When it comes to so called “natural capital” the same is not true. God put honeybees on this earth. One reason they are on this earth is to pollinate the billions of dollars worth of crops that are grown world-wide and that are vital for our continued existence. But those bees are part of the natural capital stock. And they get paid squat. After all, it is said, that the bees never leave an invoice with the almond growers in California! Nor do countries in South America pay the Amazon rain forest each year for the water that it generates to sustain their agriculture.

Is this right? Do such valuable natural assets not receive payment for their services (and by extension are doomed to exploitation and demise)? Well, not exactly. Imagine a simple world where there are two states. In each state the weather conditions are identical, the climate is suitable for growing the same crops, the soil and landscapes are identical and the workforces are identical. The only thing different is that in one state there are huge swarms of honeybees in existence and in the other state honeybees are afraid to enter because of an abundance of kingbirds that like to eat them. Now, you are a farmer hoping to plant 500 acres of apple trees. In which place would you be likely to purchase your land? In the place where the natural capital stock exists or in the place where it does not? All else equal, you will of course purchase the land in the place with the bees. In equilibrium in this simple world you’d see the price of the bee-infested land be higher than the other property. So while the bees themselves are not sending you a bill, someone is surely sending it to you – and it was whomever was the rightful owner of that land before it was commonly known that the bees were useful.

That the marginal cost of accessing God’s bees is zero is not changed by this account, and thus there may be reasons to suspect that the bees themselves may not be treated well, but it is certainly not the case that when we have market forces operating in a relatively open economy that natural assets are not valued or priced in some way. And as for whether the bees are destined to be doomed (or the gold or tin or clean water, etc.) I’ll leave it to your imagination for now.

The population of Rochester, N.Y., peaked in 1950 at 330,000 … in a small city like Rochester, whose population is now at 210,000 plus.

…

If Kodak’s looming bankruptcy closes the book on this storied company, much will be written about the company’s blindness to digital cameras and then smart phones. Rubbish! Kodak knew the future was digital as far back as the 1970s and, with Mr. Fisher at the top, began hiring managers with deep digital knowledge

…

Kodak’s other structural problem is geography. When you study the history of great American companies that stumbled and failed, or only partially recovered, you see how difficult it is to overcome the mindset of your immediate surroundings. Businesses located in places where success is the norm, and innovation is built into the ecology, have a better chance of fixing themselves.

…

Paralysis can infect cities and regions, and not just small ones. It is still a mystery how the entire Boston-area-based minicomputer industry could fail so suddenly in the early 1990s. Digital Equipment, Data General, Wang, Apollo—all went poof. Each fell from the top of their industries to death in less than a decade.

…

What Mr. Gerstner did was difficult. It would have been infinitely harder to do in Rochester, because the impact on a small city and the multiplier effect of lost jobs, axed all at once, would have been a civic disaster. Of course, Kodak’s slow bleed has turned out to be a civic disaster anyway.

The world might be flat. But innovation and adaptation remain local.

The problem with Kodak is that the folks in Rochester were misled into two things. First that something as good as Kodak was the norm. I cannot tell you how many retirees from that company I have met with gold-plated retirement packages who still talk about the “glory days.” They talk as if anyone with any job ought to have the same lifetime job and fantastic retirement plan that Eastman Kodak was able to offer its huge workforce for dozens of years (I recall seeing that at its peak Kodak employed 60,000 people).

Second, it is that the city planners and the locals have “big company as savior” on their mind. A never-ending litany of plans to “revitalize” downtown, to develop the “next Kodak” and so forth. You know, cities are allowed to shrink. Incredibly we have an infrastructure that would be appropriate for a city twice our size, and I think that prevents some creative thinking about the best way to shrink. It should also go without saying that Rochester’s largest sectors (I think) are now health care and education — two areas where prices are out of line and productivity is lagging and also two sectors where the mindset is not exactly the entrepreneurial one that led Kodak to so much success. Yet the planners seem to be banking on those being the cornerstones of the 21st century revitalization of the city. It will not happen in my lifetime. I will guarantee it. And for insight into why I’ll make you wait until future posts.

I don’t want to summarize the arguments here, you can click through the links, starting with the Krugman one above, then Steve’s and then following the Boudreaux one, to get the economic intuition behind the arguments. I am strongly in the corner of my colleague’s model of whether debt is ipso facto an issue.  It’s not, as I think his parable here makes clear. His entirely correct point is that government spending indeed imposes a burden on someone. But from the fact that it is financed with debt says nothing about whether that burden necessarily is imposed on future generations. Current generations have complete control over who the burden of their spending falls upon. What remains unsaid in the debate, but implied, is that the spending  indeed can cause harm, and irrespective of whether it is tax financed or debt financed it can cause harm to future generations.

I guess my only quibble with my colleague’s point above is what the term “complete control” means and it is here that I will add my one cent. Assume for simplicity’s sake that all tax collections today and in the future are non-distortionary. It is possible to structure taxes this way, though we are unlikely to see it in practice. What is the problem with transferring resources from some citizens to others? If we ignore prices perhaps nothing. But don’t be a priceless economist. When resources are transferred from Peter to Paul, this will distort the relative prices in an economy from where they would be if Peter had command over the resources himself. And these relative price distortions have ramifications not just for current production and consumption (by others) but also out into the future.

So, if there is a reason to be apoplectic about the level of the public debt, it should be retrospective. It seems to me an indicator that market prices were likely to have been heavily distorted in the past and that the adjustment process in the future of prices getting “more right” is going to be painful. I would note, however, that this position does not follow ipso facto from the fact that governments spend, I suppose one could write down a model where such government spending is price neutral, but again I find that to be an implausible assumption to make.

Profit (and loss) is an amoral market signal that guide economic transactions.  It works automatically within the price system to direct goods and services to the persons most willing to pay for them, and this usually reflects society’s collective demand for scarce goods and services.  When demand increases, price increases, which increase profits in the short run to encourage more production of the good or service.  Likewise, when supply increases, prices fall which reduce profits in the short run and production is reduced.  In fact, in any voluntary exchange, both parties profit by necessity; an exchange will not occur unless both the seller and the buyer benefit by it.

Profit also provides the incentive for businesses to be increasingly efficient with resources.  Consider the efficiency in home heating and cooling.  In Germany, the standard house used 30 liters of oil per square meter per year for heating and cooling in 1982.  Twenty years later, that number dropped to 1.5 liters (McDonough & Braungart, 2002).  Without loss, there wouldn’t be an incentive for many homeowners to invest in more efficient windows and insulation.  The link between profit and efficiency can be seen more clearly in regimes that attempt to ban profit.  Although it is theoretically possible to be efficient without markets, profits, and prices, the high informational and computational costs make efficiency unlikely (Prato, 1998).  This is because the coercion that is necessary in a system without profit stifles innovation.  In the Soviet Union, a premier noted that managers avoided innovation like the devil avoids incense (Sowell, 2004).  This is not surprising, considering that in Stalin’s Russia failure was treated like sabotage.  In socialist India, the most popular car was the Ambassador which remained relatively unchanged from the original, which was a copy of the 1954 Morris Oxford (Sowell, 2004).  As Thomas Sowell says, “Profit is a price paid for efficiency” (2004, p. 81).  Without profit, there is little incentive for entrepreneurs or anyone else to take the risks that are necessary to improve efficiency and drive economic development.

Profits tell us nothing about the morality of the market, only the incentive to produce the good.  By looking solely at profit, it is impossible to tell if a company uses slave labor or high wage workers, if the demanded good was drugs or baby formula, nor does it inform us if the transaction was voluntary or under duress.  But we do know that if a market is subject to competition, then the morality of society can be expressed through markets.  For example, even without government regulation, the greediest businesses won’t remain solvent for long if they sell shoddy goods or have prices too high.  In the 1990s, Nike changed its child labor practices due to market pressures.  “The Nike product has become synonymous with slave wages, forced overtime and arbitrary abuse.  I truly believe that the American consumer does not want to buy products made in abusive conditions” (Cushman, 1998).  Although profit is seen as a motive for people to act immorally, this example show that it can also force companies to act morally.  In short, profit is not something that can behave or misbehave; it merely reflects and reacts to real conditions.

Deriding profits as immoral may just be an easy scapegoat for bad policy.  A state representative once told me that the “Law of Unintended Consequences” was the greatest law in the land.  This was because he learned over the years how policy and laws with good intentions can incentivize immoral conduct.  In New York City, the only way for some landlords to avoid massive losses due to the rent control laws was to save money by neglecting services, accepting bribes, or committing arson and selling the land to industrial or commercial uses (Sowell, 2004).  Furthermore, when the laws were changed to compensate tenants who lost their apartments from arson, tenants began to commit arson (Sowell, 2004).  Similarly, the Aid to Families with Dependent Children act in the United States became infamous for its significant immoral consequences prior to 1996; it made fathers uneconomical in the low income levels of society while encouraging single mothers to have more children in order to receive more money from the government program (Codevilla, 2009).  Were the benefits they earned immoral?  No, the profits were an incentive to commit an immoral action; it reflected real conditions as set by law.

Profit is a function of the irreparable laws of supply and demand.  These basic market forces are present in any regime and work to transmit information about how society collectively desires to distribute scarce resources.  In this sense, markets are purely amoral; they provide information about interactions in the economy but are incapable of declaring the morality of the interactions.

References

Codevilla, A. M. (2009). The Character of Nations: How Politics Makes and Breaks Prosperity, Family, and Civility. Basic Books. New York.

Cushman, J. H. Jr. (1998). “Nike Pledges to End Child Labor and Apply U.S. Rules Abroad.” The New York Times, International Business.   http://www.nytimes.com/1998/05/13/business/international-business-nike-pledges-to-end-child-labor-and-apply-us-rules-abroad.html?pagewanted=all (28JAN10).

McDonough, W., Braungart, M. (2002). Cradle to Cradle. North Point Press. New York.

Prato, T. (1998). Natural Resource and Environmental Economics. Iowa State University Press. Ames, IA.

Sowell, T. (2004).  Basic Economics: A Citizen’s Guide to the Economy. Basic Books. New York.

He's Mr. Green Christmas, He's Mr. Sun

His brother Snow Miser is also in the show. I got to thinking about their names while hanging some Christmas lights the other night and you know what? They’re incredibly stupid! Calling these two brothers Heat Miser and Snow Miser is like calling Santa the present miser or calling the Easter Bunny the chocolate miser. Seriously. What do we think the term miser means? Doesn’t it mean someone that is stingy with their stuff? In the case of “Heat Miser” wouldn’t it mean that Mr. Green Christmas was not forthcoming with heat and sun? But that is precisely the opposite of his schtick. Same for his brother snowy.

What the heck does this have to do with this blog? Well, it’s fun to not take oneself too seriously sometimes. Alas, there is another message to convey. First of all, I am moderately offended that the term miser has come to be used pejoratively. After all, think of how virtuous certain miserly activities are considered to be. What if you were an energy miser? It would mean you have stored up lots of potential energy, but have not dispersed it, nor ever would. Is that “bad?” Or how about a promiscuity miser?

On a somewhat related note, I got to thinking of myself as a bit of a heat miser. I don’t like to turn the heat up very much in the winter. First of all, I like being cool (my wife does not!). Second of all, I am a cheap bast$rd, I hate spending money on my heating bill when I could do other things with it, even savings. This now brings me to the reason I wrote up this post. I am very much a supporter of using the price system to ration scarce resources. And when it comes to appropriate regulatory rules for dealing with problems (such as global warming policy), to the extent that we are going to get regulation, I’d much prefer them to be market oriented. So, for example, if forced to choose a global warming policy that was not “do nothing” I would much prefer a carbon tax.

But think of what a carbon tax does. It raises the price of carbon intensive activities like driving, heating your home and mowing your grass. These policies, I would argue, are unfair to misers. For some folks (like me!) we already have economized a great deal on how much energy and fuel we use, and adjusted our lifestyles in such a way as to accommodate that. At the current margin of use, it is not much easier for us to adjust. For example, the average winter temperature in our home is probably around 63 degrees. If heating prices increased due to a carbon tax, I would be facing either divorce from my wife, a visit from child and family services for freezing my kids, moving to a warmer climate or simply paying the larger tax on my already limited fuel use. I suppose I could spend even more money to make our home efficient – but it is already a small-ish home and pretty well insulated as it is. This is true more generally when it comes to price signals. When prices increase, the folks who have already made lots of economizing adjustments are more likely to have income effects dominate substitution effects and for folks who perhaps make more use of resources there is more room for substitution.

I could draw some indifference curves and budget constrains to demonstrate these impacts, but then I’d be giving away a midterm question for my class next semester. In any case I think the implications for policy go beyond fairness here. Lots of economists simply assume that the elasticity of demand for certain carbon-intense activities is pretty high (i.e. we respond a lot to price changes). I’m not so sure, particularly as we’ve become much more energy efficient over the past 40 years and particularly as prospects for serious energy transitions are not bright and prospects for continued use of fossil fuels are. Supporters of large government might actually rejoice – taxing carbon seems to me to be a big revenue generator if these conditions are in fact true.

This is not a post on the post office. It should be eliminated, and we can discuss that at some other time (and the reasons people still defend it on public goods grounds). Rather, imagine the scenario that might unfold when it is disbanded or even “worse” – it is privatized. The essence of the post-office’s losses today is that the 46 cent stamp does not capture the full cost of mailing a letter. Indeed, we feel some of that cost via lower quality at the post office, and we feel the rest of it quietly through our taxes. So, perhaps the real cost per letter sent is 70 cents.

What happens when the agency goes private, gets its act together and starts selling stamps to reflect the true costs? Maybe the new private stamp costs 54 cents. Note that this cost allows the private agency to be run (economically) profitably, requiring no subsidy or bailout. Note too that this cost captures the value of the better service that a private company is likely to provide. And note that when privately run, there is an incredible incentive for the private agency to bring this stamp price down. And if the record of FedEx, UPS or really any private food, clothing, etc. company is indicative, in the long run one would expect dramatic decreases in the costs of delivering mail as well as dramatic improvements in the quality.

Yet opponents of privatization, those who worship at the altar of the government, will go absolutely bananas at how “unfair” and how greedy the new private agency is for charging 54 cents for the new stamps. “You see!” they’ll all say – private businesses are more costly to operate than government businesses. “You see!” they’ll all say – private businesses face no discipline and can raise prices to whatever they wish, forcing the rest of us to eat cake. “You see!” they’ll all say – look at how this makes the lives of the poor worse off.

Prepare for these sorts of observations and arguments when we try to get water priced properly around the world. Much water is terribly underpriced, which imposes incredible costs to all of us. Prepare for these sorts of observations as some public schools make transitions to more market oriented schools (especially in higher ed). Prepare for these sorts of observations when and if people are asked to pay for trash, fire, police and other services. Prepare for these sorts of arguments when rent control laws are removed in cities. Prepare for these sorts of arguments when anti-price gouging laws are removed. And so on.

If I wanted to bore you, I’d draw you a picture with a “proof” of my above points – we learn it in every Intro Econ class, or at least most students do. We need a name for this sort of a thing, can anyone come up with one?

For the sake of intellectual consistency, I’ll demonstrate an analogous version of this phenomenon committed by the right (at times) in a post over the weekend.