Archive for October, 2009

The Closet – funny ad

October 27, 2009
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The Politically Incorrect Guide to Capitalism

October 26, 2009

A few quotes from Bob Murphy’s The Politically Incorrect Guide to Capitalism for later reference.
I highly recommend this book, which touches on virtually all the controversial subjects and debunks a great number of faulty arguments against capitalism. It will make you think about and maybe re-assess commonly accepted myths. The casual tone and short chapters make for an easy read.

 

Capitalism is the system in which people are free to use their private property without outside interference. That’s why it’s also known as the free entreprise (or free market) system […]

Better be at the mercy of an employer in a free market – where you have a choice, the employer has competitors, and the worst he can do is cease giving you his money – than to be at the mercy of a state bureaucrat who makes choices for you with the force of the government behind him.

Are we simply to assume that powerful people in a capitalist system are evil, while powerful people in other systems are benevolent?

Ironically, another consequence of rent control is that it places an extra burden on […] “disadvantaged” groups. Because landlords can no longer rent to the highest bidder, other criteria are used to ration the supply of housing to the demand for it.

Discrimination is bad for business
Unfortunately, neither the United States nor any other country has an entirely free labor market, and so we can’t count on market forces to eradicate the unjust discrimination that offends most people.
It remains a mystery why leftists trust government to reform an unjust society. After all, any prejudices harbored by the people at large will be be reflected in the government officials they elect. The only difference is that bureaucrats don’t face the same free market penalties that employers (or customers) do for following their prejudices.

The sad fact is, people are motivated by all sorts of bad ideas [war, slavery, etc.] that keep us poorer than we otherwise could be. Beyond this general fact of human condition, here’s another: people will always lobby the government for privileges, even though everyone would be better off it all privileges were eliminated. The institution of slavery was just a particularly horrific consequence of this fact.

What’s the difference between bald eagles, white rhinos, and giant pandas on one hand, versus talking parrots, dairy cows, and thoroughbred horses on the other? Answer #1: All of the former are endangered species, while the latter are in plentiful supply. Answer #2: It is illegal to trade in the former, while the latter are brought and sold in the open market. This is no coincidence. When someone has well-defined and secure property rights in a reproducible resource, he has every incentive to ensure its continued existence.

[Julian Simon considered the human mind to be] the “ultimate resource”. A rising population meant more geniuses to solve the practical problems of food production and cramped living quarters. Julian Simon’s proof that additional people contribute more to society than they take? As population grows, so do real wage rates.

As Friedman points out, licensing doctors stifles research in unapproved areas, discourages them from testifying against each other in malpractice suits, and creates a sort of labor union problem where skilled doctors waste time performing routine medical procedure that, were it not for the AMA rules, could be handled by nurses.
The impossibility of any individual or small group conceiving of all the possibilities, let alone evaluating their merits, is the great argument against central government planning and against arrangements such as professional monopolies that limit the possibilities of experimentation.

Despite their possibly noble intentions, the end result of city planning was exactly the opposite: neighborhoods that were the most carefully “engineered” were the ones that ended up the most decrepit. The late Jane Jacobs in her 1961 classic “The Death and Life of Great American Cities” […] explained the surprising connection between zoning regulation and crime. She pointed out that public safety is best ensured when people voluntarily look after their own streets […].

What [Meyer and Finney] do claim is that the official reports rely on a faulty method: by studying only the data taken from crashes in which a fatality occurred, researchers would understandably infer that airbags save lives on net.
[But] In a severe accident, airbags can save lives. However, they are inherently dangerous and pose a risk to the occupant. Our analyses show that in lower-speed crashes, the occupant is significantly more likely to die with an airbag than without.

More generally, we must ask ourselves, how are bank runs possible?
By shielding banks from their contractual obligations, government policies encourage recklessness.

Because they leave out intermediate goods, GNP data grossly [exaggerate] the level of consumption in the economy… Naturally, this high level implies that the US economy is consumer-oriented, that changes in consumer spending – not investment or business spending – are the key to economic growth or decline.
[…] the conventional GDP (or GNP) exaggerates the relative importance of spending – both by consumers and by the government. […] In 2005 personal consumption expenditures were 70 percent of GNP. [… After correcting the accounting method], we find that consumer expenditures represent only 32 percent of total economic activity in 2005, while business spending accounted for 62 percent […].

Critics of capitalism think (wrongly) that the profit and loss test is arbitrary and crude. On the contrary, it provides an indispensable barometer of the consumers’ preferences over how resources are deployed. For example, when people say that government needs to subsidize a stadium or bus service, because “it wouldn’t be profitable for private business,” what that really means is that consumers would rather spend their money on other goods and services that would be profitable. By taxing their money and spending it on the stadium, the government hasn’t suddently changed people’s tastes or created resources out of thin air. No, all that’s happened is that the government has overridden the voluntary choices of the public and instead forced them to spend their money on the politically favored items.

[Outsourcing] makes our economy more efficient and makes America richer.
[The workers’] loss is more than counterbalanced by the gain of the shareholders of the corporation. How do we know that the winners win more than the losers lose?
We know the corporation must gain more than the laid-off workers lose by the following considerations. If the proposition weren’t true – in other words, if the displaced workers lost more in wages by switching to a different job than the corporation saved in production costs – then the corporation wouldn’t have outsourced the jobs in the first place.
Although the affected workers are hurt by an innovation in their particular trade, obviously all workers (in their capacity as consumers) benefit from the labor-saving machinery in general. The same is true of outsourcing.
[There are also benefits to people’s investments in form of retirement savings]

[…] the Fraser Institute’s famous studies (available at www.freetheworld.com) that demonstrate that freedom – especially economic freedom – strongly correlates with a country’s economic strength. Freedom works in practice, not just in theory.

The hated “markup” (the difference between the farmer’s price for his goods and the retail price to the consumer) is proportional to the importance of his actions: the middleman makes the most profit when he ships goods from areas of relative plenty (low price) to areas of relative scarcity (high price).
Beyond actualy transportation of goods, middlemen also provide more intangible services due to superior knowledge or economies of scale.

Elephant Birth – The Dramatic Struggle for Life

October 24, 2009

This is a very touching, emotional and visceral video. After a worrying minutes, the baby is fine.

Short Selling

October 24, 2009

I was curious to learn more about short selling after reading Wall Street’s Naked Swindle (strong language warning), a pretty intense piece on the fall of Bear Sterns, the role of government (FED, SEC) and practice of naked short-selling.
In particular, the author blames naked short-selling for the “murder” of Bear Sterns, and government for both playing a part it in (Bernanke’s confidential meeting with major banks except Bear a few days before the fall, Paulson forcing Bear’s aquisition by JP Morgan) and not policing the market enough (SEC not going after short-sellers which defraud buyers by “failing to deliver”, SEC not investigating the hitmen traders).

To me, it seems that Bear Sterns was in a mess, some people knew how much mess, and they benefited from the inevitable fall (insider trading). On the other hand, Bernanke’s and Paulson’s role seems murky at best.
I didn’t quite understand one of the points of the article, that naked short-selling allows cheating by casting more shareholder votes than there are shares. That seems really broken and preventable with a proper design.

Finally, the article made me wonder about competition between markets. Why would there not be competitors to the Wall Street exchange? Is there some government-induced monopoly? Otherwise, it seems that different exchanges would compete on setting better frameworks for both buyers and sellers, and enforcing those rules.

 

Bob Murphy has a good introduction to short selling, and naked short-selling. In particular, he brings up a good argument to explain that markets are naturally resistant to manipulation, and short selling does not allow more manipulation than regular trading.
In general, speculators help the market, by smoothing prices and adjusting the price signals to the latest information and future expectations.

There is a good debate in the comments on whether naked short-selling constitutes fraud (bad or broken contract) or simply incompetence (which would lead to bankruptcy of the mis-calculating brokers). That’s not obvious and actually depends on what the contracts and IOU state exactly (what are the expectations of each parties?). Either way, the problem should be solvable by proper contracts, enforcement, system design (a share is held by a single person at any given time) and competition.

Art Carden also has a good overview of short selling and the function of financial markets in this recording from Mises University 2009.
Short Selling: Explanation and Defense (mp3)

Recorded 1 August 2009 at the Ludwig von Mises Institute; Auburn, Alabama. [49:00]

Play Art Carden

A few notes from Carden’s lecture:
“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” – F.A. Hayek

“Just because some cannot be trusted with liberty doesn’t mean that some should be trusted with power.” – (sounded like Sheldon Richmond?)

I’ll need to dig some references (found one so far) around Carden’s remark that the stock portfolio of Congress representatives vastly outperforms the market.
He makes another interesting claim (without going into a detailled argumentation) that today’s opaque financial instruments are side-effects of previous attempts at regulating markets.

Carden re-iterates two general points: the knowledge problem (how do you know? how would the government know better?) and the nirvana fallacy (something may be imperfect and yet remain the best available realistic solution).

Live Geometry screencast

October 21, 2009

Kirill Osenkov‘s pet project, Live Geometry, is a cool Silverlight application which lets you build geometric constructions and interact with them.
Watch the 5 minute screencast and try the application on livegeometry.com.

Also, check out the class diagram illustrating the design (dependency tracking and change propagation, similar to a spreadsheet software).

PS: I wish more screencasts were that condensed. Video on the web is too slow 😉

 

Life lessons from an ad man

October 18, 2009

Aside from being humourous and very entertaining, this talk does a great job of illustrating a basic economic principle: value is subjective.
Value comes from the usage or consumption, not from production: “Pearls are not valuable because men dive for them, but men dive for them because they are valuable.”
Also, marketing can influence beliefs and perceived value (the segment on Diamond Shreddies is hilarious).

The second important point is that there are many dimensions underlying subjective value and personal preferences. Emotions and morale values are often stronger than monetary rewards or punishments.
Behavioral economists are curious about this sort of things, but they actually don’t much impact economic theory overall. All that matters is that people have different preferences.

Finally, it illustrates that markets find ways to fulfill needs. It is incorrect to think that consumers are victims of producers. Actually, producers have to work hard to discover and match consumer desires, to make them happy.
If you think ads are banal, blame the consumers.

You-Centric: A Sketch of The Future of Browsers

October 18, 2009

A must-watch keynote for anyone interested about the development of the web. With a few UI sketches and some ideas of scripting APIs, Aza Raskin presents a vision of a better browser platform. It includes authentication (already started in Weave), payment, contacts, having your friends help in making trust and security decisions, and using language for task-centric and extensible functionality (Ubiquity).
I was also pretty receptive to the idea of transforming local storage into global storage using synchronization (server or P2P replication?), switching away from SQL for client-side storage (LINQ interface?) and increasing the hackability in general.

Repeal The Minimum Wage

October 17, 2009

In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour. Before it went into effect, the Shelby County Commission in Tennessee passed an ordinance requiring firms that contract with the county to pay a “living wage.” Similar ordinances are in place around the country.

But these laws actually eliminate opportunities for low-skill workers and waste resources. They also couldn’t have come at a worse time: The last thing people on the margins of the labor market need are laws that will make them more difficult to employ. With unemployment hovering near 10%, perhaps now is a good time to consider repealing the minimum wage.

[…]

The market process reveals the marginal value of a given hour of labor, but supporters of minimum wages assume that the impersonal market process is somehow capable of committing injustices. This is a line of thinking that is centuries out of date. In Medieval times, markets were hampered by the “just price” doctrine, which basically held that, in any transaction, there was a morally correct price and other prices that were morally incorrect. There was no compelling theory for why some prices were morally correct and some were not; further, there was nothing to ensure that the mechanism by which these prices were determined was legitimate. In the same way, can we reasonably expect to identify those who are blessed with sufficient moral insight as to be able to determine which wages are “just” and which wages are “unjust”?

Unfortunately, this is a point that has to be made over and over again. No matter how they are packaged, restrictions on how labor markets operate ultimately destroy wealth and hurt poor workers. If Neumark’s estimate is accurate, then as a result of a minimum wage increase, about 300,000 people will be denied the opportunity to acquire the skills they need to succeed later in life.

“Repeal The Minimum Wage”, by Art Carden on forbes.com

 

I used to believe that minimum wage laws were a good thing for society. Whenever I would hear the minimum was raised, I would have a fuzzy feeling that this was a positive step. But, after some reading and reflection, I reached a different position: the popular rationale offered by the media and politicians are wrong. By looking at the complete picture and in particular the point of view of the different actors involved, it became clear that such laws actually cause harm.

The point of view of the employer is quite revealing in this instance: you currently hire a group of people, of various skills and productivity. You can only hire someone if their cost of their labor is lower than the benefits their labor provides in terms of revenue. You now face a problem when the minimum wage is forced or raised on your company if you currently employ some people below the minimum. After the mandated raise, the cost/benefit of some employees, the least valuable ones, may no longer make sense and you can no longer afford to hire them. In that case, the law caused harm by preventing the voluntary exchange of two goods, labor and money, which means that both participants are now worse off.

The same thing happens if a minimum price was set for any kind of good. In the market for second hand cars, a minimum price would forbid the exchange of some cars (worth less than the minimum) at the agreeable price to both parties, and some of the least valuable cars would remain “unemployed”.

 

Art Carden provides a good summary of the issues with minimum wage laws: they hurt low-skill workers, create more unemployment and prevent exchanges (labor against money) that would be beneficial. He also points to detailled evidence reinforcing the conclusion.

In addition, because both participants want the exchange to happen at the lower price (rather than not happen), I also think the minimum wage law encourages a black market (even though it comes with various increased risks).

The arguments in favor of minimum wage laws stem from a misunderstanding of competitive market process: for a given level of skill or productivity, the value of an hour of labor tends towards the value it produces, within a window of uncertainty and negotiation. It is an humbling realization, but we actually cannot conceive a system that would be more just or fair.

 

PS: Art Carden also has a good piece on Wal-Mart. He notes that Wal-Mart lobbies for minimum wage increases, effectively restricting its potential competition.

Mathematics, Metaphors and Economic Visualisability

October 15, 2009

A few notes and quotes from Mathematics, Metaphors and Economic Visualisability.

[In the interaction view of metaphors,] Upon hearing or reading a metaphorical expression [such as “The king is a lion”], the system of the subsidiary subject — all of the reader or listener’s knowledge and beliefs about the subsidiary subject — interact with the system of the principal subject […] in the listener or reader’s thoughts. The result of this interaction is that the principal subject looks more similar to the subsidiary subject. A similarity or analogy is created.
[…] metaphors are not “ornamental” but play an important and useful cognitive role.

The choice of language influences the reader’s mental model and cognitive process.

Metaphors can help advance understanding, but also slow it down (when features of the subsidiary subject are mistakenly attributed to the principal subject, or some features are emphasized at the expense of others).

Economic visuability is important because it is the images invoked by mathematical metaphors in economics […] that may help to propel the development of knowledge in our science. Unfortunately, there would appear to be a tendency in contemporary mathematical economics towards low visualisability.

Everything You Always Wanted To Know About Economists

October 15, 2009

In a recent article for the Huffington Post, Pulitzer Prize winner Jane Smiley questions the wisdom and integrity of economists–as well as the value of economics. Unfortunately, she misunderstands what economics is and what economists do.

It is tempting (…) to dismiss Smiley’s article as little more than sound and fury. Yet it does signify something profound and troubling: economists’ failure to communicate the essential insights of our discipline. Jane Smiley’s contemptuous and uninformed dismissal shows that we really need to redouble our efforts.

Art Carden and Steven Horwitz on forbes.com

 

There can never be such a thing as a free market, because it is human nature to cheat, monopolize, and buy off others so as to corner the market. This is what leads people like me to feel that economists can hardly be so simple-minded as they appear — they must be spouting this junk just to suck up to tyrants. If there is an unregulated free market, then everything must be for sale, including lives, children, bodily organs, endangered species, the air we breathe, and the planet earth. The key thought here is that the free market puts all of these things up for sale, and quite often what the free market values little (the ozone layer, child sex workers), humans value very much. If an economist is on the side of the free market in this instance, then he is a fool or a monster. Or at least an ignoramus.

Jane Smiley on huffingtonpost.com

 

Both Jane Smiley’s critique, voicing common misconceptions from laymen against economics, capitalism and free-markets, and the response by Art Carden and Steven Horwitz are great reads. It is a mistake to confuse the current american system of centralized political power and corporatism for actual free-market capitalism.

Along the same lines, consider Robert Murphy’s question in his Politically Incorrect Guide to Capitalism (see more quotes): “Are we simply to assume that powerful people in a capitalist system are evil, while powerful people in other systems are benevolent?”. What about people in government?