Podcasts

THE MESSAGE OF MALTHUS

Sun, 18 Apr 2010 17:58:24 -0700

Thomas Robert Malthus was not the first to discover the question of possible population pressures on resources. For twenty-five hundred years, there have been wonderments and suggestions concerning the potential importance of the size and the rate of growth of population on various aspects of personal and social well-being. But Malthus -- writing at the end of the eighteenth century and in the early years of the nineteenth -- firmly established population as an appropriate and significant topic of formal economics.
The Malthusian message was not a light and happy one. It was, indeed, a major contribution to the reputation of economics as "the dismal science."
Malthus was interested in explaining real aspects of the real world. And in reality, he inferred, population TENDS to increase at a faster rate than does food. By definition, people CANNOT long increase faster than the means of subsistence. But the checks and constraints which keep population growth from outrunning food either involve mischief and tragedy or require uncommon strength of character. If we do not curtail the birth rate through "vices" of abortion and prostitution or bloat the death rate through "miseries" of famine and war, then we must rely on "moral restraint" -- a chaste delaying of marriage until children can be adequately provided for.
The Reverend Malthus has been ungenerously misrepresented and dismissed by some modern commentators. True, he was not an elegant formal theorist; his historical and empirical generalizations were too easy and sweeping; his anticipations of technological advance and communal adjustment were inadequate; and his moralistic and sociological entreaties have been too confining for many. Still, he was on sound ground in urging us to face the fact that the world has its limitations and that much depends on the sense with which we make our unavoidable adaptations to scarcity.
In particular, problems of population will be aggravated, not solved, by relieving those who breed too much of the consequences of their actions. If the community takes care of the children of those who cavalierly think only of the pleasures of the moment, the improvident will forever continue to be parasites on the prudent.
More generally, Malthus is telling us, you do not change a condition by subsidizing it; you do not end a difficulty by continuing it; you do not engender responsibility by sympathetically relieving people of responsibility; you do not conduce rationality by compassionately rewarding irrationality. If people are not to bear the costs as well as enjoy the benefits of their own decisions, then all of us -- including innocent offspring of the promiscuous -- will bear grievous costs which could have been avoided.
In language which seems harsh and callous, this -- and not the details of his doodling -- is the real and critical message of Matlhus. Malthus was not a magnificent analyst. But he was neither an ogre nor a fool. And in his major message of responsibility and accountability, he was not wrong.

William R. Allen

Valley Forge…BUT WE WERE BORN FREE

Thu, 1 Apr 2010 14:26:21 -0700

Man does not live without bread. And the way he organizes activities of production and exchange has critical political and sociological, as well as economic, significance. Free men require free markets.
   But man does not live by bread alone -- or even by bread and circuses together. There is more to life than economics. Indeed, what most basically distinguishes one person or one people from another has less to do with material wealth and power than with qualities and characteristics of the mind, the heart, and the soul.
   Our current public heroes are disproportionately represented by clowns and gladiators. But the world's most vital work is done by those of courage and integrity and judgment and dedication and perseverance, most of whom are largely unsung and unfavored with extraordinary reward.
   Perhaps the community's conception of the heroic is modified as the condition of the community develops. Perhaps what is deemed exemplary and worthy of emulation when a nation is young and lean, with future promise dominating present attainment, and yearning for independence, is heavily diluted and substantially replaced when the nation seemingly runs short of frontiers to explore. Some have been obliged to earn their freedom, with both sweat and blood. But most of us were born free. Perhaps inheritances are not as well comprehended and prized as what we ourselves have won and produced.
   It would be naive to suppose that all the American colonists of the late eighteen century were revolutionary heroes -- or that the revolutionists were regarded as heroes by all the colonists. Indeed, the revolutionists were a minority of the community -- and not all of the revolutionary zeal reflected political idealism and philosophic purity. The revolution was conducted by people, not deities, so there is to be found in the history of the grand adventure a sufficiency of coarseness, ineptitude, and fear.
   But the inherent frailties of people and the confusions and uncertainties which divided the community serve to make more visible the strength and the sense of those who bore monumental burdens to make us a nation. Certainly, the burdens of those men and boys at Valley Forge in the terrible winter of 1777-78 were monumental -- quite beyond full comprehension as one now serenely surveys the lovely landscape in a warm summer day. No shots were fired at Valley Forge. But while enemy forces comfortably occupied nearby Philadelphia, more than 3,000 of the 11,00 troops under General George Washington perished from cold, disease, and starvation.
   They died for us. Truly, I have trod hallowed ground. We shall deserve damnation if -- through failure of our courage and integrity and judgment and dedication and perseverance -- we meanly lose our noble inheritance.

THE MARKETPLACE, LABOR SERVICES, AND THE MINIMUM WAGE

Tue, 26 Jan 2010 12:13:38 -0800

Most basically, the marketplace is not a place. Rather, it s a process, a procedure.

In market activity, individuals directly or indirectly bargain with each other. Demanders and suppliers, savers and investors, employers and employees make bids and offers. If the maximum demand price for a good or service is at least as high as the minimum supply price, a deal can be made. In the buy-and-sell transaction, each party, in his own estimation, makes himself better off. Perceived MUTUAL gains are the foundation and incentive of market exchanges.

Labor services are a commodity. When employers add workers to the payroll, they are not engaging in philanthropy. Instead, they are buying productivity, adding personnel who can contribute to the activity of the firm. That productivity, that contribution to output, has value.

It has value in the estimation of many potential employers. So employers are obliged to compete with each other, bidding up the price -- but not paying more for the service than the value of its productive contribution. The greater the competition for workers, the higher the offered wage; and the greater the productivity the worker, the greater the wage which can be rationally paid. If an employer will not meet the bids of other employers, he will not obtain the desired labor services, but if an employer pays more than the labor is worth, he will not prosper and may not long survive as an employer.

Another form of competition is involved. Not only do demanders of labor services compete with each other, thereby tending to bid up the price. At the same time, workers compete with other workers in obtaining jobs, thereby tending to bid down the price. For the individual worker, the happiest of market situations consists in many employers seeking his services and in few fellow workers vying for the same jobs, perhaps because few others are prepared to supply such services.

In this welter of competitions, some fare very poorly. Why don't those competing employers recognize a bargain and bid for the services of people who are being paid so little? But there is little demand for services of people who are relatively unattractive in the eyes of the demanders.

People can be unattractive, their services being seen of little value, for many reasons, professional, personal, and social. Perhaps a candidate for employment seems not to be very bright or mature; he may have gone to lousy schools and to no school very long; he has gained little relevant experience or substantial training; he comes from an unpromising family living in an unpromising neighborhood; he may have severe social problems -- wrong skin color, wrong religion, wrong nationality. A person can be plagued with no end of deficiencies, inadequacies, handicaps -- few skills, limited track record, dubious orientation of refinement and ambition. He has little to offer, and so there is little demand for his labor.

Now, if you are trying to sell a product in limited demand, how can you compete? How do you move the merchandise? Obviously, a key possibility is to offer better terms of purchase, including cutting the price. Over the last couple of years, prices of innumerable goods have been reduced by sellers. And prices of labor services have fallen in the open market. But, with breathtaking perversity of timing, the federal government-imposed minimum wage was RAISED in summer 2009!

If a stipulated minimum wage is to have effect, that wage is necessarily higher than the wage that would result from open market procedures. A worker of low productivity might warrant a wage of, say, six dollars an hour. But Senator Snort and his friends decry such an exploitative pittance and decree that the employer cannot offer, and the employee cannot accept, a wage below eight dollars. A hiring transaction below the government-set wage is made illegal. The worker, who already suffers grievously from various handicaps, now has taken from him his best opportunity to compete.

The employer will not pay eight dollars for a productive input that he calculates is worth to him no more than six dollars. So the deal is not made. The employer is frustrated, and the laborer is devastated, for benevolent Big Brother has taken a key tactical option from those who already are terribly burdened by severely limited options.

-- William R. Allen

DISEASED KIDNEYS, PURE HEARTS, AND DIALYSIS FOR THE BRAIN

Sun, 11 Oct 2009 07:34:24 -0700

I am quite attached to my kidneys. As far as I know, they feel the same toward me. But I have two of them, and the Natiional Kidney Foundatiion assures us that one good kidney is enough. Some people do not have one good kidney. At some finite price, I would be willing to sell one of my kidneys; it is easy to imagine a person in grave kidney difficulty being willing to meet my supply price. I would sell my kidney for his money; he would sell his money for my kidney; in our respective assessments, each of us would be better off.
A person with bad kidneys has available only limited strategies of survival. Possibly he has access to expensive, cumbersome, and confining dialysis treatment; possibly a kidney is available from a deceased donor -- but the number of kidneys transplanted annually is only one-tenth the number of people on the ever-growing national waiting list; possibly someone will simply give a kidney -- but analyst Virgina Postrel finds that "our laws and culture discourage healthy people from donating," and there are very few kidney donations by living contributors.
Obviously, the patient's situation would be improved by adding the alternative of BUYING a kidney. But while state governments try to cajole and pressure cadaver commitments in advance, as related by economist Richard H. Thaler, consensual commercial contracts of the living are deemed reprehensible. According to the National Kidney Foundation, such "cash payment" is "immoral and unethical." A federal law of 1984 prohibits the purchase and sale of human organs. The market is primly outlawed.
Surely, economics is not to be the ultimate arbiter of morality and ethics. Indeed, economics is amoral, being simply a technique of thought to help explain -- dispassionately, even (if we may say) cold-bloodedly -- certain cause-and-effect relationships. In uncoerced exchange, both parties gain, and, if no one else is hurt, it might seem pretty clear that the transaction should be permitted. But maybe the National Kidney Foundation and congressmen are attuned to a higher, more subtle Truth. Perhaps it is better for the kidney patient to die -- morally and ethically, to be sure -- than to participate in utterly contaminating market exchange. Some will suspect that a more likely explanation of the anti-market position is sophomoric sophistry.
The registering of demand preferences, the inducing of supply responses, the freedom to exchange privately owned assets -- all this is not a trivial or doubtful luxury tolerable only in halcyon and unstrained circumstances. The market produces sinews of adaptability to and survival in an unfriendly world.
The contribution to our well-being of market processes of trade are never more apparent than in rolling with the kidney punches of fate. A house burns down, a car is stolen, disease strikes. We are confronted by grave misfortune, and tears, wit, and government cannot undo the initial injury. But there are ways and ways of dealing with the problem. We can MINIMIZE the costs and inconveniences. We achieve our BEST possible situation by pursuing the best of the available options. Those options commonly involve other people, and through market procedures -- procedures of bidding, offering, and contracting -- we improve our condition.
All this strikes reasonable people as reasonable. It is reasonable, not only with respect to houses and cars, but also kidneys. The unreasonableness of some is a pity -- especially since there is no dialysis for the brain.

William R. Allen

MOUSE WISDOM: THE NEW DEAL -- IDEOLOGY AND PERFORMANCE

Sat, 3 Oct 2009 16:25:13 -0700

Karl, the usually cynical mouse who lives in my office, was uncommonly solicitous. "What is wrong with Professor Allen?" he asked his rodent friend, Adam.
"I am afraid," replied the usually solicitous but now bemused Adam, "that Professor Allen can't decide whether to laugh or to cry. But, of course, he is not permitted to do either. Economists are not supposed to laugh, and men are not supposed to cry."
"Hoo boy," sighed Karl, "it sounds like anther attack of historianitis."
"That's right," confirmed Adam. "A historian friend has sent him an article by another historian -- a Harvard historian, no less. In the first page, the author has made a magnificent blooper."
"Harvard historians do have a way with words," murmured Karl. "Just what silliness did he bloop?"
"The historian," Adam replied, "describes his lasting love of Franklin D. Roosevelt's New Deal of the 1930s. The scholar concedes that 'the New Deal was not a "social revolution"; 'it did not bring full employment'; it 'did not bring significant redistribution of incomes'; and it did not 'set the country on the path toward economic growth.'"
"Well," asked a confused Karl, "if the New Deal failed in all its efforts, what was so great about it?"
"Why, the glory of the New Deal," said Adam, "is that it was 'a revolution in political IDEAS.' The historian was ghostwriter for two of the President's 'brain trusters.' In both positions, he says, the 'preoccupation [was] to persuade people to look to Washington for help,' to convince them that 'government is the solution.'" That government failed, that government could not do what the rousing rhetoric called for and claimed, was not very important. The critical thing was for the President and his brain trusters to convince people that there are no beneficial market mechanisms, that the community cannot prosper or even survive through individual initiative and accountability in a stable setting of wide options provided by a necessary but severely contained government; that government -- with neither market incentives nor market guidance -- must be our chief producer (and distributor) of wealth, that government -- reeking of purity and wisdom -- will save us from the nefarious forces of greed and stupidity."
"But," Karl protested, "the historian agrees that the New Deal did NOT succeed. And he must realize that 6,000 years of recorded history has been persistently dominated by dominating government and that that domination has yielded a consistent story of both tyranny and poverty."
"Oh, fascism, communism, and socialism -- along with the New Deal -- have failed to produce the goods," agreed Adam. "But the historian claims -- unhappily, with much reason -- that in the 'revolution of ideas,' the New Dealers largely 'succeeded.' It matters little to these purported descendants of Thomas Jefferson that the people live less well than they could, to so long as they embrace Big Brother. For them, political ideology is vastly more important than economic performance."

William R. Allen

COSTS, BENEFITS, RATIONALITY, AND HEALTH CARE

Fri, 18 Sep 2009 13:30:32 -0700

A radio commentator has noted the rising price of chest X-rays, and concluded that fewer X-rays will be bought. But, the commentator wondered, SHOULD one apply the comparison of costs and benefits to something as important as health?
Many are reluctant to acknowledge that such weighing of costs and benefits is appropriate with ALL scarce resources. Health care, oil, and potatoes are scarce. They carry prices, they must be paid for. Thus, the question: If I spend some of my limited income on an X-ray, will I be better off than if I had spent those dollars on a tank of gas? Not to consider this grubby question of balancing alternative expenditures means waste in using one's income.
Sensible people (and most people are intuitively sensible most of the time in handling their budgets) have always balanced costs against benefits, even for things which poets say should not be corrupted by placing dollar values on them -- health; safety in flying airplanes, driving cars, and producing energy; helping the unfortunate; education. But health, safety, welfare, and training are not free. To have more of one means having less of others. We cannot escape the question: How big a price are you willing to pay, how big a cost are you willing to bear, to get what you want?
Perhaps mythology -- but certainly not economics -- holds that some things are "beyond" or "above" price tags and rational calculations of costs and returns. Rationality, a few seem to suggest, is a luxury, a complication to forgo in the crunch of making really important decisions. But "cost" MEANS sacrificed alternatives; market prices reflect costs; foolishly eschewing effective use of economic information does not magically make anything abundant in this world of scarcity. And when things are not free, we have hard decisions to make. Those decisions of choice inevitably WILL be made one way or another. It behooves us to make them as efficiently as possible. And that requires use of market prices.
Without MEASURES of VALUES of alternatives, we cannot make intelligent choices among them. Without knowing what must be given up in order to obtain an item, we do not know if we are sensible to acquire it. So we have to have market data, or economic values, to supplement technological, engineering information in order to make good decisions.
Such basic considerations struggle for recognition in today's contentions regarding national health care. A major newspaper, which is not known as a paragon of economics sobriety, has found itself unavoidably confronted by confining reality. The paper editorially contends that the President has "made a compelling case for reform." But a case for reform is little more than exhilarating exhortation, a specifying of aspirations and supposed anticipations. "The hard part," the paper acknowledges, "in ... both policy and politics, is finding a way to pay for the expansion in coverage." It is noted that "most of the cost" is to be covered "by attacking waste, fraud and abuse in Medicare and Medicaid -- a pain-free path that's as unrealistic as it is alluring." So the newspaper, while inspired by the vision of governmental revolution, sadly finds the suggestions of financing to be "disingenuous."
Without a market to provide a mechanism for choicemaking, a method of recording people's preferences, and a process of allocating resources in accordance with those preferences, hard decisions will be made FOR us instead of BY us. Freedom and efficiency go hand in hand. Are we to forgo our heritage of freedom of efficient choice and supinely acquiesce in what a handful of commissars and bureaucrats decree is best for us? If we are so cavalierly irresponsible, we shall deserve the tyrannical fate which will devolve upon us.

William R. Allen

ECONOMICS, POLITICS, RATIONALITY, AND HEALTH CARE

Sat, 12 Sep 2009 10:54:16 -0700

Many political and journalistic -- and some academic -- types share a predilection with small children. Ask a four-year-old if he or she prefers cake or ice cream, and the response often will be, "Both."
The young person does not yet understand that, following the nefarious fiasco in the Garden of Eden, we inhabit a world of LIMITATIONS. Living with SCARCITY means that we cannot have all of everything we want. And that implies that CHOICES must be made, picking an option deemed more valuable than others. We forego alternatives to obtain what we prefer.
To the economist, this is the meaning of COST. The cost of something is what we must sacrifice to obtain the good. In a world of scarcity, we have an abundance of cost. It behooves us to MINIMIZE the cost of a given acquisition -- or to MAXIMIZE the return for a given cost. This is a conspicuous element of RATIONAL behavior, and it is at the core of economic analysis.
And so economists are party-poopers, practitioners of a dismal science. It is much more fun to speak expansively of acquiring any amount of any good thing while ignoring the costs entailed. Indeed, one can have some sport along the way by chiding and denigrating those sane and sober types who raise questions about covering costs.
Consider a recent review in a prestigious newspaper of a book by a professor of medicine and a professor of political science, the review written by a professor of public policy who has had experience as a policy-maker. The "timely and insightful" volume provides a history of efforts under a series of presidents to impose some scheme of "universal health care."
The "most provocative finding" of the study "is that presidents who have been most successful in moving the country toward universal health coverage have disregarded or overruled their economic advisers. Plans to expand coverage have consistently drawn cautions or condemnations from economic teams in every administration .... [P]residents have found it increasingly difficult to keep their economists at bay .... Cost estimates and projections emanating from the White House's Office of Management and Budget and the Congressional Budget Office ... have bound presidents within webs of technical arguments, arcane rules and budget limits."
But down with the party-poopers, however rational. "It's not so much that presidential economic advisers have been wrong -- in fact, Medicare is well on its way to bankrupting the nation -- but that they are typically in the business of thinking small and trying to minimize risk, while the herculean task of expanding health coverage entails great vision and large risk."
So much for rationality. So much for responsibly facing up to reality. But the problem is not one of economists "thinking small." The problem is that many policy-makers, after dipping heavily into the cooking sherry, eschew thinking at all, and aggressively urge that "a new president must move quickly, before opponents have time to stoke public fears."

MOUSE WISDOM: INFLATION -- GOVERNMENT, COMMUNITY, AND LOVE OF POISON

Wed, 26 Aug 2009 11:33:01 -0700

The chairman of the Federal Reserve has acknowledged the obvious: We have been pursuing "a highly accommodative monetary policy." And "accommodative policies will likely be warranted for an extended period." But "at some point ... as economic recovery takes hold, we will need to tighten monetary policy to prevent ... inflation ...." Indeed. We are assured that the Fed has "the necessary tools to withdraw policy accommodation, when that becomes appropriate, in a smooth and timely manner."
The sobering concern remains if the Fed really will exhibit the wit, the wisdom, and the will to use those tools appropriately and in good time, with steadfast determination in the face of severe, inevitable political opposition.
All this has led to another analytic conversation between Adam and Karl, the analytic mice who live and analytically think in my office.
"I believe," said mouse Karl quite believably, "that I understand the monetary basis of inflation. I think," he said quite thoughtfully, "that if the amount of MONEY increases much faster than the OUTPUT which is bought with money, then the money prices of those goods very likely will be bid up."
"Yes," agreed mouse Adam quite agreeably, "it can be anticipated that rising money per unit of output will be accompanied by a rising price level."
"I can even sort of see," Karl continued while squinting his beady little eyes, "that some people and institutions might gain from uneven inflation redistributing the real wealth of the community. But I have heard that GOVERNMENT can gain from inflation. I don't want to believe that government people like inflation, for that would be very unstatesmanlike."
"You better believe," responded Adam. "Government can gain in CREATING inflation and from the EXISTENCE of inflation. Much of the problem is that people in government are under much pressure to SPEND -- partly to provide benefits to constituents directly and partly to help them indirectly through supposedly stimulating the economy. But those in government are loath to tax. So there is a strong tendency toward big budgets, big deficits, and much borrowing."
"And government spending, deficits, and borrowing create inflation!" cried Karl cutely.
"Not inevitably," corrected Adam. "The effects on prices of such over-anxiousness to do good expansively will vary with market circumstances and fiscal techniques. But it IS realistic to expect rapidly expanding budgets and deficits commonly to be accompanied by rapidly expanding money."
"At least," considered Karl, "bad fiscal policy is partly counter-balanced by the sense of the Federal Reserve. The Fed, as everyone knows, is the heroic fighter of inflation."
"I don't mean to be catty," said mouse Adam, "but the Fed has made its own critical contributions to inflation. It has usually allowed the amount of money to rise much too fast and much too erratically, partly because it has not taken money sufficiently seriously and, instead, concentrated on interest rates. And the Treasury can find comfort in inflation, for rising prices reduce the real value of the accumulated government debt. Meanwhile, government can effectively and surreptitiously TAX -- obtaining more of the community's wealth and resources -- through creating and spending more money and inflating money prices and money incomes without having to pass an explicit taxation act."
"Gasp," gasped Karl. "The White House, Congress, the Treasury, the Fed -- all are involved in choosing those policies and ways of implementing policies which conduce inflation. Government does like inflation. And," he added gravely, "behind representative government are the people who are represented. Government realistically associates inflation with POWER. The public innocently associates inflation with PROSPERITY. So we all tend to love the poison of inflation."

William R. Allen