Near all freshwater availability problems come from the fact that farmers get it cheap or for free, diverting it from much more valuable uses like keeping people alive if they drink it. This is true in California – we’ve actually cases of farmers using $400 of water to grow $100 of alfalfa – as it is in Pakistan. There are cases of people growing water hungry crops in near drought areas just because they get that water too cheaply.
[…]
Gaining revenue with which to build dams is useful, it most certainly is. But that’s not the only function of pricing. The cash to increase supply, great, but the very fact of charging will reduce demand. And we should be charging what it costs to produce the water too. So charges should cover 100% of the costs of the dams, not just 25%.
It’s entirely possible that charging that full cost will mean that no farmers want the water. OK, then we shouldn’t build the dam, should we? For if the value of the water – measured by what people will pay – is less than the cost of its provision, then that’s value destroying, providing the water. The dam makes us all poorer, therefore we shouldn’t build it.
The point here being – and it’s an important one – that prices affect both supply and demand. They’re what brings them into balance even. So, yes, charge for water, but not just so that we can pay to increase supply, also so that we, merely by charging, reduce demand.
Tim Worstall, “Pakistan’s Chief Justice Almost Right – Charge For Water, Not For Dams, But To Charge For Water”, Continental Telegraph, 2017-07-17.
November 3, 2020
QotD: Water pricing
October 2, 2020
QotD: Price “gouging” in emergencies
Consider price fixing on goods as necessary as water. During the Texas floods of last year, the price of water rose to heights of $99 per case, from the average of $5 per case. The cruelty of a store owner to do this during a time of emergency offends us all, but to people that think empathetically, it’s especially offensive. This was counterbalanced by Puerto Rico that had strict price controls on water.
In spite of the fact that per capita, there were more emergency responders sent to Puerto Rico and more funds sent to Puerto Rico than Texas, their problem persisted while the Texans very quickly received aid. The answer to the question why is: because of price fixing.
The free market, in seeing the price jump recognized the shortage of supply and responded quickly supplying Texans with an abundance of water cases because of the excessive profit margins – the increased supply eventually caused market competition and the price quickly dwindled to a more reasonable price.
Meanwhile, the market ignored Puerto Rico because the market was asked to ignore them by their own leaders through price fixing. Texans received water, quickly, and at reasonable prices, while Puerto Ricans didn’t.
If water is selling for $99/case, by the end of the day someone will have airlifted water into the region at $50/case, and the next morning water will be selling for $30/case. This will go on for a day or so, and the water crisis is quickly resolved. This was never permitted to happen in Puerto Rico.
Brandon Kirby, “Why Women Generally Aren’t Libertarian”, Being Libertarian, 2018-06-27.
August 25, 2020
Berlin’s experiment with rent control has already made huge changes in the housing market
Sadly, for advocates of rent control in other cities, the changes are not positive for renters or landlords:
In the beginning of this year, the city government of Berlin brought in a rent freeze, a particularly crude form of rent control. Predictably, this led to calls from certain quarters for introducing similar measures here in London. I had several discussions about this, making the standard economic case against rent controls, but to no avail. I was told that I was blinded by neoliberal dogma, that the world is not as simple as my Econ 101 textbook, and that this was a brilliant and necessary measure to rein in the power of greedy landlords and speculators.
The first results are already in now, and they can be interpreted as the revenge of Econ 101. In Berlin, the supply of new rental properties coming on the market has fallen by a quarter compared to last year. No, this is not because of the virus: in other big cities such as Hamburg, Munich and Cologne, supply has increased by a third over the same period.
In fact, the one subsector of Berlin’s rental market which is exempt from the rent cap, namely new-built properties, is not that different from the rental markets of other big cities. In this subsector, the number of new rental properties coming on the market has increased by a quarter. Yet in the main market, where the cap does apply, supply has fallen by almost half – a drastic reduction, which more than cancels out any gains made elsewhere.
There has also been an increase in the number of properties that are up for sale, rather than rent, because while rents have been capped, sales prices have not.
So whether you compare the rent-capped part of Berlin’s rental property market to its counterpart in other cities, to its cap-exempt counterpart in Berlin itself, or to the owner-occupier sector – the result is always the same. The rent cap clearly is having a negative impact on supply, and this is happening astonishingly quickly: even I was not expecting to see any impact in this year, or the next.
None of the arguments against rent controls are new. You can already find them all in Verdict on Rent Control, a book which the IEA published in 1972. The book is actually a collection of papers on the subject, some of which are much older than that. It contains one paper by Milton Friedman and George Stigler on wartime rent controls in the US, which were still lingering after the war had ended. It was first published in 1946, but they were already having the same arguments then that we are still having today.
August 15, 2020
QotD: The worth of a human being
According to this article, the worth of a human being was 98 cents. The authors showed how their figure was arrived at. They had combined current market prices for the materials in an average human frame of 130 pounds. (Details like this I remember.) A sceptic, even then, I recall noting that they excluded hat, mid-season clothing, and shoes, from their total; and that they didn’t mention whether they were citing wholesale or retail values on the flesh and chemicals. Most pointedly, while accompanying my mother to a supermarket, I checked the prices for beef, pork, and broiler chicken, choosing the lowest grades. All were over 10 cents a pound; and so I concluded that the overall price of the meat alone, per human, would exceed their estimate.
Given background inflation rates, I think the total value in 2020 may approach twenty dollars, or even twenty-five. I’d have to recheck chemical prices, to be sure. Though perhaps the total might be reduced, closer to one dollar again, for babies.
David Warren, “Virtual March for Life”, Essays in Idleness, 2020-05-14.
July 29, 2020
How Freight Trains Connect the World
Wendover Productions
Published 5 Mar 2019Support Wendover Productions on Patreon: https://www.patreon.com/wendoverprodu…
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Select footage courtesy the AP Archive
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July 20, 2020
QotD: Protectionists misunderstand the role of money
The Econ 101 teacher typically draws on the white board a diagram of two countries trading with each other. Country A is shown exporting (say) steel to country B in exchange for dollars, and then using those dollars to buy lumber from country B. The Econ 101 teacher informs his or her class that, while these exchanges are mediated by dollars, what ultimately is going on in this diagram is that the people of country A produce steel and send some of that steel to the people of country B because the people of country A want lumber from country B. Likewise, the people of country B produce lumber and send some of it to the people of country A because the people of country B want steel from country A. “The money that you see, class,” explains the Econ 101 teacher, “merely facilitates the exchange of steel for lumber. What’s important here is the getting of steel and of lumber. Money is a tool used by the people of country A to transform some of the steel they produce into lumber that they want to consume. Likewise, money is a tool used by the people of country B to transform some of the lumber they produce into steel that they want to consume.”
The protectionist thinks of this hypothetical two-country exchange entirely differently from the way that the Econ 101 teacher thinks of it. For the protectionist, the people of country A produce steel as a means of getting money; that is the ultimate goal. And the people of country B produce lumber as a means of getting money; that – the getting of money – is the ultimate goal. While for the Econ 101 teacher the two-country diagram that he or she draws is meant to show how money facilitates the ultimate acquisition by the peoples of each country of real goods, for the protectionist the diagram seems to show that the production of real goods is a means of facilitating the ultimate acquisition by the peoples of each country of money.
Don Boudreaux, “A Protectionist is Someone Who…”, Café Hayek, 2018-04-10.
July 15, 2020
Donald Shoup, the “Sir Isaac Newton of parking” or an “‘academic bottom-feeder’ who found a wonderful, rich ecological niche down there in the depths”
Colby Cosh, after taunting Ontarians yet again over our just-barely-past-Prohibition views on alcohol in public places, goes on to praise the work of UCLA economist Donald Shoup and his insights into the economics of parking:
“Parking meter FAIL” by kingdesmond1337 is licensed under CC BY-NC-SA 2.0
Parking — boring topic, ain’t it? Shoup latched onto it as a young-ish man because he was a follower of Henry George (1839-1897), the intriguing “single tax” economic theorist of the 19th century. George favoured a tax on the unimproved value of land parcels as a way of socializing pure rent (the value earned from occupying a mere location) and encouraging development. It is a concept that many economists still like, although it is potentially difficult to apply at scale. The widely used concept of tax increment financing is one example of Georgism in practice.
Shoup started out trying to fit parking spaces into the Georgist picture, but the boring topic was so underexamined that he found himself having to build a general theory of parking. He quantified the relationship between parking and traffic, finding that people “cruising” for parking spots were more destructive than anyone had imagined, and he inspired waves of research into the hidden market values of parking spots, which are rarely bought or sold in their own right. He happily describes himself as an “academic bottom-feeder” who found a wonderful, rich ecological niche down there in the depths.
Shoup has spent decades travelling the world and preaching against the concept of free parking, often meeting with bad-tempered resistance. Nevertheless, he has made a lot of headway in the world of urban planning. Any economist can see immediately how bundling a “free” parking space with an apartment or a job might be inefficient. The renter or homeowner has to pay a hidden extra cost for an amenity he might not choose to use, and the commuter is being given an incentive to drive to work — an incentive whose cash value he might prefer to keep. Shoup soon found, on empirical investigation, that most urban parking lots show signs of less-than-optimum use.
[…]
Of course, too little parking is as much of an efficiency problem as too much, which is why Shoup and his followers want parking to be priced wherever possible: if more is really needed, let a market create it. (To my eyes he has at least as much Hayek in him as Henry George.) In the era of Uber and smartphones, it is a lot easier to imagine a fully Shoupista world in which prices for parking spots update in real time and drivers look up prices at or near their destination before setting out.
July 9, 2020
QotD: Energy return on energy invested
To be valuable, any conversion technology must produce reliable, just-in-time power that greatly exceeds — by a factor of seven and upwards — the amount of energy that goes into its extraction, conversion and delivery to a consumer. It is this measure of productivity, EROEI (energy return on energy invested), that limits our choice.
By the EROEI criterion, biofuel is a disastrous choice, requiring about as much tractor fuel to grow as you get out in ethanol or biodiesel. Wind power has a low energy return, because its vast infrastructure is energetically costly and needs replacing every two decades or so (sooner in the case of the offshore turbines whose blades have just expensively failed), while backing up wind with batteries and other power stations reduces the whole system’s productivity. Geothermal too may struggle, because turning warm water into electricity entails waste. Solar power with battery storage also fails the EROEI test in most climates. In the deserts of Arabia, where land is nearly free, sunlight abundant and gas cheap, solar power backed up with gas at night may be cheap.
Fossil fuels have amply repaid their energy cost so far, but the margin is falling as we seek gas and oil from tighter rocks and more remote regions. Nuclear fission passes the EROEI test with flying colours but remains costly because of ornate regulation.
Matt Ridley, “Nuclear Fusion Could Provide Unlimited Energy”, HumanProgress, 2018-04-09.
June 19, 2020
The economy isn’t all huge corporations and government
Paul Sellers reminds us that the economy is far more than just the big names that get mentioned in the financial pages:
An example of the kind of one-man businesses Paul is talking about.
Independents in micro-businesses are few and far between and often hard to discover, despite the internet’s ever-increasing web of enterprises. The backbone of British industry is made up of small, independent people striving to retain a measure of individualism, independence and entrepreneurialism in their lives. Statistics from 2019 show that in Britain there were 5.82 million small businesses responsible for 99.3% of the total business output in the UK.
Small businesses here comprise those with 0-49 employees and digging deeper still into what might at first seem more irrelevant than relevant is that the niche that small businesses fill in the real world of enterprise. Over 76% of businesses are operated by one-man bands; single-person enterprises who operate alone comprise almost 4.5 million men and women. With an additional 1.15 million micro-business (1-9 employees) around 95% of businesses here operate on a strength of under just 10 people. So over 99% of small to medium business enterprises, that’s zero to 249 employees, but only 0.6% have a workforce of 50-249 employees. Less than 4% are small businesses with 10-49 staff members and get this, over 95% operate as micro-businesses with 0-9 employees. What does this tell you about businesses output? What it tells me is how little of this is newsworthy by the mass media manufacturing companies (Like BBC News and ITV, Sky and so on) who constantly tell us about how many this massive company or that massive company is laying off and how little this really affects our economy because the little guys still get out into their little micro-shops and make what cannot work work.
June 3, 2020
How to be a Pirate: Quartermaster Edition 
CGP Grey
Published 2 Jun 2020‣ Adapted largely from The Invisible Hook. It’s great, go read it: https://amzn.to/36PLKSE
‣ Director’s Commentary later today: https://www.patreon.com/cgpgrey## Special Thanks
Peter T. Leeson for reviewing a draft of the script. Check out his newest book, WTF?!: An Economic Tour of the Weird: https://amzn.to/3eEMm09
## Crowdfunders
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## Music
David Rees: http://www.davidreesmusic.com
May 22, 2020
When raising tax rates reduces total tax revenue
In the Continental Telegraph, Tim Worstall explains that the US tax system is already drawing too much in tax and any hope of increasing the total revenue will hinge on reducing the tax rate:
“washdc040208-02” by carencey is licensed under CC BY-NC-SA 2.0
It is often stated that the rate [the Laffer Curve peak rate] discovered here is 75 to 80%. This is not so – that could be the rate if only we entirely and wholly changed the taxation system in a mass of highly undesirable ways. If we remain with roughly what we’ve got in structure and intent then the peak of the Laffer Curve is 54%. That is not income tax, that is taxes upon income. That means we add together all Federal and State taxes upon income, including “employer paid” portions of Social Security, Medicaid, special amounts for this and that and so on and on. Anyone even vaguely familiar with the US taxation system will note that top earners are, already in many states, paying this or more.
There is something else though. The Laffer Curve is not about taxes upon high earners. It is about taxes upon income. It’s true that there will be slight differences in what the peak rate on lower incomes should be, or what the peak of the curve is there. The income effect will be higher than the substitution at lower incomes than it is at higher. We don’t know how much so let’s just stick with what we’ve got – 54%.
At which point:
The U.S. has a plethora of federal and state tax and benefit programs, each with its own work incentives and disincentives. This paper uses the Fiscal Analyzer (TFA) to assess how these policies, in unison, impact work incentives. TFA is a life-cycle, consumption-smoothing program that incorporates household borrowing constraints and all major federal and state fiscal policies. We use TFA in conjunction with the 2016 Federal Reserve Survey of Consumer Finances to calculate Americans’ remaining lifetime marginal net tax rates. Our findings are striking. One in four low-wage workers face marginal net tax rates above 70 percent, effectively locking them into poverty.
This includes the withdrawal of welfare benefits as income rises – as it should – and so is compatible with the Universal Credit idea that the peak tax and withdrawal rate should be 60%. Or is it 66%?
As we can see that rate is hugely above the Laffer Curve peak. It should, therefore, be lower.
It’s possible to extend the taper. Withdraw benefits at slower rates as income rises. This is, however, hugely, vastlylily, expensive. So it’s not going to happen to any significant degree and if it does then it will be financed by reducing the overall amount of benefit being paid. Which would mean taking money off the truly low income in order to soften the blow to the marginally low income – not the way we want to be doing things.
The only other way to do this is to reduce the taxation of the income of those low income folks. This has been done, a bit, by the Trump tax reforms and the much larger personal deduction. A further bite could be taken by FICA taxation only applying to the income above the personal deduction, not from dollar $1 of income as now. In fact that would be the simplest manner of at least beginning to get to grips with this problem. FICA only starts at $12,000 a year or so. Or even, if all are to be sensible, starting income tax and FICA only at the poverty line, currently $14,000 or so a year for a single adult.
May 16, 2020
QotD: Division of labour in the modern world
In another example — the making of a woollen coat — Smith emphasises that the division of labour allows us to use machines, even “that very simple machine, the shears with which the shepherd clips the wool”.
The shepherd has the perfect tool for a focused task. That tool needs countless other focused specialists: the bricklayer who built the foundry; the collier who mined fuel; the smith who forged the blades. It is a reinforcing spiral: the division of labour lets us build new machines, while machines work best when jobs have been divided into one small task after another.
The rise of the computer complicates this story. Computers can certainly continue the process of specialisation, parcelling out jobs into repetitive chunks, but fundamentally they are general purpose devices, and by running software such as Microsoft Office they are turning many of us into generalists.
In a modern office there are no specialist typists; we all need to be able to pick our way around a keyboard. PowerPoint has made amateur slide designers of everyone. Once a slide would be produced by a professional, because no one else had the necessary equipment or training. Now anyone can have a go — and they do.
Well-paid middle managers with no design skills take far too long to produce ugly slides that nobody wants to look at. They also file their own expenses, book their own travel and, for that matter, do their own shopping in the supermarket. On a bill-by-the-minute basis none of this makes sense.
Why do we behave like this? It is partly a matter of pride: since everyone has the tools to build a website or lay out a book, it feels a little feeble to hand the job over to a professional. And it is partly bad organisational design: sacking the administrative assistants and telling senior staff to do their own expenses can look, superficially, like a cost saving.
Tim Harford, “Why Microsoft Office is a bigger productivity drain than Candy Crush Saga”, The Undercover Economist, 2018-02-02.
February 28, 2020
QotD: Greek and Roman views of markets
Now, if it could be shown that the Aztecs had no concept of market behaviour, and that they were motivated by considerations wholly different from our own, it would be of little consequence. Everything we know about Aztec civilisation raises doubts whether it was worth calling a civilisation. The Aztecs had no writing and were ignorant of metal working and wheeled transport. Their cultural values were expressed in ritual torture, mass human sacrifice and cannibalism. The Mayans and Toltecs and all the others of their sort seem to have been no better. We may deplore the brutality of the Spanish conquest, but still conclude that it was, on balance, a blessing for the peoples of South America.
But it is different with the empires of the ancient Near East — and very different with the Greeks and Romans. These latter races are our intellectual fathers. Everything we ourselves have achieved is built on the foundations they laid. They gave us the names of all our arts and sciences. Eighty per cent of the English vocabulary is derived from Greek or Latin. Knowledge of these languages may be less widely diffused than it was until a century ago. But the general prestige of the Greeks and Romans is barely less now than it was among the mediaeval pilgrims who gaped at the crumbling remains of the Colisseum and the Baths of Diocletian. If it can be shown that they were wholly unlike us in their economic motivations, that would surely place in doubt the notion that market behaviour is natural to us.
And if few people outside the relevant university departments have read Polanyi and Finley, their conclusions are transmitted through popular histories and newspaper articles and television documentaries, and through large numbers of students who, however superficially, are exposed to these conclusions.
Sean Gabb, “Market Behaviour in the Ancient World: An Overview of the Debate”, 2008-05.
January 19, 2020
QotD: Bad fiction writers often know little or no economic theory
It is clear that she comes from an academic background, since she thinks that shelves are allotted by order of “importance.”
This is a problem for me as a reader often because I run into a lot of writers like her. It’s less important in things like romance, though even there it can get weird, like when some authors assume that the best thing possible in the Regency would be being a duke AND a doctor. (Head>desk, repeat.) This is because they misunderstand the relative wealth and importance of earning a living in the professions.
But there are a ton of books in mystery that hit the wall. Those that require understanding of how the world worked. So the economics these writers write are what you expect from exquisitely maleducated people. They learned sociology and various grievance studies. So you know, factories are bad places where people are forced to work in terrible conditions — for the 21st century. None of these darlings has the slightest idea what actual conditions were like at farms in the Regency, say — and do not even get health care or counseling, and are probably totally deprived of free ice cream.
I have now walled mysteries, some romances and a few fantasies, because they assume people who build and run factories are “evil exploiters” and villains. (As opposed to you know not building anything and letting the peasants starve.)
I’ve walled even more of them when the villain becomes “reformed” and just gives his whole fortune away to people who probably drink it away within a week and, presumably, dies in a gutter shortly thereafter.
In science fiction and fantasy this is even more painful. You’ll have entire worlds getting paid for things, without it making any sense, since there is no galactic agreement on money, no universally agreed upon standard, nothing that makes whatever they hand you worth anything. We have entire worlds paid for things that make no sense to transport inter-world with the money existent at that time. You have “exploited” groups, that you can’t figure out why anyone would exploit or what sense it makes.
Then there is the soc jus in these worlds, which often consists of upending historic injustices by creating worse injustices and, oh, yeah, incidentally making it impossible for the economics to function and starving everyone in the world. If you’re going to do that call it Planet Venezuela already, okay?
And don’t get me started on the economics of worlds with magic, where monetizing magic is somehow either wrong or no one ever thought of doing it (because everyone in that world is born mentally impaired.)
Sarah Hoyt, “A Fundamental Misunderstanding of Supply and Demand”, According to Hoyt, 2019-11-06.
January 2, 2020
The 2010s … the best decade (so far) in human history
Matt Ridley explains why, despite all the doom and gloom in the daily headlines, the last ten years have been the best by almost any measure:
Let nobody tell you that the second decade of the 21st century has been a bad time. We are living through the greatest improvement in human living standards in history. Extreme poverty has fallen below 10 per cent of the world’s population for the first time. It was 60 per cent when I was born. Global inequality has been plunging as Africa and Asia experience faster economic growth than Europe and North America; child mortality has fallen to record low levels; famine virtually went extinct; malaria, polio and heart disease are all in decline.
Little of this made the news, because good news is no news. But I’ve been watching it all closely. Ever since I wrote The Rational Optimist in 2010, I’ve been faced with “what about …” questions: what about the great recession, the euro crisis, Syria, Ukraine, Donald Trump? How can I possibly say that things are getting better, given all that? The answer is: because bad things happen while the world still gets better. Yet get better it does, and it has done so over the course of this decade at a rate that has astonished even starry-eyed me.
Perhaps one of the least fashionable predictions I made nine years ago was that “the ecological footprint of human activity is probably shrinking” and “we are getting more sustainable, not less, in the way we use the planet”. That is to say: our population and economy would grow, but we’d learn how to reduce what we take from the planet. And so it has proved. An MIT scientist, Andrew McAfee, recently documented this in a book called More from Less, showing how some nations are beginning to use less stuff: less metal, less water, less land. Not just in proportion to productivity: less stuff overall.
This does not quite fit with what the Extinction Rebellion lot are telling us. But the next time you hear Sir David Attenborough say: “Anyone who thinks that you can have infinite growth on a planet with finite resources is either a madman or an economist”, ask him this: “But what if economic growth means using less stuff, not more?” For example, a normal drink can today contains 13 grams of aluminium, much of it recycled. In 1959, it contained 85 grams. Substituting the former for the latter is a contribution to economic growth, but it reduces the resources consumed per drink.
As for Britain, our consumption of “stuff” probably peaked around the turn of the century — an achievement that has gone almost entirely unnoticed. But the evidence is there. In 2011 Chris Goodall, an investor in electric vehicles, published research showing that the UK was now using not just relatively less “stuff” every year, but absolutely less. Events have since vindicated his thesis. The quantity of all resources consumed per person in Britain (domestic extraction of biomass, metals, minerals and fossil fuels, plus imports minus exports) fell by a third between 2000 and 2017, from 12.5 tonnes to 8.5 tonnes. That’s a faster decline than the increase in the number of people, so it means fewer resources consumed overall.
H/T to Damian Penny for the link.
