Discover Your Macadamia Nut

Writing at the Foundation for Economics Education, Duke University Professor of Political Science Michael C. Munger excoriates Ricardo. Comparative advantage, he argues, is a dead letter in an age of highly mobile capital, fewer obstructions in labor markets, and an astonishing acceleration in the market discovery process.

ATSRTWT

Analysts seeking to understand idiosyncratic patterns of production and exchange need look no further than the two fundamental questions of economics:

1) Opportunity cost: what is the value to all salient parties of alternative uses of the resources in question?

2) Division of labor: to what extent does the structure of the market permit buyers and sellers to strike a mutually beneficial (dare I say euvoluntary?) exchange?

Answer these two questions, my friends, and you can explain why it was that New England was home to most American manufacturing in the 19th century (lower opportunity cost for building multi-story mills plus Western European immigration) as well as the advent of the sharing economy (insanely cheap communication allows for otherwise idle resources to be employed rapidly). The "comparative advantage" of dumpy Connecticut mill towns was an illusion, little more than the vagaries of historical accident and geographical fancy. Imagine an alternate history where Jamestown had been a few miles north, out of the swamp and the disease. Semi-skilled laborers might have landed in Roanoke rather than Boston and the American industrial revolution might have taken place on the Potomac. And don't tell me for an instant that you think there's something innately advantageous about an ambitious family renting out a spare bedroom with Airbnb.

So is there any role left for comparative advantage? Shall we toss Ricardo's poor bones onto the pyre and be done with him? I'm not entirely sure.

Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.

Emphasis added.

Judged against the immense volume of commerce on this little blue-green planet of ours, the macadamia nut is pretty humble. Yet this sensitive little guy is picky about climate. Perhaps not as sensitive as the vanilla orchid, but you're not likely to find a macadamia farm in Wisconsin. Dairy farmers give up too much milk production to justify a futile attempt at hothouse macadamia trees, at least at typical market prices. Australia is better suited to the task (70% of world macadamia nut production is Australian). You might say that fixed geographical differences persist in some agricultural markets. Nuts. Spices. Wine. Wild-yeast beer.

And, perhaps also in natural talents. "Ringo isn't even the best drummer in The Beatles" may be a false Lennon quote, but it captures the spirit of immutable differences in endowments. Try as I might, I'll never have the lungs and paddle-like extremities of Phelps, nor will I be able to dunk from the free-throw line (indeed, I'll never be able to dunk at all, except on my daughter's toy hoop). I will never write anything as good as either Charge of the Light Brigade or Ozymandias. I can't sing. But where Munger's point shines, it is here. Ability is one part natural talent and 99 parts practice. I had no particular affinity, no natural talent for operating a nuclear reactor, nor for churning out button blanks. Yet I performed these tasks admirably enough with sufficient practice. Opportunity cost and the division of labor determine the extent to which I am able to discover and hone what talents nature has bestowed. Comparative advantage is a starting point, a suggestion. At the extremes, in winner-take-all tournament competition, it might still matter, but for most of us, we pick something that suits our tastes and then practice until we get good at it.

And then we have to start all over again when the market conditions change. Life, friends, ain't easy in the hive.

The Commerce Clause and a Refreshing Glass of Delicious Beer

Courtesy Radley Balko, cops once again "just doing our job, ma'am."

So you can't sell this beer over state lines because "Sorry about the limited distribution, non-Wisconsinites, there are only so many hours in the day to make beer and we can only keep up with the local demand."

Uh huh. I see. Someone in a neighboring state took the time to drive out and buy your beer and transport it on their own time with their own nickel, and it what, it immiserates your other customers or something?

Look people, we have the Commerce Clause in the Constitution precisely to avoid interstate trade disputes like this. It's destructive enough to erect international trade barriers, but to prohibit commerce across state lines is not only economically inefficient, but contra the spirit of '76. The whole of the US is a free trade zone. That some local interests have managed to subvert the guarantee of commerce free of geographical constraints is embarrassing to anyone who cherishes the values of free association and free commerce.

This is Munger's ice truck story again, except I reckon nobody's cheering this time. And the media coverage wisely refrains from reporting what almost certainly happened to the beer in question: it either ended up dumped into a gutter somewhere or as gratis libation for a department kegger.

The thing itself is the [alcohol] abuse.

Choice Architecture and Medical Reform

New from Cass Sunstein.

Behaviorally Informed Health Policy? Patient Autonomy, Active Choosing, and Paternalism

What do you think? An error in a health care decision (including the decision to abstain) could carry with it a pretty sizable downside risk. Time and attention are valuable, so sticking with the status quo is a very quick, and often reliable way of economizing on these scarce resources. Except when it fails, as well it might in medical decisions. Can't centrally-planned default rules help to minimize these downside risks while still preserving the fundamental right to choose?

When it comes to medicine, I admit to a pro-Sunstein bias. Unless folks can find a decent way to once and for all sever the unproductive, anachronistic link between employment and health insurance, there will continue to be unseemly distortions in health delivery systems. It would be much easier and more economically efficient to ditch the current system and much more humane to go full-blown single payer (but not single provider!). The chimera system is nearly as stupid as it is cruel and wasteful. The PPACA for all its good intentions, maintains the un-negotiated bundling of your job with your health coverage.

Medicine isn't euvoluntary. Which is exactly why it shouldn't be treated as if it were a rent-seeking contest. Gosh.

Trade Unions

Generally speaking, folks who share the same camp as me tend to shy from supporting the idea of trade unions. Even absent the risk of corruption, even without union management slowly but steadily alienating the workers they represent, even when everything is going according to the stated goals of the organization, it's tough for folks who believe in the freedom of individuals to associate with whom they choose (under the contract terms they find amenable) to support exclusionary labor cartels with great cheer.

Part of Smithian political economy is devoted to the endless task of slaying the mercantile hydra without the benefit of a barrel of pitch. To use a well-worn metaphor, mercantilist economics is concerned with how to divide the pie of national opulence, whereas marginalist economics is concerned with how to make the pie bigger. Who cares, goes the argument, how large your relative slice is, so long as the absolute slice is bigger than it would have been under an alternative arrangement. That's why we here at EE get away with (or try to, anyhow) cheering suboptimal arrangements like sweatshops, organ sales, and drug and sex work legalization. It's not because we're fond of low wages, desperate hawking of a kidney to pay for bread, shooting smack, or visiting a dingy massage parlor. It's because the next most attractive alternative is often dirt farming, starvation, overdosing, and vice units stretched too thin to actually pay attention to the horrors of real-deal human trafficking. Sweatshops at least give their workers the slim change of scrimping a few bucks together to send their kids to college (or to America, God willing). No such options exist for subsistence farmers.

So why bother turning any attention to a dying institution? Trade unions, after all, exist to protect workers' share of producer surplus against a specific threat: the threat of cheaper domestic labor. Unfortunately for the needleworkers, auto welders, elevator constructors... well, check the wiki page for a full list, scabs aren't the only threat to union members' wages. Capital mobility means that firms can shutter domestic plants and hire labor elsewhere in the world. Capital deepening (and cheap credit) means that firms can more easily shift towards capital-intensive production (more robots). If you're a consumer, you welcome the greater abundance of material goods available at lower prices. If you're a neoclassical economist, you welcome the triumph of your discipline over the craven misanthropy of the mercantilists, or something. But if you're one of the poor saps with your leg caught in the transitional gains trap, smug smirks decorating economists' lips is salt in the wound. You, after all, are the one swept up in having to train for an economy that has little to no use of the skills you worked so tirelessly to perfect in yon Detroit factory.

"So you have to learn some new skills" they say, those tweedy, reedy economists. "The gain to society brought by greater productivity more than offsets your personal loss." They remind you from their tenured positions that job security is not in the description, and that uncertainty is an inescapable condition of life. While I share many of these sentiments, I also give occasional thought to alternative institutional arrangements that could both provide a robust, dynamic economy and make sure that workers (who retain dignity both on the clock as workers and off as shoppers) don't get bruised too badly when they get thrown out on their keister by the robot uprising.

There's something of an agreement in economics that the government should provide those public goods not produced by private voluntary associations. Depending on whom you ask, the set of public goods can be quite expansive, or it can be extremely narrow. I'd guess that if you polled a random selection of professional economists (the KFF Survey of Americans and Economists on the Economy doesn't ask this specific question), a majority would claim that low, stable unemployment is a public good, while a very large supermajority would agree that an individual job is a private good (at least for the worker; many would also acknowledge that from the point of view of the public and the firm, labor is a production cost).

I confess to being a bit of a Cassandra when it comes to the pending demographic pressures faced by US residents. An aging population coupled with anti-immigrant sentiments, berserk spending by local and state political elites who find themselves unbound by any hard budget constraints, and a constituency characterized by a curiously strong faith in the ability of the sovereign to immanentize the eschaton by executive fiat. In other words, the US has some very large, very politically powerful public unions whose members will command immense tax-funded pensions upon retirement. And if taxation technology (remember that income taxes are merely one way of funding government) can't keep up with the promises made to police, fire, teachers, & al by politicians now decades out of office, the alternatives will be actuarially messy. Debt financing of pensions can lead to big-brick interest payments (and God forbid you actually have to start issuing debt in order to keep up with interest payments). Giving pensioners a haircut is an option, but the political fallout of that kind of decision would be nasty enough to give even a nation of Scott Walkers pause. You could default on the sovereign debt I suppose, but I'll leave the consequences of that as an exercise to the reader.

Thus the pickle: except for a few wild-haired libertarians, everyone agrees that society needs a decent police force, a reasonable public education system, and (as long as every other sovereign nation on earth is armed) some appropriate level of national defense. We also all mostly agree that the total lifetime compensation for this work should reflect the total social productivity of the work. But future taxpayers might not be able to afford it. Yikes yikes, triple yikes. You don't tug on Superman's cape, and you don't welsh on cop retirement pay (isn't that the plot of the first Robocop movie?). So how do we eat that pickle?

Well, a good start would be to reflect for a little while on the underlying exchange made between constituents and the folks laboring on their behalf. The euvoluntary exchange between police and citizen is the provision of law and order, not the banditry of asset forfeiture, not the goonery of no-knock drug raids, not the petty thuggery of stop-and-frisk. The euvoluntary exchange between educator and student is literacy, not teach-to-the-test one-size-fits-all Ritalin-fueled college prep. The euvoluntary exchange between ATF agents and individual is non-existent because the mere existence of drinking statutes contributes to non-salutary campus binge drinking and all the sexual misconduct that entails.

The culture of petty popular tyranny is not free, and the bill will come due once all the Baby Boomers retire to comfort, leaving the burden of their care to a nation weaned on the fiction of government-as-parent. I wonder whether or not it's too late to renegotiate the terms of some of these big ol' service contracts. Pot legalization is a step in the right direction, so let's not hope it's another disappointing case of closing the barn door after the cows have fled.

From Coruscant To Tatooine in Less Than 12 Parsecs

I met a stranger from a distant land. He told me of grand spaceports, shining plinths, vertiginous superscrapers, and a furious economic bustle that lifted my mercenary heart. His was a spacefaring race, you see. Deep in the hearts of the Galactic Barquentines his folk used to ply the starscape nestled the key to space travel: a core of refined phlebotinum.

Alas, the stranger's heart was heavy. In his land, the stellar vessels were lovingly crafted in his home country of Mungertopia, but every dry dram of raw phlebotinum was to be found in one place and one place only: the neighboring nation of Spivonostan. The Mungertopians were brilliant, productive engineers and scientists, notable for their grace, courage, and professionalism. Contrarily, the Spivonostanis were dour, dull, and poor. Phlebotinum mining had crowded out their traditional way of life and thanks to the conversion of (nearly) all of their physical capital, they were entirely dependent on trade with the Mungertopians to maintain their national income. This, the stranger said, weighed on his conscience. Commerce with his people had the effect, even if unintentional, of sowing dependency in the Spivonostani culture. It was exploitation, so he claimed.

"Hold on a minute," I rejoined. "Isn't there a decent case that they're the ones exploiting you?"

"Huh?" He sounded puzzled and a little amused, as if he was caught between two possibilities: I was either trying to make a dumb joke or our meeting had turned my thoughts to jelly. Either way, there was patient pity in his reply. "We're rich, they're poor. We have an advanced economy, they produce just one thing. They're, in your own words of euvoluntary exchange, desperate to trade."

"But you can't make your spacecraft fly without what they have. Consider yourselves enlightened. Where I come from, our political leaders have installed puppet governments just so we could put cheap bananas on our cereal in the morning." I reminded myself of the embarrassing news coverage I watched as a boy of Operation Just Cause and the terrible rout of Noriega. "Look, your economy is just as dependent on theirs as theirs is on yours." I was warming to the topic. "The trade may not be fully euvoluntary, but it's at least voluntary, right? You said it yourself, the alternatives would be to return to their traditional ways, making both your lands worse off." I wanted to insert a pregnant pause, but he mistook my silence for an invitation to rebut.

"But all that wealth ends up in the hands of the oligarchs that own the mines." I could almost feel the indignation spill from his clenched hands. "They own the mining equipment, they keep wages low, they buy up any patch of land that has even a remote chance of having a vein of phlebotinum underneath it. Trading with these people empowers these oligarchs. It's immoral."

"So you're worried about the inequality in Spivonostan?" I was careful to be a little vague here, intentionally not specifying exactly what sort of inequality he found worrisome.

"That's one part of it, yes. The average Spivonostani earns but a tiny share of the massive gains from trade generated by the phlebotinum economy." I could tell that he was on the cusp of making a common error: comparing his own situation with that of the target of his pity. Luckily, he caught his mistake and proceeded, "I'll grant that they're better off mining phlebotinum on the evidence that they've chosen to do so without being coerced beyond the promise of what we Mungertopians can offer in trade, but Justice demands that gains from trade be proportional. Isn't that what your Aristotle said?"

"It is. Where I come from, prudent, thrifty foreigners save and borrow in the hopes of migrating to my prosperous country to create a better life for themselves and their family. Can't the Spivonostanis do the same?" My pride and prejudice have a hard time passing up an opportunity to flog open borders, after all. "Wouldn't free migration at least mitigate some of the exploitation problems you cite?" I hoped that some elementary economics was part of his education. "Good outside options should help increase the reserve wages of the workers in Spivonostan."

"Would that this were true, young man." I was a little taken aback at being called young by this dude who looked barely out of his twenties. Maybe they've solved the aging problem in Mungertopia. I shrugged it off. "Our land is poisonous to the Spivonostanis. They can't survive here." He sounded forlorn, as if this were old, painful news. "This is a technological problem, not economic, not political, not even philosophical."

At this, he bid me a brief farewell and got back inside his wee spaceship. I watched the "my other ship is a Corellian Corvette" bumper sticker dwindle in the distance as he flew off. And I pondered.

You see, we here in the affluent West are awfully accustomed to being the Mungertopians. We're in the "first world", we're comfortable, we're rich, and we can afford the luxury of indulging condescension towards the rest of the world. But if the Singularity folks are right, we'll sooner or later find ourselves in the shoes of the Spivonostanis and it will be our brain emulation (or maybe AI) descendants who'll be trading asymmetrically with us. And it's worth considering if we want ourselves or our flesh-and-blood descendants to end up the butt of condescending paternalism of the sort we find in the new imperialism.

Why is it worth considering? Because one of the answers to Andrea's Question is that ideas, particularly given weight and time to germinate, can influence attitudes. A revival of bourgeois dignity can help not only boost human flourishing here and now, but it can underpin the approach our mechanical descendants have towards our meatier progeny. The only downside might be to stick a thumb in the eye of our contemporaries who so greatly enjoy fancying themselves to be better judges of our behavior than we are.

Of course, given the right temperament, that might be a virtue rather than a vice.

Innumeracy and Immorality

Is it immoral to trade with someone who doesn't know how to count to ten?

For members of the Pirahã tribe, this isn't an idle thought experiment. The Pirahã language lacks words for numbers (Wiki page here). They have vague words for "few" and "many", but this does not allow them to add two and two.

An oddity, this lil' Amazonian tribe is a trove for linguists. But it also challenges moral intuitions about the gains from trade. Everything else is there: there appears to be no evidence that the linguistic quirks reduces their ability to adjudge subjective value. But can prices do that voodoo what they do do so well if they're effectively written in alien Futurama scrawl? Is there a conventional capacity to exchange if there's no meeting of the minds on the terms of trade? Pirahã is monolinguistic, the numeracy problem appears to be intractable.

This question might seem like navel-fluff-rolling armchair moral economics, but consider that the US's own Uniform Commercial Code (which is actually not Federal law, but rather 50 separate state laws, plus similar codes for DC and the territories, and also some [all?] of the Indian Nations) treats minors as non-contracting entities. With a few exceptions, a contract with a minor is avoidable. If you sign up for a lifetime membership with a record club when you're sixteen and decide the following year you've had enough, you're protected under the UCC from civil penalties (nb, this is NOT legal advice, it's my murky lower-division recollections of my undergraduate business law class. For actual legal advice, contact an attorney). But the same elementary intuition applies: kids are too dumb to make decisions they'll have to carry around for the rest of their lives, so we don't make them accountable until a "reasonable" age.

Does any of this mean that the axiom of exchange is violated when trading with kids or the Pirahã? Does the willingness to trade no longer signal economic efficiency in these cases? And if so, what is the appropriate remedy? Thanks to the evident impossibility of Pirahã tribe members gaining numeracy, what does this imply about their market autonomy?

And if basic numeracy is declining in the bottom quintile, what does this imply about marginal autonomy in the secular West? What alternative institutions are available to address these issues?

As usual, there are no solutions, only tradeoffs. How much coercion is appropriate to ensure individual autonomy?

Infant Farming

Noah Smith shared my MIE post on selling babies to Twitter. Adam Blackstone objected to my proposition:

@Spivonomist I mean that puppy mills are evil. Extending that to humans would be evil also.
— Adam Blackstone (@Celt_Englishman) November 21, 2013

The argument he's making is this: prices send information to both buyers and sellers. People who know they can earn a profit by selling children have an incentive to increase production. Ex ante, producers (in this case, biological mothers) have little in the way of quality control and can produce lemons, for lack of a better term. In the agricultural industry, farmers can turn bad lemons into lemonade. There is no such mechanism for dealing with unsaleable children. Indeed, some kids might be so rotten that producers would have to pay adoptive parents to get their surplus inventory out of the warehouse.

Blackstone is dead on the money with this observation. Children are heterogeneous. To clear the market, so to speak, prices would necessarily have to be tailored to the product on offer. It would be more like a market in cut gemstones than one in rubber bands. And yes, some prices might have to be negative.

It's this price heterogeneity I think that would be fatal to my idea. It would be sufficiently unfair that certain types of children would sell for a hefty premium while others would be negative price duds, that well-intentioned folks would organize politically to shut down the venture before it ever started. The problem isn't that prices couldn't adjust to match children to homes, it's that voting constituents object to using the price system efficiently.

So okay, that's one thing. That's for children bred for the purpose of being sold. But does this same logic apply to surrogacy? Why or why not?

Kantian Ethics and the Freedom of Exchange.

Jessica Flanigan at BHL shares some elation that Japa Pallikkathayil is blogging over at Political Philosop-her.

The topic? The moral limits of markets.

ATSRTWT

You'll probably find quite a bit of overlap about the questions Pallikkathayil poses and the sorts of topics we tackle here at EE.

And I have a new blog to put in my feed. Excellent.

Haggling Norms: Euvoluntary?

Jeffrey Tucker (with special thinks to Cathy Reisenwitz) has a great piece on haggling. The question he wants to us to ask ourselves: how is a woman buying a car in Illinois like an American buying a sponge in Italy? As a former expat, I frequently found myself on the short end of the stick abroad. It upset my wife to no end when I'd get shafted by a vendor who mumbled something like, "he's an American, he's got money" in a language he thought I didn't speak.

Still, a deal's a deal. It was voluntary.

But was it euvoluntary? Does the fact that other folks get better deals make your relatively lousy terms of trade unfair? Why? Which EE condition is violated?

Labor is not Euvoluntary: LFP Edition

Kevin E. at Idiosyncratic Whisk picks up on an ongoing row folks are having over labor force participation. Tyler linked to a WaPo article that makes some curious claims about the causes of LFP malaise. He says (in the comments): "I am (mostly) not blaming cycle, rather seeing the trend, most of your points do not overturn my view." That was my reading too. The up-edging of elderly workers still in the labor force provokes consideration of what Richard Epstein was talking about in this video (please ignore the socks and unicorn flatus to the best of your ability):


Epstein's point, the one that Skidelsky adamantly rejects, is that it is labor market barriers that is keeping folks out of work. Things like uncertainty over off-balance sheet liabilities, minimum wage requirements, threats of forthcoming legislation, even mandatory health coverage provision (and I don't want to dwell too closely on that one, given some of the shady comments I've read lately) all contribute to an edifice of business uncertainty. Add to that the rank regime uncertainty we've seen since the start of the Bush II administration, and it should be no great surprise that employment is wobbly.

A brief technical digression:

For the uninitiated, LFP is another metric for analyzing employment. If you're so inclined, you can check out reports, data, statistics, whatever so you fancy at the BLS page for employment here. The typical "unemployment" figure that gets reported in the press is U-3. Here's a list of the different measures used by BLS:

U-1 Persons unemployed 15 weeks or longer, as a percent of the civilian labor force
U-2 Job losers and persons who completed temporary jobs, as a percent of the civilian labor force
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)
U-4 Total unemployed plus discouraged workers, as a percent of the civilian labor force plus discouraged workers
U-5 Total unemployed, plus discouraged workers, plus all other persons marginally attached to the labor force, as a percent of the civilian labor force plus all persons marginally attached to the labor force
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force

Clear as mud, huh? Well, a "discouraged worker" is someone who can't find a job and who has more or less given up. The stereotype is the 20-some-odd college grad who has moved back in with her parents and spends her days instagramming on Pinterest or whatever it is the kids are doing these days.

But as Erdmann notes, we're actually seeing two things going on. Yes, we have some noise, but there are longer, larger trends at play. And if you'll note in the WaPo piece, the pie is increasingly sliced onto grandpa's plate. The 75-79 y.o. LFP rates are up. Considerably.

What do I make of this? Well, maybe 2008 exposed some of the malaise Washington DC and the several states have been legislating into the labor markets over the course of the past few administrations. We've been seeing at least a little more executive discretion when it comes to enforcing the rule of law. We've also seen generally more pugnacious law enforcement, and we're seeing new graduates caught in a peacock-plume dilemma, so perhaps it's understandable that employers are slightly more reluctant to hire on Johnny BA with no experience in lieu of Gregory Grandpappy who may be a little long in the tooth and grey in the eye, but who still knows how to work the system and crank out the goods.

It's a hypothesis anyway. A few charts here and there won't resolve the issue. But the disaggregated LFP rates seem to at least point to the suggestion that Epstein and Roberts aren't blowing hot air across the stage (and I see no horns atop their foreheads in any case) when they talk of structural uncertainty.

Which then makes me wonder: what's worse, legislatively "correcting" what may be phantom errors in the labor market, or using tools that end up ensuring very few young people get their foot in the door? Is it more euvoluntary to have a 25% chance of landing a legislatively protected job or a 90% chance of landing a caveat operarius gig with relatively free entry and exit? How much of that question hinges on positive analysis, how much on normative judgement? Is it right to force workers to pick only one option?

As for the DI argument, I'm not convinced it's an especially important margin. If there is malingering, then it's probably low productivity workers doing it anyway, so it's no great loss, all things considered.

Magic Mirror on the Wall, Who is the Most Euvoluntary of Them All?

Pity poor Narcissus. Not that he got turned into a flower, but that he had to suffer the backbreaking indignity of having to bend down to the surface of a still pond to enjoy his comely visage. The now-common mirror, a technology so dully prosaic that acne-ridden teenagers have them hanging (by magnets!) in their school lockers by the truckload, was utterly and completely beyond his ken. Yes, he indulged his vanity, but without the luxury of more easily avoiding sciatica.

Jason Brennan reviews Sandel at BHL, and forwards a very euvoluntary proposition: part of the civilizing effect of markets is that they enjoin a supply side effect: the information that prices give go (at least) two ways: they are necessary information for consumers to make inevitable tradeoffs, but let suppliers know what they should produce and where they should direct innovative talents. If everyone has to line up for a mirror, what incentive does the mirror-maker have to ply his trade?

I agree with Sandel wholeheartedly that there are lots and lots of exchanges that are well outside the realm of euvoluntary, but I also have to agree that making that set more comprehensive demands a system that best encourages craftsmen to lower their costs and make their wares available more widely.

Just think of how much more lovely the flower would be if he would have endured his divine punishment standing upright.

Who Exploits Whom?

Greedy capitalists take advantage of hapless producers in third world countries, paying a pittance to honest tradesmen so rich commuters in expensive suits can swill designer coffee at ridiculously hyperplumped markups. Trade between rich and poor countries can never be fair in any meaningful sense since the desperate poverty of the poorer trading partner will force them to accept the most miserly of all possible deals.

Right?

There's a lot wrong with chronically poor countries. Trade is not on the list. Insecure property rights? Sure. Threat of government expropriation? Yep. Regime uncertainty? Of course. But not trade. Indeed, because trade is by its very nature voluntary, both parties are better off for having participated.

Imagine* that you lived in the Kingdom of Zeal in 12,000 BC. You happen to be one of the lucky people who live on the Floating Continent, and you've got a free trade agreement with the Earthbound folks. One day, along comes a kid with spiky red hair, a princess with a ponytail, and a talking frog. Outraged by your hubris, they steal the Aero-Dalton Imperial and lock your queen in a stasis field that lasts until 1999 AD. The upshot is that the meager surplus earned by the dirtkickers below dries up right away and they're left to harvesting cave mushrooms and eating snow. Gone is any hope of capital accumulation or investment. Crono's good intentions have reduced them to autarky in the short term and a crippled ability to even attempt growth convergence over the long haul.

It's appealing (though facile) to attribute immiseration to capitalism. After all, capitalism appears to nakedly leverage the sin of greed, and government appears to rely on the virtue of noble service, but it's awfully hard to square these pedestrian intuitions with careful scrutiny. Chronic poverty travels much better with weak (esp. informal) institutions than with the ability of folks to trade of their free volition. If there are problems with rapacious capitalists, the first place to look is probably estate collusion. Business folk cannot easily force exchange without state backing. Nor can they pollute unabashedly where strong property rights and a functioning rule of law is in place. Mind the greed of business elites, sure, but mind the greed of political elites yet more. They're the ones with the guns.

At any rate, it's probably more fair to say that it's the poor folks abroad who do the greater exploiting. Trade with the wealthy west allows them to escape desperate drudgery and bothersome BATNAs. All I get out of the deal is cheap shirts and a cup of tasty caffeine in the morning. Sounds to me like I'm the one getting the short end of the stick.

And I wouldn't have it any other way.




*If you're unfamiliar with the classic SNES game Chrono Trigger, I feel bad for you son. I got 99 problems but being a marshmallow ain't one.

Price Discrimination, Surprise, Stealth Assassination

Ever get the feeling you're being ripped off, even when you know you're not being ripped off?

Every so often, a popular online video game service offers deep discounts on popular titles. It's usually a great opportunity to grab some of the year's sleeper hits or games that were just a little bit too expensive the first time round. Among this year's offerings, there was a particular game with a stealth assassination mechanic set in a steampunk-inspired world. I had been putting off buying it in favor of some of the year's other, more compelling titles, including a run-and-gun, loot heavy FPS and a space opera cover-based shooter. Still, given the right price, I could justify picking it up as a Christmas present to myself.

So that's just what I did. I'd had my eye out for a sale, and when the price dropped from $60 to $45, I grabbed it lickety-split (there's an idiom not seen much these days--I wonder why it fell out of fashion). Well, Christmas season and all, what to my wondering eyes did appear the very next day? The retailer had deepened the discount by another 25%. The game is selling for $30 at the time I type this.

Imagine my mental anguish. Here I am, squire to Sir Munger in the Kingdom of Euvoluntaria, defender of the morality of voluntary trade and I'm all bent out of shape because I learned that if I'd have waited a day, I could have saved another 15 bucks? Come on.

Look, at the time I made my purchase, I did so with all the knowledge I had available to me. I felt I was getting positive consumer surplus. I had no way of knowing the price would be dropped the next day. In econ jargon, the future, unobservable market is irrelevant at the time of purchase. The transaction was euvoluntary when I made it.

Did it suddenly cease to be euvoluntary the following day? If so, I presume it's because of the regret condition? If so, which cell of my regret matrix would it be in? High search costs and high information asymmetry? If you agree with me that this is the bad box to be in, do you think it would be appropriate for government agents to interfere with the terms of the sale?

I will offer this: very often in brick and mortar stores, if a customer shows up ex post with a coupon and a valid receipt, they can claim an adjustment. Bed Bath and Beyond does this, at least. I'm not sure if I can haggle down the purchase price of my game another 15 bucks, nor am I sure if it's worth the time and hassle, but boy-howdy, despite my economics training and my sensitivity to the principles of euvoluntary exchange, I sure am smarting over this. It's kind of soured my enthusiasm for the game itself, which is an innocent bystander in all this.

How I Learned to Stop Worrying and Love the Monopoly

"Monopoly" is a maddening word. Time was, a monopoly was a privilege granted by the crown so that (a) a merchant would enjoy protection from competition backed by the Royal House and (b) a cash-strapped royalty could raise treasure without begging the House of Commons or sending goons across the countryside. A characteristic of a venture granted monopoly rights is a lack of competition. What was once a mere feature has become the defining characteristic of sole-provider firms. This is frustrating for some of us in economics because there are important, genuine distinctions between production characteristics of protected and non-protected monopolies, yet in many principles textbooks, monopoly is taught as if they're the same thing. They're emphatically not!

But what I'm interested in today is less the Econ 101 definitions and more the pedestrian perception of the fringes of monopoly. I have a hunch that the following four factors color perception of big enterprise or monopoly: firm size, market thickness, consumer separation, and government involvement. Let me elaborate below the fold.

Machine Wash Warm, Tumble Dry

Politicians' favorite Bobo doll for the past decade or so has been China. Before that, it was Japan. Every election season, America's woes are laid at the feet of the Oriental nation du jour. It's an embarrassing spectacle for onlookers familiar with the principles of economics, but whatever other failings they might have, politicians are pretty adept at gauging public opinion. This suggests to me that the median voter clings tightly to their anti-foreigner bias, which is a pity because I think all of us want to know what love is.

I'm curious to how much of this bias is tied to non-euvoluntary exchange sentiment. I think there's some paternalism over sweatshop labor, which we've covered here before, but these arguments seldom seem to form the crux of the arguments against China. It's usually "currency manipulation" (whatever that means in an era of widespread central banking) or "shipping jobs overseas". Mercantilist ledger-rattling demands a "level playing field" or some such nonsense (hint: when Congress doles out heavy subsidies to US industries, maybe elites should worry about taking the needle from their own eye first) and "fair trade", a term I suspect was written to make George Orwell do a spit take.

Anyway, the bluff and bluster against trade with China is a good challenge to some claims I've made before. I've written that euvoluntary exchange is, among other things, economically efficient and morally acceptable to the great bulk of folks (certainly, the median voter). International trade is quite obviously efficient, but if there is this moral opposition, can it be euvoluntary under my interpretation of EE? If it's not euvoluntary, which condition is violated?

This could just be my pride talking, but I have a hunch that the intuition is either in a conventional capacity to exchange feeling or, probably more accurately, an uncompensated externality argument. The conventional capacity to trade angle might be atavistic tribalism waving its banner in the form of parochial nationalism. More to the point, the "shipping jobs overseas" charge could plausibly be an externality argument. International trade includes some costs and some transfers on some Americans (ignore for the moment that automation in manufacturing has resulted in far more job destruction than international trade), and even if we assume no xenophobic sentiments among voters, these claims of job losses may be sufficient for voters unfamiliar with concepts like creative destruction and comparative advantage to support politicians who pledge to "get tough" with a nation that has the unabashed temerity to contain within it peaceful humans who wish to (taco) truck, barter and trade with peaceful humans who call the 54 states, districts and territories home.

The above paragraph feels a little weaselly to me. Students of economics (like me) would probably be a lot more likely to describe international trade as euvoluntary. Think of the Pepsi challenge: you're an economic nationalist in a store buying a TV with the  product information redacted. You like the TV and it's not stolen property or anything. There are plenty of other sets to choose from and nobody's holding a gun to your head. Only after you bring it home do you notice a little sticker saying "Made in China" and all of a sudden you feel cheated. Is this new bit of information the result of careful analysis of the costs, benefits and transfers of international trade or is it knee-jerking against an imagined foe, honed by years of exposure to sloppy economic arguments? I think I'd like to get into this question in more detail in a future post. For now, I'll just ask if there's a difference between the formation and the maintenance or moral intuitions about the role of, broadly, trade and more specifically, international trade. How did this bugbear heave itself from dust and how does it continue to shuffle its woolly feet around public discourse?

The Greatest Blog Post Ever Written

I have been privileged to spend the past week at Hermosa Beach with John Tomasi, author of the fascinating new book, Free Market Fairness.

There is a contretemps royale on the book over at BHL.  Many of the essays are worth reading, on the question of what it means to be "voluntary."

But the essay by Prof. McCloskey has been called "The Greatest Blog Post Ever Written."  If true, that's significant.  Because there have been a  LOT of blog posts.