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Simple Economics
ifihadahif Posted: Wed Aug 11 16:21:31 2004 Post | Quote in Reply  
  Economics 101
Walter E. Williams

August 11, 2004

Economic ignorance allows us to fall easy prey to political charlatans and demagogues, so how about a little Economics 101?

How many times have we heard "free tuition," "free health care," and free you-name-it? If a particular good or service is truly free, we can have as much of it as we want without the sacrifice of other goods or services. Take a "free" library; is it really free? The answer is no. Had the library not been built, that $50 million could have purchased something else. That something else sacrificed is the cost of the library. While users of the library might pay a zero price, zero price and free are not one and the same. So when politicians talk about providing something free, ask them to identify the beneficent Santa Claus or tooth fairy.

It's popular to condemn greed, but it's greed that gets wonderful things done. When I say greed, I don't mean stealing, fraud, misrepresentation or other forms of dishonesty. I mean people trying to get as much as they can for themselves. We don't give second thought to the many wonderful things others do for us. Detroit assembly-line workers get up at the crack of dawn to produce the car that you enjoy. Farm workers toil in the blazing sun gathering grapes for our wine. Snowplow drivers brave blizzards just so we can have access to our roads. Do you think these people make these personal sacrifices because they care about us? My bet is that they don't give a hoot. Instead, they along with their bosses do these wonderful things for us because they want more for themselves.

People in the education and political establishments pretend they're not motivated by such "callous" motives as greed and profits. These people "care" about us, but from which areas of our lives do we derive the greatest pleasures and have the fewest complaints, and from which areas do we have the greatest headaches and complaints? We tend to have a high satisfaction level with goods and services like computers, cell phones, movies, clothing and supermarkets. These are areas where the motivations are greed and profits. Our greatest dissatisfaction is in areas of caring and no profit motive such as public education, postal services and politics. Give me greed and profits, and you can keep the caring.

How about the idea that if it saves just one life it's worth it? That's some of the stated justification for government mandates for childproof medicine bottles, gun locks, bike helmets and all sorts of warning labels. No doubt there's a benefit to these government mandates, but if we only look at benefits, we'll do darn near anything because there's always a benefit to any action.

For example, why not have a congressionally mandated 5 miles per hour highway speed limit? According to the U.S. Department of Transportation, there were 43,220 highway fatalities in 2003, with an estimated cost of $230 billion. A 5 mph speed limit would have spared our nation this loss of life and billions of dollars. You say, "Williams, that's preposterous!" You're right. Most people would agree that a 5 mph speed limit is stupid, impractical and insane. That's one way of putting it, but what they really mean is: The benefit of saving 43,220 highway deaths and the $230 billion that would result from mandating a 5 mph speed limit isn't worth all the inconvenience, delays and misery.

Admittedly, the 5 mph speed limit is an extreme example, a reductio ad absurdum. Nonetheless, it illustrates the principle that our actions shouldn't be guided by benefits only; we should also ask about costs. Again, when politicians come to us pretending they're Santa Clauses or tooth fairies delivering benefits only, we should ask what's the cost, who's going to pay and why.

FN Posted: Wed Aug 11 17:12:38 2004 Post | Quote in Reply  
  Weren't you the one who wanted tax cuts?

And instead of a library or some healthcare or educational benefits, what would you have liked, another tank or 2 to throw on the pile?

zander83 Posted: Wed Aug 11 18:13:40 2004 Post | Quote in Reply  
  that article is correct in so far as teaching the basics of economics to those who don't know it. However, when people talk about lets say free library, they mean free after-tax... this might not make sense since a tax is equivalent to buying something(in this case a government service). Ofcourse most people use this in the same way they use the phrase :"I'd kill for _____". I'm not really going to debate the value of taxation and whether it is the most efficient form (I will say this I;m for decreasing taxes and cutting government services)...

A couple years ago though, the nobel prize of economics was given to someone who had conducted the following research(he also developed the theory that goes with it but I am not discussing that here). Heres an article about it:

Phony Generosity
Economics Nobelist Vernon Smith's alarming discovery about human nature.
By Steven E. Landsburg
Posted Thursday, Oct. 10, 2002, at 10:17 AM PT

Let me tell you about two people I'll call A and B. No, on second thought, let me tell you nothing about them at all, beyond the fact that they are strangers to you and to each other, and that none of you will ever meet or learn any more about each other than you know right now.

I have three questions: Would you like to give some money to A? Would you like me to force B to give some money to A? And would you be willing to pay me to force B to give some money to A?

I'd like to think the answers are no, no, and no. Giving money to A seems at first blush like a nice thing to do, but why give money to a total stranger, who might already be very rich or very lucky, or for that matter very nasty, when you could give it to your favorite charity?

As for forcing B to give money to A—what would be the point? After all, if you knew anything at all about these people, you'd be just as likely to think that A should give money to B. And as for paying me to move money from B's pocket into A's—would you also pay me to move money from A's pocket into B's? And then pay me again to move it back to where it came from? Can I make a career out of this?

Which brings me to this week's Nobel Memorial Prize in Economic Sciences. One of the winners, Vernon Smith of George Mason University, was honored for his pioneering work in experimental economics. In one series of experiments conducted by Smith and his former colleague James Cox, the subjects effectively answer my original three questions not with the expected "no, no, no" but instead with a "no, yes, yes." No, I do not want to give money to A. (Understandable.) Yes, I want B to be forced to give money to A. (Weird.) Yes, I am willing to pay someone to force B to give money to A. (Very weird.)

Smith, for the record, does not agree with my interpretation of his experiments (as I learned after I first wrote about this topic in Reason magazine), so let me tell you what the experiments show and you can decide for yourself.

In one experiment, you (assuming you're the subject) are placed in a room and given 10 dollars. You're invited to put some of those dollars in an envelope that is passed to the stranger in the next room. Whatever doesn't go in the envelope is yours to keep.

The result? About two-thirds of the subjects keep all the money for themselves. In other words, people don't like giving money to total strangers. That's the part I understand.

In the next experiment, you're placed in a room and given 10 dollars. Once again, you're invited to put some of those dollars in an envelope that is passed to the stranger in the next room. But this time, your gift is automatically tripled: If you put two dollars in the envelope, the experimenter adds another four to make it six. All the extra cash goes to the stranger, and once again whatever doesn't go in the envelope is yours to keep.

In other words, the experimenter is offering, for a fee (i.e., whatever you put in the envelope) to take money from B (the taxpayer who's funding this experiment) and give it to A (the stranger in the next room). You have no reason to think that A is any poorer or richer than B, no reason to think that A is any more or less deserving than B, and no reason that I can think of to care more about A than about B. Nevertheless, now a lot of money goes into the envelopes—the average envelope contains $3.63, so that A gets $10.89 of B's money. And you, the subject, have paid $3.63 to make it happen.

Now I wonder what would happen if the experimenter offered to reverse the flow of funds—inviting you to pass dollars to B (the taxpayer), all of which would be tripled out of the pocket of the hapless subject A, the stranger next door. (Of course, this experiment would be difficult to conduct in practice since A would probably call the police. But let's consider the hypothetical.) Since A and B are interchangeable to you, this seems like exactly as desirable a proposition as the original experiment. Would you spend your life passing money back and forth between strangers, coughing up your own funds at each step along the way?

You might object that subjects are unaware—or at least potentially unaware—that these experiments are funded by tax dollars. Fine, but I don't think that changes anything. Surely the subjects must be aware that these experiments are funded by someone, and that every dollar comes out of someone's pocket. Even if you think the experimenter is determined to keep going till he's spent, say $1,000, it's still true that every dollar you give to A is a dollar that won't be available to some future experimental subject. And why should you care more about A than about his future counterpart?

There are only three explanations I can see for all this. One is that people just really enjoy moving other people's money around, independent of who those people are. Another is that people simply forget that there are no free lunches, and you can't give something away without making someone pay for it. Yet another is that people somehow care less about anonymous faceless taxpayers than about other anonymous faceless strangers. I'm not sure which of these explanations is right, but none of them does much to improve my faith in democracy.

zander83 Posted: Wed Aug 11 18:16:15 2004 Post | Quote in Reply  
  Now heres an idea, that follows insurance 101, that I would like to see applied more often.

The $100 Terrorist Insurance Plan
A better way to screen airline passengers.
By Steven E. Landsburg
Posted Wednesday, Aug. 4, 2004, at 5:53 AM PT

If you've been on the Internet lately, you've probably run across Annie Jacobsen's article in WomensWallStreet about her harrowing experience on a Northwest flight from Detroit to Los Angeles in June.

In brief, Jacobsen's fellow passengers included 14 Middle Eastern men, most of whom boarded separately. Once the plane was in the air, according to Jacobsen, the men began gesturing to each other and congregating in large groups near the lavatories, which they took turns entering, in some cases with mysterious packages. One went into the bathroom with a full McDonald's bag and emerged with it nearly empty. At one point, seven of the 14 men stood up in unison and all made for the lavatory simultaneously.

Jacobsen reports that she, several other passengers, and the flight attendants were alarmed, in some cases to the point of near panic. What could the men have been up to? In fact, they appear to have been Syrian musicians en route to an engagement in San Diego. But U.S. government agencies have issued recent warnings about teams of terrorists conducting dry runs to see if they can build bombs in flight from individually innocuous-seeming components that they carry on separately. Jacobsen asks: "Since the FBI [actually, the Transportation Security Administration] issued a warning to the airline industry to be wary of groups of five men on a plane who might be trying to build bombs in the bathroom, shouldn't a group of 14 Middle Eastern men be screened before boarding a flight?"

The government frowns on ethnic profiling for airline passengers, but Jacobsen and the 12 bazillion bloggers who have linked to her story think the feds and the airlines should throw political correctness to the winds and adopt a policy of full-fledged ethnic profiling. Meanwhile, roughly another 12 bazillion bloggers have warned that profiling Arab men will seriously undermine civil liberties.

But there are two points those on both sides seem to have missed. First, detaining 14 Middle Eastern men is neither more nor less an infringement of civil liberties than detaining 14 passengers chosen at random. Either way, 14 people have their liberty infringed.

Is it worth detaining 14 people (or an entire planeload of people) on every flight to see what's in their McDonald's bags or to question them closely about their reasons for traveling? I honestly don't know. But this I'm sure of: If you're going to detain 14 people, they should at least be the 14 people who are statistically most likely to be worth detaining.

Second, just because you detain particular people, it doesn't follow that you've got to treat them unfairly. Being detained and questioned is a burden; it's inconvenient and it's demeaning. But there's no reason that burden has to be borne entirely by the detainees. To spread the burden, all the airlines have to do is give each detainee a $100 bill for his trouble. If Northwest had had a policy like that on Annie Jacobsen's flight, it would have paid out $1,400 to the 14 Syrians. Assuming there were another 200 passengers on that board, they could have covered that cost with a $7 hike in ticket prices.

I am guessing that Annie Jacobsen would have been thrilled to pay a $7 surcharge for the comfort of knowing that her Syrian co-passengers had been thoroughly vetted before takeoff. The Syrian musicians, in turn, would have picked up a hundred bucks apiece in exchange for, oh, 15 minutes or so of answering questions. How many musicians do you know who would turn down a gig at that hourly rate?

It's possible, of course, that a majority of passengers would balk at paying an extra $5 or $7 or $10 for a little extra security. If so, then so be it—if the passengers place so little value on this particular form of insurance, then the airlines probably should provide less of it. But I'm guessing otherwise.

A cold-blooded economist might argue that the last thing we want to do is subsidize air travel for the very people who trigger our search instincts. Searches, after all, are expensive, and therefore often best avoided altogether. So, ideally we'd charge these people extra to discourage them from flying in the first place. Innocent or not, their very presence imposes costs on the system, and economic logic says they ought to bear those costs.

But to this there are two replies. First, who says we have to be cold-blooded all the time? When there's a conflict, why can't we sometimes be fair instead? Second of all, even if your own blood runs cold as ice, you're never going to enact a policy that runs so counter to the general public's sense of fairness. Paying people for their inconvenience is a good idea first because it is fair, and second because its very fairness makes it a plausible alternative to the current policy of pretending that old Midwestern women are as dangerous as young Middle Eastern men.

There's precedent for this kind of targeted compensation. There was a time when airlines dealt with overbooking by bumping a few unfortunate people off the flight and letting them fend for themselves. Nowadays, bumpees receive free travel (and sometimes cash) worth hundreds of dollars. We all pay a little more for our tickets to cover that cost, but that's OK—it means the burden of overbooking is shared by all travelers rather than concentrated on an unlucky few.

The present system of compensating bumpees has a second advantage—getting bumped is now largely voluntary. That, of course, is not an advantage we want to duplicate when it comes to searches and detentions. Detaining only volunteers would be silly, because it would catch all the wrong people. Detaining people randomly would be silly in exactly the same way, only a little less so—instead of catching all the wrong people, it catches mostly the wrong people. The right people to detain are the people we're most scared of—the passengers that our best intelligence determines are most likely to be dangerous. Most of those passengers—almost all of them—are likely to be innocent. Let's avoid unduly punishing them by paying them a fair price for the trouble we cause them.

Kira Posted: Wed Aug 11 22:01:28 2004 Post | Quote in Reply  
  Walter Williams is a pretty cool guy.

ifihadahif Posted: Thu Aug 12 09:21:23 2004 Post | Quote in Reply  
  Sailovzi said:
>Walter Williams is a pretty cool guy.
I agree


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