Monday, September 30, 2013

FEE: The Mystery of the Mundane

            by Dr. PETER BOETTKE

The world is full of marvels, from FaceTime to air travel. But the real action is in the mundan—those everyday: things we take for granted. Economics, and the economic way of thinking, are indispensable for learning how to see the mystery of the mundane. And when we do, it's awe-inspiring.

This is one of the crucial insights in Paul Heyne's The Economic Way of Thinking, which I've relied on for more than 25 years now (and of which, along with David Prychitko, I've been coauthor for more than a decade). Along with another rule "don't overteach the principles" we can show others how economics belongs in everyday life and not just in the classroom.

Don't Overteach the Principles

Heyne's first rule was this: "Teach the principles of economics to your students as if it was the last time they will ever take an economics course, and it will be the first of many."

In other words, there's no reason to teach basic economics with an emphasis on the tools of economic reasoning, such as mathematical formulas, graphs, and statistical relationships. Instead, you want your audience to be intrigued by the insights that one can gain by persistently and consistently applying the economic way of thinking to the puzzles and problems they confront in their daily lives.

We must show our students—or anyone with whom we talk about economics—how the principles of economics make sense out of the buzzing confusion that makes up a modern economy. And we must show how to clarify and correct the daily assertions they read in newspapers and hear from political figures, axe-grinders, and talking heads commenting on economic affairs.

Our job as teachers is to help students cut through the nonsense and begin to understand the world around them. So we have to outfit them with the right lenses.

The Mystery of the Mundane

Paul's second rule was, "Allow yourself and your students to be amazed by the mystery of the mundane."

As we say on page 1: "When we have long taken something for granted, it's hard even to see what it is that we've grown accustomed to. That's why we rarely notice the existence of order in society and cannot recognize the processes of social coordination upon which we depend every day."  Don't focus exclusively on the miracle of exotic or peculiar things, such as how we can FaceTime with family across the country, what forces enable a plane to fly, or why did Miley Cyrus do that. Instead recognize and be astonished at the feats of everyday social cooperation that you engage in and benefit from. Think about the how, what, why of the shoes on your feet, the hat on your head, the car that you drive, the smartphone on which you may be reading these words.

Adam Smith, in attempting to get his readers to appreciate the mystery of the mundane, went through the numerous specializations in production, the exchange relationships that must be established, and the mutual adjustments that must continually be made just to provide the common woolen coat to the average citizen.

More recently, FEE founder Leonard Read used the example of the No.2 pencil to convey the same point as Adam Smith when he described the production of a woolen coat. Milton Friedman used Read's No.2 pencil to explain the power of the market to coordinate economic affairs, in contrast to the tyranny of government controls that failed to produce such an overall order.

F. A. Hayek used the example of the market's guidance of the use of tin in production and consumption. Hayek wanted to convey the ability of the price system to provide the required information and incentives for economic actors who must adjust their behaviors one-to-another until all the mutual gains from trade are realized.

Adam Smith pointed out in The Wealth of Nations that every man lives by exchanging. The successful coordination of economic activity in society, where everyone lives by specializing and exchanging, is an extraordinarily complex phenomenon. The "invisible hand" metaphor for the market economy—with its private property, relative prices, the lure of pure profits (not to mention the penalty of loss)—is meant to capture the wonder of this complex coordination. Social cooperation happens through constant mutual adjustment. Once we appreciate this fact, it is easy for us to lose our awe at the miracle of it all. Hayek referred to the "marvel of the market" to try to jolt his readers from their intellectual complacency.

Economics Out the Window

So as you are studying economics this year as a teacher, a student, or a casual reader, step back from the chapter or the lecture notes and look out the window of your room. Drive around town. Pick any good or service and track down all the exchange relationships that must have been formed to enable that good or service to be available to people like you. From lawn services to milk shakes, the marvel of the market is on full display. If you allow yourself as you study economics to be open to the mystery of the mundane, then the teachings of economics will be that much easier to absorb and appreciate.

Read more:

Tuesday, September 24, 2013

Ronald Coase and Gary Becker on Utility Theory


China: Yes, It's Capitalism

            by JANE SHAW

            Ronald Coase and Ning Wang, How China Became Capitalist. Palgrave Macmillan, 2013.

            Ronald Coase, the Nobel Prize-winning economist who died on September 2, never retired. He was 97 years old in 2008 when he and Ning Wang, now an assistant professor at Arizona State University, began their book, How China Became Capitalist, published this year.

            As David Henderson points out in his Coase biography, Coase never wasted time writing about trivialities; his reputation was made on the basis of two articles written 23 years apart. Like Coase's other writings, the book is intellectually bold. And the —China—is of tremendous import.

What we learn in How China Became Capitalist is quite different from conventional wisdom like that exemplified in a Wikipedia entry on China's economy. To begin with, the title is How China Became Capitalist It is not "How China Fostered State Capitalism" (to use the usual term for the country's economic system). Nor is it "How Deng Xiaoping Created a Mixed Economy."

More important, Coase and Wang argue that China became capitalist—and terrifically productive—largely in spite of efforts to build —state capitalism.— They write that China's economy today is a "striking example of what Hayek has called "the unintended consequences of human action."

Leadership decisions made following Mao Zedong's death in 1976 were indeed critical. But they were critical in unexpected ways. Deng Xiaoping is properly called the architect of China's post-Mao economy, but his deliberate actions did not create the Chinese "miracle." Rather, he and others ended the chaos of the Mao era and created an environment that allowed a market economy to develop on its own.

The process described in the book suggests a possible analogy with an action of the seventeenth-century Scottish parliament. Scotland, a backward country, instigated universal education in order to enable Presbyterian children to read scripture. An unintended consequence was to fertilize the ground for an intellectual revolution—the Scottish Enlightenment. Or perhaps there's an analog in DARPA, the U.S. government agency that created a communications network for universities that ultimately became the worldwide Internet. In a similar way, actions by Deng and others enabled the Chinese economic miracle to occur, but not by the methods they adopted and not in the ways they designed.

By focusing reform efforts on State enterprises, China's government largely ignored—and sometimes actively restrained—the sectors where economic growth actually took place. State-owned enterprises never became engines of growth; ultimately, many were privatized or closed. Meanwhile, the neglected areas thrived. "The most significant developments were to occur not at the core of the socialist economy but on its periphery, where state control was the weakest," write Coase and Wang.

In fairness to Deng and his predecessor, Hua Guofeng, it should be said that at Mao's death the country was so desolated by socialism and torn by chaos that basic steps were certainly helpful. For example, by the end of 1976, trade in commodities was restored (although the prices of most commodities were set by the central government until 1992); a little later, workers could get bonuses and differential pay (although their mobility was regulated); and then in a few cities, state-owned enterprises were allowed to decide what to produce (these were precursors of enterprise zones).

Changes were always couched in terms of "socialist modernization." All leaders, it seems, were weighed down by a commitment to socialism. Everything had to be stated in terms of making socialism work; criticism of Mao and his legacy was muted at best, for Mao remained highly respected, even revered.

One historical fact was in the reformers' favor—unlike the Soviets, Mao had always believed in decentralization; his favorite form of socialism was the local cooperative. In 1957, Mao had increased the independence of local governments and given them management of most state-owned enterprises.

Another beneficial factor was a Confucian tradition embodied in a saying that Mao had adopted—"seeking truths from facts." That is, practical experience should inform ideology or theory. Citing that guideline, reformers could move away from the constraints of Maoism.

But the transformation of China, say Coase and Wang, came from the "disadvantaged and marginalized," those people "on the fringe of government bureaucracy and excluded from state planning."

In 1987, Deng himself expressed surprise at how much rural village industrial enterprises had grown, with output expanding by 20 percent a year. Their success, he said, had come "out of the blue." In fact, although he didn't say so, the central government had been actively hostile to them. They competed with the State-owned enterprises favored by the central government; thus they were the last to receive government-provided benefits such as loans.

It wasn't just village enterprises, but also private farming, that fueled economic growth—even though private farming was prohibited until 1980. Well before that, unofficial non-state farming existed in many forms, from family plots to contracts between households and "production teams" (communal organizations). Ironically, when the State ended the ban and instituted the "house responsibility system," it eliminated the vast variety of farming arrangements. By limiting farming to family control, it made economies of scale virtually impossible (an interesting governmental miscalculation).

There is a lot of detail in this book, and Coase and Wang have a number of subtle statements to make about institutional complexity and development while also giving a blow-by-blow account of the changes, deliberate and spontaneous, in the polity and economy of China.

I hope that this book will be read by China "experts." Perhaps it will have an impact on economists' understanding of economic growth comparable to the effect that Coase's two seminal articles had on economics more broadly.

Read more:

Tuesday, September 17, 2013

Stay tuned...

...It is coming soon.


CEPOS hosts Bob Chitester in January 2012


FEE: Neighborhood Effects or Culture Rot? What did Milton Friedman say on the question of college subsidies?

            by GEORGE LEEF

While he did not write extensively about higher education, Milton Friedman wrote enough to help us see where our college system has gone wrong. Today, we can see how his thinking evolved over time. Specifically, Friedman wrestled with the question of subsidies. That is: Does government support for higher education create positive spillover effects on the rest of society?

Neighborhood Effects

In 1955, Friedman wrote a paper titled "The Role of Government in Education." In it, he argued that government support for educational though not necessarily government running of educational institutions—could be justified on the basis of "neighborhood effects."

The argument goes like this: An individual's education benefits not only himself, but also society generally, when it makes him a better citizen. Friedman explained, "A stable and democratic society is impossible without widespread acceptance of some common set of values and without a minimum degree of literacy and knowledge on the part of most citizens."

Therefore, Friedman argued, government would be justified in mandating that parents provide at least a basic education for their children. While most families are able to bear the cost of such education, some cannot, and that permits the government to step in and assume the financial burdens for them.

Friedman maintained that these neighborhood effects were clear and significant at the level of basic education, but much less so at higher levels. Basic literacy for all would have societal benefits, but learning material covered in college — such as differential calculus or the origins of the War of Spanish Succession — not so much.

Nevertheless, Friedman thought that governmental support for liberal arts education at the college level was socially beneficial "as a means of training youngsters for citizenship and community leadership." Toward that end, he favored a voucher system similar to the GI Bill that would assist college students, although Friedman did not want to have government subsidize professional and vocational education. Education of that kind (medical school, for example) would be undertaken simply on the basis that it was an investment that would later be recouped through earnings in the occupation. There was no need to subsidize it.

A Change of Heart

By 1979, when he and his wife Rose wrote Free to Choose, Friedman had become far more skeptical about the claimed social benefits of higher education. They wrote, "When we first started writing about higher education, we had a good deal of sympathy for the [social benefits] justification. We no longer do. In the interim we have tried to induce the people who make this argument to be specific about the alleged benefits. The answer is almost always simply bad economics."

Specifically, the Friedmans pointed to a study by the Carnegie Corporation that concluded (naturally) that higher education provides great social benefits and thus warrants generous government support. Rose and Milton ripped into that study:

It did not undertake any serious attempt to identify the alleged social effects in a way as to permit even a rough quantitative estimate of their importance or of the extent to which they could be achieved without public subsidy. As a result, it offered no evidence that the social effects are on balance positive or negative, let alone that the net positive effects are sufficiently large to justify the billions of dollars of taxpayer money being spent on higher education.

So, while the "neighborhood effects" argument for government subsidizing college had seemed appealing years earlier, by 1979 Friedman was quite unsure about it.

Negative Externality

By 2003, Friedman had further revised his views. In an email exchange with Professor Richard Vedder (Professor of Economics at Ohio University and Director of the Center for College Affordability and Productivity), he wrote,

I have not changed my view that higher education has some positive externalities, but I have become much more aware that it also has negative externalities. I am much more dubious than I was when I wrote Capitalism and Freedom that there is any justification at all for government subsidy of higher education. The spread of political correctness right now would seem to be a very strong negative externality. A full analysis along these lines might lead you to conclude that higher education should be taxed to offset its negative externalities. (Sept. 12, 2003)

That idea about taxing higher education was, I'm sure, tongue-in-cheek, but it indicates Friedman's realization that college education had changed dramatically over the decades.

Instead of teaching students about their history, culture, and generally "how to think"—  as it did when he was an undergraduate— by 2003 college had become far more about indoctrinating students on the proclaimed evils of our history and culture, and teaching them what ideas they should believe.

Government should emphatically not support that kind of "education," but it would be politically impossible to limit the use of federal vouchers only to those colleges and universities that still offer a curriculum geared toward forming good citizens and good leaders.

The Separation of . . .

Almost 20 years after Free to Choose was published, Friedman did an interview with George Clowes of the Heartland Institute. Clowes observed, "There are some who are for the total separation of school and state, so that parents would have to be individually responsible for the education of their children. "Friedman replied," I agree with them as an ultimate idea." Although the topic was K— 12 education, I think that Friedman would have agreed that higher education also should be separated from government.

Over his long career, Friedman had come to doubt the standard view about higher education— that it should be subsidized so as to improve society. He had concluded, I believe, that going to college was neither a necessary nor a sufficient condition for good citizenship and that subsidizing it served mostly to gratify the rent-seeking of higher education leaders, not to give the country better citizens.

Monday, September 16, 2013

Cafe Hayek: Quotation of the Day September 15

            by DON BOUDREAUX from pages 168-169 of Gordon Tullock's 1983 essay "The Machiavellians and the Well-Intentioned," which is reprinted in The Economics and Politics of Wealth Redistribution (volume 7 of The Selected Works of Gordon Tullock, Charles K. Rowley, ed. [2005]):

Most of us like to think of ourselves as helping the poor and doing other good things, and we like also to have our own income and real well-being improved.  The politician who argues that you should do something which will benefit you, not because it will benefit you but because it is abstractly the good and just, gets more votes than the politician who points out the difficulties with that line of reasoning.  All of us like to think that we are better, more altruistic, more charitable, than we actually are.  But, although we have this desire, we don't want to pay for it.  We are willing to make a sacrifice of perhaps 5 percent of our real income in charitable aid to others.  We would like to think of ourselves, however, as making much larger transfers without actually making them.  One of the functions of the politician in our society is to meet this demand– the demand I suppose one can call a demand for hypocrisy but nevertheless a very human demand.  He provides arguments that programs which benefit us personally are actually aimed at helping the poor, the national interest, a cure for cancer, etc.

Reason's Extended Interview with George Will


Tuesday, September 10, 2013

Johan Norberg and the Fraser Institute

A short clip from Economic Freedom In Action: Changing Lives


FEE: Britain's BBC Tax

            by EMMA FREIRE

            Last year, over 180,000 people in Great Britain were prosecuted for failing to pay the tax levied on their TV signal. This comprised 12 percent of all criminal prosecutions in Great Britain. Of those prosecuted, 155,000—two-thirds of them women—were convicted and ordered to pay fines of up to £1,000 ($1,600). Each walks away with a criminal record. 

            The tax in question is known as the "license fee." It is unusual in that it goes entirely to fund the British Broadcasting Corporation (BBC). "The license fee is, in effect, a television tax," explains Philip Booth of the Institute of Economic Affairs, a free-market think tank based in London. "It's a sum of money that everybody has to pay if they have a television which they use for receiving television signals. All the revenue of the license fee goes to the BBC, regardless of whether or not you watch BBC programs at all."

The BBC has an annual budget of $11 billion$8 billion from license fees and $3 billion in the form of free spectrum granted by the government.

The license fee is currently set at about $226 annually for color TV and $76 for black-and-white. The level of the fee is set by the government, but the BBC collects the money itself. It does this under the trading name "TV Licensing," presumably so that the BBC brand is not associated directly with the dirty work of collecting the fee.

And that work can be quite dirty. TV Licensing starts by sending threatening letters to suspected offenders. These are worded to imply that their inspectors have the right to enter private homes (in fact, they need a warrant). The next step is a home visit from an inspector, who will try to gain entry with permission. If that fails, TV Licensing has technology to detect if a house is receiving a signal. They use this to gather evidence to apply for a search warrant. TV Licensing's inspectors have targets for the number of offenders they are supposed to catch, and they earn bonuses for exceeding their targets.

TV Licensing's policy stipulates that the first adult resident of the house that the inspector encounters becomes liable for prosecution. This is the reason two-thirds of those prosecuted last year were women. Inspectors usually come calling during the day when women are more likely than men to be at home.

Up to now, various campaigns to demote the license fee to a civil matter have been unsuccessful, though punishments have grown less severe. "The criminal aspect if anything has gotten slightly better," says Booth. "People are very rarely now sent to prison for not paying the TV license." In 1993, over 800 people were jailed for failure to pay their license fee, typically for sentences of around two weeks. Today, only fines are imposed. However, failure to pay the fine can land a person in jail.

As a regressive tax, the license fee falls heaviest on the low earners. Journalist Charles Moore wrote in The Spectator, "The licence fee is the most regressive and most ruthlessly collected of all government imposts, and the annual sum of "145.50 is a seriously painful sum for the social groups who watch television (though not, usually, the BBC) the most.

Moore, author of an acclaimed biography of Margaret Thatcher, decided to stop paying his license fee to protest a segment on BBC Radio that offended him. The segment involved Jonathan Ross, who was being paid $9 million a year by the BBC to host various shows. Moore wrote to the BBC to say he would start paying again when Ross was fired. The BBC responded by taking Moore to court, where he was fined $260.

This regressive and ruthlessly collected "impost" doesn't just pay a generous salary to stars like Ross. Over the past three years, $39 million was paid out in severance to 150 BBC senior managers. That's equivalent to 400,000 license fees. In at least a quarter of the payments, the person received more than what was required in their employment contract.

The BBC's large, guaranteed revenue gives it an overwhelming advantage in Great Britain's media landscape, particularly for news coverage. According to a government study, in 2011 the BBC spent $669 million on its news division, more than all other English radio and TV news providers combined. Also, 73 percent of all TV news hours watched in Great Britain were produced by the BBC. The BBC's news website attracts 14 million unique visitors each week (between 60 and 70 percent of them in Great Britain).

This is troubling for many reasons, not least because the BBC is biased against free-market views. "There is a sort of mainstream opinion in the BBC which is left leaning," says Booth. "It's not that they sit around at their desks thinking "ah, we must present this in a left-leaning socialist way. "They don't actually see that there could be another rational worldview from their own."

As an example, Booth points out that Paul Krugman is a frequent guest on the BBC's flagship news show "Newsnight," where he gets long segments to air his opinions without any presentation of alternative viewpoints. Also, until recently, one of the show's chief economics correspondents was Paul Mason, a former member of the Socialist Workers Party.

New research from the Centre for Policy Studies shows that BBC News was far more likely to cite ideas from left-leaning think thanks than right-leaning ones. The study also found that BBC anchors are far more likely to point out the political ideology of a right-leaning think tank than a left-leaning one.

And then there is the matter of BBC News's failure to investigate Jimmy Savile, a pedophile who is accused of raping hundreds of boys and girls. Savile was a BBC radio and TV host for over 40 years, and some of the rapes are alleged to have taken place on BBC premises. In 2012—a year after Savile's death from pneumonia—British channel ITV aired a documentary revealing Savile's crimes. Subsequently, some BBC staff indicated there had been office gossip about his pedophilia for years.

At the time of Savile's death, "Newsnight" journalists were investigating rumors about him, but the story never made it onto the air. The BBC commissioned an independent review, which found that the "Newsnight" story was axed because of "chaos and confusion" among BBC management who had no idea how to handle the situation. Several employees were disciplined as a result, but no one was fired.

The review cost over $4 million. The BBC's general director received $166,000 for testifying. The BBC's legal costs over Savile are already above $20 million. The one area where the BBC is getting off relatively cheaply is the victims. Under a settlement currently being finalized, 120 individuals who were raped as children by Jimmy Savile will be paid $52,000 each.

All these costs are adding up quickly for the BBC. TV Licensing inspectors will have to work hard to keep the revenue coming in.

Stigler on Your Fellow Man


Thursday, September 5, 2013

A Letter to You, From our Founder

            by BOB CHITESTER

            In the "libertarian" worldview there is a tendency for
people to think that "anything goes." One result is, defense of the family is
largely left to or thought to be the purview of conservatives. Many a classical
liberal/libertarian has addressed the central role of culture in determining
political outcomes, yet when Jennifer Roback Morse published her book "Love and
Economics"  she was thought by some to have joined the "touchy-feeling"academics in building a case for her conclusions rather than drawing
conclusions from rigorous research.

            Since the family is a powerful force in shaping culture it
deserves more serious consideration by those who seek to live in a society with
the least governmental intervention in people's lives. Indicating favor for "gay rights" is thought consistent with such a position. If you support "family
rights" you're often demonized. And yet neither of these rights should be part
of our agenda when real human rights--the rights of the individual--are all

            We adopted the phrase Winning Ideas to symbolize the values
for which we stand. I define the phrase thus: winning idea / "active" noun
/  1. An idea about how societies should
be organized to maximize the well-being of all citizens. 2. An idea reflecting
humans — desire to make tomorrow better than today. 3. An idea that has been
tried and tested over centuries and remains useful. 4. An idea resulting from
Friederich von Hayek's concept of civil evolution.  5. An idea that advances human freedom.

            These thoughts came to mind as I viewed this photo capturing the realization of a personal goal — to celebrate my 75th year by running a 10k (6.2 miles) race with my son Mark and grandson Andrew. My son, who has completed the Alcatraz Triathalon, had to moderate his pace so Andrew
could finish his first 10k, and I could complete what may be my last and we all
finish together.

            We've just completed an inspiring one hour TV special: stories
about people in South Korea, Zambia, Slovakia and Chile who have made their
lives and those of many others better through the power of economic freedom. In
every case it was a "family story," not by our design, but because around the
world family is at the heart of human survival and flourishing. The program,
titled "Economic Freedom in Action: Changing Lives," hosted by Johan Norberg,
will be released to public TV stations October 31. As they say — check your
local listings".  in fact call your local station and tell them you're looking
forward to seeing the program.

            In January we'll release a program hosted by Hernando DeSoto
examining the role that denied property rights play in the unfolding Arab Spring
story. And in April, public TV viewers will watch our biography Walter
Williams, in which  "again" family played such an important role.

            And among several programs in development we are working
with Jacob Mchangama, a Danish lawyer who heads  Justicia.
Our hope is to counter the use of |claims of rights, "claims of
victimhood," to distort the meaning of human rights and justify
governments and tyrants forcibly directing the lives of citizens and the
families that for millennia have been the overwhelming source of support for
those in need.

Some Lovely, Spontaneous Feedback!



Milton Friedman on Equality, Family & Lottery