Category Archive: Economics
Comments Off on Congestion tax in Manhattan: Readers speak!
Last month, I wrote a post that asked whether Manhattan should tax ride-shares, tax all vehicles, do something else, or do nothing at all. And you had some ideas about that.
Below, I have tried to combine your answers (I got nearly 30) into a manageable set of categories. Responses were about evenly split among Do Nothing, Impose General Congestion Tax, and Impose Taxes on Ride-Shares.
To save space, and avoid repetition, I chose some of the most representative of each group, edited them very lightly, and combined them to make what I print below as an illustration of a general view.
That means that some individual nuance was lost, but I wanted to give readers a chance to see something of the breadth of views. I also present, in the final section, a response that questions whether a partial approach to one policy change is a sensible method in the first place.
I. Do nothing (or at least do nothing more).
- The taxes are coercive, don’t accomplish their objectives, and in any case will be misused. It seems to me that morally, the coercive nature of taxation makes me dubious to support an expansion of these mandatory payments to the state. Uber has been a wonderful free market solution to dismal public transportation. In my eyes, we should also be thanking Uber for ridding the streets of countless drunk drivers and allowing a voluntary system of ride sharing. The trivial amount of “congestion” added to the roads (as it can be assumed that one way or another these customers would be on the road) can be dismissed as an attempt for the state to confiscate ever more of our money.
- Uber should not be selectively taxed, because why hinder innovation — and how often are “public officials” right anyway? Winston’s view [advocating congestion pricing] does seem to be well argued. Less dead-weight loss, and using queuing revenue towards subsidizing and improving transportation, could benefit all involved.
After listening to your talk on transaction costs, which was awesome btw, I’m not convinced congestion pricing is best. After a few classes of economics, I believe my final answer is that we just leave the market to clear on its own. Incentives, supply and demand, and stuff. “The genius of markets is the ability to create harmony and agreement out of disagreement.”
- The right goal is that transactions should be set up to establish efficiency and guard against theft. You are correct that the information is lacking when there is no market equilibrium of seller and buyer. I would add the price should not be fixed by a regulator; quality markets have both supply and demand move and that is part of the information.
What all modern implementation plans miss, in my opinion, is the need for simple general equilibrium analysis. In regular market transactions all participants are made better off. But in congestion pricing, paying for the full price in all operational models seems to make the users they have stated that they intended to help worse off. Many of the remaining payers of the toll remain worse off.
Drivers on average pay the full price of congestion. On the margin in most congestion situations one more marginal-value user causes far more incremental delay cost on all other users than the benefit the marginal-value user experiences himself.… But the point to keep in mind is that the marginal-value user that we want to eliminate is not the last-in-time user, but the lowest-gain user.
If no price discrimination is used, the marginal price has to be charged to all users, which starts out by tripling the delay cost to the users that are desired to be helped.… Manhattan NYC-owned streets are the best candidate for effective congestion in any US Metro Area, but transaction costs mean any implementation will cost more than it delivers to NYC residents and commuters.
II. A general congestion tax is better.
- A first best solution would be a congestion tax. The way to do this would be to equip all vehicles with sensors that detect the presence of other sensors and record it. Being near a large number of slow-moving or stopped vehicles would be “congestion,” and the time spent in the situation and the number of other vehicles involved would be the basis for the tax. The tax could be calibrated to include a road use charge, leaving the gasoline tax a pure CO2 accumulation charge.
The tax would be optimal because all vehicles would be charged in proportion to the harm done to the free flow of other vehicles. The cost per person would be smaller for buses and carpools than for single occupant vehicles, giving people the incentive to shift means of transportation and the time of use and choice of routes.
If the charge were equal to the harm inflicted, there would be no reason to use revenues to subsidize mass transit; they could be returned to the owners of the streets as a tax credit. If the tax cannot be extended to other vehicles, then it should at least apply to both taxis and Uber equally, to prevent substitution between the two modes.
- First, there is a market for transportation. Even with a congestion charge, each road user chooses to interact with the government (as owner of the roads) and only travel if it makes that road user better off. Where it gets strange is when thinking about who owns what property rights. If current road users have a property right to continuing to use the road at the same time they currently do, then you are correct that congestion pricing doesn’t represent a market transaction in that those who start or continue to use the road do not compensate those who stop.
Second, in any case, congestion pricing likely leaves many road users worse off (relative to the status quo). However, there are ways to design it so that adding a toll makes all road users better off, even before using the revenue.
Third, my vote would be for implementing congestion pricing. Yes, you cannot have a toll booth at every block, but second best solutions can capture a lot of the gains while avoiding the large transaction costs of having a toll booth at every block. I would start by adding tolls to all highways. Furthermore, once we have autonomous vehicles it should be possible to have tolls that vary block by block, as the vehicle can calculate this. There are potential privacy issues with this that should be addressed first.
III. Ride-shares are the problem, so they should be paying for the costs they impose.
- Rideshare vehicles, which are causing the congestion, should be singled out and made to pay additional fees! If the city will not regulate the amount of rideshare vehicles allowed on the road, why should ordinary vehicles, taxicabs, or delivery vehicles be asked to subsidize all the rideshares, which are the cause of the problem!
- There are too many For Hire Vehicles chasing too few passengers that need the service. Cut the number of Uber and Lyft vehicles by at least 50% if not more, then cap their number. Double the number of Yellow Medallion Taxis to compensate and all will be fine. It’s not that difficult a problem to solve.
IV. There are problems with thinking of this as “redistribution”
I would like to offer what I imagine Robert Sugden would reply, based on my understanding of the following excerpt from one of his articles:
Ultimately, I think, one has to decide how far one is committed to the (for me) deeply attractive idea that underlies [James Buchanan and Gordon Tullock’s] Calculus of Consent — the idea that the market is a cooperative endeavour among individuals who accept differences in their endowments without rancor and who look forward to mutual gains from transacting with one another. I cannot see how that idea can be sustained unless it really is the case that, on the whole and in the long run, everyone does tend to benefit from the continued operation of the market. That need not imply the kind of egalitarianism espoused by Rawls, but it may require a collective commitment to some degree of redistributive taxation of the surplus generated by market transactions. Such taxation may be an essential component of a society in which (to adapt [John Stuart] Mill’s words) people can see one another’s wealth and prosperity with good will. (Robert Sugden, 2012, “The Market as a Cooperative Endeavour,” Public Choice, Vol. 152(3/4): 365-370, at p. 370.)
The initial redistribution (the incidence of the congestion tax) is not the kind of redistribution that Sugden augurs. Perhaps other components of the larger “policy package” — for example, allocations of congestion-tax revenues (or of income-tax revenues or of wealth-tax revenues) to mass transit projects or social transfer payments — would conform to the spirit of Sugden’s analysis. One must ask whether the overall policy package will exacerbate rancor about unequal endowments.
The answer to your questions hinges on an empirical issue: Are the proposed congestion tax and its complements (e.g., investment in mass transit) designed and explained in ways that foster broad acceptance of the new efficiency? Or, at least, is it highly likely that people will accept the policy package without rancor, after implementation, even if they mistrust it at the moment? If the policy package does not meet these criteria, then economists and policymakers should sharpen their pencils and go back to the drawing board. Or … hire a better PR firm?
Feel free to respond to these responses. I’d be interested in what you think. Email me at munger at Duke dot edu!
Comments Off on The organic industry is a case study in rent-seeking.
Adam Smith, the 18th century economist and philosopher, offered good insights into human nature as well as economics. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” he wrote in The Wealth of Nations.
We’re seeing evidence of that in current lobbying skirmishes — for example, over whether novel, effective, inexpensive hearing aids should be made available over-the-counter. The battle lines are predictable: Patient groups are encouraging Congress to pass legislation that would create new standards for hearing aids that could be used by people with moderate impairment and sold at modest cost over-the-counter. Meanwhile, the association that represents audiologists believes “the absence of audiological involvement” would be “detrimental to patient outcomes.”
The real issue is, of course, not “patient outcomes,” but what economists call “rent-seeking” — attempting to manipulate public policy in order to increase profits — on behalf of the association’s members. The excellent new hearing aids, which resemble wireless ear buds, cost about $300, while conventional alternatives can cost many thousands.
The self-interest of audiologists in that situation is quite obvious, of course; less so is the ongoing campaign by the organic agriculture and food and “natural products” industries to discredit and diminish modern genetic engineering of crops and the scientific community that is in any way involved with them.
Is organic farming sustainable and environmentally friendly?
Advocates of organic agriculture tout it as a “sustainable” and healthful way to feed the planet’s expanding population. That is wishful thinking, if not outright delusion, but it is being widely promulgated by the credulous media and the foodie elites. The truth is that organic practices are to agriculture what cigarette smoking is to human health.
In fact, organic practices result in a significant increase in leaching of nitrates into groundwater and impose a variety of stresses on farmland and especially on water consumption. Moreover, although composting gets good (and highly organized) PR as a “green” activity, on a large scale it generates a significant amount of greenhouse gases, and is also often a source of pathogenic bacteria applied to crops.
Another prevalent “green myth” about organic agriculture is that it does not employ pesticides. Organic farming does, in fact, use insecticides and fungicides to prevent predation of its crops. More than 20 chemicals (mostly containing copper and sulfur) are commonly used in the growing and processing of organic crops and are currently acceptable under USDA’s arbitrary and ever-shifting organic rules, and many of those organic pesticides are more toxic than “synthetic” ones. In any case, as was pointed out by Bruce Ames and colleagues in a 1990 academic article, “99.99% (by weight) of the pesticides in the American diet are chemicals that plants produce to defend themselves.”
The fatal flaw of organic agriculture is the low yields, which cause it to be wasteful of water and arable farmland. Plant pathologist Dr. Steve Savage analyzed the data from the U.S. Department of Agriculture’s 2014 Organic Survey, which reports various measures of productivity from most of the certified organic farms in the nation, and compared them to those at conventional farms, crop by crop and state by state. His findings are extraordinary: Of the 68 crops surveyed, there was a “yield gap” — poorer performance of organic farms — in 59. And many of those gaps, or shortfalls, were impressive: strawberries, 61 percent less than conventional; fresh tomatoes, 61 percent less; tangerines, 58 percent less; carrots, 49 percent less; cotton, 45 percent less; rice, 39 percent less; peanuts, 37 percent less.
These findings are important. As Dr. Savage observed: “To have raised all U.S. crops as organic in 2014 would have required farming of 109 million more acres of land. That is an area equivalent to all the parkland and wildland areas in the lower 48 states, or 1.8 times as much as all the urban land in the nation.”
Is organic food healthy?
Are the products of organic agriculture healthier or otherwise superior in any way? An article published in 2012 in the Annals of Internal Medicine by researchers at Stanford University’s Center for Health Policy aggregated and analyzed data from 237 studies to determine whether organic foods are safer or healthier than non-organic foods. They concluded that fruits and vegetables that met the criteria for “organic” were on average no more nutritious than their far cheaper conventional counterparts, nor were those foods less likely to be contaminated by pathogenic bacteria like E. coli or Salmonella.
And on the subject of contamination: Organic foods are highly susceptible to it. According to Bruce Chassy, professor of food science at the University of Illinois, “organic foods are recalled 4 to 8 times more frequently than their conventional counterparts.”
Organic agriculture is kept afloat by political rent-seeking.
If organic agriculture isn’t sustainable, doesn’t produce more nutritious food and is far more expensive, what is the purpose of USDA-mandated organic standards and certification? “Let me be clear about one thing,” Secretary of Agriculture Dan Glickman said when organic certification was being considered: “The organic label is a marketing tool. It is not a statement about food safety. Nor is ‘organic’ a value judgment about nutrition or quality.”
But that marketing tool has been grossly abused. Organic agriculture’s dirty little secret is that it is kept afloat only by massive subsidies and nurtured by a whole panoply of USDA programs, by misleading advertising, and by “black marketing” that disparages the competition with disinformation.
Academics Review, a reliable, science-oriented nonprofit organization of academic experts, performed an extensive review of hundreds of published academic, industry, and government research reports concerned with consumers’ views of organic products. It also looked at more than 1,500 news reports, marketing materials, advocacy propaganda, speeches, etc., generated between 1988 and 2014 about organic foods.
Their analysis found that “consumers have spent hundreds of billion dollars purchasing premium-priced organic food products based on false or misleading perceptions about comparative product food safety, nutrition and health attributes,” and that this is due to “a widespread organic and natural products industry pattern of research-informed and intentionally-deceptive marketing and paid advocacy.”
It is hardly news that some industries systematically mislead the public to further their interests — who can forget the decades of mendacity from the tobacco industry — but the organic industry’s comparable actions are actively aided, abetted, and supported by the U.S. Department of Agriculture’s Organic Seal and the National Organic Standards Program (NOSP), in clear violation of the NOSP’s mission. Thus, American taxpayers are funding propaganda about organic products that misleads consumers with fraudulent health, safety and quality claims and fools them into supporting production methods that are an affront to the environment. This is rent-seeking.
What about genetic engineering?
Perhaps the most illogical and least sustainable aspect of organic farming in the long term will turn out to be the systematic and absolute exclusion of “genetically engineered” plants — but only those that were modified with the most precise and predictable modern molecular techniques. Except for wild berries and wild mushrooms, virtually all the fruits, vegetables, and grains in our diet have been genetically improved by one technique or another — often as a result of seeds having been irradiated or via “wide crosses,” which are created by moving thousands of genes from one species or genus to another in ways that do not occur in nature. Irradiation has produced thousands of useful mutants that comprise a significant fraction of the world’s crops, including varieties of rice, wheat, barley, pears, peas, cotton, sunflowers, peanuts, grapefruit, bananas, cassava and sorghum. Wide crosses have given rise to important varieties of oat, sugar beet, pumpkin, cotton, tomato, rice, bread and durum wheat, black currant, and corn.
In recent decades, using molecular genetic engineering techniques, we have seen advances such as plants that are disease- and pest-resistant, boast higher yields, and are drought- or flood-resistant. These advances make farming more environmentally friendly and sustainable than ever before. But they have resulted from science-based research and technological ingenuity on the part of farmers, plant breeders, and agribusiness companies, not from social elites disdainful of modern insecticides, herbicides, genetic engineering, and large-scale “industrial agriculture.”
As genetic engineering’s successes continue to emerge, the gap between modern, high-tech agriculture and organic methods will become a chasm, which brings us back to the cabal postulated by Adam Smith. There exists in this country (and elsewhere) a well-established, highly professional and vast anti-genetic-engineering industry fueled by special interest groups spending billions of dollars, seeking to line their own pockets but oblivious to the public interest.
Some of the NGOs, their budgets and funders are listed in a table in an article, “The fat lies and fatter wallets of anti-GMO lobbyists,” by Iowa farmer Michelle Miller (no relation to this author), aka the “Farm Babe.” In the article, she describes the massive disinformation campaigns about genetic engineering in agriculture which attempt to make less efficient, inferior organic products more cost-competitive.
These activists have even funded phony “advocacy research” that alleges health problems from genetically engineered crops and foods, “documentary” films — such as “Food, Inc.” and “Genetic Roulette” — and other propaganda tactics. They have powerful allies in the media. Viewers of the Dr. Oz TV show, for example, have been repeatedly warned by “friend of the show” and anti-biotechnology activist/levitator (yes, you read that correctly) Jeffrey Smith and Stonyfield Organic CEO Gary Hirshberg that genetically engineered crops are inadequately tested and are actually responsible for adverse health effects.
In its news articles, op-eds and columns by reporters and columnists such as Keith Schneider, Danny Hakim, Nassim Taleb and Mark Bittman, the New York Times has waged a decades-long campaign of opposition to genetic engineering that has been widely criticized by the scientific community.
Because of discriminatory overregulation of genetically engineered crops worldwide, they “are the most studied crops in history,” in the words of plant biologists Miguel Sanchez and Wayne Parrott, in their landmark analysis of “scientific studies usually cited as evidence of adverse effects of GM food/feed.” Spoiler alert: They conclude, “Importantly, a close examination of these reports invariably shows methodological flaws that invalidate any conclusions of adverse effects.” In other words, the reports are consistently erroneous, representing flawed advocacy research from the same self-interested cast of characters. After the cultivation of more than 5.3 billion acres and the consumption of more than three trillion servings of food derived from genetically engineered crops, there has not been a single documented case of an ecosystem disrupted or a bellyache.
When businesses offer consumers a spectrum of product choices, whether they are made with different technologies or in ways that appeal in some way to personal preferences — like halal, kosher, free-range or organic — market forces can operate. But if businesses get government subsidies to make their products cheaper, or “capture” regulatory policies to limit or boost the prices of what the competitors can offer, that’s rent-seeking — which harms consumers, innovation, the economy, and in the case of organic agriculture, even the environment.
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Is it fair that CEOs get paid millions—even billions—while there are so many people still in poverty? Well, it depends! Watch the second entry in our question and answer series with Prof. Howie Baetjer.
Comments Off on Free trade lets us turn corn into cars.
People often see international trade and immigration as a way that foreigners take advantage of us, but economists, whether they’re liberal or conservative, Democrat or Republican, tend to see trade and immigration as good for both us and them.
When we teach international economics to college students, economists invoke something called “comparative advantage.” Our best argument, though, is a story.
Imagine a visionary scientist announces that he’s discovered a way to turn corn into cars. Everyone laughs at him. His fellow scientists call him a crank, but he builds a factory in an abandoned port, and lo and behold, corn goes in and cars come out.The competition hurts existing auto workers, but Americans are clearly far richer as a result of the scientist’s amazing discovery. Cars that only the rich could drive before are now affordable for all.
One day, though, a journalist sneaks into the factory and discovers the scientist’s secret. A bunch of dock workers are unloading cars from a Japanese ship and filling it with corn to take back to Japan. He snaps some pictures and frantically writes an expose. The next day’s headline reads, “Corn-Made Cars a Fraud.”
The government shuts down the company and sends the founder to jail for breaking every foreign-trade law on the books.
The point of the story is the visionary scientist did have a way to make corn into cars. What difference does it make what’s inside the factory?
Foreign trade is a technology.
For all practical purposes, foreign trade is a kind of technology, a creative way to reduce our cost of living, and thereby raise our standard of living. The fact that we keep looking for a dark lining in this silver cloud is a symptom of what I call anti-foreign bias, human beings’ tendency to underestimate the economic benefits of dealing with people from other countries.
Are there any important difference between technology and foreign trade? Absolutely. When Americans use new technology, we’re better off. When Americans trade with foreigners, we’re better off — and so are they.From the American point of view, technology and trade are the same. From the human point of view, however, trade is better, because after all, trade is made of win. The corn-into-cars story is the heart of economists’ case for trade, regardless of other countries’ trade policies.
When people say, “We can’t have free trade, because other countries don’t,” economists yearn to respond, “If all your friends were jumping off the Brooklyn Bridge, would you jump too?”
The 19th-century economist Henry George mocked protection against foreign products as a self-enforced blockade. What protection teaches us is to do to ourselves in time of peace what enemies seek to do us in time of war.
Immigration is a good deal too.
If that’s economists’ quick case for trade, what’s their case for immigration? More of the same. Another name for immigration is trading labor, and as we’ve seen, trade is just a technology.
If a company invented a self-driving lawn mower, Americans would rejoice. From the American point of view, the immigration of gardeners from, say, El Salvador has exactly the same effect as the invention of a self-driving lawn mower. Our cost of living goes down, our standard of living goes up. As a happy side effect, the Salvadorans get a huge raise, a raise that allows them to give their families a better life.
This doesn’t mean that most economists want us to adopt free trade or free immigration overnight. The real world is full of complications. Nevertheless, almost all economists think that trade and immigration are greatly underrated.
When you make a deal with another person, both of you are normally better off. When you hire another person, both of you are normally better off. Does it really matter if the other person comes from another country?
Video: Foreigners Are Our Friends
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Is human blood a “public resource”? Prof. Peter Jaworski argues that your bodily fluids belong to you, and governments should let you sell them.
Comments Off on Does Manhattan need a congestion tax on Uber?
I carpool with a friend; one day, he called to say his car had broken down, and asked if I could pick him up. That was a busy day for me, so I offered what I thought was a reasonable solution: he should take Uber to my house, and I’d pay for it.
He objected: “That’s too expensive! You should just come pick me up.”
For an economist, the expense of an activity is the sum of the opportunity costs of all the resources expended in engaging in that activity. That means that the cash “price” may be a small part of the true cost.
Taking an Uber to my house would cost $15. If I drove 10 miles to pick him up — his house is not on the way — and then to work, that would cost $10 (20 miles x $0.50/mile gas and car wear and tear), and 30 extra minutes of my time, worth at least $50 on a busy day.
So the total cost of my picking him up was $60, compared to only $15 for the Uber. In effect, I was using the “Coase Theorem”: Who paid didn’t really matter. The efficient solution was for him to take an Uber to my house, rather than having me go pick him up. That’s why I offered to pay for the Uber: I was much better off paying for the Uber than picking him up myself.
That approach to public policy problems can be quite useful. Take the recent kerfuffle over “congestion pricing” for Uber in Manhattan.
Congestion Pricing for Uber
An article in the New York Times describes the non-monetary costs of ride-share services, pointing out that by parking and driving around between fares, Uber, Lyft, and Juno drivers are taking up space. They don’t pay for this “external” effect directly, but everyone else pays indirectly in terms of greater difficulty parking and using the clogged streets.
The point is that the cost of using the road depends partly on how large the road is. But it also depends on the number of other drivers on the same road at the same time. When my choices affect your costs (and vice versa) that’s an externality.
There are several proposals being considered. One is an $8 fee for entering Manhattan through a bridge or tunnel. But that seems like a bad idea, because it is simply a fixed cost; if you have to pay $8 to enter, you’ll stay longer and look for more rides on the island itself.
Another idea is a fee per ride for ride-shares, to match the surcharge now paid by yellow taxis. But ride-shares already have to pay sales taxes, which average more than $0.70 per ride, more than taxis pay.
Uber suggests a different policy to account for the externalities of congestion. According to the New York Times, Uber spokesperson Alix Anfang claimed that “A new transit tax system should fully fund mass transit by setting fees based on how crowded the roads are, not the type of vehicle people are traveling in.”
But could congestion pricing work? Putting up toll booths on every block would measure traffic, and allow the city to collect an extra nickel from each driver who travels each block. But the transaction costs of waiting in line at the toll booths would make congestion much worse.
Cliff Winston and Russ Roberts had an interesting conversation about this on EconTalk back in 2013. Winston was talking about his paper — published in Journal of Economic Literature — that advocated congestion pricing.
Roberts argued that having a zero price on roads was actually misleading. There is a zero money price on the use of most roads, but the actual cost of using the road includes the “queuing costs” of congestion — delay and inconvenience.
The problem is that the only way to reduce congestion is to have fewer people use the road, at least at peak times. So, it could be true (if the congestion price could be implemented at low cost, and could be dynamically updated constantly) that charging for road use would improve the efficiency of the observed patterns of road use. But all that “efficiency” means to the economist is that the last driver to enter the highway is paying a congestion surtax that makes that driver indifferent between driving and staying home.
The trick would be to balance two deadweight losses: “too many” people staying home and waiting for cheaper travel times, or “too many” people sitting in traffic. Achieving efficiency might well reduce the deadweight losses of traffic, but at the cost of deadweight losses of otherwise productive trips and activities not undertaken.
“Efficiency” for Whom?
More simply, economists often act as if achieving efficiency is always a Pareto improvement (meaning that it harms no one). But there is no reason that has to be true; there will be winners and losers. The losers in a monetized congestion price system will be those who have little money and whose time has little value. It doesn’t cost them much to sit in traffic, but it isn’t worth it to them to pay a congestion price. Those are the people who will stay home.
In the EconTalk episode, Winston didn’t deny that. In fact, he said that this was precisely what made the system desirable. There is substantial heterogeneity in the value people place on time. This could be an intrinsic preference (patience vs. impatience with waiting), or opportunity cost of time (I would just be watching cat videos vs. I’m a skilled surgeon late to an emergency operation), or ability to pay (I’m poor and don’t have the money to pay vs. I’m rich and the congestion price is trivial to me). So the advantage of congestion pricing, in Winston’s view, is that people who don’t value travelling at peak times can defer travel until later, or can take some other form of transportation, such as mass transit.
This reduces the deadweight losses from queuing, and much of the difference is captured in revenue from the congestion tax price. Converting queuing to revenue means that alternative transportation can now be subsidized and improved, and that benefits those who stopped using the roads. In Winston’s words,
It’s heterogeneity and now the ability through technology to actually charge different prices, that has opened people’s eyes up to say: Wait a minute; you know, there can be sort of a better matching here, where yes, the prices are pretty high but people really have a high value of time, and it’s not just rich people. (This quote starts at 38:45.)
Winston’s point about heterogeneity is important. In fact, it’s an underappreciated aspect of economics in general. People who disagree about the value of things are what drive much of the cooperative exchange system; average values are misleading. If I value something you own more than you value it, that means we disagree. But we can probably agree on one thing: a price. A price that is above your value but below mine. When I pay you that price, the one we agree on, we are both made better off.
In politics, disagreement is allowed, but then it’s ignored in favor of the average or median opinion. In other social settings, such as clubs or churches, we expect others to agree on values. The genius of markets is the ability to create harmony and agreement out of disagreement.
What Markets Need
Russ Roberts’s objection to Wilson’s argument is a subtle one, and it took me a long time to understand it. But once you see it, it’s obvious and important. In essence, his objection is that charging “prices” does not a market make.
In a market, property is exchanged voluntarily, and in a voluntary exchange both parties must be (subjectively) better off. In the case of congestion pricing, there is an implicit exchange: the people who value their time at higher money price buy less congestion so they can drive faster, and the people who have lower opportunity cost of time supply less congestion by staying home.
The reason the objection is subtle is that there is no sale by those giving up slow travel, and no purchase by those buying faster travel. As I pointed out in a theory piece on cost-benefit analysis and Coasean bargaining, there’s an enormous difference. In a Coasean setting, if I offer and you accept, a specific right is transferred and both of us must be better off, or we wouldn’t have made the deal.
But in the case of congestion pricing, that needn’t be true. We don’t have the information component (the seller agrees) nor the compensation component (the seller gets paid). The imposed cost on travel would be redistributive, from those with low opportunity cost of time and to those with high monetary opportunity cost of time.
So, is a congestion “tax” system a solution to the problem of street congestion? Is Uber right, and the problem is congestion in general? Or should Uber be selectively taxed, as some public officials have claimed? Or should we just leave things alone, and recognize that the total price, the sum of monetary cost and queuing cost, will cause the market to clear on its own?
Please tell me your thoughts at email@example.com. I’ll offer a survey of the answers I receive next month.
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How is Communism described in theory, and how does it play out in the real world? Join us for our question and answer series with Prof. Howie Baetjer.
Comments Off on What’s wrong with making money?
Social justice advocates argue that it is “society’s” duty to eliminate pain and inequality wherever and whenever it exists. What is interesting is that I have never met Mr. Society. Society is composed of individuals.
What the social justice advocates really mean is that the government should redistribute wealth from rich individuals to lower-income and middle-income individuals.
In my classes, I use the example of my orthopedic surgeon friend and my neurosurgeon friend who earn very high incomes from their private practices — and from other business opportunities presented to them because of their expertise. I would love to earn what they do, but, as I say to my students, if I ruin an economics lecture, big deal! The worst that happens is that students get bored. When my surgeon friends make a mistake, their patients are permanently affected or they die!
So it shouldn’t be surprising that people are willing to pay a lot more to make sure those surgeons do their jobs well. And because surgery requires rare and difficult-to-learn skills, it shouldn’t be surprising that few people can become surgeons to compete in that market and bring the prices down. (In a world without government price-fixing and other interventions in health care, surgeons might earn less or more money than they do now, but I bet they’d still earn more than I do!)
So I have no problem with surgeons being paid more than me. It’s not immoral for them to earn a high income — they should be proud of it!
What is immoral is for the government to punish individuals like my friends, who have worked hard to become surgeons — or to punish individuals who became successful entrepreneurs and started businesses that made them wealthy. When someone works hard and their input even makes our lives better, why is it fair for politicians to begin taking money from them to redistribute it?
I worked hard to get a PhD in economics and I make a good salary as an economics professor. I also earn additional income from teaching more classes than required and from various speaking engagements. Why should my work efforts and the opportunities presented to me be penalized by the government?
When entrepreneurs become millionaires or billionaires it’s usually because they created a product or service that is useful or desired by others. Unless the entrepreneurs start getting crony privileges from the government, they can’t forcibly take money from their customers.
When a businessman or businesswoman makes a dollar, the world is better off because someone voluntarily traded their money for the good or service the business provides — it’s a win-win situation.Unfortunately, most of my students have been influenced by “progressive” high school teachers and professors. They come to my classroom with the belief that the businessperson “took” money from their customers and that they should feel ashamed for having so much money and such a big house or numerous fancy cars.
I try to balance my students’ education by arguing that perhaps businesspeople and entrepreneurs should be praised, and that “profit” is not a bad word.
Of course, I also make it clear that a supporter of true free enterprise believes it is immoral for the government to give subsidies to government organizations or to give specific corporations special protection. If a business cannot survive without government help, it deserves to die.
Financially successful individuals do not have an economic moral duty toward others. In fact, using higher taxes to punish surgeons or those in other fields who make very high salaries or business profits could discourage young people from pursuing these essential, challenging careers. That would lead to society having fewer excellent and talented surgeons and businesspeople.
I am not arguing that individuals should not help others, but that they should not be forced to do so through coercion by the government. Being charitable and giving away even a portion of one’s earnings should be an individual choice.
Comments Off on The real effects of good intentions
Good intentions do not always lead to good outcomes. In fact, many times, they lead to dire consequences.
One of the first principles students learn in a good economics class is that individuals respond predictably to incentives and that individuals subjectively determine their own benefits and costs. In other words, nobody knows the individual better than him or herself. Moreover, everyone looks at the world through his or her own glasses.
I use three main examples to illustrate this.
1. I’m being exploited.
On the first day of my economics classes, I tell my students that if they saw my paychecks that they would realize the school is exploiting me. After a few heads nod in agreement, I ask them if they think that I can weigh my own benefits and costs and choose what is best for me.
Most, if not all, nod in agreement. I inform them that, of course, I would love to get paid more (because I deserve it!) and that the school would like to pay me less, but the fact that I keep showing up to teach and they keep employing me proves that I and my employer are both, in a sense, winning.
I do my best to expose students to economists and other authors who come from a more free-market perspective on various issues because my students probably have not and will not receive this perspective again. Of course, one of the names my students get to know is that of my former professor Dr. Walter Williams. Eventually, I use him as an example of looking at the world through one’s own glasses and unintended consequences.
I tell my students that if Professor Williams saw my paycheck he would laugh — or, perhaps, cry — because he gets paid so much more than I do. So, what would happen if he flew out to California to meet with the president of my school (actually, I teach at two schools, but Williams could meet with both the presidents) and made an appeal on my behalf, to get my salary increased.
Williams could say, “If my former student Ninos Malek is teaching here, then he must be paid what I would be paid!” I ask my students how they think I would feel. Most say I would be extremely happy. Actually, I would not be happy! I would respectfully tell my favorite professor to stop caring about me and fly home. Why?
Because the presidents of my institutions would tell Dr. Williams, “Oh, Ninos Malek must be paid what you get paid? Well, Ninos Malek can instead be paid nothing, because we can cease employing him as a member of the faculty.” The point I am trying to make is that in this example Dr. Williams would be looking at the world through his own lenses — the reference frame of his own paychecks — not mine. His advocacy on my behalf could lead to an unintended consequence.
Even though I would love (really love) to get paid more, the fact I choose to come to work each day must logically mean that this job is my best option and that I am “winning” in the exchange.
2. Do wealthier parents love their children more?
As another example, I tell my students that my wife and I send our two-year old daughter to preschool and that other parents in wealthy countries send their children to school, but that many parents in poor countries send their children off to work. So, obviously, wealthier parents love their children more than poor parents.
When I make this claim, many students strongly shake their heads in disagreement. I then argue that wealthier parents can make decisions for their children better than poor parents can. Again, the students strongly disagree.
But then, if I ask my students whether child labor should be outlawed — thus taking that choice away from parents — they say yes.
My point is to drive home the fact that many individuals from wealthier countries, including some of my students look at the world through their privileged glasses.
Their good intention in trying to outlaw child labor can actually hurt those children. The reason those children are working is not because their parents don’t love them. Instead, the family actually needs the labor of their children to help provide enough income for bare necessities like food. To put it bluntly, before a child can get educated they need to be alive.
And once again, the fact that families are choosing to send their children to work means that’s the best option they have. Outlawing child labor can actually hurt them by taking away that option and forcing them into starvation or riskier work (including prostitution).
3. Let’s make Ferraris mandatory
Finally, I use my Ferrari example. I ask my students how they would feel if some famous, kindly billionaire who wants us all to have sports cars got a law passed declaring if you are driving a car it must be a Ferrari. Many of my students smile and think it’s a great idea. However, by this time, some of my students understand what that would mean — walking a lot more!
If the only cars you can drive are Ferraris, then most people won’t be able to afford to drive at all.
The problem is that this hypothetical billionaire with good intentions is looking at the world through a billionaire’s glasses. My life is better off driving my old Honda Civic than it would be walking. Once again, the fact that I drive my Civic shows that it is the best option I have (until I get that raise).
As another one of my former professors, Don Boudreaux, argues in a Learn Liberty video, intentions are not results. Looking at the world through your own glasses can lead to unintended consequences.
All people, rich or poor, should be free to make their own decisions for themselves and their families because they subjectively determine their benefits and costs. It is pure arrogance to impose on others the lenses through which we look at the world.
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