Division of Labour: July 2010 Archives
July 31, 2010
Government Efficiency in Action

The photo below was taken on a street near my house. It is one of several duplicate signs on the street; apparently old signs are being replaced by new ones. Admittedly it is relatively small budgetary potatoes, but with Rome being so tight for funds that it is hiking property taxes it seems that replacing perfectly good signs could be deferred for a few more years.


Posted by E. Frank Stephenson at 10:56 AM

July 28, 2010
David Friedman on Anarcho-Capitalism

Here's David Friedman on anarcho-capitalism, embedded at Let A Thousand Nations Bloom. You can get, among other things, the first edition of his classic The Machinery of Freedom at his website. This would, of course, make an excellent companion for a reading group studying For a New Liberty.

Addendum: Here's Friedman arguing that we should get rid of criminal law. It's great background for data entry on the history of legal systems.

Posted by Art Carden at 10:49 AM in Economics

July 27, 2010
Building Brand Equity: New Working Paper, New Column, More Mises Blogging

1. Chris Coyne and I are working on a couple of papers and a short book about the Memphis Riot of 1866. Here's the first paper. We're presenting the project at the Instituto Bruno Leoni's Mises Seminar in October and, we hope, a few other places this coming academic year.

2. My blogging here at DOL is going to get lighter going forward. In addition to being absolutely slammed with research commitments until about 2112, I'm going to be writing a weekly column for Forbes.com (my so-far-irregular contributions to date are here) and twice-weekly posts for the Mises Economics Blog. I'll be fighting a more systematic battle against economic illiteracy at a rate of about 1200 words per week.

Posted by Art Carden at 08:57 PM in Misc.

Just a bit off c. 1910

From the July 27, 1910 NYT:

Mother Earth, like all femininity, defies man to learn her age. Scientists still admit their defeat. Their latest estimate credits her with "not above 70,000,000 years or below 55,000,000 years."

This estimate, given in a publication by the Smithsonian Institution, is the result of studies by Frank Wigglesworth Clarke and George F. Becker of the United States Geological Survey. Prof. Clarke, in a paper entitled "A Preliminary Study of Chemical Denudation," presents a review of all available data of the proposition from a chemical point of view. Mr. Becker discusses the question, in a paper on "The Age of the Earth," from a philosophical point of view.

Philosophy vs. chemistry? I think I would take the chemistry.

From today's Wikipedia entry:

The age of the Earth is around 4.54 billion years (4.54 × 109 years ± 1%). This age has been determined by radiometric age dating of meteorite material and is consistent with the ages of the oldest-known terrestrial and lunar samples.
Well, at least the scientists/philosophers from 1910 were closer to the truth (albeit just a few orders of magnitude away) than those who claim the Earth is only 6,000 years of so old.

Posted by Craig Depken at 02:17 PM in Science

Rent-Seeking Exercises

From AL.com. How many other cities have spent $850,000 on lobbyists since 2008 fighting for the same contracts and funding? Here's co-blogger Mike Munger's great article "Rent-Seek and You Will Find."

Posted by Art Carden at 09:22 AM in Economics

July 26, 2010
Selgin's Theory of Free Banking

Great news: George Selgin's important work The Theory of Free Banking is now freely available online at the Liberty Fund's Online Library of Liberty site. This is essential reading for anyone wondering whether there is a viable alternative to our failed central banking regime.

P. S. Anyone includes Thomas Sargent, whose interesting recent working paper on the question of laissez faire versus legal restrictions in money and banking would benefit from some reference to the free banking literature beyond the work of Neil Wallace.

Posted by Lawrence H. White at 05:32 PM in Economics

Teaching Corner: What is "fungible"?

Here is an example that complements the usual money examples.

Google Invests in Wind Farm
Barbara Hernandez, PC World
Jul 20, 2010 7:28 pm

Google plans to become carbon neutral at the same time promote green energy by entering into a 20-year agreement to buy power from an Iowa wind farm. The farm, part of NextEra Energy Resources in Story and Hardin counties, will sell Google 114 megawatts of renewable power. Google says that the energy it will buy is enough to power several of its data centers.


In reality, Google will not directly power its server farms with NextEra Energy. ... The wind energy Google buys, it explains, will be sold back to the regional grid. That in turn reduces -- by 114 megawatts -- the amount of non-renewable energy created to maintain the regional power grid.

Posted by Edward J. Lopez at 04:23 PM in Economics

July 25, 2010
Wreck the Currency or Default on the Debt?

The government's fondness for spending without taxing implies, through the government budget constraint G = T + ΔD + ΔM, some combination of the compulsions to borrow and to print money.

In the latest installment of the Econ Journal Watch podcast series , I talk to Jeff Hummel about the intersection of debt finance and seigniorage. Will Greece, Spain, et al., default? Or will the ECB try to inflate away its fiscal problems? What about the US? I'm worried about inflation, but Hummel argues that default is a political equilibrium: it stiffs foreign creditors without angering domestic money-holders.

Posted by Lawrence H. White at 11:40 AM in Economics

Historical Financial Statistics

Kurt Schuler's applause-worthy new project is an ongoing effort to build a freely accessible comprehensive database of historical financial statistics for as many countries and as many years as possible. The initial framework is now online here, hosted by the Center for Financial Stability. Researchers are invited to use the database and to contribute to filing in the gaps. Data series include:
•Exchange rates: low-frequency data.
•Monetary authorities: assets and liabilities; income and expenditures.
•Deposit money banks: assets and liabilities; income and expenditures.
•Other banking institutions: assets and liabilities; income and expenditures.
•Other financial institutions: assets and liabilities; income and expenditures.
•Monetary aggregates.
•Interest rates: low-frequency data.
•Prices, production, labor.
•International transactions
•Government finance.
•National accounts and population.
•Summary data on the history of financial institutions

Posted by Lawrence H. White at 11:25 AM in Economics

July 23, 2010
The Dangers of Extrapolation

This week's kerfuffle over USDA employee Shirley Sherrod reminded me of a WSJ piece from 1992 on the numer of farmers vs. the number of Agriculture Department employees. While the article, by David L. Littmann, makes a great point about USDA's bloat, it also contains a memorably silly chart. The chart, reproduced below, predicts the nonsensical situation in which there is a negative ratio of farmers to USDA bureaucrats. Of course, such a ratio could never exist because one cannot have a negative number of farmers.


Posted by E. Frank Stephenson at 10:23 AM

July 22, 2010
Immigration and the American Economy

Here's Stossel.

Economics question:

Some commentators are calling for what might be called a strategic immigration policy whereby we allow in immigrants with good educations and good English skills. That way, they will augment our high-tech industries.

True or False? Uneducated, low-skill Mexican immigrants who speak no English do not augment the American high-tech economy. Explain your answer. Hint: Bryan Caplan has discussed something similar at Econlog, but I encourage you to try to work it out yourself before consulting The Google.

Posted by Art Carden at 01:22 PM in Economics

July 21, 2010
Lovin' the Dodd-Frank Bill

From my Personal Yoda, Angus, over at Kids Prefer Cheese:

And so it begins.

Posted by Noel Campbell at 08:01 PM

Teaching Corner: The division of labor and critical thinking skills

Essay question:

Consider Leonard Read's famous 1958 essay, I, Pencil:

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—-no, that’s too much to ask of anyone—-if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—-well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year.

Next consider Jeffrey Riggenbach's biographical essay, Henry David Thoreau: Founding Father of American Libertarian Thought, July 2010:

But this is not to say that [Thoreau] had no practical skills. Actually, he was a man of many skills. Not only could he teach school and make pencils and tutor children and garden and serve as a literary man's assistant, he could do all sorts of other work as well. As Robert Louis Stevenson put it in his 1880 essay on Thoreau, "there were few things that he could not do. He could make a house, a boat … or a book. He was a surveyor, a scholar," and "he could do most things with unusual perfection."

Write an essay that addresses these two conflicting claims.

Hint: consider making use of the talk, "When Ideas Have Sex," by Matt Ridley, July 2010.

Posted by Edward J. Lopez at 06:34 PM

Mike Lester on Voter Ignorance

From yesterday's Rome News-Tribune. Yesterday was election day here in GA; the only vote I cast was for Bob's daughter's queso video.


Posted by E. Frank Stephenson at 08:29 AM

July 20, 2010
Love It Or Leave It!

If the Iroquois lacrosse team doesn't want to conform to our American (or Canadian) way of life and travel on American (or Canadian) passports, they need to get out of our country and go back where they came from. HT: Savage Minds.

Addendum: this is one of the best image memes ever.

Posted by Art Carden at 09:53 PM in Economics

Vote for my kid's Moe's video

Click here and hit the "like" button asap. Thanks!!!

Posted by Robert Lawson at 08:41 PM in Funny Stuff

A Headline for the Ages c. 1910

A headline that would have been interesting to experience in real-time, from the July 20, 1910 NYT:

Cy Young Wins 500th Victory
The story goes on to describe how Cy pitched a complete game, 11 inning, four hitter for the victory.


Posted by Craig Depken at 02:50 PM in Sports

July 19, 2010
Economic Freedom of the World and the Resource Curse

Preliminary results:

The “resource curse” idea is based on the observation that economies often grow very slowly in nations that have an abundance of natural resources. Explanations have revolved around the type and level of investment in physical capital and human capital, institutional choice, and rent seeking.

Tom Snyder, my new colleague & new co-author write: In this paper we seek to identify a channel for the resource curse through its effect on the degree of market liberalization that occurs in a country. We use EFW as our measure of market liberalization. The base model derives from Doucouliagos & Ulubasoglu (2006) "best practices" model. The "resource," in this application, is non-renewable energy. The time period is from 1995-2007, presented as a single cross-section of growth rates or 2002 levels for 122 countries. Given that most of the variation is cross-sectional and not through time, this treatment of the data is standard. EFW data is from the Fraser Institute; energy and school enrollment data is from the World Bank; all other data is from the Penn World Tables.

Our evidence indicates that the resource curse exists via the "public choice" channel (without ruling out other paths): Energy resources, and the poor politics they engender, reduce a country's market liberalization. The restrained economic freedom leads to worse economic growth outcomes.

Posted by Noel Campbell at 08:54 PM

Dead Letter Office Cognitive Dissonance in the White House Economic Team?

UPDATE (7/21): The letter wasn't dead, just on life support. It appears in today's WSJ.

This WSJ editorial prompted the letter below which at this point seems unlikely to see print:

I was surprised to read that “White House economists believe taxes have little effect on growth” (“The Obama Tax Trap,” July 2). Just a few days ago I received the June 2010 issue of the American Economic Review, the flagship journal of academic economics. The current issue contains an article by CEA Chair Christina Romer and her husband David Romer on the macroeconomic effects of tax changes. Their paper examines “all major postwar tax policy actions” and concludes that “tax increases are highly contractionary.” For emphasis, the authors add that this finding is both “strongly significant” and “highly robust.” Could it be that the White House economic team is suffering a bit of cognitive dissonance?
Posted by E. Frank Stephenson at 01:47 PM in Economics

History of Economic Thought Fail?

From something I'm reading:

"By the early 1800s, however, with the publication of David Ricardo's landmark work on free trade and the adoption of his ideas by Adam Smith, the British state had embraced global liberalism, and the British-dominated world economy that emerged after the Congress of Vienna of 1815 was defined almost entirely by these values."

What's the problem?

Posted by Art Carden at 11:05 AM in Economics

July 16, 2010
Cavalcade of Miscellany: Nullification and Conservatism

1. Tom Woods discusses Nullification on PressTV, which is "the first Iranian international news network.

2. Bryan Caplan makes the case for "Why Libertarians Should Be Conservatives." He will argue for "why conservatives should be libertarians" on Monday.

Posted by Art Carden at 09:20 AM in Misc.

July 15, 2010
The Forensic Economics of Rent Seeking in Action

From the politics section of the WSJ.

Senate VIP Loans Mount. Countrywide Dealt With More Lawmakers and Staffers Than Previously Known July 15, 2010

U.S. senators or Senate employees received 30 loans—far more than had previously been known—under a controversial lending program at Countrywide Financial Corp. that provided cut-rate terms to favored borrowers.

The information is contained in a letter sent to the Senate Select Committee on Ethics by Rep. Darrell Issa (R., Calif.), who has been spearheading the House Oversight and Government Reform Committee's investigation into Countrywide's so-called VIP mortgage program.

No specific loan recipients were named in the letter. But Mr. Issa's letter said borrowers on a dozen loans listed their place of employment as the office of "Senator Robert Bennett." Available public records don't indicate that Sen. Bennett, a Utah Republican and member of the Senate Banking Committee, received a Countrywide home loan.

Full story (ungated). Stay tuned...

Posted by Edward J. Lopez at 04:09 PM in Politics

Cavalcade of Miscellany

1. Do the producers of these eco-friendly cups account for the fact that you have to use two cups to keep from burning your hands in their calculations of how many gallons of fuel, kW hours of electricity, and tons of carbon are being saved by their products? Or are they assuming a 1-to-1 substitution between their cups and styrofoam or plastic cups? I was about to say "maybe they're not for hot liquids," but there's a warning saying "Caution: Contents Hot" on the side.

2. In cleaning out my office I (re-)noticed an old WSJ op-ed by Bradley Schiller on my bulletin board titled "Min Wage, Max Politics." I don't have the date handy, but here's are some highlights:

The debate was always more about political posturing than economic reality.

Debates like this almost always are. The minimum-wage workforce is very, very tiny relative to the total workforce, and a lot of people--"tipped employees, seasonal recreation workers, charitable organizations, mom-and-pop businesses, farm workers, and Samoan laborers"--are exempt. Schiller points out what this means for the measured effects of the minimum wage:

This huge "uncovered" (exempt) segment of the labor force not only restrains the wage impacts that Democrats promise but also obscures the disemployment effects that Republicans project. A worker displaced by a legislated wage hike at McDonald's can take a waiter or busboy job in a sit-down restaurant. In the process, uncovered employment becomes a substitute for increased unemployment. The "beneficiary" of the legislated wage hike may actually experience a wage decline in the process.

As a result, the true displacement effects of an effective minimum wage hike are not easily observed, much less measured.

3. Having The Hayek Interviews online is totally awesome. Interestingly, I was reading something talking about "conservative" free-market economists while watching a discussion between "Why I Am Not a Conservative" author F.A. Hayek and "Why I, Too, Am Not a Conservative" author James Buchanan.

Posted by Art Carden at 03:58 PM in Economics

It's About Intentions, Not Effects (Updated)

What's wrong with this headline?

House bill would make school lunches healthier

The answer is intimately related to why I don't lose much sleep over newspapers' struggles in the information age. I'd go on, but co-blogger Ed Lopez beat me to it a few weeks ago.

4:38 Update: speaking of intentions, here's Justin Ross on new crib regulations.

Posted by Art Carden at 03:14 PM in Economics

Horwitz on Payday Lenders

Here's Steve's latest Freeman column, in which he takes up the cause of payday lenders and their customers. Here's Walter Block's Defending the Undefendable, available for $0. The moral, and I paraphrase Justin Ross: "Economics is the art of not killing people with your good intentions."

Posted by Art Carden at 10:46 AM in Economics

July 14, 2010
Third Degree Price Discrimination: Apology Not Necessary

That's the title of my paper with David Molina that is now forthcoming in the Atlantic Economic Journal. The paper revisits an old issue in micro theory, one that was apparently settled. It goes something like this.

Ask any economist, "what are the Marshallian surplus effects of changing from a uniform price monopolist to a multi-market (i.e., third-degree) price-discriminating monopolist?" The right response used to be: "Well, that depends on whether output increases." Hal Varian's very nice 1985 AER paper shows that 3DPD is a means by which the firm can increase output, which in turn increases Marshallian surplus. The dominant wisdom in economic theory maintains that a necessary condition for 3DPD to increase welfare is that it increase output.

Now the right response is: "Well, that depends on how you add the demand curves of the different segments." Here is the abstract of the paper:

Applied work in price discrimination often treats demand curves among multiple market segments as algebraically additive. Yet the welfare effects of multi-market (third degree) price discrimination depend on the method by which demand segments are added. Treating demands as geometrically additive yields the well known result that discrimination absent an increase in production diminishes Marshallian surplus. But if demands are treated as algebraically additive then discrimination increases welfare relative to uniform pricing. Quantity is identical in the three cases, so the effect is not due to market opening. Nor is the effect due to scale economies since marginal cost is assumed constant. Profit is always greater under discrimination, so the effect is due to distributional changes in consumer surplus. The model is restricted to linear demands and constant marginal cost but can be generalized for future work and policy analysis.

All the fun details are in the paper, available here on SSRN. Sorry for the messy equations, due to a glitch in converting from LaTex to .docx and back to .doc again. Feedback welcome! Enjoy!

P.S. The title is inspired by Robert D. Willig’s famous article, “Consumer’s Surplus Without Apology” (AER 1976), which defends the use of Marshallian surplus as a measure of market welfare.

Posted by Edward J. Lopez at 04:49 PM in Economics

Sam's Club Versus the Fatal Conceit

For one of our Big Box retail projects, I'm reading the section of Walmart's 2009 annual report on Sam's Club. This passage was striking:

Sam's also remains focused on changing packaging to make certain products more relevant to Advantage members' needs. For example, repackaging three bottles of ketchup together in a size that is easier to pick up, has longer shelf life, and fits in refrigerator doors better than one large bottle, resulted in a significant increase in ketchup sales.

Even if central planners could have figured this out, how would they know that it's a wise use of resources?

Posted by Art Carden at 04:20 PM in Economics

Interviews with Hayek

Here. I'm especially looking forward to his discussions with James Buchanan, Axel Leijonhufvud (author of Keynesian Economics and the Economics of Keynes, which I still, to my shame, haven't read), and Armen Alchian.

Posted by Art Carden at 11:13 AM in Economics

Well Said

Justin Ross: "The deadweight loss of Ohio's income tax is LeBron James."

Posted by Art Carden at 10:40 AM in Economics

July 13, 2010
Interview with Bryan Caplan

Jeffrey Tucker interviews Bryan Caplan about Pictures of the Socialistic Future here.

Posted by Art Carden at 06:36 PM in Economics

Building Brand Equity: Crazy in Alabama?

My new Forbes piece considers the question I raised in a letter to the Birmingham News last week.

Posted by Art Carden at 02:39 PM in Politics

In Case You've Been Wondering What Naomi "Earth Tones" Wolf Is Doing These Days

Looks like she (or maybe even the sex poodle himself) is advising Wal-Mart to switch to earthtones. The one closest to my house is a work in progress:


Posted by E. Frank Stephenson at 02:36 PM

Wonder if She Said It With a Straight Face

A snip from NPR's Morning Edition:

It is a familiar cycle in Haiti. Important development projects are bypassing the cash-poor, inefficient government in Port-au-Prince and instead are financed by foreign charities.

"Nobody knows to whom they are accountable to, how the money is spent, where it's spent," says Haiti's former prime minister, Michele Pierre-Louis, referring to aid groups in Haiti.

Pierre-Louis currently runs her own nonprofit organization in Haiti. She says aid groups working in the country need to be more transparent. "If you come to help, show us that you are really helping, that the Haitian people, especially the poor, the destitute, those that most need this help, are the ones really getting it," she says.

So the former prime minister of a country that ranked 168th on Transparency International's corruption rankings thinks that foreign aid organizations need to be more transparent. That's rich, though to be fair I should acknowledge the possibility that Ms. Pierre-Louis was an honest and efficient prime minister. Donor nations, of course, should be monitoring their aid contributions.

Posted by E. Frank Stephenson at 02:23 PM

July 10, 2010
If It Saves One Life, It's Worth It

This could very well be the perfect Onion News Network video. Teaching stats? Econ? Poli Sci? Torts? Mass Comm? It works on every level.

Truck Accident That Killed Rafters in Canyon Sparks Truck-Canyon-Rafter Reform Debate

Posted by Art Carden at 09:31 PM in Funny Stuff

168 Hours: Because Opportunity Cost Matters

Readers of DOL, Econlog, and Coordination Problem probably know that we're crazy about Lenore Skenazy's Free-Range Kids, which is probably the only parenting book likely to develop a cult following among economists. A few weeks ago, Portfolio sent me a copy of Laura Vanderkam's 168 Hours: You Have More Time Than You Think (here's the accompanying blog). It's an excellent book, and it even invokes comparative advantage (!). In a recent blog post, she discusses coupon-clipping and asks whether it is worth the effort. For a lot of us, the answer is "no." As an occasional producer of Productivity Pr0n, I really enjoyed it. Look for a short write-up either for Lifehack or Booked...uh, soon.

Posted by Art Carden at 09:01 PM in Economics

July 09, 2010
Just Asking

Cleveland Cavs owner Dan Gilbert:

Gilbert said James quit on the Cavs during their second-round series against the Boston Celtics, who rallied from a 2-1 deficit to eliminate Cleveland.

"He quit," Gilbert said. "Not just in Game 5, but in Games 2, 4 and 6. Watch the tape. The Boston series was unlike anything in the history of sports for a superstar."

If it is true that James quit on his team in several playoff games then why sir did you want to pay him millions to stay and why are you moaning about his leaving?

Posted by E. Frank Stephenson at 11:30 PM

Another Day, Another Example of Government Waste
A federal program designed to help impoverished families heat and cool their homes wasted more than $100 million paying the electric bills of thousands of applicants who were dead, in prison or living in million-dollar mansions, according to a government investigation.


Posted by E. Frank Stephenson at 03:33 PM

Decline of Newspapers as Market Success

Last week I wrote a column for The Freeman where I argue that the decline of newspapers is not a market failure. Here is a related podcast for The Heartland Institute.

This week I wrote a follow up piece, also for Heartland, which argues that the decline of newspapers is a market success.


Posted by Edward J. Lopez at 01:28 PM in Economics

July 08, 2010
Incentives Matter: Where's LeBron Going Edition

NBA superstar free agent would pay over $12 million in New York income taxes, none in Miami

He'd also face a steep bill in OH, IL, and NJ.

UPDATE: A reader email points me to this analysis about the tax difference between playing in Miami and elsewhere. It concludes that the difference between Miami and Chicago would be negligible but that the difference between Miami and New York would be substantial.

I've also spent a few minutes looking for sports econ research on the topic. I found two papers (one co-authored by DOL friend Justin Ross and the other co-authored by noted public finance economist Jim Alm) finding that baseball free agents signing with teams in high tax jurisdictions sign for larger salaries. These studies suggest, but offer no direct evidence, that in a salary capped sport such as the NBA players' location decisions might be affected by state income taxes.

Posted by E. Frank Stephenson at 02:00 PM in Economics

The Greedy Hand

Lanny Davis pitches 1% transaction tax

Posted by E. Frank Stephenson at 01:09 PM

Great Papers I've Read and Re-Read in the Last 36 Hours

I'm revising my paper "Economic Calculation in the Environmentalist Commonwealth in response to excellent referee reports from the Quarterly Journal of Austrian Economics. In the process, I've read and re-read some absolutely fantastic papers:

1. Hasnas, John. 2009. Two Theories of Environmental Regulation. Social Philosophy and Policy 26:95-129. John and I were on staff together at an IHS "Liberty & Society" seminar in 2008. His lectures changed the way I think about tort. The link is gated; I was able to find a PDF by searching Google Scholar.

2. Norman, Wayne and Chris MacDonald. 2004. Getting to the Bottom of “Triple Bottom Line.” Business Ethics Quarterly 14(2):243-262. Gated JSTOR link. If you're interested in business ethics, the environment, or pretty much anything, you should read this paper very carefully. The authors conclude that 3BL consists of "vague and literally meaningless principles" that "are best only for facilitating hypocrisy." Here's an ungated version.

3. Hülsmann, Jörg-Guido. 1997. Knowledge, Judgment, and the Use of Property. Review of Austrian Economics 10(1):23-48. The discussion of the differences between action in coercive and non-coercive environments alone is worth the $0 download. I don't know if I agree with his assessments of Hayek and Kirzner.

4. Rothbard, Murray N. 1982. Law, Property Rights, and Air Pollution. Cato Journal 2(1):55-99. Reprinted in Murray N. Rothbard, 1997. The Logic of Action Two: Applications and Criticisms from the Austrian School. Cheltenham, UK: Edward Elgar Publishing, pp. 121-170. This should be essential reading in law & econ and environmental econ. I've toyed with the idea of assigning it in econ 100, but it's pretty long and a little outside the scope of what I cover when I go over externalities.

5. Reisman, George. 1996. Capitalism: A Treatise on Economics. Ottawa, Illinois: Jameson Books. OK, it's a book, not a paper, and a massive one at that (1100 large pages, two columns/page). I've never read this massive tome all the way through, but before I started grad school I read about the first 200 pages. The section on externalities beginning on p. 96 is really provocative. The $0 PDF is a handy reference.

Posted by Art Carden at 12:37 PM in Economics

Broken Windows in Bozeman

Bozeman MT recently had a hail storm that damaged many buildings. Naturally it was treated as good news; the local paper reported "Storm boosts Bozeman economy."

Luckily, my excellent former student Shawn Regan now lives in Bozeman and sent this response to the paper:

Writing in 1848, Frédéric Bastiat explained the difference between a good and a bad economist. “The bad economist,” he wrote, “confines himself only to the visible effect.” By contrast, the good economist takes into account both “what is seen and what is not seen” when evaluating the results of an event.

To illustrate his point, he described the scene of a broken window, which onlookers claimed would actually benefit the town. The glazier would get extra business and the economy would be stimulated.

But as Bastiat pointed out, this line of reasoning is fundamentally flawed. It evaluates only what is seen, a new window, and neglects what is not seen, the countless ways the money would have been spent if the window had not broken. This often-repeated claim has become known as “the broken window fallacy.”

In the wake of last week’s hail storm, which left most Bozeman residents with literal broken windows, the Bozeman Daily Chronicle committed Bastiat’s enduring fallacy (“Storm boosts Bozeman economy,” July 7). The paper reported that the hundreds of thousands of dollars being spent repairing broken windows, dented cars, and fractured roofs will boost Bozeman’s economy.

But by reporting only on the increased activity in the repair industry the paper is focusing solely on what is seen. What is not seen are the foregone investments and purchases of clothing, appliances, and other goods and services that would have been made had the “windows” not been broken.

Economies do not prosper by repairing broken infrastructure. Otherwise, it would follow that the best remedy for the economic downturn would be nationwide hail storms – a ludicrous assertion. The unfortunate reality is that Bozeman is poorer, not richer, as a result of the storm.

Posted by E. Frank Stephenson at 12:15 PM in Economics

July 07, 2010
Vintage Capital and Creditor Protection

The abstract of a clever new NBER WP by Efraim Benmelech and Nittai K. Bergman:

We provide novel evidence linking the level of creditor protection provided by law to the degree of usage of technologically older, vintage capital in the airline industry. Using a panel of aircraft-level data around the world, we find that better creditor rights are associated with both aircraft of a younger vintage and newer technology as well as firms with larger aircraft fleets. We propose that by mitigating financial shortfalls, enhanced legal protection of creditors facilitates the ability of firms to make large capital investments, adapt advanced technologies and foster productivity.
Posted by E. Frank Stephenson at 10:05 AM in Economics

The Rent Seeking Society

From Ronald Bailey in Reason:

The nonprofit Center for Public Integrity reported in March that an “analysis of Senate lobbying disclosure forms shows that more than 1,750 companies and organizations hired about 4,525 lobbyists—eight for each member of Congress—to influence health reform bills in 2009.” Lobbyists for unions opposed taxes on gold-plated health insurance plans; lobbyists for doctors opposed cuts in Medicare reimbursements; a lobbyist for Dunkin Donuts opposed a soda tax to pay for health care reform; and a Cigar Association lobbyist fought a tobacco tax.

Hope and change!!

Posted by E. Frank Stephenson at 09:50 AM in Politics


Was guest on "The Takeaway" this morning, live at 6 am. (You think it's all glory? Set YOUR alarm for 5:15 am, and see how perky you are!). National NPR program. You can listen by clicking "listen" here.

They asked me to do a little blog post, so I did. Call me Scrooge-mael.

Posted by Michael Munger at 09:34 AM in Economics

July 06, 2010
I Still Love Monopoly...

...always and forever. Given that stamp prices have risen faster than gas prices, which have risen faster than the CPI (how do they compare to college tuition?), I have to wonder why people are always so angry about oil companies but perfectly willing to give the USPS a free ride.

Posted by Art Carden at 09:41 PM in Economics

Depressing Stat of the Day

New single family home building permits in Rome Ga.

2007: 281
2008: 309
2009: 72
2010 Q1: 11 (roughly half of the 21 in 2009 Q1)

Source: www.builderonline.com (there are data for many other MSAs).

Posted by E. Frank Stephenson at 08:48 PM in Economics

Building brand Equity: Nullfication

I went to the office on Thursday or Friday morning telling myself I wasn't going to spend the entire morning writing an article about Tom Woods' Nullification. And then I spent the entire morning writing an article about Nullification. It's available here.

Posted by Art Carden at 01:32 PM in Misc.

Don Boudreaux, Man of Letters

Don hammers another one out of the park: "make it so" is insufficient for results.

Posted by Art Carden at 11:04 AM in Economics

A Cash Free Restaurant: Geez, Credit Cards Have Benefits Too

The credit card companies are in the crosshairs of the financial regulation bill because of supposedly exhorbitant fees charged to merchants who accept credit cards. Even with the fees, at least one business, a New York restaurant, will no longer accept cash. A snip from a WSJ piece:

Mr. Zazula didn't back down. While other new and buzzworthy restaurants nationwide still buck the credit-card trend by refusing to accept anything other than cash -- bypassing the surcharges levied on every purchase -- he said the convenience and security afforded by going cashless are well worth the added cost. Gone is the age-old restaurateur's fear of getting robbed, either by outsiders or his own employees. "No more armored trucks," he says.

And going cashless allows restaurants to please the Internal Revenue Service, because cash-based transactions are easier to hide.

Posted by E. Frank Stephenson at 10:51 AM in Economics

July 05, 2010
Should Alabama's 7th Congressional District Secede from Alabama?

My mother-in-law directed me to this story a few days ago: an Alabama politician has been looking into what it would take for Greene County (and the seventh Congressional district) to secede from Alabama and form its own state. The 7th district covers the University of Alabama and parts of Birmingham. I doubt those areas would go, but if the seventh district seceded, it would create a state roughly the size of New Jersey with a population larger than Wyoming's. If only the Black Belt counties seceded, they would still have a higher population than Wyoming (it would split the rest of Alabama into non-contiguous chunks, though). I sent the following letter to the Birmingham News:

"The push for the 7th Congressional District to secede from Alabama isn't as crazy as it sounds at first. To put things in perspective, there are about 4.7 million people in Alabama. In 1790, there were about four million people in the entire United States. A quick search suggests that the 7th Congressional District had about 635,000 people as of the 2000 Census, which would have made it one of the largest states in the union just a few years after the Constitution was adopted. A lot of commentators have suggested that the political order has become too large and too unwieldy to be responsive to the citizenry; see in particular the "Secession Week" entries at www.athousandnations.com that led up to Independence Day, particularly the entry about what we can learn from the formation of the Swiss Cantons. The idea that governments would function better if the states were smaller has merit and should not be dismissed out of hand.

Would secession be a wise move for the 7th District? According to the US Constitution, that's for the district itself, Congress, and the State Legislature to decide. It's certainly an idea that deserves serious consideration rather than mockery."

Posted by Art Carden at 06:19 PM in Politics

July 04, 2010
In Honor of Independence Day

A quote from Bastiat:

And now that the legislators and do-gooders have so futilely inflicted so many systems upon society, may they finally end where they should have begun: May they reject all systems, and try liberty.
Posted by E. Frank Stephenson at 04:37 PM

I'm sad I noticed this on the 4th

I didn't see this story until today.

It's about passing a budget bill that doesn't exist. The bill doesn't exist because the House has passed that power to National Commission on Fiscal Responsibility and Reform.

I thought this Commission was a piece of political theater, a non-entity. Apparently I was wrong.

The enforcement resolution is being used instead of a full-fledged budget resolution because rank-and-file Democrats did not want to vote for a budget resolution that would show large deficits, particularly in an election year marked by worries about the nation’s fiscal solvency.

The measure calls for a budget by 2015 that would be balanced except for debt interest payments. This mirrors a goal already set out by Obama.

The budget document, however, doesn’t say what policies Congress should enact to reach that out-year goal, something past budget resolutions have done. Instead, it relies on the White House fiscal commission, a bipartisan panel looking at tax, spending and entitlement policies, to come up with a plan to reach their target by 2015.

So Congress has passed power of the purse to the Executive. Somehow, this reminds me of the Roman Senate voting Julius as imperator, consul, and pontifex maximus for life.

Posted by Noel Campbell at 03:51 PM

Letter on Prohibition

To the Memphis Commercial Appeal:

The story about the havoc wrought by Craig Petties was tragic, but it could have been avoided. Violence is the predictable and tragic consequence of drug prohibition. People continue to demand drugs in large quantities, drug suppliers have to resort to violence to settle disputes because they are barred from formal legal channels, and the conditions created by prohibition itself makes it more profitable to be a criminal. The same factors that produced the horrors of alcohol prohibition have also produced the horrors of drug prohibition.

Blood and violence are the price we pay for prohibition. It's a price that's far too high.

Posted by Art Carden at 12:49 PM in Misc.

July 02, 2010
Economists Have Work To Do

If you subscribe to Arts & Letters Daily, you've probably seen Naomi Wolf's piece on sweatshops and the like. Here's Ben Powell's defense of sweatshops.

Even if voluntary sweatshops violate human rights and oppress women, the answer isn't necessarily boycotts or consciousness-raising candlelight vigils. The answer is open immigration. Here's Ben Powell defending that, too. For a multitude of immigration resources, just type "immigration" in the search box on the right.

Posted by Art Carden at 02:19 PM in Economics

Econ Exercise from XKCD

Are risks being managed appropriately?

Posted by Art Carden at 08:32 AM in Funny Stuff

July 01, 2010
His Lips Are Moving

Remember this pledge that no form of taxes would go up for families making less than $250,000?

Well, today is the first day of the tanning bed tax--at least the second (following last year's cigarette tax hike) time that Obama has broken his tax pledge. No real surprise, of course, but the whole hope and change thing looks more cynical by the day.

UPDATE: Americans for Tax Reform cheekily offers an Obama Tax Hike Exemption Card. Thanks to Art for the pointer.

Posted by E. Frank Stephenson at 10:36 PM

Tax Shifting in Action

South Carolina's cigarette tax increases 50 cents per pack effective today. I saw this sign in SC a few weeks ago.


Posted by E. Frank Stephenson at 11:37 AM in Economics

Building Brand Equity

I review Pete Leeson's Invisible Hook in The Freeman.

I also have a forthcoming piece in Public Choice.

Posted by E. Frank Stephenson at 11:15 AM

The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. -Adam Smith

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