In the entire history of economic thought, nobody has ever been able to demonstrate that there is an objectively “right” price for anything separate and apart from the subjective valuation that happens in the marketplace. Progressives like speeches about diversity, but they loathe the actual diversity of views and desires, especially the idea that prices should be sorted out according to the billions of subjective valuations in the marketplace through a process that nobody is in charge of. (In Dante’s Hell, the engraving reads: “Abandon Hope All Ye Who Enter Here.” In Ezra Klein’s Hell, the engraving reads: “Nobody In Charge.”) Implicit in this belief is that most people — consumers and workers alike — are too stupid or too weak for us to allow them to act on their own subjective valuations, that we are compelled by … justice, efficiency, expert opinion, whatever … to substitute our own judgment for theirs. And then all you need is two government studies and a rent-a-philosopher writing in the New York Times to proclaim that there is some real-world basis for your own preferences as compared to those of the rabble on whose behalf you have just deputized yourself to organize the world. The language of “social justice” is largely a sort of moral minstrel show designed to distract from the real argument, which is: “You’re too stupid to be entrusted with your own life.” Something close to the entirety of the progressive agenda (apart from sexual license), from wage rules to health care to “investments” in modish fantasy projects to industrial policy, assumes that that metaphysically correct price is out there, simply waiting for the right people with the right ideas in service of the right policy to discover them, or at least to approximate them.
Kevin D. Williamson, “The Profit Police”, National Review, 2014-06-30.
April 24, 2015
April 22, 2015
“Victorian style poverty” in the UK
In a recent Forbes column, Tim Worstall pours scorn on the recent claim that some British children are living in “Victorian conditions”:
There’s a very large difference between arguing that we have Victorian style (for those unacquainted with British practise, this means late 19th century style) poverty in the UK and that we have Victorian style inequality in the UK. That second is at least arguably possible, although untrue, while the first is simply a flat out untruth. There is nothing even remotely akin to 19th century poverty in the UK today. Nor is there, of course, in any of the industrialised nations. The problem stems from people simply not understanding how poor the past was.
The claim is made this morning in The Guardian:
Many children are living in Victorian conditions – it’s an inequality timebomb
That second assertion could be true but is a matter for another day. That first is just wrong.
I was reminded of this by the teaching union NASUWT’s warning this week that there are children in this country living in “Victorian conditions”, turning to charity for regular meals and going without a winter coat.
“Going without a winter coat” might be something we’d like to remedy (and yes, I think we would like to do so) but it’s not a reminder of Victorian levels of poverty, it’s nothing like it at all. It’s necessary to actually understand what Victorian poverty was. Late 19th century Britain had some 25% of the population living at or below the subsistence level. This subsistence level is not a measure of inequality, nor of the lack of winter clothes. It is a measure of gaining enough calories each day in order to prolong life. This is the sort of subsistence level that Malthus and Ricardo were talking about. The sort of level of poverty that the World Bank currently uses as a measure of “absolute poverty”.
This absolute poverty is set at $1.25 per person per day. No, this is not the number that can be spent upon food per person per day. This is the amount that can be spent upon everything per person per day. This covers shelter, clothing, heating, cooking, food, education, pensions, health care, absolutely everything. This number is also inflation adjusted, so we are not talking about $1.25 a day when bread was one cent a gallon loaf. This number is also Purchasing Power Parity adjusted: so we are not talking about lentils costing two cents a tonne in India and £3 a kg in Tesco. We are adjusting for those price differences across geography and time.
Just to note, by these PPP and inflation adjusted numbers, being on the minimum wage in the UK puts you in the top 10% of all income earners in the current world. Being on nothing at all but benefits would put you into the top 20%.
Up to 25% of the population of Britain were that badly off in the late Victorian era: “Actual real starvation to death as a result of poverty was not unknown, even that late, as late as 1890.”
April 21, 2015
Lee Kuan Yew and Singapore’s amazing economic success
Earlier this month, Alvaro Vargas Llosa examined the economic success of Singapore under the authoritarian rule of Lee Kuan Yew:
Lee Kuan Yew, Singapore’s legendary statesman, who died last month at the age of 91, posed a challenge to those of us who believe in political and economic freedom (and all other freedoms). His combination of authoritarianism and economic freedom, of social engineering and self-reliance, worked. The result was a society that is more prosperous than most others, but free only in some respects.
For years, the best examples one could come up with to show that the marriage of economic and political liberty could work were the liberal democracies of the developed world, whose achievements originated in centuries past and different circumstances.
Lee Kuan Yew’s credentials became strong as many countries that also gained independence in the 1950s or 1960s opted for a mix of nativism and collectivism that kept them poor while tiny Singapore, with no natural resources, emerged as an economic powerhouse. While Mao, Ho Chi Minh, and Castro — not to cite Mobutu, Idi Amin Dada, and others — destroyed the chances of a decent life for many generations, Lee Kuan Yew created the conditions for a 124-fold increase in Singapore’s per capita income in half a century.
[…]
Singapore’s case is exceptional, which makes it a tough challenge for those of us who think freedom is best served by not carving it up. My belief is that Singapore has been able to preserve its curious mix because of the absence of prosperous liberal democracies around it. But its model is based on globalization, and it’s therefore porous to good ideas.
In a world in which more countries, including Asian ones, end up successfully embracing democracy under the rule of law as well as free trade, it will be impossible for the city-state to avoid the comparison and the contagion. It is one thing to preserve an authoritarian model because your neighbors espouse a less successful one, and quite another to perpetuate it in the face of equally or even more successful societies that espouse a freer model.
April 20, 2015
Supply and Demand Terminology
Published on 2 Jan 2015
What is the difference between a change in demand and a change in the quantity demanded? The terminology can be confusing — but we’ll provide some clarity in this video. In short, a change in demand refers to a shift in the demand curve — caused by a number of factors such as income, population, etc. A change in quantity demanded refers to a movement along a fixed demand curve — caused by a change in price.
April 19, 2015
Does the Equilibrium Model Work
Published on 2 Jan 2015
Does the equilibrium model work? Nobel Prize winner Vernon Smith conducted experiments testing this model and found that time and time again, the model did indeed work. This video takes a look at Smith’s evidence and analyzes other instances where market conditions shift either the demand or supply curve, and the equilibrium model comes into play.
April 16, 2015
Exploring Equilibrium
Published on 2 Jan 2015
In this video, we’ll review equilibrium in the adjustment process, showing that the equilibrium price is the only stable price. Then we’ll take a look at equilibrium quantity, where quantity demanded is equal to quantity supplied, and how this plays out in a free market economy that seeks to maximize gains from trade.
Measuring productivity in the modern economy
Tim Worstall on how our traditional economic measurements are less and less accurate for the modern economic picture:
… in the developed countries there’s a problem which seems to me obvious (and Brad Delong has even said that I’m right here which is nice). Which is that we’re just not measuring the output of the digital economy correctly. For much of that output is not in fact priced: what Delong has called Andreessenian goods (and Marc Andreessen himself calls Mokyrian). For example, we take Google’s addition to the economy to be the value of advertising that Google sells, not the value in use of the Google search engine. Similarly, Facebook is valued at its advertising sales, not whatever value people gain from being part of a social network of 1.3 billion people. In the traditional economy that consumer surplus can be roughly taken to be twice the sales value of the goods. For these Andreessenian goods the consumer surplus could be 20 times (Delong) or even 100 times (my own, very controversial and back of envelope calculations) that sales value.
We are therefore, in my view, grossly underestimating output. And since we measure productivity as the residual of output and resources used to create it we’re therefore also grossly underestimating productivity growth. We’re in error by using measurements of the older, physical, economy as our metric for the newer, digital, one.
In short, I simply don’t agree that growth is as slow as we are measuring it to be. Thus any predictions that rely upon taking our current “low” rate of growth as being a starting point must, logically, be wrong. And that also means that all the policy prescriptions that flow from such an analysis, that we must spend more on infrastructure, education, government support for innovation, must also be wrong.
April 14, 2015
The Supply Curve Shifts
Published on 2 Jan 2015
This video explores factors that shift the supply curve. How do technological innovations, input prices, taxes and subsidies, and other factors affect a firm’s costs and the price at which the firm is willing to sell a good? By answering these questions we have a better idea of how the supply curve will shift. This video walks you through examples and scenarios that illustrate this concept.
April 13, 2015
A Deeper Look at the Demand Curve
Published on 2 Jan 2015
This video looks at both the horizontal and vertical methods for reading the demand curve, how demand curves shift, and consumer surplus.
April 10, 2015
A Deeper Look at the Supply Curve
Published on 2 Jan 2015
What does the supply curve show us? This video takes a look at what we can tell from the supply curve about the behavior of sellers and quantities supplied at different prices. We’ll talk about producer surplus as well as factors that lead to an increase in supply and a decrease in supply — and we’ll provide a list of these important supply shifters.
QotD: Zoning hurts the poor
One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.
Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.
Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.
Sandy Ikeda, “Shut Out: How Land-Use Regulations Hurt the Poor”, The Freeman, 2015-02-05.
April 9, 2015
The Demand Curve Shifts
Published on 2 Jan 2015
How do increases or decreases in demand affect the demand curve? An increase in demand means an increase in the quantity demanded at every price. Similarly, a decrease in demand means a decrease in the quantity demanded at every price.
This video takes a look at some important factors that shift the demand curve, such as changes in population, changes in income, prices of substitutes, and changes in taste. We’ll look at real-world scenarios that cause a change in demand — like how the demand for batteries increases when a hurricane is expected, how our demand for inferior goods decreases when our income increases, and how the demand for hot dogs increases when the price of the complement, hot dog buns, decreases.
April 8, 2015
This is probably why so many people think businesses should pay more tax
At Forbes, Tim Worstall reports on a staggering misconception among Americans about what corporate profits amount to:
A wonderful little find by Mark Perry. Something that helps to explain quite why so many completely ridiculous economic ideas and public policies manage to gain traction. The problem is that the average person just doesn’t understand the economy at all. No, I don’t mean economics, or the abstruse arguments about whether we should use monetary or fiscal policy. But just the basic raw numbers of what’s actually going on out there. As Perry goes on to point out this, well, let’s not beat about the bush here, let’s call it what it is, this ignorance of the universe they’re inhabiting by the average person out there is what keeps the economic demagogues in business.
Here’s what Perry found:
When a random sample of American adults were asked the question “Just a rough guess, what percent profit on each dollar of sales do you think the average company makes after taxes?” for the Reason-Rupe poll in May 2013, the average response was 36%! That response was very close to historical results from the polling organization ORC’s polls for a slightly different, but related question: What percent profit on each dollar of sales do you think the average manufacturer makes after taxes? Responses to that question in 9 different polls between 1971 and 1987 ranged from 28% to 37% and averaged 31.6%.
That’s simply a ridiculous belief. Plain howling at the Moon crazy. The capital share of the economy isn’t that high and the capital share is made up of a great deal more than just profits (depreciation, rent, interest and so on as well as profits). There’s just no way that this is anywhere near true. As Perry goes on to point out:
According to this Yahoo!Finance database for 212 different industries, the average profit margin for the most recent quarter was 7.5% and the median profit margin was 6.5%.
The Equilibrium Price
Published on 2 Jan 2015
In this lesson, we investigate how prices reach equilibrium and how the market works like an invisible hand coordinating economic activity. At equilibrium, the price is stable and gains from trade are maximized. When the price is not at equilibrium, a shortage or a surplus occurs. The equilibrium price is the result of competition amongst buyers and sellers.
