Thursday, September 13, 2012

Euvoluntary Exchange


I participated in a webinar by Mike Munger yesterday.  He spoke on “euvoluntary exchange”.  It was very interesting.

The concept is pretty basic in economics that voluntary trade creates wealth because all parties in a trade would not have participated unless they expected to be made better off than before they started.  Any trade that actually occurs must then make all parties better off, absent mistakes or regret. 

Munger formalizes the concept of voluntary exchanges by stipulating five rules.  First, the items to be exchanged must be subject to some form of ownership and second, this ownership must be transferable.  He stipulates in a voluntary transaction not only that there must be no force or coercion compelling the sale, but that all parties are satisfied after-the-fact and that there are no uncompensated externalities to third parties.  All trades that satisfy these five criteria of a voluntary transaction make all parties to the trade better off than they otherwise would be. 

The question is, why are there so many voluntary transactions that are stigmatized or even outlawed?  Why do people want to stifle wealth creation?  Munger posits a sixth, intuitive deontological, rule for “good”, or “eu”voluntary exchanges: that neither party be “coerced” by circumstances into accepting the deal.  He used the concept of the best alternative to a negotiated agreement (BATNA), to explain why people feel that otherwise voluntary exchanges are looked upon as exploitative. 

I’ll give an example of a lawyer.  A lawyer may have many clients and many cases at any one time.  Losing any one case is unlikely to bankrupt him.  The client, on the other hand, may invest a significant part of his net worth in hopes of winning one particular case and would be devastated by having to start over with a new lawyer.  In this circumstance, the lawyer’s BATNA (or result of losing the deal) may be having to buy a Mercedes instead of a Lexus, but having time for an extra round of golf.  The client’s BATNA may be bankruptcy and/or jail time.  This wild disparity in BATNA’s reflects the state of the underlying reality.  We can see that the lawyer has a negotiating advantage and we hate him because it looks unfair. 

Munger’s point is that life is unfair.  Non-euvoluntary trades, as unfair as they may look, can still be just because, when they are voluntary, they make life less unfair. 

We, as humans, seem to have an instinctive revulsion towards non-euvoluntary transactions.  We want life to be fair.  We can believe that the evil capitalists exploit workers; and the poorer and more in need of employment the worker is, the more we hate the man who hires him.  The “moral smugness” that lets us hate the employer in lieu of the difficult circumstances that make the worker need the employment so desperately can only hurt the worker.  When we punish the employer for “exploiting” the workers, we are condemning the workers to remain in poverty.  Preventing non-euvoluntary exchanges hurts the worst-off.

So, how can we overcome this moral smugness in order to help people?  There’s always charity, but charity is less efficient than the market (wrong incentives).  The more voluntary exchange we allow, the more euvoluntary trade will become possible because the poorest and most needy will have more options.


Good luck convincing policy makers of this.

Monday, May 21, 2012

The Fairy's Mistake's Mistake


[This is based off a conversation that I am glad I was able to have with my 12 year old daughter because I read what she was reading.  Failure to analyze leads to errors internalized.]


Today, I’m going to use economics to dissect “The Fairy’s Mistake” by Gail Carson Levine:  87 short pages that can be read in an hour.  Levine writes charming fairy tales.  “Ella Enchanted”, probably her most famous, is about how the use of power leads to unintended consequences, and why liberty is to be desired above all else but requires hard work and bravery to attain.  (That’s the book. I haven’t seen the movie and can’t vouch for it.)  “The Fairy’s Mistake” is also about unintended consequences. 

[Spoiler Alert:  I will discuss the full plot including the end of the book.]

In the classic fairy tale, the naturally good, sweet young maiden freely provides some service to an old hag who turns out to be a powerful being in disguise and rewards the maiden’s service handsomely.  An envious sister hears of the maiden’s good fortune and tries to duplicate the feat, but her natural selfishness botches the job and she receives her comeuppance.  In Levine’s version of the tale, the fairy attempts to reward the first sister, Rosella, with unlimited riches.  Every time she speaks, random precious and semi-precious gemstones fall out of her mouth.  The twin sister, Myrtle, is rewarded with foulness.  Every time she speaks, disreputable creatures crawl out of her mouth:  spiders, snakes, frogs, insects, and worms.  Unfortunately, the fairy’s gifts do not have the consequences that she intended.

The good sister cares nothing for the jewels (which end up being like a resource curse to her).  She lets them fall carelessly to the ground as she sings while tending to her garden.  This demonstrates that the jewels have no inherent value.  (Neither does any other form of money or goods, including gold.)  Unfortunately, Rosella’s careful attention does not bode well for her garden as her mother later uproots all of the plants in order to sift through the dirt for fallen gemstones.  This demonstrates subjective valuation.  Rosella valued the garden and its produce more highly than the pretty rocks, but Rosella’s mother placed the value of the gemstones (and what she could trade them for) above that of the plants.

A passing prince who cares nothing for Rosella’s goodness or her beautiful voice notices the jewels and immediately offers to marry her.  The prince and Rosella’s mother are both careful to provide Rosella with a cup or a bag to catch any gems that she drops while speaking to them; and when she arrives at the prince’s castle, he even provides guards to stand around her bed and catch any gems that she may drop while talking in her sleep.

Rosella’s ladies-in-waiting are supposed to help her dress, but they ignore her unless she speaks.  When she speaks, they fight each other to obtain possession of the jewels and end up destroying all of the fine clothes provided in Rosella’s wardrobe.  Rosella is left to wear burlap.  I am going to call this one a dramatic example of rent seeking.  The ladies-in-waiting use their position to their own advantage, spending time and energy arguing and fighting over the division of the spoils rather than in producing value.  Rosella would have been happy to reward them with the jewels, but because she did not assert a property right over the gemstones they were seen as a common good to be snatched by the fastest comer.  The attempt to secure this common good as a private rent caused a considerable waste and destruction of resources.

After the engagement ceremony, all of the prince’s subjects stand in a receiving line to meet the new princess.  They all bring bags and cups and buckets to catch whatever bounty may fall to them as Rosella speaks to each one in turn. Rosella wanted to give diamonds to the poor woman who needed a warm winter coat because she wanted that woman to be able to afford the warmest beaver coat, but giving her a fistful of diamonds did not trap an extra beaver, nor cause it to be made into a coat.  If giving the woman a diamond meant that she could buy a beaver coat, it was only because someone else had to forgo buying that coat because the new money in circulation has bid up the price of the coat.  This woman is better off and the furrier is better off because he can get a better price, but the other prospective buyer is worse off because she cannot buy a coat. 

The same goes for the farmer who needed a new plow.  Rosella was happy to give people money in order to relieve their suffering, but giving the farmer money to buy a new plow did not create a new plow.  If the farmer uses his gift to buy a new plow, then the blacksmith who makes the plow will not have time to build the wagon wheels that he would have spent his time on.  If a hundred farmers each need a new plow and show up at the blacksmith’s shop with new jewels, the blacksmith will not be able to accommodate them.  The price of the plow will be bid up by all of the farmers who thought they were now wealthy enough to buy new plows.  The gentleman who wants his carriage will also compete for the blacksmith’s time.  All prices will be bid up, but not at the same rate.  The luxuries that the people now think they can afford will be bid up first, shifting production towards these luxuries and away from other goods.  Our blacksmith may hire an assistant away from a farmer or a carpenter who will now be able to produce less.  When shortages develop in staples due to that shift in production then prices of staples will be bid up until the people realize that they can’t afford the luxuries and production shifts back to normal.  Those that can shift into and out of luxury production the fastest will be the beneficiaries of the distorted economy.  More will be made somewhat worse off.  Wealth is shifted to the people who receive the gems not from Rosella but from the people that did not receive her benefaction.

It is completely rational for each of the individual subjects of the prince to stand in line all day in order to receive a fistful of wealth because if they don’t, then their neighbors will benefit at their expense.  The farmer who spends his day working will still have to bid for his new plow against the farmer with a pocket full of jewels.  He will be much worse off as prices rise.  It makes sense individually to forgo work in order to receive the largess, but at the end of the day is the kingdom better off?  Every farmer and craftsman who spent the day standing in line has had a day without production.  The total output of goods in the kingdom is down by one day’s work.  This means that despite the new jewels in their pockets, the kingdom is poorer.  No one in the book realizes this.  Everyone is happy with his or her gifts.

Meanwhile, our princess listens to all the sob stories of the people in the receiving line and wonders why there is so much poverty.  When she asks her betrothed about it, his response was, “Subjects were always poor.  ‘I wish they were richer too, cutie pie.  Then I could tax them more.’”  Taxes are a redistribution of wealth.  Wealth is created through industry and trade.  Excessive taxes discourage industry and trade and thus less is available to be expropriated by our charming, shortsighted prince.

Rosella is kind hearted and refuses nothing.  The prince is completely blithe to the misery of his betrothed.  “How could she be unhappy?  If I were in her shoes, I’d be delighted.  She wouldn’t be a princess today if I hadn’t come along.  She gets to wear a crown.  She has nice gowns.  Royal Ladies-in-Waiting.  And me.”   This is another demonstration of the subjective theory of value.  Every attempt by the prince to please Rosella results in more misery because he never bothers to hear what she wants.  He just gives her what he thinks he would want.  Just because he loves wild boar meat, doesn’t mean she can stomach it.  Between the stress of constantly talking (and never being heard),  lack of sleep (remember the guards around her bed?), and unpalatable food, she is soon desperately ill. 

What about the other sister?  When the mother realizes that her favorite daughter, Myrtle, was unsuccessful in duplicating Rosella’s blessing she is upset that she let Rosella leave with the prince.  When they figure out that Myrtle is cursed, she demands that Myrtle stop talking.  Myrtle, while upset at first, soon realizes her power.  She walks into the bakery and demonstrates her curse to the horror of the baker.  She promises to stop talking in exchange for some muffins.  She is soon extorting goods from every shop in town and invites all of the town’s inhabitants to her fourteen-and-six-weeks birthday party.  They all bring gifts.  Myrtle’s curse was supposed to be a punishment, to regulate her rude tongue.  The fact that she was able to quickly turn it to her advantage is analogous to regulatory capture.  Later in the book, the fairy asks Myrtle to help her.  When Myrtle refuses the fairy threatens to punish her, but Myrtle likes the fairy’s punishments.  The ploy that secures Myrtle’s cooperation is threatening to remove the original curse.  Deregulation rarely favors the regulated parties.

The grand climax of this book comes when they trick the prince into believing that Myrtle is Rosella.  After being stung by a few hornets that come humming out of the mouth of his apparent betrothed, he starts to listen to her for the first time.  Rosella then asserts a property right over her jewels for the first time.  While the jewels have no intrinsic value and low subjective value to her, she sees that their market value is high.  She has the power to stop their production by refusing to talk so she asserts a property right as a condition of speech.  He thinks that this is very selfish, but agrees when he remembers the hornets.  Property rights are meaningless unless backed up by the threat of force.  Because of the threat of force backing up her property rights, they are finally able to meet as equals and discuss mutually advantageous terms—not what he thinks she should want, but what she actually wants.  Rosella agrees to give him half of the jewels because he has made her into a princess and he is going to be her husband.  She finally gets served her quail eggs instead of the hated wild boar meat.  The prince and Rosella get married and eventually fall in love and get to live happily ever after.  The prince uses his half of the treasure to commission a new palace of marble and a golden coach, and “Rosella was happy talking to her subjects and making sure they had enough plows and winter coats and leather for making shoes.”

WHAT?

After this cute story, Levine ends it with THAT drivel?  If Rosella made it rain diamonds, how would this produce one more square foot of leather?  Would those diamonds increase the size of the cows or the fertility of the fields? How does she cure poverty and hunger by showering the people with money?  They can’t eat the diamonds.  If we do not look at the kingdom as a closed system but assume that they trade all jewels to neighboring kingdoms then we are left with the same situation as the farmer who did not attend the receiving line.  All of the neighboring kingdoms will accept the jewels in trade at the old price and thus be cheated until they realize that their neighbors are inflating the number of gems.  Our princess will indeed be solving poverty in her kingdom by impoverishing its neighbors.  This is another form of rent seeking.  No wealth is created, but existing wealth (in the form of goods) is transferred out of neighboring kingdoms into this one.  The neighboring kingdoms will in turn trade out the jewels (that are falling in value) to their neighbors and the poorest countries will end up being the ones farthest down the trade line.  Rosella thinks she is helping, but all she is doing is pushing the poverty further away where she can’t see it.  She has done nothing to increase productivity and make the world a better place—and if her prince really uses the increased nominal income of his subjects as an excuse to tax them more then she might as well have given him the jewels in the first place.

So, here we have the twin fourth branches of government.  The first is the Federal Reserve, which promises to end our monetary problems and provide prosperity to all; while actually inflating our currency, and distorting our markets—but it’s okay because the plunder is divided between governmental opulence and largess.  The second represents the administrative regulatory agencies:  agencies that do nothing to produce wealth for society, and that are often hated because of their power to destroy businesses—but the use of power does attract followers.  “Myrtle became truly popular, which annoyed her.”  The fairy, unlike the fairies in “Ella Enchanted” that eschew ‘big magic’ because of the inevitable unintended consequences, just “grew more careful.”  “Nowadays when she punishes people, they stay punished.  And when she rewards them, they don’t get sick.”  This expresses a lot of faith in big government.  I’m sure we’ll get it right this time.

Let me know how that works out for you.  You may think you are doing well under this system, but what is unseen is the forgone prosperity due to rent seeking, destroyed resources, lost production, perverse incentives, market distortions, and general unintended consequences.

“And they all lived happily ever after.”

Really??

Friday, May 11, 2012

A parody

I doesn't really fit here as it's not about truth, but a parody of it, but this is a link to an article I wrote:  http://www.zpatriot.com/zpatriot/articles/138/rogue-carrots  It's worth the read. (EDIT:  That site being now defunct, the piece is currently residing on this blog, at http://anchiosonpittore.blogspot.com/2013/09/feral-carrots.html .   Share and enjoy.)

I'm going to call it a protest against the philosophy of interventionism.  I think liberty is a moral issue. Natural rights, if you will. The fact that it has utilitarian justification is, to me, just gravy. Freedom would be worth it even if it didn't produce the 'best' outcome. I enjoyed Bastiat's Harmonies because it attempted to show that utilitarian outcomes flowed from natural liberty. I find attempts to rigorously calculate utilitarian outcomes without recourse to 'natural rights' are often very off-putting. After all, how does one measure utility? If the American black man was better fed and cared for before the civil war than after, was it wrong to free him?  If my pigs are safe in my field, not bothering anyone, then it's wrong for anyone to force me to shoot them, because unjustified force is evil.  The fact that it is a tremendous waste of resources is secondary to the fact that my rights have been violated.

Edit:  It has come to my attention that where I said utilitarianism, I meant consequentialism in general.  Wikipedia says that consequentialism judges an action by it's outcome. Utilitarianism measures that outcome by aggregate happiness.  Judging the outcome of any action involves establishing a scale of goodness. Determining whether that scale should be in utils, dollars, leisure hours, level of self-determination, or some other measure (either absolute or relative) is necessarily normative. My (hyperbolic) point about the slaves was that without a natural rights argument, who cares what the slaves want? If we can objectively evaluate potential working conditions and determine that they were better off in slavery, are we justified in keeping them there against their wishes? After all it's for their own good. Or the greater good. Depending on the scale we decide to use.

Saturday, March 17, 2012

Money Flows

Troy Camplin's post on "The Constructal Law" was fascinating.  I have never heard of the term, but the post was about branching patterns of rivers and chaos theory and evolution and economics were all about how things flow.  I think it's worth further exploration. This was my initial response:



My favorite imagery from reading Adam Smith is his recurrent use of flowing water. Whenever governments try to steer industry away from its natural channel, their purposes are thwarted by entrepreneurs in such a way that everyone is generally worse off than if the government had not acted at all. Water seeks its own level, and capital seeks profit opportunities. The power of water carves canyons and sculpts seashores. Governments try to dam the power of markets and command the tide not to rise, but price controls create scarcity instead of prosperity, and resulting black markets do not have the safeguards of legal property rights. 
My pet example is "campaign finance reform". The Hoover Dam is a remarkable feat of engineering. It was made from 4 million cubic yards of concrete and killed dozens of people during construction, not to mention the continuing environmental costs, but at least we can say that it does what we intended it to do: eliminate flooding, create electricity, and provide water for irrigation. On the other hand, the Colorado River that carved the Grand Canyon is not going to be stopped for long by whatever concrete we can throw at it. Every year the water seeps a little bit farther and faster through the rocks around the dam. In geologic time, the awesome Hoover Dam will be gone in an eye-blink. Compare this to campaign finance reform. Person A has influence to sell, person B wishes to buy. This is determined to be undesirable so we dam the transaction. Person A may not take person B's money, but he still has influence to sell and B still wishes to buy. Introduce the middleman. The middleman may take the form of soft money, 527's, PAC's, or hiring A's useless son for a sinecure; but the money will move from B to A because even the the most draconian legislation is much more pervious to individual relationships than concrete is to water. Money flows.

Wednesday, March 14, 2012

The Voice of the People - On behalf of the one

Dr. Tim Nerenz posted a great article explaining why all citizens should tell the government to back off from regulating church teachings and practice.  It is a well-done piece, but perhaps he didn’t go far enough.  This debate over forcing employers to cover contraceptives is a matter not only of religion, but also of conscience.  We are quibbling over whether the government can force someone to pay for contraceptives, but the same arguments could be applied to paying taxes to support what some label as an immoral war, or to indoctrinate our neighbor’s children in state institutions, or even to enforce the temperature at which food is served.  The only difference here is that Obama is treading on the toes of an organized religion and not an unaffiliated mass of individuals.  I would argue that this must be a violation of the first amendment.  If “Congress shall make no law respecting an establishment of religion”, then why does the violation of the tenants of the Catholic church carry more weight than the violation of the conscience of any American?  The Catholic church serves a large number of Americans so it seems ridiculous that Obama would seemingly provoke them deliberately, but would it be any better if it were only one?  The whole issue throws into sharp focus how our political dialogue has wandered away from the concept of liberty.  Perhaps Dr. Tim stopped short because he feared that if everyone saw the inconsistencies in our system we would end up with an uprising.  I do NOT in any way support an uprising.  I’m not even sure I support Thoreau’s conscientious objection to paying taxes that support an immoral regime.   We have mechanisms in place to democratically remove the usurpers of our liberty.  If we do not do so, we deserve what we get.

Democracy is a very dangerous thing.  Plato hated democracy because he saw its logical conclusion first hand.  Socrates was condemned to death because he was a constant source of annoyance.  Annoy enough people—or, today, have a large enough bank account—and a democracy is sure to take everything you have:  property, liberty, life.  Athens was the “cradle of democracy” which was a pejorative term until well after the founding of America, because with the coming of democracy:

“From this time the People became altogether idle and unnactive; they received the same pay for sitting at home and doing nothing but attending the publick Diversions as they did for serving their country abroad, and the former was without question the easiest duty.—Military Glory had then no weight; the orators ruled the People coaxing them with new schemes of additional wealth and often overruled the most experienced commanders, turning them, continuing them or changing them as they thought fit. Levies were then seldom voted and where they were, as seldom made. The Athenians from being the most enterprising people in Greece were now become the most idle and unnactive.”

Contrast this with the current perception of democracy.  There currently popular notion seems to be that the will of the people sanctifies any action.  Here we read “Now it is not common that the voice of the people desireth anything contrary to that which is right; but it is common for the lesser part of the people to desire that which is not right; therefore this shall ye observe and make it your law—to do your business by the voice of the people.” 

We’ve all heard examples of mob rule, right?  Not pretty.

To continue the quote: “And if the time comes that the voice of the people doth choose iniquity, then is the time that the judgments of God will come upon you; yea, then is the time he will visit you with great destruction even as he has hitherto visited this land.”

Ouch.

So, the point here isn’t that democracy is good, it is just that the mistakes and prejudices of a thousand people are more likely to cancel each other out, at least compared to a dictator who merely argues his selfishness against his own conscience.

The brilliance of our “founding fathers” was that while they allowed a sort of a democracy where the will of the people had the power to change things, either to eliminate tyranny and oppression (let’s list Constitutional Amendments 13, 15, 19, and 21) or to increase it (16 and 18? the federal reserve system?), they inserted brakes in the system so that we did not destroy ourselves too quickly.  Because we have a republic, the voice of the people does not automatically translate into policy—but it does steer the direction our country is headed in.  Are we headed towards liberty or slavery?

How do we change it?  It’s not by lobbying or protesting or suing the government, at least not directly.  We change the course our country is charting by changing the hearts and minds of her people.  Teach, write, proclaim, sing, and celebrate liberty, righteousness, and TRUTH.  Stand up for rights of others, even if you don’t agree with them, by speaking out.  BE the voice of the people, and speak for the rights of the ONE.

Does it matter who gets elected?  A little.  But we get the policies we deserve.


Sunday, March 4, 2012

The Key to Happyness - Life sucks. Grow up.



Last night I watched "The Pursuit of Happyness".  It was an adorable movie about dedication and perseverance to a dream, overcoming the odds to become successful.  This dad loses everything and ends up sleeping in a bathroom in a subway station with his five-year-old boy, but they struggle through and end up multi-millionaires. 
The story is cute and inspiring, but what really stuck with me about this movie was the mother’s story.  She hates her life.  She is tired of struggling, wondering if they can catch up on the back rent and the IRS payments, working double shifts and trying to be a wife and mother.  I can really feel for her frustration, but what I don’t understand is what happens next. 
She quits.
Quits.
He is late getting home and when he calls from a payphone to let her know, she informs him that she won’t be there when he gets back.  She is just not happy anymore.  He comes home to an empty house. 
So, my question is:  How does that make things better?  The debts don’t disappear, the bills don’t disappear, communication breaks down, coordinating childcare becomes harder, and now – since you were so stressed out about not being able to afford the rent – you get to pay another rent.
She moves to New York because her sister’s boyfriend might have a job for her and we don’t see her the rest of the movie.
How can she walk away from family: her five year old son and a loving husband?  The lesson here is that life sucks.  Expect it.  Deal with it.  Leaving (because she wasn’t ‘happy’) did not make her happy, because – guess what? – life still sucks!!  Her troubles did not leave her because she left her husband.  The only things that changed were that they no longer shared their struggles and that she could no longer blame him for her struggles. To quote Thomas à Kempis, “whithersoever thou comest, thou bearest thyself with thee, and shalt ever find thyself,” or, in the vernacular, “wherever you go, there you are.”  The way to be happy is not to have the perfect plan to avoid suffering.  That leads to disappointment.  The way to be happy is to expect both joy and suffering and embrace them together. 
[NOTE: I don’t know what the mom in our story was seeking and I’m sure that she wouldn’t be happy with Hollywood’s portrayal of her, so I’m only reacting to that portrayal and its thinly developed character.  Perhaps a better development of the mother’s character would have left me less jarred and better able to enjoy the rest of the movie.  Or perhaps not.]
After stewing on that all night, today I read Heather Mac Donald’s “Too Poor to Marry?” and it has me thinking.  She references a NYT article that tries to explain illegitimacy rates by explaining that many people just can’t afford to get married.  Not that they can’t afford a fancy wedding, but that women can’t afford to take care of a husband in addition to their illegitimate children. “Money helps explain why well-educated Americans still marry at high rates: they can offer each other more financial support, and hire others to do chores that prompt conflict.”  
What?
Sharing chores, sharing a dwelling, and sharing child-rearing responsibilities are money saving features of marriage.  And, as Heather MacDonald says:
“The notion that being a married parent requires more financial resources than being a single one is wrong not just as a matter of economic arithmetic but, more importantly, in terms of what married biological parents bring to their child — not money, but a 24/7 partnership in the extraordinarily difficult task of child-rearing. Household wealth is the least important reason to form a two-parent family; the idea that raising children as a single mother is on average in any sense easier than doing so as a couple, even in the stormiest of marital relationships, is absurd, and ignores the enormous strains of being both the sole bread-winner (or even welfare-collector) and the sole source of authority for your child. A second parent in the home provides back-up support in discipline when the other is at the breaking point, and a doubling of the emotional, intellectual, and moral resources that a child can draw on. You don’t need to be wealthy to offer that complementarity; poor married parents have raised stable, successful children for millennia.”
My personal conclusion:  Grow up.  “The value of marriage is not that adults produce children, but that children produce adults.” Peter De Vries.  I don’t care to argue the chicken and egg argument whether people don’t get married because they are emotionally immature or they don’t have to grow up because they can avoid marriage.  Marriage and assuming adult responsibilities are both Good Things for a myriad of reasons, including happiness.  Both are individual choices which can be encouraged but not mandated.  So, when you see someone being irresponsible in a movie or book, point it out.  Fight against the downward spiral of our culture, not by boycotting or trying to ban irresponsible images but by spotlighting them.  Perhaps you’ll make someone else think twice before doing something stupid.