doing the dance has a goal (making it rain) and is engaged in action that is directed towards achieving that end.

The fact that we know the action will not accomplish the purpose does not mean the action is not “human action” (or “rational” as Mises uses the term). That’s why I like Murphy’s formulation that the man engaged in “human action” must believe that he can influence the future. This way, we can avoid judgments about whether that action is based on correct information, or whether it actually will achieve the purpose he believes it will achieve.

That summarizes Chapter 2, and is enough for today. Remember, we are still in foundational mode. Tomorrow, we will address the issue of Mises’s economics being an a priori discipline.

UPDATE: Let me say, as I should have at the outset, that any errors in these summaries are mine and not Murphy’s. I am restating his points in my language, and that opens up the possibility of inaccuracy. Should that happen, blame me, not him.


“Human Action” and Robert Murphy’s “Choice,” Part 1

Filed under: Economics,General,Human Action and Choice — Patterico @ 7:54 pm

Regular readers know that I increasingly believe that having a firm grasp of basic economics is one of the most important duties of a citizen. Placing religion to the side, the free market has been the greatest engine for improving the lives of humanity in recorded history. Understanding it is central to being a responsible citizen.

For a couple of years now, I have been studying Austrian economics, which offers (in my judgment) the best set of tools with which to battle the Keynesians and those who seek to regulate and manipulate the economy. And I think it’s beyond question that the most important figure in Austrian economics is Ludwig von Mises, and his most important work is “Human Action.” (Hayek is certainly more well known, and “The Road to Serfdom” should be required reading for every citizen, but Mises is still #1.)

The problem is that Human Action is a monstrously intimidating work. Not only is it long, but Mises assumes that you are familiar with the work of previous economists like Carl Menger or Eugen Böhm von Bawerk. And if you’re like most people, you aren’t.

Economist Robert Murphy has done the world a great service in writing a book that communicates to the general public, in crystal clear English, the basics of “Human Action.” Murphy’s book is called Choice: Cooperation, Enterprise, and Human Action. At $23.70, it is on the pricey side, which is an unfortunate side effect of the fact that it is likely to be used as a textbook. (Ironically, this treatise against coercion gains value by virtue of the fact that many students will be compelled to buy it!) But I consider it to have been well worth the price, and urge anyone interested to buy it.

Murphy ends the book by quoting Mises to the effect that civilization depends upon every citizen studying basic economics. Murphy notes that this is the point of his book, and urges readers that if they convinced that Mises is right, it is their “duty to relay this precious knowledge to others.”

I have made some attempts at discussing Austrian economics here and there on the blog, and in particular I have always wanted to take a stab at discussing the Austrian theory of the business cycle. But that’s a hell of a post to write, and I could never find a way to put it all in one post. [UPDATE 8-29-15: Perusing my old posts, it appears I did try this once after all. Hubris!] Well, it took Bob Murphy this entire book to do it right. And the end result is compelling. And you need to hear about it.

Hence this planned series of posts. I intend to summarize Murphy’s summary of Mises, chapter by chapter. Since Murphy’s book has 17 chapters, I plan 17 posts.

In part this is for my benefit, as I believe that the best way to thoroughly master complex material is to try to restate it to others in your own words. You soon learn where the gaps in your understanding are. But in a larger sense, I am undertaking this project because I think it’s important to relay this knowledge to you, the blog reader, and get you interested in Murphy’s book.

And maybe some of you are interested in reading something that isn’t about Donald Trump or the Republican primary race.

My summary of Chapter One will be in the extended entry. It is short, but foundational to the project.



Why Hillary! Is Both Wrong and a Giant Hypocrite for Criticizing High CEO Pay

Filed under: Economics,General — Patterico @ 6:48 pm

Here we go:

Hillary Clinton, under pressure from the left wing of her Democratic Party to aggressively campaign against income inequality, voiced concern about the hefty paychecks of some corporate executives in an email to supporters.

Striking a populist note, Clinton, who announced on Sunday she was running for president in 2016, said American families were still facing financial hardship at a time “when the average CEO makes about 300 times what the average worker makes.”

There is both a punchy way to respond to this and a thoughtful and analytical way to respond. Nobody really cares about the thoughtful and analytical way to respond, so I’ll concentrate on the punchy way.

First, Hillary makes a pretty penny herself, does she not? I seem to recall “dead broke” Hillary making $300,000 a speech (the “special university rate”) while demanding travel in private jets and staying in hotels’ “presidential suites.”

Second, will anyone ask Hillary if she thinks Oprah is overpaid? Oprah is worth $3 billion, and makes $77 million in a bad year and $290 million in a good year. How dare she? Why, that’s more than 300 times what the average worker makes! $77 million is, in fact, almost 3000 times the medium annual salary in the United States.

If you don’t like Oprah as an example, pick your favorite Friend of Hillary and ask her that question. Any highly paid person in Hollywood will do.

Now for the more thoughtful analysis, which nobody really cares about, so I’ll put it beneath the fold:



Thomas Sowell on the Fed: “When Somebody Removes a Cancer, What Do You Replace It With?”

Filed under: Books,Economics,General — Patterico @ 9:11 pm

I have recently begun a giant post about why we need to get rid of the Fed. But rather me writing a giant post, why not just ask you to watch a very short (under four minutes) video of one of our best thinkers arguing that we should do away with the Fed?

I love the fact that the interviewer is totally flabbergasted by his answer — admitting that he didn’t actually expect Sowell to say that.

I just finished Sowell’s Economic Facts and Fallacies. Just wonderful stuff; you always learn much you didn’t know from Sowell books, and it’s well-written and well-reasoned. He is a national treasure.

Here’s the video:


A Conflict of Visions, Part 4: The Constrained Vision’s Support for the Free Market

Filed under: Books,Economics,General — Patterico @ 3:12 am

I have promised a series of posts on Thomas Sowell’s revelatory book A Conflict of Visions: Ideological Origins of Political Struggles. The book has given me critical insights into the way people think about various issues, and I now find it hard to consider any political issue without seeing it through the lens of Sowell’s constrained/unconstrained dichotomy. Since the this dichotomy is becoming an integral part of my day-to-day analysis, you might as well become familiar with it.

I have delivered three posts so far, here, here, and here. Here is part 4. The last post I did was a bit meandering, muddled, and inconclusive — so today, by contrast, I am tacking an issue that is quite clear and straightforward. The post is a bit long, to be sure, but the concepts are very simple and easy to understand.

A couple of people suggested that I do a post on each of the 20 questions I included in my quiz. That might be a bit too ambitious, but I will certainly do a few. Today I would like to discuss a point that may be obvious but is an absolutely central and unshakable belief of mine: my belief in the free market. I thought I would illustrate the point with question 3, which explains part of my thinking, and then move on to the critical relationship between a free market and the very concept of political freedom. As I will show below, the latter simply cannot exist without the former.

Here’s question 3 from my quiz:

a. I want to get government out of the people’s way, and let people make their own decisions for themselves. The knowledge any one human can possess is limited, and I prefer to rely on a process that coordinates information scattered throughout society, rather than relying on experts.
b. Government has a role in improving people’s lives. Part of the reason is that certain people possess concentrated specialized knowledge, and I would prefer to entrust decisions to those people, rather than to the masses.

Here, I am quite clearly from the constrained vision (and have become more so over time, as I have learned more about Austrian economics.). Here is a (very slightly) less-doctrinaire-than-today Patterico, from December 2008:

I’m skeptical of government intervention in economic affairs, because I believe they can lead to unintended consequences that are hard to predict. And I’m generally a believer in free-market principles. The idea is that the free market is the economic system most compatible with freedom, because rather than putting our trust in government to manage the economy, I believe we should trust the collective wisdom of consumers to make whatever decisions are best for them. As those decisions multiply, markets form as if by magic — and (in theory at least) it causes the best businesses to flourish while less useful ones fail. Put simply, a collection of choices, freely made, forms our markets.

This is a straightforward articulation of the “constrained vision” as applied to economics. As I have described in my recent posts on Sowell’s book, the believer in the “constrained vision” trusts mankind as a whole, far more than he trusts individuals or small groups. This view has implications for his views of all manner of social policies.

As for economics, the holder of the “constrained vision” rejects rule by a handful of experts relying on their purportedly superior vision, command of the facts, and rational explanations for their policies. Instead, the constrained vision prefers systemic processes that have evolved over time, building on the wisdom of humanity collectively — but stemming from individual decisions, not by a single group of philosopher kings, but by everyone in society. In particular, he is a believer in the price system, which directs entrepreneurs to move their resources into the lines of production most demanded by individual consumers. Like magic, this results in shortages being met by supply, and gluts being met by slowing demand, all providing for efficiency — but also, very importantly, in a higher standard of living for the least fortunate in society.

In short, if leftists really wanted to improve the lot of the poor, they would get government the hell out of the way and let the market work its magic. Thanks to the workings of the free market — and no thanks to government — the world has made gains in the lot of the poor in the last 200 years that would have been unthinkable to the richest kings and queens of the 1500s.

It’s not really a coincidence that I hold this vision, though. I learned this view of economics from reading . . . [wait for it] . . . Thomas Sowell — namely, his book Basic Economics, which changed my life years and years and years ago. Indeed, I cited an example from this book on this blog over ten years ago, in May 2004 — and I cited it in August 2007 as one of five books that fundamentally changed the way I look at the world.

One important point that bears repeating: capitalism is the only economic system compatible with freedom. That is important enough, in a long post, to say twice, so that you don’t miss it. Capitalism is the only economic system — the only one — compatible with freedom. I made this point in 2009, citing [prepare for a shock] Thomas Sowell, who said in “Basic Economics”:

Too often a false contrast is made between the impersonal marketplace and the compassionate policies of various government programs. But both systems face the same scarcity of resources and both systems make choices within the constraints of that scarcity. The difference is that one system involves each individual making choices for himself or herself, while the other system involves a smaller number of people making choices for others.

It may be fashionable for journalists to refer to “the whim of the marketplace,” as if that were something different from the desires of people, just as it was once fashionable to refer to “production for use, rather than for profit” — as if profits could be made by producing things that people cannot use or do not want to use. The real contrast is between choices made by individuals for themselves and choices made for them by others who presume to define what these individuals “really” need.

As I summarized the argument in my 2009 post:

Simply put:

Capitalism is each individual making choices for himself.

Socialism is those who claim to know best, making your choices for you.

The former is freedom. The latter is anything but.

So says the adherent to the constrained vision.


Why Gold? (And, Why the Gold Standard?)

Filed under: Economics,General — Patterico @ 7:29 pm

In comments to the gold standard blog post from this morning, a lot of people asked a question that I have asked from time to time in my life: why gold? You can’t eat it. You can’t wear it. Who cares if you have a little yellow metal or not? Who cares if the country does? If banks do? Etc.

It’s a natural reaction, but I think I have learned the basic answer in beginning to study Austrian economics. Beware: I am not an economist. Beware: I have read very little. Beware: A little knowledge is a dangerous thing. And so on and so forth. As always, I am throwing out these ideas to be discussed; this is not my area of expertise and I am happy to be corrected or to have my arguments improved upon. That said, I think I understand enough to contribute some insight into this question.

Before we get there, let’s take a step back and talk about the division of labor. (We’ll get to gold, but this is necessary background.)

As I have remarked before, the division of labor is the reason that we have a standard of living that would have been the envy of kings centuries ago. But it’s as simple as this: people specialize in those areas that they do best.

In providing examples of a very simple economy, economists love to cite Robinson Crusoe and Friday on a desert island, and who I am to try to improve on that? So: imagine a desert island where Crusoe and Friday each need 10 bananas and 10 coconuts per day to live. Crusoe can gather 10 bananas an hour, but only 4 coconuts per hour. Friday can gather 10 coconuts per hour, but only 4 bananas per hour.

If each is left to his own devices, he will work 3 1/2 hours per day: one hour gathering that which he is best at, and 2 1/2 hours gathering that which is he least efficient at gathering.

But if each spends two hours gathering what they are best at, Crusoe can get 20 bananas in two hours, and Friday can get 20 coconuts. Each trades half his supply for half of the other’s, and each has his 10 coconuts and 10 bananas, and each has cut his labor time from 3 1/2 hours to 2 hours.

It is this concept that allows you to live in a comfortable house you could never construct, drive a car that you could never build, and turn on the air conditioning even if you don’t have the slightest clue how it works.

So far so good. But in a more complex economy, it is difficult to barter your own commodities in kind, because the person from whom you need goods or services doesn’t always want what you have. So you want to try to trade your goods or services for something that more people will accept. That’s a “medium of exchange”: a commodity that everyone in the society (or nearly everyone) wants. People will accept that commodity in exchange for providing you with what you want — because they know they can turn around and provide it to someone else for what they want.

Different commodities have functioned as media of exchange in different societies. Some have used cigarettes. Some have used cocoa beans.

The more universally desired the commodity, the more valuable it is as a medium of exchange. Initially, there is competition among various commodities. But over time, people start to notice which are the more universally accepted commodities, and those commodities crowd out other commodities. Think about it. If two people want my services, and one is offering me cigarettes, and the other is offering me gold, I will provide my services to the person who can give me the medium of exchange that most other people will accept when I try to buy something.

With me so far? Good. Here’s the important part. A good medium of exchange should have several characteristics. (I’m not taking these from a textbook, but am rather going from memory, so cut me some slack if I miss some.)

It should be unchanging. Thanks for the fruit, but in two weeks it will be spoiled. Gold is inert — one of the “noble metals” that resists corrosion or oxidation.

It should be transportable. There are fascinating stories of cultures that use giant unmovable boulders as currency. Everyone knows that is Og’s boulder over there, even if Og can’t drag it to his cave. These cultures have been known to employ giant ships to move boulders from neighboring islands — and if the ship capsizes and the boulder sinks to the ocean floor, they don’t even sweat it . . . because, well, Dag’s boulder is the one at the bottom of the sea! That’s nice and all, but most societies tend to think that a medium of exchange should be transportable. A related factor is that it should be divisible, such that different amounts (weights) can be used to represent different values.

It should be rare, in the sense that, while you don’t always want a fixed amount, you don’t want to have a situation where one can easily double the supply. After all, when you increase the supply of a commodity, you decrease the demand and therefore the price. A medium of exchange that is rare, and cannot have its amount increased by multiples overnight, is one that preserves value (purchasing power) for all who hold the commodity.

There are other desirable characteristics that a successful medium of exchange should have. It should be recognizable, hard to counterfeit, easy to store, and have some intrinsic value. And so on.

Well, it turns out that, over time, humans have always gravitated towards gold and silver as containing the best mix of characteristics to serve as a medium of exchange. Silver has typically been employed for smaller transactions, and gold for transactions involving higher values (because gold better provides the mix of characteristics needed for a medium of exchange).

But the most important fact here is this:

GOLD IS A COMMODITY. It is a thing. It is tangible. It is a commodity used as a medium of exchange, but it is nevertheless a commodity. It has some intrinsic value in its beauty and use for ornamentation. But it is a thing, which just happens to be the best thing to use as a medium of exchange.

That answers the question. You can stop reading now if you want. But I have to keep writing.

CIRCLING BACK TO CURRENCY AND THE GOLD STANDARD: I now have to circle back around to paper (currency), because I know that people will object that in a modern economy, you simply can’t have rapid financial transactions occurring with people handing pieces of gold back and forth. That’s why you have to have pieces of paper or the equivalent (nowadays, it could even be computer code) — something that cannot be easily counterfeited, that represents your right to exchange it for gold if you so choose. Call it currency, call it a bank note, call it what you like.

The genius of Murray Rothbard is to compare these currencies to a warehouse receipt. Here’s the idea: again, GOLD IS A COMMODITY. So, you can’t always carry around your commodity. Business will arise that will warehouse your commodity for you, and give you a slip of paper (call it a bank note) which you can use to redeem for gold any time you like.

When these warehouses, which we call banks, begin to engage in “fractional reserve banking” — lending out more gold than they have — they are giving multiple people warehouse receipts to the same commodity. This is fraud. Let me repeat: THIS IS FRAUD. Giving multiple people warehouse receipts to the same commodity is fraud, because the receipt should entitle the holder to repossess his property whenever he so chooses (although this can of course be limited by a contract with the bank).

Although it’s fraud, it works great — unless and until people get suspicious that they can’t get their commodity back . . . and then you have a “bank run.” People line up to get their gold, because they are afraid they can’t get their gold back. And, if their bank is a fractional reserve bank, as all banks are these days, they are right. They can’t get their gold back, because the bank committed fraud the minute it promised the same gold to multiple people.

If society treated fractional reserve banking as the fraud that it actually is, and kept us on a strict gold standard, then maybe — just maybe — governments would not have the ability to borrow endlessly; to mask their debts and lessen their pain by causing runaway inflation; and to generally deprive people of the value of their savings.

I could go on and on, but hopefully this gives readers a better idea of why humans might value gold, why fractional reserve banking is dangerous; and why going off the gold standard unmoors us from any fiscal discipline.

Don’t say any of this too loud, though. People will think you’re crazy.

Ah, but the system of fiat money we have nowadays? The one that is about to drive us into the depression to end all depressions? That system? Yeah, that system is totally awesome. And stuff.

It’s the gold standard that’s crazy, we’re told. What we’re doing right now? Perfection.


Planet Money on Rent-Seeking, Part 4: The Government-Mandated Minimum Prices for Sugar

Filed under: Economics,General — Patterico @ 9:02 pm

When I did my recent three-part series on rent-seeking based on Planet Money episodes, commenter jakee308 said: “Do one on sugar.”


This is Part 4 of my three-part series on rent-seeking — legal bribery of politicians to pass protectionist laws. The series discusses individual episodes from the wonderful NPR show Planet Money, a sometimes quietly subversive show which does a lot of episodes (on NPR!) that explain how government interferes with the free market.

Part 1 of the series dealt with state-created monopolies for car dealerships. Part 2 addressed the Jones Act, which creates an absurd and costly rule that shipments between U.S. ports must be made with American-made ships. Part 3 introduced readers to the “Raisin Administrative Committee” — a government-sponsored cartel that controls the raisin supply, and ruins any raisin producer who bucks the Stalinist organization and dares to sell all his raisins.

Today, we have Part 4: the U.S. federal government setting minimum prices for sugar.

The Planet Money episode opens with a CEO of a candy company talking about how he could expand his operations here in the U.S., rather than send massive parts of his operations to Mexico. What does he need? he asks rhetorically. Lower tax rates? Workers’ comp reform? A right to work law? Nope. He says he could pay no taxes, and get all those other things, and would still manufacture candy canes in Mexico. What does he ask for?

“Let us buy sugar on the free market.”

People say: What? You can’t do that?

No, you can’t.

The program explains that there are two prices paid for sugar: what people pay in the U.S., and what the rest of the world pays. The U.S. price is, on average, 15 cents more per pound than it is in the rest of the world.

Just 15 cents? What’s the big deal? Well, the candy CEO mentioned above uses 100,000 pounds of sugar a day. So he pays $15,000 extra per day. That’s between $3 million and $4 million extra per year — a “sugar penalty” the businessman must pay as a cost of doing business in the U.S.

Why? If you guessed “federal law,” you have been paying attention. The operative provision is contained in The Food Conservation and Energy Act of 2008 (aka the U.S. Farm Bill), under which the U.S. Government guarantees a minimum price for sugar: 22.9 cents per pound.

The sugar beet farmers says foreign competitors are getting subsidies. Economists respond that the solution to unfair trade practices is a complaint to the World Trade Organization — or having the U.S. slap a tariff bigger than the subsidy received by the foreign grower. Not setting a minimum price.

The most revealing story: the sugar CEO says that, according to the Ken Starr report, Clinton took a 22-minute phone call from someone while getting serviced by Monica Lewinsky. (Supposedly he was trying to break it off — but the cigar incident had not happened yet, so . . . ) Who was Clinton talking to for 22 minutes at such a moment? A sugar magnate. Now that’s access. It turns out that the sugar industry spends a ton on lobbying — double what the food and beverage industry spent as a whole in one recent year.

The hosts talk to a Congressman who is a big supporter of the minimum price. He says people call him a communist — a central planner — and he’s fine with that. After all, it’s 25% of the economy in his district. The lobbying doesn’t affect me, he says. The sugar folks support me because I support them. Sugar creates jobs in the U.S., he says.

The candy guy replies: yeah. And it also costs the U.S. jobs in my industry — jobs that are going to Mexico.

Every government intervention into the economy has consequences — often unforeseen ones that are the opposite of what government intends. Yet the machinery of interference creaks on, inevitably — as lobbying money greases the wheels. And businessmen and consumers suffer.

Yay government!

Thanks to jakee308 for the suggestion.


Planet Money on Rent-Seeking, Part 3: The Government-Created Raisin Cartel

Filed under: Economics,General — Patterico @ 7:40 am

This is Part 3 of a three-part series about rent-seeking: legal bribery of politicians to pass protectionist laws. The series discusses individual episodes from the wonderful NPR show Planet Money, which often makes a surprising case for the free market.

Part 1 of the series dealt with state-created monopolies for car dealerships. Part 2 addressed the Jones Act, which creates an absurd and costly rule that shipments between U.S. ports must be made with American-made ships.

Today is Part 3: raisin outlaws. In this episode we meet a scofflaw who refused to join a government-sponsored raisin cartel, and broke federal law by selling all the raisins he had produced.

The show opens with an investigator who is looking into an illegal scheme in the Central Valley of California. Footage shows a truck showing RAISINS BEING SOLD!!!!!!!


It is illegal, this act of selling raisins. Il-LEGAL!

Because the government has created a cartel for raisins. Meet the Stalinist-sounding “Raisin Administrative Committee.”

During the New Deal, a glorious time of rampant government intervention into the economy, the geniuses in the federal government passed the Agricultural Marketing Agreement Act of 1937. Pursuant to that law, during the Truman administration, the Secretary of Agriculture issued a marketing order — Marketing Order 989 — which established the “Raisin Administrative Committee.” The committee, made up of raisin producers but overseen by the federal government, formally restricts the supply of raisins through programs of “diversion.” People sit in a room around a table. People make motions that are seconded and voted on. The upshot: producers divert some of their raisins into a “raisin reserve” — to limit the supply of raisins for sale, in order to keep the price high.

A Washington Post article quoted an expert calling this what it is:

It’s a cartel. Let’s use the power of the government to operate a cartel,” said Daniel Sumner, director of the University of California’s Agricultural Issues Center.

That’s correct. The producers are colluding. This type of action would normally be prevented by antitrust law. (I doubt it should be; but while I might be OK with cartels, I don’t like them when they are protected by the government.)

But some people don’t want to collude. Enter Marvin Horne. He refused to obey the “Raisin Administrative Committee.” The Washington Post article put it well:

In the world of dried fruit, America has no greater outlaw than Marvin Horne, 68.

Horne, a raisin farmer, has been breaking the law for 11 solid years. He now owes the U.S. government at least $650,000 in unpaid fines. And 1.2 million pounds of unpaid raisins, roughly equal to his entire harvest for four years.

His crime? Horne defied one of the strangest arms of the federal bureaucracy — a farm program created to solve a problem during the Truman administration, and never turned off.

He said no to the national raisin reserve.

More than 10 years ago, Marvin Horne sold all his raisins. In 2002, the “Raisin Administrative Committee” decided to “divert” 47% of the raisis into the reserve. Marvin Horne said: No. I will not do that. He and his wife spent nights reading the law to see if there was some way they could sell all their raisins. Seriously, they did. And they thought they found a loophole.

But then they had to pack the raisins. And the packers most people use to pack their raisins? Those packers had been to the meeting of the “Raisin Administrative Committee” too. So Horne and his wife had to pack their own raisins, to keep from getting nabbed for the illegal act of selling what they had produced.

They got caught. The Supreme Court (yes, this case has been there) details what happened next:

After petitioners refused to surrender the requisite portion of their raisins, the United States Department of Agriculture (USDA) began administrative proceedings against petitioners that led to the imposition of more than $650,000 in fines and civil penalties.

Hand over the raisins!!!! As Justice Scalia said in oral argument on the case: “Your raisins or your life, right?”

So how did the Court rule? Horne argued they couldn’t take his raisins without compensation, as it would be an illegal taking. Sounds good, right? Alas, the case presented a mere jurisdictional issue in the procedure posture that went up to the High Court. The whole thing is back in the hands of the Ninth Circus.

So: to review: to help business owners, the federal government sponsors a cartel. If someone tries to violate the edicts of the cartel, the government comes after him and imposes fines and penalties that, if upheld, will ruin him.

Nice free-market economy we have here in the United States of America, isn’t it?


Planet Money on Rent-Seeking, Part 2: The Jones Act

Filed under: Economics,General — Patterico @ 7:31 am

This is Part 2 of a three-part series about rent-seeking, a phenemonon in which rich businessmen maintain their wealth by legally bribing politicians to pass absurdly inefficient laws protecting their industries. The series relies on the NPR show Planet Money, a sometimes quietly subversive show which undermines the bases for liberal tinkering with the economy by showing how such interference creates inefficiencies.

Part 1 of the series dealt with state-created monopolies for car dealerships, a situation that has contributed to the ouster from New Jersey of the popular Tesla car. New Jersey was the perp in Part 1 — but today, in Part 2, New Jersey is the victim, as we discuss The Jones Act.

Here’s the story told in the episode. The state of New Jersey ran out of rock salt to melt ice and snow — which was a problem, because they were in the middle of a giant winter storm. But all was well: Maine had a mountain of rock salt. Even better, there was a giant ship in Maine that could easily transport 40,000 tons of rock salt in a single trip. Best of all, the ship was already on its way to Newark.

Problem solved, right?

Wrong. You see, using that particular ship was illegal.

Was the ship not seaworthy? Had the captain neglected to file necessary paperwork? Had the company that owned the ship failed to pay taxes?

No, none of that was the problem. The problem was: the ship was not made in America and did not fly an American flag. And under a law passed decades ago called the Jones Act (aka the Merchant Marine Act of 1920), any ship that carries material from one U.S. port to another must be made in America, staffed by an American crew, and must fly an American flag.

The law was passed, as laws like this often are, to protect American businessmen who couldn’t hack it in the marketplace. We wanted to keep a strong marine industry, so we hurt the consumer by passing protections for business. Thing is, it didn’t work out so well. The U.S. doesn’t build that many ships any more. (We barely build anything anymore.)

So it’s not like an equally capacious American-built ship was standing by to haul the rock salt to Newark.

No, instead everyone waited for a little barge to come to the dock. It was filled with rock salt to melt the New Jersey snow and ice. The barge then took off with its load of salt — leaving a mountain of it sitting on the dock. Because, you see, the 40,000 tons could not begin to fit on the small barge. So the barge took some salt down to Newark, dropped it off, went back to Maine, got another “fraction” of the mountain of salt, and went back to Jersey.

The reporter does not say how many trips were required to transport the whole load, but it’s clear it would be at least three.

Well. Serves New Jersey right for banning the direct sales of Tesla.

This rock salt example is just one of many examples of inefficiencies and expense created by the Jones Act. If you miss your cruise ship in a U.S. port, you’ll have to pay a giant fee to catch it in another port. A cattle rancher in Hawaii seeking to avoid the extra expense of using American-made ships has gotten his cows to the U.S. mainland in two ways. Formerly, he shipped them to Canada so they could travel over the border to the U.S. Now, he sends the cows by plane when they are younger and weigh less.

Absurd, right? You bet. Economists hate the law. Yet the chances of repeal appear to be zero.

You see, politicians don’t pay attention to what works. They pay attention to the almighty dollar.

Coming in Part 3: government-sponsored cartels in raisins, and the Stalinist-sounding “Raisin Administrative Committee.”

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