Everyone wants the items they buy to be safe to use or consume. When products undergo third-party certification processes to determine their safety, market forces are able to optimize the amount of testing conducted and consumers can use the information provided by certification firms to make their own decisions. It is difficult to say how much testing is enough: another test can always be run on a product, but at some point the benefit of the extra testing outweighs the costs. In a free-market system, competition among certification firms allows the market to work as it should and prevents both under- and over-testing of products. Conversely, when the government holds the monopoly on safety standards, products are likely to be over-tested, delaying their entry into the market and making them more expensive. Sometimes the costs of such delays cannot be quantified; lives can be lost while life-saving medicines are held up in safety-testing processes.
Have you ever thought much about property rights? Many believe ownership protections primarily favor the wealthy, but it turns out that the wealthy and politically connected actually benefit more when ownership is vulnerable. Without strong property rights, those with the power are able to take property from those who lack such political connections. In places like Zimbabwe—where the government is able to confiscate profits, merchandise, and even businesses with ease—the lack of property protections has been one cause of the country’s decline. Today, Zimbabwe is the poorest country in the world, and eroded property rights are at least partially to blame. Prof. Dan Russell argues that “doing less to protect ownership turns out to be a really effective way to create poverty.” Perhaps property rights deserve protecting. Except, maybe, among Finnish race car drivers.
Think you’re too small to save the world—even one species at a time? Sometimes big change starts with thinking big and perhaps a little outside the box. Take it from enviropreneur Hank Fischer.
Hank Fischer was concerned about the gray wolf. It was on the endangered species list and extinct in the American West. Efforts to reintroduce it in the region had been unsuccessful, largely because the local population didn’t want hungry wolves killing their livestock. Rather than fight the ranchers in the region, Hank established a fund to compensate them for losses and give them incentives to support the growth of the wolf population. And it worked! Today, the gray wolf isn’t even considered endangered. Hank’s story is just one of many stories of enviropreneurs around the world. Laura Huggins of the Property and Environment Research Center (PERC) explains how thinking outside the box and innovating can work for the environment as it does for business. Enviropreneurs like Hank have been able to save species. Think about the difference you could make!
The question of how to address poverty in the United States is complicated. Steven Horwitz, chair of the department of economics at St. Lawrence University, and Jeffrey Reiman, professor of philosophy and religion at American University, debate the level of government assistance that should be given to help the poor.
In this clip, professors Horwitz and Reiman discuss how children who are poor can best be helped. While adult poverty may, in many cases, be due to some fault of the adult, should children have to suffer their parents’ mistakes? Both argue in favor of improvements in the education system, especially in creating more choice. While Prof. Horwitz suggests this can be done outside of government, Prof. Reiman argues that government will still have to be involved, even if only to create the vouchers.
Prof. Reiman also turns the question on its head, suggesting that perhaps the children of successful parents should not benefit from the parents’ success any more than children of poor parents should not be punished for their parents’ failings. Should all children start out on an equal footing, financially as well as educationally? What should be done to improve education opportunities for the poor? Is the government the best provider of education? What are your thoughts?
What would happen if we didn’t have a central bank? Prof. Lawrence H. White explains that private banks would be able to circulate money by issuing notes and checks redeemable for coin. Trustworthy banks would make arrangements to accept each other’s notes and checks. Banks would have better incentives than the federal government to ensure their currency retained its value, because if it didn’t, people would bank elsewhere. By contrast, central banks controlled by the government are able to devalue currency as they see fit and can even quit redeeming notes for coins of real value if they want to do so. It sounds like social-science fiction, but there are numerous real-world examples in history of successful free-banking systems. In fact, central banks arose largely because governments wanted an institution willing and able to lend them money with easy terms, not because of any problem with the free-banking system. Free markets offer the most efficient system for allocating goods and services, and money is no exception. As failures among central banking systems mount, it is time to reconsider the alternative of free banking.
Presumably you’ve already made plans for surviving a zombie apocalypse. You have detailed escape routes, stockpiled weapons made for killing zombies, stores of food . . . or at least plans for these things. But have you thought through the important economic factors that might make the difference between surviving and losing your brain to one of the walking dead? If uncertainty about how market prices and currency changes might affect your odds in a zombie-dominated society has been keeping you up at night, fear not. In this video, Prof. Antony Davies provides a crash course in how a zombie apocalypse is likely to affect the economy. Hint: sell your designer shoes now while you can. And buy bullets.
When economic troubles strike, policymakers are eager to do something to try to help the citizenry. But Prof. Lawrence H. White argues that government doesn’t necessarily know how to relieve economic woes, and in fact, often wastes and mismanages resources. Individuals in the market know better what they need in their circumstances, as economist Friedrich Hayek argued during the Great Depression. Relying on government to fix our economic woes instead of allowing individuals to make decisions for themselves means putting all of our eggs in one basket. Individual decisions in the market won’t be mistake-free, but each individual mistake will be smaller and will correct more quickly. The unusually slow and painful recovery that we have seen in this recession point to problems with the “government should do something” view. What do you think might be the best way to handle economic difficulties? Why?
As part of the government shutdown that started October 1, the National Parks Service has closed all U.S. national parks and monuments. Would-be visitors will be denied entry to Yosemite and Yellowstone and acres and acres of national park lands until the government resumes business. Economics professor Holly Fretwell suggests an alternative that would have enabled parks to stay open despite the government shutdown.
She recommends leasing our national parks to entrepreneurs who would be responsible for managing the maintenance, campgrounds, trails, and infrastructure in the parks. The private management company would have to adhere to strict parameters, maintain low admission fees, and would pay the federal government for the right to lease the management of the parks. Under such a system, our national parks would generate income for the government instead of costing the government money to run. If this system were already in place, the parks could have stayed open during the shutdown.
You may feel skeptical about a private business’s ability to manage and maintain the beauty of our national parks, but private businesses currently manage thousands of public recreation areas and campgrounds and nearly half of all Forest Service campgrounds. Most campers who use these public lands don’t even realize they are managed by private companies. Private management for our national parks would make them accessible to visitors even during the government shutdown, and could make our parks revenue generators for the government.
Would developing more silly walks benefit society? Possibly. But who will pay for them? Professor Art Carden regrets that the only way he can come up with to receive payment for creating silly walks is through receiving a subsidy from the government. If the government subsidized the creation of silly walks, there would surely be more silly walks around. Prof. Carden points out, however, that if people aren’t willing to pay for silly walks voluntarily, they must not be worth the value they create.
This draws into question subsides in general. Are subsidies for more serious things, like food, valuable to society? Some argue that without farm subsidies the United States would have a shortage of food. But is that the case? Prof. Carden suggests that while subsidizing food will lead to more food production, it also leads to the production of foods that cost more to produce than they are worth to society. This indicates that resources are wasted.
Economists argue that subsidies are useful when they increase something that creates positive externalities, or spillover benefits for society. Some would argue education should be subsidized, for example, because society benefits from a better educated work force. But is the government really a good judge of what deserves subsidies and what doesn’t? Even if we assume that markets will produce too little education, for example, this does not imply that government intervention will make things better.
An “externality” occurs when a transaction between two people affects a third person without that person’s permission. Professor Michael Munger illustrates a simple externality problem with potato chips. If Art sells potato chips to Betty, Art and Betty are both better off. However, if Betty crunches her chips loudly enough that it annoys Carl, then Carl has to bear a cost (in the form of annoyance), despite not receiving any benefit from the potato chip exchange. In this example, the volume of Betty’s eating is an externality Carl has to endure.
Because negative externalities represent a cost that is not included in the price of a transaction, it seems like the solution would be to try to adjust price so it coincides with the total cost. Many people believe that means the problem should be fixed with taxes, but Professor Munger shows several alternatives. For example, if Carl asked Betty to eat more quietly, she probably would. Alternatively, Betty could share some of her chips with Carl in exchange for her munching.
Even if these solutions don’t work, it may be difficult for government action to resolve the externality. Even A. C. Pigou, the original scholar who proposed fixing externalities with taxes, recognized that it would be very difficult for a government body to obtain sufficient knowledge to solve this problem. The government has a knowledge problem just like everybody else, and poor policy can lead to negative unintended consequences.
Is what’s good for General Motors really what’s good for America? Professor Steve Horwitz explains the difference between free market and pro-business attitudes – and why one is better than the other.
In a free market system, Horwitz argues, competition encourages firms to provide higher quality products at lower prices. Because firms have to compete with one another for consumer dollars, those that give consumers what they value most will generate the greatest profits. This pressure creates an incentive for businesses to offer cheaper and better products than their competitors, and promotes innovation that results in value creation. Ultimately, the consumer benefits.
Because free markets create prosperity, supporters of free market systems oppose pro-business measures such as bailouts, subsidies, and monopolies because they do not discourage the inefficient practices of the businesses that receive them. Additionally, regulations allow these inefficient businesses to remain powerful, as they present barriers to entry for new firms and serve the interests of those who have “captured” the regulators.
Supporting free markets, Horwitz concludes, does not make an individual pro-business, but pro-human and pro-people. It is free markets and competition – not what’s best for big business – that is best for America.
Check out Prof. Cowen’s popular econ blog: http://www.marginalrevoultion.com
What is the central claim of Austrian Business Cycle Theory? Prof. Tyler Cowen boils down the Austrians’ boom-bust explanation: when the government manipulates the money supply, entrepreneurs get false ideas about the economy and make unsustainable decisions. When the central bank inflates the supply of money, the real interest rate falls because there is more money to be lent out. Since money is cheaper to borrow, entrepreneurs ramp up investment and take on riskier long-term projects—a boom often follows. But the man-handled market environment doesn’t hold. False hopes lead to failures and an apparent boom, well, busts.
Tyler points to the housing bubble as a case study. Between 2001 and 2004, the Federal Reserve played fast and loose with credit. Booming borrowing to invest in housing inflated the housing bubble. But when house prices fell, these long-term investments proved to be unprofitable and brought on the bust.
How can we escape the cycle? Austrians propose that we steer clear of inflation—institute a gold standard or a monetary rule to avoid financial disaster. The rationale: a tighter money market means a more stable monetary supply that will enable entrepreneurs to keep expectations and investments in check. For many Austrians, kicking inflation takes on additional urgency based on their claim that once inflationary effects occur, the only corrective is to let investments fail and re-allocate remaining resources.
The Ideas in Action:
Turning to the Great Depression and our current financial crisis, Cowen explains that Austrians and Keynesians explain the downturns quite differently. For Keynesians and monetarists, both big busts could have been avoided if there was an increase in aggregate demand.
Austrians, on the other hand, blame the effects of loose monetary policy misleading entrepreneurs. Which theory does historical evidence support? One point in the Austrian corner: many credit bubbles, the Great Depression and recent recession included, correspond with periods of loose monetary policy.
But the Austrian angle has its shortcomings. First, put yourself into the mind of a bright entrepreneur for a moment; if you can reliably predict that loose money leads to riskier long term investments, wouldn’t you exercise caution while taking on new projects in easy-money times? Second, we have to look at more than two historical case studies; in a broader field of view, we can find many economic downturns that have been caused by monetary contractions rather than expansions.