The broken window fallacy is a classic hurricane-season misstep. “Hurricanes may do damage”, the reasoning goes, “but look on the bright side. Think of how many jobs will be created because of the destruction. Think about all the demand that will be stimulated. Things may look bleak, but this is actually good for the economy.”
Bastiat debunked this reasoning in his 1848 essay “That Which Is Seen and that Which Is Not Seen“, and countless economists since have echoed his remarks. In the essay, he tells the parable of a shopkeeper whose careless son breaks a window, and he asks the reader whether this is good for the economy. At first glance, it’s tempting to say yes. But as Bastiat shows in the story, this conclusion ignores the unseen effects of the broken window.
“If … you come to the conclusion,” he writes, “as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, ‘Stop there! your theory is confined to that which is seen; it takes no account of that which is not seen.'”
What is not seen, briefly, is the lost opportunities, the things that could have been done with our resources had they not been needed to replace the broken window. Taking those into account, it becomes clear that the broken window is harmful to the economy. After all, there is now one less window in our stockpile of goods.
The same reasoning applies on a larger scale. There may be plenty of jobs and demand when a hurricane destroys a town, but saying this is “good” for the economy is simply wrong. If this logic were true, the more destruction we experience the better off we’d be! But economic reasoning — and plain common sense — tells us this can’t be right.
Patrick Carroll, “3 Economic Fallacies to Watch Out for during Hurrican Season”, Foundation for Economic Education, 2022-09-30.
January 5, 2023
QotD: The Broken Window Fallacy
August 27, 2022
QotD: The key functions of cities in pre-modern economies
The role of infrastructure is also different. We are also used to cities as the center-point lynch-pins of infrastructure networks – roads, rail, sea routes, fiber-optic cable, etc. That isn’t false when applied to pre-modern cities, but it is much less true, if just because modern infrastructure is so much more powerful than its pre-modern precursors. Modern infrastructure is also a lot more exclusive: a man with a cart might visit a village where the road does not go, but a train or a truck cannot. The Phoenician traders of the early iron age could pull their trade ships up on the beach in places where there was no port; do not try this with a modern container-ship. Infrastructure is largely a result of cities, not their original purpose or cause.
So what are the core functions of a pre-modern city? I see five key functions:
- Administrative Center. This is probably the oldest purpose cities have served: as a focal point for political and religious authorities. With limited communications technology, it makes sense to keep that leadership in one place, creating a hub of people who control a disproportionate amount of resources, which leads to
- Defensive/Military Center. Once you have all of those important people and resources (read: stockpiled food) in one place, it makes sense to focus defenses on that point. It also makes sense to keep – or form up – the army where most of the resources and leaders are. People, in turn, tend to want to live close to the defenses, which leads to
- Market Center. Putting a lot of people and resources in one place makes the city a natural point for trade – the more buyers and sellers in one place, the more likely you are to find the buyer or seller you want. As a market, the city experiences “network” effects: each person living there makes the city more attractive for others. Still, it is important to note: the town is a market hub for the countryside, where most people still live. Which only now leads to
- Production Center. But not big industrial production like modern cities. Instead it is the small, niche production – the sort of things you only buy once-and-a-while or only the rich buy – that get focused into cities. Blacksmiths making tools, producers of fine-ware and goods for export, that sort of thing. These products and producers need big markets or deep pockets to make end meet. The majority of the core needs of most people (things like food, shelter and clothes) are still produced by the peasants, for the peasants, where they live, in the country. Still, you want to produce goods made for sale rather than personal use near the market, and maybe sell them abroad, which leads to
- Infrastructure Center. With so much goods and communications moving to and from the city, it starts making sense for the state to build dedicated transit infrastructure (roads, ports, artificial harbors). This infrastructure almost always begins as administrative/military infrastructure, but still gets used to economic ends. Nevertheless, this comes relatively late – things like the Persian Royal Road (6th/5th century BC) and the earliest Roman roads (late 4th century BC) come late in most urban development.
Of course, all of these functions depend, in part, on the city as a concentration of people, but what I want to stress […] is that in all of these functions the pre-modern city effectively serves the countryside, because that is still where most people are and where most production (and the most important production – food) is. The administration in the city is administering the countryside – usually by gathering and redistributing surplus agricultural production (from the countryside!). The defenses in the city are meant to defend the production of the countryside and the people of the countryside (when they flee to it). The people using the market – at least until the city grows very large – are mostly coming in from the country (this is why most medieval and ancient markets are only open on certain days – for the Romans, this was the “ninth day”, the Nundinae – customers have to transit into town, so you want everyone there on the same day).
(An aside: I have framed this as the city serving the economic needs of the countryside, but it is equally valid to see the city as the exploiter of the countryside. The narrative above can easily be read as one in which the religious, political and military elite use their power to violently extract surplus agricultural production, which in turn gives rise to a city that is essentially a parasite (this is Max Weber’s model for a “consumer city”) that contributes little but siphons off the production of the countryside. The study of ancient and medieval cities is still very much embroiled in a debate between those who see cities as filling a valuable economic function and those who see them as fundamentally exploitative and rent-seeking; I fall among the former, but the latter do have some very valid points about how harshly and exploitatively cities (and city elites) could treat their hinterlands.)
Consequently, the place and role of almost every kind of population center (city, town or castle-town) is dictated by how it relates to the countryside around it (the city’s hinterland; the Greeks called this the city’s khora (χώρα)).
Bret Devereaux, Collections: The Lonely City, Part I: The Ideal City”, A Collection of Unmitigated Pedantry, 2019-07-12.
May 30, 2022
Technocratic meddling in developing countries at the local level
One of the readers of Scott Alexander’s Astral Codex Ten has contributed a review of James Ferguson’s The Anti-Politics Machine. The reviewer looked at a few development economics stories that illustrate some of the more common problems western technocrats encounter when they provide their “expert advice” to people in developing countries. This is one of perhaps a dozen or so anonymous reviews that Scott publishes every year with the readers voting for the best review and the names of the contributors withheld until after the voting is finished:
But even if the project was in some sense a “failure” as an agricultural development project, it is indisputable that many of its “side effects” had a powerful and far-reaching impact on the Thaba-Tseka region. […] Indeed, it may be that in a place like Mashai, the most visible of all the project’s effects was the indirect one of increased Government military presence in the region
As the program continued to unfold, the development officials became more and more disillusioned — not with their own choices, but with the people of Thaba-Tseka, who they perceived as petty, apathetic, and outright self-destructive. A project meant to provide firewood failed because locals kept breaking into the woodlots and uprooting the saplings. An experiment in pony-breeding fell apart when “unknown parties” drove the entire herd of ponies off of cliffs to their deaths. Why, Ferguson’s official contacts bemoaned, weren’t the people of Thaba-Tseka committed to their own “development”?
Who could possibly be opposed to trees and horses? Perhaps, the practitioners theorized, the people of Thaba-Tseka were just lazy. Perhaps they “didn’t want to be better”. Perhaps they weren’t in their right mind or had made a mistake. Perhaps poverty makes a person do strange things.
Or, as Ferguson points out, perhaps their anger had something to do with the fact that the best plots of land in the village had been forcibly confiscated to make room for wood and pony lots, without any sort of compensation. The central government was all too happy to help find land for the projects, which they took from political enemies and put in the control of party elites, especially when it could use a legitimate anti-poverty program as cover. In Ferguson’s words, the development project was functioning as an “anti-politics machine” the government could use to pretend political power moves were just “objective” solutions to technical problems.
A local student’s term paper captured the general discontent:
In spite of the superb aim of helping the people to become self-reliant, the first thing the project did was to take their very good arable land. When the people protested about their fields being taken, the project promised them employment. […] It employed them for two months, found them unfit for the work, and dismissed them. Without their fields and without employment they may turn up to be very self-reliant. It is rather hard to know.
Two things stand out to me from this story. First, the “development discourse” lens served to focus the practitioners’ attention on a handful of technical variables (quantity of wood, quality of pony), and kept them from thinking about any repercussions they hadn’t thought to measure.
This is a serious problem, because “negative effects on things that aren’t your primary outcome” are pretty common in the development literature. High-paying medical NGOs can pull talent away from government jobs. Foreign aid can worsen ongoing conflicts. Unconditional cash transfers can hurt neighbors who didn’t receive the cash. And the literature we have is implicitly conditioned on “only examining the variables academics have thought to look at” — surely our tools have rendered other effects completely invisible!
Second, the project organizers somewhat naively ignored the political goals of the government they’d partnered with, and therefore the extent to which these goals were shaping the project.
Lesotho’s recent political history had been tumultuous. The Basotho Nationalist Party (BNP), having gained power upon independence in 1965, refused to give up power after losing the 1970 elections to the Basotho Congress Party (BCP). Blaming the election results on “communists”, BNP Prime Minister Leabua Jonathan declared a state of emergency and began a campaign of terror, raiding the homes of opposition figures and funding paramilitary groups to intimidate, arrest, and potentially kill anyone who spoke up against BNP rule.
This had significant effects in Thaba-Tseka, where “villages […] were sharply divided over politics, but it was not a thing which was discussed openly” due to a fully justified fear of violence. The BNP, correctly sensing the presence of a substantial underground opposition, placed “development committees” in each village, which served primarily as local wings of the national party. These committees spied on potential supporters of the now-outlawed BCP and had deep connections to paramilitary “police” units.
When the Thaba-Tseka Development Project started, its international backers partnered directly with the BNP leadership, reasoning that sustainable development and public goods provision could only happen through a government whose role they primarily viewed as bureaucratic. As a result, nearly every decision had to make its way through the village development committees, who used the project to pursue their own goals: jobs and project funds found their way primarily to BNP supporters, while the “necessary costs of development” always seemed to be paid by opposition figures.
The funding coalition ended up paying for a number of projects that reinforced BNP power, from establishing a new “district capital” (which conveniently also served as a military base) to constructing new and better roads linking Thaba-Tseka to the district and national capitals (primarily helping the central government tax and police an opposition stronghold). Anything that could be remotely linked to “economic development” became part of the project as funders and practitioners failed to ask whether government power might have alternate, more concerning effects.
As we saw earlier, the population being “served” saw this much more clearly than the “servants”, and started to rebel against a project whose “help” seemed to be aimed more at consolidating BNP control than meeting their own needs. When they ultimately resorted to killing ponies and uprooting trees, project officials infatuated with “development” were left with “no idea why people would do such a thing”, completely oblivious to the real and lasting harm their “purely technical decisions” had inflicted.
May 18, 2022
From “Software as a Service” to “Property as a Service” then to “Hypercapitalism” aka Neo-Feudalism
Whenever I could, as the software I used to depend on switched from the old-fashioned “purchase a license” to “Software as a Service” model, I found something else to use or I didn’t bother “upgrading” from the last iteration before it went SaaS. My Microsoft Office installation is the 2007 version — after that I used Open Office (and now LibreOffice) for anything Microsoft-related. Even working in the software business, I hated SaaS and I try as much as I can to avoid products distributed that way. Imagine how I feel about the expansion of that toxic idea to other areas of life, as Chris Bray discusses here:
Twenty-two years ago, the economist and social critic Jeremy Rifkin warned about the emerging commodification of human experience. Markets have always exchanged private property, he wrote, and people have grown accustomed to the act of holding it personally – that is, of owning things. But in a new “hypercapitalist” world, he warned, ownership would be concentrated in a few corporate hands, and most people would pay to access property, “in the form of short-term leases, rentals, memberships, and other service arrangements,” rather than owning it. Remember that description about leasing all of your stuff in a series of service arrangements, because you’ll be seeing it again in a minute or two.
The man was not wrong about the degree to which businesses would aspire to turn one-time sales of stuff into endless monthly purchases of a service:
And then comes the politics:
The shift from a propertied regime based on the idea of broadly distributed ownership to an access regime based on securing short-term limited use of assets controlled by networks of suppliers changes fundamentally our notions of how economic power is to be exercised in the years ahead. Because our political institutions and laws are steeped in market-based property relations, the shift from ownership to access also portends profound changes in the way we will govern ourselves in the new century.
And this, and look closely for the most important sentences — two of them, short and adjacent:
In a society where virtually everything is accessed, however, what happens to the personal pride, obligation, and commitment that go with ownership? And what of self-sufficiency? Being propertied goes hand in hand with being independent. Property is the means by which we gain a sense of personal autonomy in the world. When we access the means of our existence, we become far more reliant on others. While we become more connected and interdependent, do we risk at the same time becoming less self-sufficient and more vulnerable?
The shift in the structuring of human relationships from ownership to access appears to invite a trade-off of sorts whose outcome is far from certain. Will we liberate ourselves from our possessions, only to lose a sense of obligation to the things we fashion and use? Will we become more embedded in networks of relationships, only to become more dependent on powerful networks of corporate suppliers?
Property is autonomy. That was a warning about your own life: less autonomous, more dependent. And it was, specifically, a warning about corporate capitalism on the subscription model, and the social and political effects of a concentration of property in increasingly few hands. Hypercapitalism would be the new feudalism, a system of lords and serfs.
May 6, 2022
QotD: “… the Spartiates were quite possibly the least productive people to ever exist”
Bret Devereaux, “Collections: This. Isn’t. Sparta. Part II: Spartan Equality”, A Collection of Unmitigated Pedantry, 2019-08-23.
January 30, 2022
“I stand corrected. All retail sucks, not just book retail”
Following up to the issue of book store-to-publisher returns last week (here), Kenneth Whyte discovered that other retailers are not that different from the book business after all:
“Indigo Books and Music” by Open Grid Scheduler / Grid Engine is licensed under CC0 1.0
Last week I wrote about the horrible, wasteful publishing-wide policy of booksellers returning unsold books for full refunds rather than putting them on sale. Some 30 percent of books in stores are sent back to publishers who bury, pulp, or remainder them. I compared this practice to other retail sectors:
If I were in the ugly sweater business, I’d sell 500 ugly sweaters to Saks at $200-a-piece. Saks pays me 500x$200=$100,000, marks the ugly sweaters up to $500, and lays them out on tidy glass shelves under track lighting. Whatever is left after the Christmas season is marked down to half price on crowded sales racks. If Saks still has some ugly sweaters in January, it will ship them to the outlet store where they’re offered at still greater discounts.
Our friend, author and regular SHuSH reader Ken McGoogan, sent my comments to a mature student he teaches. She comes from the fashion industry and says it’s not so simple:
The reality is, if Saks cannot sell that ugly sweater, they will ask for mark-down money from the brand (the wholesaler) who sold them that ugly sweater. If the brand is not willing to give Saks that mark-down money, they will never carry anything from the brand again. Is mark-down money better than returns? Honestly, it’s not that much better. The amount of the mark-down money is an often shocking figure. And this is not just for Saks, all big retailers do it, without exception.
Barnes & Noble or Chapters are just like department stores. The business model is the same. The only thing is, if the readers found out how much waste the book returns are generating every year, it’ll be a big turn off for the customers. They’d rather force themselves to read e-books or audio books than be part of the wasteful culture. Especially for the younger generation, they are buying less garments because of the fashion industry’s wasteful level. Fyi, a lot of new clothes and unsold inventories are burned every year as they are running out of storage spaces.
I stand corrected. All retail sucks, not just book retail. And the book industry had better sort this out before the aforementioned younger generation begins to focus on it.
January 23, 2022
The oddity of the bookselling business
Unlike so many other retail operations, book stores have a different sales cycle because they can generally return unsold books (in good condition) to the publisher for a full refund. This means that 30% or more of the books on the shelf at Christmas will be shipped back to the publisher early in the new year, only to appear again on the discount shelves a year or two later for a fraction of the original retail price (and often in rather worse shape for all the additional handling). In the latest SHuSH newsletter, Kennethy Whyte calls this the worst problem in book publishing:
“Indigo Books and Music” by Open Grid Scheduler / Grid Engine is licensed under CC0 1.0
Book publishing doesn’t work like most other retail businesses. If I were in the ugly sweater business, I’d sell 500 ugly sweaters to Saks at $200-a-piece. Saks pays me 500x$200=$100,000, marks the ugly sweaters up to $500, and lays them out on tidy glass shelves under track lighting. Whatever is left after the Christmas season is marked down to half price on crowded sales racks. If Saks still has some ugly sweaters in January, it will ship them to the outlet store where they’re offered at still greater discounts.
What happens to them if they don’t sell at the outlet doesn’t interest me because I’ve got my $100,000. If Saks ordered far too many ugly sweaters, that’s Saks’ problem.
In the book world, I sell 1,000 copies of a book to a retail chain like Barnes & Indigo for $15-a-piece, half the retail price. Barnes & Indigo pays me 1,000x$15=$15,000 and maybe puts some of the books on a front table, or maybe buries them on a bottom shelf in the darkest corner of the store. I might sell a two hundred, four hundred, or six hundred copies.
Let’s be generous and say 600 sell at Barnes & Indigo through the autumn and over the holidays. Come January, the store doesn’t put the remaining stock on sale: it packs up the unsold 400 and ships them back to me for a full refund. The 400 returns, or at least those of them that aren’t crumpled or coffee-stained, go back into the warehouse, which charges me fees to process the returns and more fees to store them. Sometime later, I get a notice of the returns and regret that extra glass of wine I ordered at dinner the night I thought I sold Barnes & Indigo $15,000 worth of books when, in fact, I only sold $9,000 worth of books, perhaps leaving me under-water on that particular title. I also regret boasting of the $15,000 sale to the author, who probably did some royalty math in his head and thought he was getting 40% more than he’ll actually receive.
Returns at publishing houses run somewhere between 25% and 30% annually, across all titles. That’s despite Amazon with its ruthlessly efficient algorithms seldom buying many more copies than it needs, and despite ebooks and audiobooks (which amount to a quarter of sales for many publishers) having almost zero returns.
Millions of books are returned to publishers at this time of year. Sales are slower in January and February, so bookstores hurriedly return all their remaining holiday-season stock and whatever else hasn’t moved to keep themselves in cash. Some of the returns go back into storage. Eventually, most are remaindered, or pulped, or buried. It’s a colossal waste of paper and ink, a headache in terms of shipping/handling/accounting, and dispiriting as heck. You might think you had a great year, hit all your sales targets, exceeded them, even, and then in about the third week of January begins the drip drip drip of returns, and it continues steadily through March. That’s if you’re lucky and it’s drips, not waves. And while the returns are concentrated in the first quarter, your books are returnable year-round, so even a pleasant summer afternoon can be ruined by the unexpected arrival of a pallet of unwanted stock.
January 12, 2022
QotD: Baumol’s cost disease in architecture and furniture
If stonemasonry is a low-tech industry, and new high-tech industries are arising all around it, stonemason wages could get prohibitively high (compared to everything else) until nobody wants to hire them anymore. This would create pressure for architectural styles that require as little masonry (or, generalized, human labor) as possible.
This has gotten me thinking about furniture.
I got a new place recently and have been looking for furnishings. Sometimes I look at people’s furniture Pinterests. If Pinterest is any kind of representative window into the soul of the modern furniture-enthusiast, people really like Art Nouveau. […] As far as I can tell, you can’t buy any of these anywhere — they’re a combination of antiques and concept pieces. The people who pin these and pine after these end up getting minimalist Scandinavian furniture with names like UJLIBLÖK, just like everyone else.
Anything that even comes close to the above costs high four to five digits. I don’t know if this is because it’s antique, because it requires more labor, or both.
I’m harping on furniture because it avoids a lot of the complicating factors in architecture. There isn’t some vague collection of “elites” making our furniture decisions. It’s a pretty free market! There are lots of normal middle-class people spending big chunks of money on furniture, lots of them really really like the old stuff, and the old stuff is still either unavailable or unaffordable. It seems like it used to be affordable — it wasn’t just kings and dukes who had the old Art Nouveau stuff — but for some reason that’s changed. I think Baumol effects offer a tidy explanation here, and if we use them to explain furniture, then they start looking really attractive for architecture.
I want this one to be true, because it exonerates our civilization. If we could make things like the Art Nouveau furniture above, or the Taj Mahal, relatively cheaply and easily, then the question of why we aren’t doing that demands an answer. If it’s just a quirk of basic economics, then our civilization is fine, and maybe we can hope that stoneworking technology advances to the point where we can do this kind of thing again cheaply.
Scott Alexander, “Highlights From The Comments On Modern Architecture”, Astral Codex Ten, 2021-10-04.
December 26, 2021
Repost – The market failure of Christmas
Not to encourage miserliness and general miserability at Christmastime, but here’s a realistic take on the deadweight loss of Christmas gift-giving:
Christmas gifts under the tree.
Photo by Kelvin Kay via Wikimedia Commons.
In strict economic terms, the most efficient gift is cold, hard cash, but exchanging equivalent sums of money lacks festive spirit and so people take their chance on the high street. This is where the market fails. Buyers have sub-optimal information about your wants and less incentive than you to maximise utility. They cannot always be sure that you do not already have the gift they have in mind, nor do they know if someone else is planning to give you the same thing. And since the joy is in the giving, they might be more interested in eliciting a fleeting sense of amusement when the present is opened than in providing lasting satisfaction. This is where Billy Bass comes in.
But note the reason for this inefficient spending. Resources are misallocated because one person has to decide what someone else wants without having the knowledge or incentive to spend as carefully as they would if buying for themselves. The market failure of Christmas is therefore an example of what happens when other people spend money on our behalf. The best person to buy things for you is you. Your friends and family might make a decent stab at it. Distant bureaucrats who have never met us — and who are spending other people’s money — perhaps can’t.
So when you open your presents next week and find yourself with another garish tie or an awful bottle of perfume, consider this: If your loved ones don’t know you well enough to make spending choices for you, what chance does the government have?
December 23, 2021
Repost — The lousy economics of gift-giving
Tim Worstall explains why gift-giving at Christmas is so economically inefficient:
Christmas gifts under the tree.
Photo by Kelvin Kay via Wikimedia Commons.
The point being made is dual, that individuals have agency and that utility is entirely personal.
To unravel that jargon.
Individuals, peeps, are able to make choices. We delight in making choices in fact, “agency” is the opposite of “anomie”, that feeling that society determines what we may or can do that so depresses the human spirits. We get to choose to get up at 6 am or 8. Have coffee or tea when we do. Go buy the latest platters from the newly popular beat combo, pay the ‘leccie bill or have the coffee out at an emporium.
Having choices, making them, makes people happier.
Secondly, utility. The result of those choices, which of them will maximise happiness, is different for each and every individual. Sure, we can aggregate some of them – food is usually pretty high up everyones’ list, that first litre of water a day tops most. But the higher up Maslow’s Pyramid we go the more tastes – and thus happiness devoured – differ.
So, we make humans happier by their having the choice to do what they want, not what others think they should want or have.
Thus, give people cash at Christmas not socks.
Balancing that is the obvious point that the care and attention with which a present is considered is part of that consumption of happiness. The boyfriend who actually listens to the type of clothing desired and goes gets it provides that joy that a bloke has, for once, been listening. Or the book that would never have been individually considered but was chosen because it might – and does.
Sure.
But the point isn’t about Christmas at all. That’s a way of wrapping the point so it can be left underneath the tree of knowledge.
October 9, 2021
The incredible growth of London after 1550
In the latest Age of Invention newsletter, Anton Howes considers some alternative explanations for London’s spectacular growth beginning in the reign of Queen Elizabeth I:
John Norden’s map of London in 1593. There is only one bridge across the Thames, but parts of Southwark on the south bank of the river have been developed.
Wikimedia Commons.
As regular readers will know, I’ve lately been obsessed with England’s various economic transformations between 1550 and 1650 — the dramatic eightfold growth of London, in particular, and the fall in the proportion of workers engaged in agriculture despite the growth of the overall population.
As I’ve argued before, I think that the original stimulus for many of these changes was the increased trading range of English overseas merchants. Thanks to advances in navigational techniques, they were able to find new markets and higher prices for their exports, particularly in the Mediterranean and then farter afield. And they were able to buy England’s imports much more cheaply, by going directly to their source. Although the total value of imports rose dramatically — by 150% in just 1600-38 — the value of exports seems to have risen by even more, as there’s plenty of evidence to suggest that for most of the period England had a trade surplus. The supply of money increased, even though Britain had no major gold or silver mines of its own.
The growing commerce was the major spur to London’s growth, with English merchants spending their profits in the city, and ever-cheaper and more varied luxury imports enticing the nobility from their country estates. Altogether, the concentration of people and wealth in London must have resulted in all sorts of spill-over effects to further drive its growth. After the initial push from overseas trade, I suspect that by the late seventeenth century the city was large enough that it was running on its own steam.
But on twitter, economic historian Joe Francis offered a slightly different narrative. Although he agrees that a change to overseas trade was the prime mover, he suggests that the trade itself was too small as a proportion of the economy to account for much of London’s growth. I disagree, for various reasons that I won’t go into now, but Joe brought to my attention various changes on the monetary side. Inspired by the work of Nuno Palma, he suspects that it was not the trade per se, but the fact of an export surplus that was doing the heavy lifting, by increasing the country’s money supply.
An increased money supply should have facilitated England’s internal trades, reducing their costs, and allowing for greater regional specialisation. Joe essentially thinks that I’ve got the mechanism slightly back to front: instead of London’s growing demands having reshaped the countryside, he contends that the specialisation of the entire country is what allowed for the better allocation of economic resources and workers to where they were most productive — a process from which a large city like London quite naturally then emerged.
I have some doubts about whether this process could really have been led from the countryside. The regional specialisation that we see in agriculture, for example, only really starts to become obvious from the 1600s onwards, by which stage London’s population had already begun to balloon from a puny 50,000 in 1550, to 200,000 and rising. I also haven’t found much evidence of other internal trade costs falling. Internal transportation — by packhorse, river, or down the coast — doesn’t seem to have become all that more efficient. Roads and waggon services don’t show much sign of improvement until the eighteenth century, and not many rivers were made more navigable before the mid-seventeenth century either. This is not to say that England’s internal trade didn’t increase. It certainly did, as London sucked in food and fuel in ever larger quantities, and from farther and farther afield. But it still looks like this was led by London demand, rather than by falling costs elsewhere.
Besides, the influxes of bullion from abroad would have all been channelled through London first, along with most of the country’s trade. To the extent that monetisation made a difference to the costs of trade then, this would have made a difference first in the city, before emanating out to its main suppliers, and then outwards. I thus see the Palma narrative as potentially complementary to my own.
October 5, 2021
QotD: Entrepreneurship
In fact, one could almost create a new economic law: the amount of abuse raining down on entrepreneurs is directly proportional to the good they do. I haven’t seen much reason to doubt this law yet.
Johnathan Pearce, “Gordon Gekko goes to Germany”, Samizdata.net, 2005-05-05.
July 19, 2021
Talk is cheap, as a pizza chain CEO demonstrates brilliantly
John Miltimore examines the claims of the CEO of the &pizza chain in the Washington DC area that his stores have no problem getting staff because he pays them a “living wage”:
As far as PR goes, Lastoria gets an A+. He was profiled by Business Insider, CBS News, and other media outlets. His economics grade, however, is another story.
First, the notion that &pizza’s wages are uniquely generous is wrong. The minimum wage in the nation’s capital, after all, is $15.20. Considering that Washington, DC has one of the highest costs of living in the US, it’s not unreasonable to assume that &pizza is paying workers what amounts to the market wage of their labor (i.e. the price they’d get in the absence of a wage floor). This is a stark contrast to other parts of the United States. Fifteen dollars in DC translates to roughly $24 in Florida, $25 in Alabama and Tennessee, $26 in New Mexico, and $27 in Louisiana.
Second, Lastoria decries the alleged “shortage of business owners willing to pay a living wage.” But it should be pointed out that &pizza is one of those businesses.
While there is no objective standard to determine what a living wage actually is, MIT has a Living Wage Calculator that allows readers to compute living wages based on the formula created by Dr. Amy K. Glasmeier.
To say that &pizza doesn’t pay its employees a “living wage” is an understatement. The living wage for a single mom with one child is $38.48 in Washington DC. For a single mother with two children, it’s $47.89. Indeed, even for a married couple with just one child, the living wage is $20.69 — nearly $5 an hour more than the average pay of Lastoria’s workers. (It’s unclear why Lastoria is having fewer problems hiring workers than other businesses, but it’s most likely attributable to local factors, such as the fact that he’s servicing nine of the twenty wealthiest counties in America.)
Finally, Lastoria’s claim that higher wages increase productivity enough to improve a company’s bottom line — the efficiency wage hypothesis — has problems logically and empirically. First, it implies that companies not currently paying an efficiency wage are willing to take less profit simply to make workers poorer. Moreover, efficiency wages have been shown to reduce employment, similar to minimum wage laws.
Lastoria might see the $16 an hour average wage as exceedingly generous — especially when he compares it to lower nominal wages paid in other parts of the country — but it’s a far cry from a “living wage”, according to the model used by living wage advocates.
I asked Lastoria how he’d respond to those who say restaurants like his should be required to pay each worker a living wage. He didn’t respond.
April 18, 2021
QotD: Two centuries on, Ricardo still right
Tim Worstall, “Ricardo Still Right 201 Years Later”, Continental Telegraph, 2018-11-01.
April 17, 2021
Considering the costs and benefits of extreme specialization
In the latest post on Matt Gurney’s Code 47 Substack blog, he considers the trade-off between population density and the range of specialization that can be supported at various densities:
“Model A Ford in front of Gilmore’s historic Shell gas station” by Corvair Owner is licensed under CC BY-SA 2.0
I wish I remembered where I read this. It was a book I was blowing through for a university paper; only one chapter was really of interest to me when I was trawling for footnotes but I stumbled upon an interesting section that talked about services and specialization in a modern economy. The author offered a simple explanation of service specialization that I’ve never forgotten. Imagine a village with 100 people, the author said. Now imagine what services are available there. There’s probably a gas station, and maybe you can get a few services done to your car there, too. Basic repairs. Tire rotations. Oil changes. Things like that. There’s probably also a convenience store, and the store might also have a place to send or receive mail, or maybe even to rent a movie. (Back when that was a thing we did.) You might have a coffee shop of some kind, maybe a diner. But that’s marginal. You almost certainly don’t have a school, full post office, bank branch or medical centre of any kind. Not in a village of 100 people.
When you itemize out all the services you can get, it’s probably about five or maybe 10 — gas pumped, tires changed, oil changed, basic engine repairs, store clerk, movie rental, mail sent and received. Maybe someone to pour you a cup of coffee and get you a sandwich — but only maybe. The point isn’t to be precise in our list or count, but just to contemplate the relationship between the population and the number and type of available services.
Now scale that village up 10 fold, the author said. Now it’s a town of 1,000. The number of services explodes. You still have everything you did before. But now you’ve also got specialized shops, restaurants, a bank or two (and all the services they provide), probably a house of worship, medical services of various kinds (including eye care, dentistry, etc), personal-care services, better access to home and lawn care, various repair and maintenance service, technical services, a post office … the list goes on. You also start to see competition and the efficiency that brings — our village of 100 would have a gas station and a convenience store (quite possibly at the same location!). But our town of 1,000 would have a few of each. You’d get more services, and start to see prices dropping for the commonly available offerings.
You get the idea — the more you scale up a population, the more specialized services that are available and the more accessible they become. And this includes not just categories of service, but also increasing degrees of specialization. Our village of 100 probably has no full-time doctor. Our town of 1,000 probably has a family physician. But after we bump things up to 10,000, 100,000 and then a million people, we’re getting not just doctors, but highly trained, specialized physicians, surgeons and diagnosticians. Our town of 1,000 has a dentist, but our city of a million has dental surgeons who’ve specialized in repairing specific kinds of trauma and injury.
Anyway. I don’t remember what book this was from. But I do remember this short section. I think about it a lot. We Canadians of 2021 are, for the most part, hyper-specialized. I’ve written columns about this before, including this one from 2019, which I’m going to quote liberally below:
Human history is, in one simplified viewing, the story of specialization. As our technology advanced, a smaller and smaller share of the labour pool was required just to keep everyone alive. Perhaps the easiest way to summarize this is to note that 150 years ago, even in the most advanced industrial countries, something close to 50 per cent of the population was directly engaged in agriculture — half the people tilled fields so the other half could eat. Today, in both Canada and the United States, it’s closer to two per cent — one person’s efforts feed 49 others. Those 49 can pursue any of the thousands of specialized jobs that allow our technological civilization to exist. … Those 49 people are our artists and doctors and scientists and teachers. Human advancement depends on this — a civilization that’s scrambling to feed itself doesn’t build particle colliders or invent new neonatal surgeries and cancer-stopping wonderdrugs.
I stand by those remarks. But I’ve been pondering them of late with a different perspective. I’ve spent much of this week talking with doctors and medical experts in Ontario, where the third wave of COVID-19 is threatening to overwhelm the health-care system, with tragic results. And one recurring theme that comes up in these conversations is how this disaster is going to take place almost entirely out of public view. There won’t be any general mobilizations or widespread damage. People are going to die, behind closed doors or tent flaps, and other people will be forever scarred by their inability to save those people. But for most of us — those who aren’t sick, or highly specialized medical professionals — life is going to be something reasonably close to normal.
