Category: Economics

With the price of various grains going up, there has been a general cry for more supply. Some people have taken to claiming that we are doomed, there are now too many people to support on the Earth. That’s nonsense of course, there is an enormous amount of potential for more food production. A lot of the developing world could supply much more food. Many of those countries’ economies are based around agriculture, but they are incredibly inefficient at it. Most of those farms are literally based on the “40 acres and a mule” concept. That needs to change, not only in order to feed everyone, but in order to get those economies on track.

Agribusiness is the answer. In 1900, 40% of the American work force worked in agriculture. Now, it is around 2% even though we produce much, much more food than before. With the use of automation and machinery, it takes far fewer people to raise food. Of course, as we lost all of those farm jobs, the standard of living and the economy dropped through the floor, right? Umm, no, it went up and up. If people are not required to toil in fields, they can do something else. If given a chance, people will think of something to do. We have seen a similar thing happening in the manufacturing sector. It takes far fewer people to make many more things. That’s good. A human doing what could be done with a machine is the definition of a wasted resource.

Africa could be feeding most of the world if efficient farming methods were used. Zimbabwe used to be a model of efficient farming, then Mugabe took land from the productive farmers and distributed it many more less efficient farmers. It was a political/racial decision, but the men that received the land did not know how to use it efficiently. Zimbabwe now has to import most of its food. They went from being the “breadbasket of Africa” to being one of the poorest nations in the world in 10 short years by going away from the agribusiness model. The distribution of land into smaller farms was a disaster for the economy as a whole and it made those farmers much worse off.

So why do so many organizations try to promote small farms? The world bank, numerous NGOs and charities make this a primary goal. Why not try to foster good property rights so that land owners can sell or rent their land to much more productive farmers? Everyone would be much better off. Freeing resources to be used for the most productive uses is one of the keys to a well performing economy.

There have been some complaints that the gas price is rising here in Yemen. The “official” price for 20 liters of gas is 1200 YR, that’s about $1.14 a gallon. Recently, there have been complaints that places are refusing to do 20 liters for that price, they “demand” 1800 YR instead. That’s a 50% increase, and that’s got to mean something. The government owned stations are still pumping at the official price, but if other stations can get away with charging 50% more, then I predict that the government stations will have long lines if not actual shortages. There’s no stopping prices, if price is rising, either supply is dropping or demand is increasing. In either case, there is less gas than there is demanded… The last time the government tried to raise prices there were riots. The same thing happened in Iran when they tried to raise the price of gasoline. As the price for gas keeps going up, governments (and especially ones like Iran and Yemen) can afford subsidies less and less. That’s one of the big problems with subsidies, people quickly become accustomed to the low prices and it doesn’t take too long before they feel entitled to them. When are governments going to learn?

The republican candidates are campaigning in Michigan for tomorrow’s primary. I don’t know why I’m still surprised, but I am. Every year, politicians promise that they’ll do things to improve the economy, to improve people’s standards of living. Just once, and especially in Michigan, I’d like someone to say that they aren’t going to do a damn thing for a particular state. It should not be the federal government’s job (and therefore everyone’s money) to help a place that has consistently shot itself in the foot. It’s one thing if every state is in bad shape. I could at least understand the argument that the feds should do something about it, but one state? C’mon…

If Michigan’s wants to improve, it will have to do it on its own. If the people think that the state is underperforming, they should take a look at some of the states that are doing well and then model their approach on the successes of those states. Instead, they engage in wishful thinking. It’s time that things changed in Michigan, and it’s time for the people of Michigan to do something instead of blaming other people (the Chinese, the Indians, etc.) and expecting other people to solve their problems.

Michigan, heal thyself!

CNN did a little story about Yemen’s “Queen of oranges.” You can read it here. It’s a nice story, a poor woman from Yemen’s rural area does well and is now wealthy. She flies to various parts of the world and does lots of business. It’s great, she had to work through a lot of cultural problems to get to where she is and deserves all of it. Unfortunately, this article also gives us a glimpse of some of the major economic problems that Yemen has. You’ll notice that she is one of 8 licensed fruit brokers in Sana’a. Why does one need a license to be a fruit wholesaler? Why does the government need to be involved at all? It’s one thing to need a business license (for tax purposes), but it’s another to have a special permission to sell fruit.

It’s another revenue stream for the government of course. Like most economies that are not doing well, the Yemeni economy is burdened with way too many bureaucratic thumbs in the pie, let’s not even talk about the various government people taking their own, private cuts of the business… . One wonders how many more people (and women in particular) would become successful if it was easier to start a business there. Make it easier to start a (legal) business, and you’ll see improvements.

I previously covered the ideas behind the practical reasons behind economic conservation. There are several ethical/moral reasons as well. Even though many people see rationing by price to be greedy, not very nice, and even immoral, I think that it is the opposite. Price rationing is not only the most effective way of rationing a scarce resource, it is also the most just and most moral way of doing it.

One of the insights into the economic way of reasoning is that there is a difference between market interactions and interactions between friends and family. Economists do not actually auction off dessert or TV time among their children even though that would be the market savvy way of doing things. We aren’t interested extracting our producer’s surplus from the consumers in our own house. We value love more than any “profits” that we could possibly get in those situations. Where many people get screwed up is they try to apply those same values to the world at large. If everyone were indeed friends and loved one another, it might work. In reality, love is scarce and it’s impossible to know everyone let alone love them. So how do we keep a society functioning and growing? Through market interactions. Where there isn’t love, the market can distribute resources to where they are needed. Adam Smith wrote that it was not through love that the butcher and baker provide us with food, it is due to their own self interest that they provide these services.

Hayek wrote an entire book about this idea, it’s called “The Fatal Conceit.” What was the fatal conceit? It was that we can treat the world at large as if they were our family. There is little worry about treating our family like the outside world, but the warning that he gave us was that if you try to treat society like your family or your family like society, you will ruin both. It’s pretty obvious that the way to avoid most of the catastrophic societal ills is to make that society as wealthy as possible. History (and all the theory in the world) has shown us that that wealth is created through distributing resources through market activities.

The reaction allowing prices set by market operations being “unkind” or “soulless” comes from falling under the conceit that we need to treat everyone as if they were in our family. When I say “we” I am talking about policy set by the government. If any particular individual decides to treat everyone as if they were in his family and accepts the ensuing poverty, then that’s their decision. The key is that we cannot have policy set as if we were all one big family depending on love to get by. The result would be the total collapse of the wealth creating and situation improving mechanism that society enjoys. The US is fantastically wealthy, even its “poor” citizens are doing very well, and it is due primarily to our historical division between market operations and charity. The government allows us to pursue what we think is our best option, the overall result is prosperity.

When people use the government to help certain people (usually through price manipulation like subsidies, tariffs, etc.), it is succumbing to the idea that we aren’t being nice to that group. In reality, there is no “us” that is “doing” something to those people. The market works a certain way, and if left alone, it will give people the incentive to change behaviors. When the government decides to take people under its wing, it is just taking money from one set of people and giving it to another with all of the associated incentive warping consequences that government actions are so famous for. You have to be very careful of the “Killing the goose that laid the golden egg” syndrome. By systematically “helping” people, or trying to show “love” through the government, you risk the functionality of at least parts of the system that is the best way of alleviating the very problem you’re trying to cure.

It is very important to understand that no group can “love” or “care,” those are emotions and only individuals have those things. Groups only have actions and the decisions of the leaders (if there are any). Any time a group coerces someone into doing something (and the government is, as far as I can tell the only group that can do this), it leads to all sorts of consequences even if the group accomplishes the goals that the leaders spell out. Those consequences will divert resources (money, time, attention, etc.) away from things that individuals care about and funnel them into what the leaders of that group think are important. The only thing this can lead to is the disruption of the mechanism that creates wealth and is the best way of alleviating those problems. Hayek goes into significantly more detail of course, he’s got an entire book about it, but this is the executive summary…

The bottom line is that if you think there is a moral reason for doing something or distributing resources, it is up to you to get it done without forcing everyone else to go along with you. I’m willing to admit that there are always people that slip through the cracks in even the best functioning society. Drug addicts, mentally ill people, totally disabled people, etc, all need help, and I think that all people should help them. There’s a big difference between that thought and forcing everyone to help them. Given enough resources, I might indeed be able to adequately take care of those types of people, but it would take away from other things. If the government is not involved, things will be run much more efficiently and more will be accomplished with less money. The things that are not done because of the forced donations are benefits that have essentially been taken away from people. That in itself seems morally questionable, but there’s another level to it as well. If you’re the type of person that thinks about morality as opposed to just ethics will have some sort of payoff from doing the “right thing.” Whether it is getting into heaven, accumulating good karma, or just getting the satisfaction of helping someone, you are the one that needs to do it if you want to do the “moral” thing.

For me, “having a soul” involves doing the things that make people as a whole better off. That in itself will minimize the number of people that are helpless and need help. By taking care of the others with my own resources (as much as I can) instead of forcing others to do what I think is right, I will have helped accomplish both the better overall situation and helped the unfortunate. And yes, I am counting on people to step up and help out of their own pockets. I don’t think that this will be a problem because if there was less government fiddling, there would be more money available to do this stuff AND I believe that most people are good. If decisions about morality are left to many people instead of a few, better results will result, what can I say, I’m an optimist:-)I can’t see another morally correct way of going about things….

That’s what Dana wrote to me in response to this post. Now part of that is just Dana humor, but there is an element of honesty to that statement, it’s a common response to economic reasoning. Many people, when presented with economic principles, don’t think the arguments through and critique them, they have an instinctive reaction against it. The thought “But that just isn’t very nice,” pops into their head. This still taints the memories of people like Margaret Thatcher and Ronald Reagan despite the many positive things they accomplished, people remember them as being “not nice.”People’s gut feelings are important, at least as far as their willingness to listen goes. I think that the “soulless” perspective of economics is warped and unfair.

I’ll tackle the “practical” advantage of economics first, cause that’s easy… The post that brought about that reaction was about conservation, there’s little doubt that price rationing is an effective way of reducing consumption. If something costs more, less is used, no debate, it works. Some people complain that that method is “unfair,” that it affects the “poor” more than the rich. It’s true that the poor always have less leeway when it comes to buying things, and they will have to make hard decisions before the rich do. It is not true that the rich are unaffected. As something’s price rises, everyone will have to weigh whether or not it is “worth it” to continue consuming that product. There’s this idea that the rich don’t pay attention to prices, that they buy whatever they want whenever they want. There are a few people in the world that are capable of doing that, but there aren’t enough of them to justify screwing up policy for. The rich are certainly price sensitive, take Bill Gates for example. Imagine that he’s hungry and he sees a hot dog vendor and thinks that’s a good idea. He asks for one and the vendor says, “That’ll be $40. There’s a hot dog shortage…” I’m willing to bet that there’s a good chance that Bill wouldn’t buy that hot dog even though $40 is nothing to him. If he was really hungry, and he was really craving it, then there’s a better chance of him buying it, but that would hold true for anyone. The point is that everyone values things at different amounts, I could buy gum for $8 a pack, but I never would, gum isn’t worth much to me. Someone that really loved it would probably go ahead and buy it (although they would end up buying less) because they wanted it.

Price is the only way people really understand the scarcity of something. People do not respond until they really “feel” the impact of the scarcity. You can trumpet the shortage of water all you want, exhort them to conserve all you want, you will not see a substantial reduction of water usage until the price changes. There are some people that are very worried about that, they conserve as a matter of course. It is part of their identity, it is part of their world view. Most people do not think about it too much, they just have too many other things to worry about. The only way to get them to conserve is to make them aware of the scarcity at the time of consumption. Since most people don’t live right next to the reservoir and can’t see the shortage, you need another way of bringing it to their attention. With a higher price, you make people think about their consumption, even the conservationists think about it. the beauty of it is that they don’t even have to care about water conservation, worrying about money conservation will accomplish the same thing.

For most things, competitive pressure keeps the prices as low as possible, but people still have to face the question of is it worth it to me or not. If there ends up being a scarcity of something for some reason, the question of who gets what becomes very important. In an ideal world, we would all know who needs things the most and we would all willingly allow those people to buy at the normal price and the rest of us would go without. In the real world, there is no way to know who needs gas, water, or even land the most. The ONLY way to weed out the people who really want something from the people that would just like to have it is by using price rationing. With the vast majority of things, there is indeed enough to go around, we only need to trim the excesses of consumption in order to maintain supply (golf courses in Arizona for example). There are some things, real estate in Manhattan for example, that are so scarce that only the wealthiest people/companies can afford it. That may not be fair in some people’s eyes, but how else do you divvy up that scarce land among millions of people and not screw whoever owns that land? If something is indeed incredibly scarce, most people are going to have to go without it, the owner is unable to know who wants it the most, and is unable to give it to everyone, so the highest bidder wins.

“But it isn’t fair!” Alright, explain to me why Beluga caviar is not a common food staple. “Well, it’s expensive, it’s a luxury item.” Ok, it is, but the reason that it is a luxury item is because it is expensive, not the other way around. Imagine a world where Beluga caviar is in abundance, maybe each fish has enough eggs to feed 100 people and they produce it 100 times a year. On top of that, the fish didn’t need to be killed for it, it was in an external sac that could just be cut off each time. People had, for millennia, eaten it as a cheap, easily available food source. Everyone ate it, but then through some sort of catastrophe, that world became much like our own and Beluga caviar become as scarce as it is here. You can imagine the gnashing of teeth involved in the rationing of it. “Greediness,” would be rampant as sellers kept raising the price until only the richest people could consume it. Eventually, people would turn to alternatives like peanuts, beans, etc. for cheap food, but they would always remember the “good old days” and blame rich people and Beluga fisherman for driving up the price. The real irony is it is they themselves that drove up the price due to their desire for the product.

“OK Isaac, but that was silly, no one cares about caviar, what about water, there is no alternative for that!” Fair enough, there isn’t. The key to the water problem is that people in some areas consume more than can be replenished and so shortages happen. If it were priced properly, people wouldn’t use as much and the shortages could be avoided. Also if the price were high enough, water would be brought to those areas and sold, thus increasing the supply. “But what about the poor?” Here’s where I can turn around and call the people that say that are soulless. In their version of the world, they would keep the price the same (so that the poor can afford it), encourage people to cut back, and bang! no problem, right? In reality, you run out of water and there isn’t any incentive for people to bring in more. Yes, in the economic way of doing things, the price goes up, but at least there is water to be had. The poor won’t die of thirst either… Behind every statement that “The government has to do it otherwise it won’t get done at all!” is a person that simply does not trust people. There isn’t any reason to believe that people will not voluntarily step up and contribute to the cause. The only reason people don’t do more is because of the attitude that “It’s the government’s job” Yes, there are greedy bastards out there, but people are, by and large decent. Barring government interference (don’t get me started on African thugocracies), people will find ways of distributing aid where it is needed.

If there really isn’t enough water to go around, if the world really does start to run out of water relative to the population, I don’t see what could be done. people will die as the supply runs out. In those types of situations, it doesn’t really matter what you think or what your political leanings are, there won’t be a solution until more water can be delivered. In the meantime, there is enough water to go around (inconveniently located in the great lakes) so we need to price water properly to make sure we never reach the point of disaster. Accurate prices will allow the distribution of water world wide and prevent water crises form occurring, how much more soul do you need?:-)

So there’s the practical defense of the economic way of rationing scarce commodities, for the ethical/moral reasons, see part 2.

I jumped into a discussion on a photo forum about a particular way of washing prints. Several people chimed in and said that it did work, but it wasted too much water, the implication being that he shouldn’t use it. I piped in and said what I thought was a pretty obvious fact, water is not scarce everywhere. It certainly is here in Yemen, but it isn’t in the entirety of the American NE. If the residents of Buffalo cut back water usage by 30%, there would be that much more water that is not being used in that area. They have an unbelievable amount of fresh water available, much more than can possibly be used. So if someone wanted to think “conservation first” in that area, they would indeed use less water, but to no effect at all. In the mean time, he might have forgone the use of a swimming pool, golf course, or the washing of fiber based paper and it wouldn’t have helped anyone…

I did mention the fact that if one did want to conserve water, all you had to do was raise the price. One guy responded and told me that it was false, that you can’t change consumer’s consumption by raising the price. What? Price doesn’t matter? He then told me that consumption has continued to rise despite the fact that prices are much higher now. Groan… Yes, people charge more money for things now, but the value of the money is considerably less now. In what economists call “real” terms, the prices of almost everything has continued to drop. It is the low “real” values that make people want to consume so much. He also told me that raising prices doesn’t affect the total amount used, it just redistributes it to people with more money. OK, so the people with more money didn’t buy it when the price was lower? If they continue to buy when the price rises and the “poor” people don’t, well, that’s a reduction of use isn’t it? Isn’t that the idea with conservation?

“But it isn’t fair..” Aha! That’s usually the real reason that people object to price rationing. It is true, at the margin, that poorer people are more likely to give up using the commodity as it gets more expensive. Once again, it is a reduction of use, so that is a point in it’s favor. In places like the US, I can’t think of a commonly used commodity that is beyond the price of anyone. If something were getting so expensive that very few people could afford it, it’s probably for the best, that thing sounds incredibly scarce.

People often times overlook two very important aspects of price rationing. By raising the price, people are inspired to make more of that commodity available, and by raising the price, people look for alternatives. Gasoline/oil are a prime example of alternatives coming to the fore. As the price rises, other alternatives become more and more attractive. But there isn’t an alternative to fresh water! That’s where that first idea comes into play. If prices of water are allowed to rise in Arizona, it may eventually make sense for there to be a pipeline from one of the great lakes down to the Southwest, as long as someone could make money off of it, it’s possible. There are any number of other methods as well, desalinization plants, trucking water in, etc. The key is that without higher prices, none of them are “worth” it. Higher prices will eventually make alternatives to the product available and/or a new way of getting that product to the people that value it most. Even if you think it’s “unfair,” this process is essential to driving growth and conservation.

Prices matter, demand curves slope downwards, conservation at all times doesn’t always make sense. If conservation is the goal, some people will have to go without, or least without as much as they used to. We know that the vast majority of people will not alter their habits without some “pushing.” It’s far better to let them decide how much to cut back than it is for someone else to dictate to them how much they should use. Prices are great things, why are people so afraid of them?

What can I say? I’m trying out some ads from Google, I have no idea if I’ll get any money or what kinds of ads I’ll get on my site, but what the hell, I gotta try! What kind of economics type guy would I be if I didn’t try:-)

A group of us were talking about the negative effects of quat on this country. There are many, a stunning amount of money is spent on it every day, it uses an amazing percentage of this country’s water supply (upwards of 40%), and it has a slew of health complications. A lot of people say that it also wastes a lot of productive time, but I think that’s just an excuse for being lazy, there’s no reason why you couldn’t chew and work at the same time… Henry piped up and said that there are some positive attributes to quat as well. “Well, they aren’t drinking…” That’s true enough, if they turned to other, more dangerous drugs like alcohol, this place would be terrifying. It’s only the fear of going to hell that is preventing this place from totally disintegrating into an alcohol induced anarchy… So yeah, it could be worse but I think it’s a stretch to call that a positive. Then he added, “And at least it keeps the money in the country.”

There’s some appeal to that view, but all you have to do is look a little closer to see how misguided it is. OK, so the money stays in the country, so what? First of all, if the money did go someplace else, that would mean that they either imported something or they invested the money someplace. If they import something, the odds are that they’d get something more useful than quat, so that’s a benefit right there, the money won’t be “wasted” on a drug. If they invest it, they would presumably get some sort of return on the investment, and that’s always good. Most people are worried about imports, so let’s look at that.

If the people of Yemen import something from Djibouti, Yemenis get some sort of product and someone in Djibouti gets some Yemeni Riyals. So the Yemenis have something that they use, probably food if it’s from Djibouti, so that’s a good thing. What are people going to do with Yemeni Riyals in Djibouti? Nothing, you can’t do anything with Yemeni Riyals in any place other than Yemen. So, the Djiboutis send the riyals back to Yemen in exchange for something.

So now the Djiboutis are faced with the same options as the Yemenis had when it came to spending money abroad, but they are forced to do business with Yemen, it’s the only place that will accept the money. The most common uses of money gotten through exports are either direct purchase of products, hiring of labor, investment in that country, or buying of that government’s debt. None of those things are bad, and they are all a direct result of Yemenis importing some product.

From the importing countries’ perspective, it’s all positive (as it is from the exporter’s view, but they have more at risk potentially). Even if the exporting country burned all of the money it got, preventing it from going back to the nation that imported it, it would still be good. If they burned the money, it would mean that the importing country got goods/services in exchange for little pieces of paper. Now that’s a deal! The government can always print more money…

So it isn’t obvious what the benefit is of “Keeping the money in the country.” This is a really contentious issue in the US. There is some worry about all of the money we send to China (although no one seems to worry about all of the money we send to Canada). The Chinese have been getting a lot of our money, and they’re using all of it. They are importing some goods made in the US, but they are mostly investing in capital here (buying equipment, property, etc.) or buying our debt. In an ideal world, we wouldn’t have any debt to sell, forcing them to either invest more or buy more of our products. Reality being what it is, our government has been deficit spending like crazy, so the Chinese have had lots to buy. Imports are a good thing for both sides, don’t be afraid of them. If you want them to buy more “stuff” from us, reduce the debt that we create…