Loss Aversion, Capuchin Monkeys, and Customer Relations

David M. Jensen
David M. Jensen

By coincidence I read about loss aversion today in Superfreakonomics, then experienced it for myself some hours later. (I’d read the material before, but I wanted a refresher.) The book tells the story (pp. 212–14) of economist Keith Chen training a group of capuchin monkeys to trade tokens (“coins”) for food. At one point Chen and his researchers offered the monkeys either a single grape or two grapes, but, half the time, by chance, they’d add a second grape to the single grape or else subtract a grape from the pair. So, on average, a monkey got 1.5 grapes, and it was statistically irrelevant whether the initial offering was a single grape or two grapes.

But it was not irrelevant to the monkey’s behavior. The monkeys “strongly preferred the one-grape researcher”; they “behaved as if the pain from losing a grape was greater than the pleasure from gaining one,” the book relates. That is, the monkeys experienced loss aversion.

Later in the day I experienced something a little like that. After I referred a friend to my dentist, the dentist sent me a very nice, hand-written note thanking me for my referral; I received the note today. At first I was thrilled: “What a nice gesture, and a nice way to build customer loyalty,” I thought. But then my dentist urged me to “enjoy the enclosed gift card” that was a token of his thanks. I must have left the gift card behind in the envelope, I thought—but no. In irritation I thought, “So where’s my freakin’ gift card?”

Then I remembered the capuchins. Although I never actually had the gift card (much less whatever goods or services it might have procured for me), I thought I had it, and I momentarily felt perturbed that I’d “lost” it. In a flash, I my emotions had turned from gratitude to annoyance. But how silly, I thought; it was still very nice for my dentist to send me a hand-written note, and the fact that he or an assistant accidentally neglected to add the gift card made me no worse off than I was before.

The lesson for businesses is to not disappoint customers by offering them things you can’t deliver. It’s better not to promise something than to promise it and not deliver it. (Of course, businesses can overcome failure to deliver something by apologizing, explaining context, and so on.)

The lesson for individuals is to remember that we are wired for loss aversion—but we are also wired with the intellectual capacity to recognize that there are contexts in which our “gut” may lead us astray here. If someone offers us two dollars gratis but then delivers only one, it’s still a good thing that we got a dollar. And I should let my irritation over the “lost” gift card fade away, and focus on my gratitude that my dentist recognized my referral. It really was a nice gesture on his part.

In short, don’t let loss aversion make a monkey out of you.

Why Many Americans Don’t Work

Image: Wikimedia Commons
Image: Wikimedia Commons

As Stephen Moore points out in an article for the Heritage Foundation, “at least one million jobs . . . go begging” for employees, even as the unemployment rate remains high. Why? Undoubtedly it has much to do with the fact that the high-paying jobs in question, in manufacturing, trucking, and energy, are hard work.

Of course, the fact that the federal government pays people not to work is also a big factor, as Moore explains:

Too many Americans have come to view blue collar jobs or skilled artisan jobs as beneath them. Contributing to this attitude is the wide availability of unemployment insurance, food stamps, mortgage bailout funds and other welfare. Taking these taxpayer handouts is somehow seen as normal and a first, not a last resort.

Moore laments the widespread loss of the “old-fashioned work ethic.” But there are many signs of hope in this regard, in Dirty Jobs, in North Dakota, in the factories and offices across America where millions of people go to work every day.

The Neo-Luddites

Image: Wikimedia Commons
Image: Wikimedia Commons

The Objective Standard just published my article, “New Technologies, Same Old Fallacies,” a reaction to Jeff Elder’s article for the Wall Street Journal, “Tech Experts See Good and Bad Sides of Robots.” I write (among other things), “Elder predicts that new technologies, including advanced robotics and self-driving cars, will soon be commonplace. Undoubtedly these technologies will make some jobs obsolete, but they will also give rise to many new career opportunities.”

Reisman on Piketty’s Program for Economic Stagnation and Decline

capitalism-reismanEconomist George Reisman recently published a twenty-thousand word reply to Thomas Piketty’s Capital in the Twenty-First Century. Reisman writes, “Over the course of several generations, the US government has taxed away trillions upon trillions of dollars that otherwise would have been saved and invested and thereby added to the capital of the American economy. . . . The government’s massive assault on the supply of capital has begun to transform the American economic system from one of continuous economic progress and generally rising living standards into one of stagnation and outright decline.” Of course, Piketty’s program to “help” the less well-off consists of expanding government’s assault on capital. If after reading Reisman’s lengthy essay you find yourself hungry for more, you can find Reisman’s double-column, thousand-page book, Capitalism, for free online.

Notes on Money in Politics

This evening I’m scheduled to talk about money in politics with a local college class. As I’m looking up some articles for this purpose, I thought I might as well provide some links and discussion here.

The main point of this evening’s discussion is to debate Amendment 65, about which I have written and spoken at length. Please see my collected commentary and links. However, my hope is to take the conversation in a broader direction tonight. The main question I want to examine here is how much “big money” actually influences politics. Of course, this issue represents only a small slice of the discussion, but a relevant one.

The main thesis in this regard is a simple one: People have brains. We are not mindless automatons, zombies passively influenced by whatever advertisements impinge on our senses. Rather, we have the capacity for reason, for thinking critically about the messages we see. When we’re talking about money in politics, we’re talking about people spending resources in an effort to persuade others (voters) to behave in a certain way. Because people have reasoning minds, the impact of money in politics is necessarily limited.

Let’s begin with some comments from Steve Simpson (shown in the photo), whom I interviewed this summer:

There are too many examples of expensive advertising flops or rich candidates who lost elections to take seriously the claim that money buys elections. Ross Perot, Michael Huffington, Meg Whitman, Jon Corzine—the list of candidates who have spent huge amounts of money and lost goes on and on. A certain amount of money is necessary to be a contender in an election. Beyond that, candidates win or lose because they have messages and support policies that the voters like.

To take a Colorado example, last year, Colorado voters rejected Prop. 103, a school tax measure, by a margin of 63 to 37 percent—an overwhelming defeat by any measure. And yet, as the Denver Post reported, “Supporters raised more than $600,000 in the effort to pass 103, while opponents raised less than a tenth of that.”

In 2003, Colorado voters rejected Referendum A, concerning water bonds, by even bigger margins: 67 to 33 percent.

A Denver Post article from November 5, 2003 (“Colorado In ‘No’ Mood,” by Joey Bunch) reviews:

Referendum A appeared headed for easy passage. Owens put his campaign aces on Referendum A and helped raise more than $750,000 to promote its passage.

He collected huge donations from corporations and residential developers.

The opposition group Vote No on A raised less than half that. High-profile opponents included Attorney General Ken Salazar and former governors Dick Lamm, Roy Romer and John Vanderhoof.

Moving to broader studies, Stephen Dubner summarizes a paper by his Freakonomics coauthor Steve Livitt finding that a candidate can double or halve campaign spending and impact the outcome only by a point in either direction.

Dubner continues:

What Levitt’s study suggests is that money doesn’t necessarily cause a candidate to win—but, rather, that the kind of candidate who’s attractive to voters also ends up attracting a lot of money. So winning an election and raising money do go together, just as rain and umbrellas go together. But umbrellas don’t cause the rain. And it doesn’t seem as if money really causes electoral victories either, at least not nearly to the extent that the conventional wisdom says. For every well-funded candidate who seems to confirm that money buys elections (paging Michael Bloomberg), you can find counterexamples like Meg Whitman, Linda McMahon, Steve Forbes, and Tom Golisano.

Dubner also rounds up the views of other economists, including Jeff Milyo, who writes:

[L]arge shocks to campaign spending from changes in campaign finance regulations do not produce concomitant impacts on electoral success, nor do candidates with vast personal wealth to spend on their campaigns fare better than other candidates.

These findings may be surprising at first blush, but the intuition isn’t that hard to grasp. After all, how many people do you know who ever change their minds on something important like their political beliefs (well, other than liberal Republicans who find themselves running for national office)? People just aren’t that malleable; and for that reason, campaign spending is far less important in determining election outcomes than many people believe (or fear).

But what of the left’s endless incantation, “Corporations aren’t people!” Besides the obvious fact that corporations are composed of individual people, each of whom with rights, it just ain’t true that corporate spending dominates politics.

Steve Chapman writes for Reason: “Of the $96 million donated to these political operations [Super PACs], 86 percent has come from individuals and less than 1 percent from publicly traded corporations. Major companies almost unanimously have concluded that they have more to lose than gain by wading into polarizing political campaigns.”

“But what about the rich people?!” The advocates of Amendment 65 explicitly call for the censorship of “the rich”—so apparently the wealthy aren’t people, either.

The problem of money in politics is not much of problem. But the “solution” of censoring political speech is extraordinarily dangerous. Liberty can survive stupid campaign ads. It cannot survive censorship.


Image of Steve Simpson: Institute for Justice

The Debate Over Public Choice Misdefines “Self Interest” and “Public Interest”

Gordon TullockAre political actors (politicians, voters, and bureaucrats) motivated by “self interest” or “public interest?” That is the central question as it is posed in the academic debate over the Public Choice school of economics. However, it is the wrong question.

Public Choice economists and their critics agree that, at least sometimes, political actors pursue financial gain and power at the expense of others, and obviously that is true. To take a few examples, recall the Youtube video in which a woman recites her reasons for supporting Barack Obama: “I won’t have to work [to] put gas in my car, I won’t have to work [to] pay my mortgage.” Does anyone doubt that political actions over the last few years to expand food stamps, expand unemployment benefits, increase subsidies for students loans, bail out auto unions, subsidize solar and wind companies, and expand Medicare coverage were calculated to gain political support? The typical member of congress today sees it as his primary responsibility to bring home the pork to (select voters within) his district.

The problem lies in describing the issue as “self interest” versus “public interest.” Before addressing that issue, though, let us first look in more detail at the debate surrounding Public Choice.

In his book Government Failure, Gordon Tullock (one of the founders of Public Choice) describes what he sees as the problem with the traditional view of politics, as well as his alternative:

Throughout the 19th and well into the 20th century, economists assumed that individuals are primarily concerned with their own interest and worked out the consequences of that assumption. In contrast, during this same period political science largely assumed that political actors are mainly concerned with the public interest. . . .

Economists changed this bifurcated view of human behavior by developing the theory of public choice, which amounts, in essence, to transplanting the general analytical framework of economics into political science. The statement that the voter in the voting booth is the same person as the customer in the supermarket does not seem radical, but it is nevertheless a very dramatic change from the political science literature. (pp. 4–5)

While Tullock grants that political actors do not necessarily act in a “self interested” way (as he uses the term), he thinks they ordinarily do:

Of course, empirical confirmation of any theoretical proposition is more important than analytical elegance. When considering the behavior of any individual politician, most people realize that the politician behaves in a self-interested way; similarly, when considering the factors that affect votes, most people assume that personal gain is certainly an aspect. (p. 6)

The critics of Public Choice, on the other hand, argue that political actors tend to act in the “public interest.” Jeffrey Friedman, editor of Critical Review, describes the debate in the Winter-Spring 1995 issue (Vol. 9, Nos. 1–2) of his journal:

[A] distinction should be drawn between two terms that are often used imprecisely or synonymously: rational choice and public choice. One understanding of the difference holds that public choice theory applies economic analysis to political (i.e., “public”) decision making, while rational choice theory goes even farther, applying economics to other nonmarket realms, such as family life. This distinction, to adopt John Ferejohn’s [citation omitted] terminology, attributes to both public and rational choice theory a “thin” understanding of the economists’ rationality postulate: individuals are assumed to have only the inclination to satisfy their stable and ordered preferences, whether these are selfish or not. But outside the academy, public choice theory has a decidedly “thick” connotation, referring to the alleged propensity of political actors to pursue their material self-interest. . . .

Like most important ideas . . . public choice theory is liable to polemical oversimplification. The main danger is that the possibility that people are as self-interested in their political as their economic behavior may be treated as the assumption that self-interest is always and everywhere the real fountainhead of politics. . . .

[T]he effort of comparing public choice hypotheses against alternatives frequently falls to non-public choice scholars. One such effort is Leif Lewin’s Self-Interest and Public Interest in Western Democracies, published by Oxford University Press in 1991. Reviewing in detail the empirical literature on a variety of public choice claims—almost all of which was written by non-public choice researchers—Lewin found that in no case does public choice theory withstand scrutiny as a general hypothesis about the ubiquity of self-interest in politics. (pp. 1–3)

Friedman goes on to explain that, according to Lewin’s findings, voters tend to select politicians they deem “likeliest to benefit the economy of their society as a whole,” and bureaucrats too frequently act outside the boundaries of what the Public Choicers predict for them (pp. 3–4).

Notably, a recent issue of Critical Review (Vol. 23, No. 3 from 2011) explores Lewin’s work in more detail, featuring an essay by Lewin himself.

Lewin writes that, today, even many Public Choicers agree “that voters, politicians, and bureaucrats are much more public spirited than public-choice theorists originally maintained” (p. 361). However, Lewin acknowledges the problem of interest groups in politics. He writes, “[I]t is hardly unexpected that people pursue their self-interest when they enroll in interest groups. That is the whole rationale for membership.”

Public Choice economists and their critics, then, agree that sometimes political actors act in their “self interest” and sometimes in the “public interest.” They disagree over how prevalent one is over the other.

The huge problem with this debate is that neither of the sides presented offers a coherent definition of “self interest” or “public interest.”

As the scholars quoted above use the term, “self interest” applies to political practices of taking others’ wealth by force, forcibly blocking or harming competitors, gaining special political favors, and the like. The opposite of “self interest,” goes this line of thinking, is “public interest,” which means acting for the general well-being of society as a whole. Neither of those definitions withstands scrutiny.

Begin with “self interest.” One’s actual, long-term, selfish interests consist substantially in achieving and supporting a government that protects individual rights, not one that forcibly transfers wealth and doles out favors. It is only within a rights-respecting society that an individual is free to act consistently for his own purposes and in accordance with his own, unhindered judgment. If one holds that the “public interest” consists in establishing a rights-protecting government—the only sensible use of the term—then there is no clash between pursuing the “public interest” and pursuing one’s “self interest,” properly conceived.

With the sloppy treatment of “public interest” within the debate over Public Choice theory, however, the “public interest” can be conceived in any number of contradictory ways, ranging from the American Founders’ support for a rights-respecting government to the communists’ support for collectivism and mass slavery. What matters is the content of one’s ideology, and referring to some undefined “public interest” only obfuscates that issue.

History shows that what we have to fear are not primarily the petty politicians who act to advance their narrow interests of wealth and power by abusing their positions, as annoying and destructive as they are. What we should fear are those politicians who sincerely act in the “public interest” conceived apart from individual rights—and who stop at nothing to achieve it.

Image of Gordon Tulluck: Mercatus Center

Mises’ Lessons for Gentlemanly Disputes

Many years after Nobel economist Friedrich Hayek visited Professor John Van Sickle in Boulder, I sat in the same living room where the two men had conversed.

Both Hayek and Van Sickle were friends and students of the great Austrian economist Ludwig von Mises. Van Sickle had saved many letters to and from Hayek, Mises, and other free-market economists of their day. I got the chance to look through these letters and reproduce them. They now reside in the archives of the Foundation for Economic Education. (I’ve told this story before; I’ve received permission from Jerry Van Sickle and FEE to reproduce those letters at my discretion.)

I was glancing through those letters for possible use in an upcoming presentation, and I happened upon a letter for Mises that I think admirably illustrates the gentleman’s way of handling a dispute. (I read the letter during a time when a friend of mine was coming under some mean-spirited and frankly ridiculous attacks.) The letter is dated March 2, 1955.

Mises stuck to his principles and did not shy away from criticizing perceived errors and slights sharply and directly:

[M]y formulations are to be taken on the one side and should be opposed to the middle-of-the-road formulations of [Milton] Friedman… and others on the other side. To proceed in a different way is tantamount to the adoption of the official position of the New Deal philosophy. Then one does not discuss the economic meaning and function of inequality, but takes it for granted that inequality is bad and discusses whether it should be abolished altogether or whether some “loopholes” should be left. There is nothing that I could contribute to such a debate. … If you assign my formulations a lower rank than to those of other participants, then please forget about them, set aside the letters I wrote you and do not expect me to attend the meeting.

Several things here are noteworthy. Mises did not refrain from blasting Friedman over fundamental disagreements. Yet he did not refrain from debating the matter with Friedman, so long as he could debate on equal footing.

Mises closed with an equally interesting paragraph:

I want to emphasize that my attitude on this question in no way reflects upon our long established friendly relations and does not at all affect the high esteem in which I hold you personally.

In other words, even though Mises thought Van Sickle was setting up a conference in such a way that slighted Mises in favor of the “middle-of-the-roaders,” Mises maintained a remarkably cordial tone, even as he pointedly explained the reasons for his irritation. (Of course, that doesn’t imply one must always deliver roses to one’s ideological opponents.)

I think Mises’s approach goes a long way in explaining why he was so widely loved, and why he remains so influential.

From Van Sickle Documents

Thank the Industrial Revolution for Longer Life

The following article by Linn and Ari Armstrong originally was published October 28 by Grand Junction Free Press.

Growing older comes with its problems, but, as we’ve all heard, it surely beats the alternative. Earlier this month Ari turned 40. (We don’t need to go into details of Linn’s age.) An interesting fact about the age of 40 is that it’s older than the average lifespan of almost all of human history. So if you’re older than 40, or hope to be, thank the industrial revolution, which radically extended human life.

The industrial revolution, fueled by the philosophical Scottish Enlightenment, gained steam in England in the late 1700s. This was right around the time of the founding of the United States, which, as the freest country in the history of the earth, soon adopted the industrial revolution as its own and created unparalleled prosperity.

Modern humans have walked the earth for roughly a quarter of a million years. So you are extremely lucky to have been born during the tiny fraction of human history in which you have a good chance to live to see old age as we now understand it.

According to the CIA’s World Factbook, one nation still has a life expectancy less than 40: Angola. Several African nations still have life expectancies less than 50. Why the difference? Much of Africa remains ravaged by tribal warfare, political corruption, and an almost total lack of industrial progress, exacerbating such problems as famine and the AIDS epidemic.

Throughout almost all of human history, most people faced conditions roughly comparable to those of the poorest regions of modern Africa. Violence, starvation, and disease were the normal conditions of life.

The Wikipedia entry on “life expectancy” offers some good leads; for example, it cites a recent text on American history that discusses England in the early 1600s. That book summarizes, “Life expectancy was only about thirty-five years, and two-thirds of all children died before the age of four.” Today children rarely die. Throughout much of human history, many or most children died, and that was considered normal.

In the industrial world, life expectancy has risen into the upper 70s and 80s. The United States comes in only 50th on the CIA’s list with a life expectancy of 78.37. (Monaco tops the list at 89.73.) But the U.S. suffers relatively high rates of auto fatalities and homicides; adjusted for those factors, our country approaches or hits the top of the list.

But how could early industry, with its dirty coal and poor working conditions, so dramatically extend human life? Prior to industry, most people lived in abject poverty, and even the few wealthy of the time had relatively few of the amenities even America’s poor now take for granted. (Andrew Bernstein does a good job of reviewing early industrial advances in Capitalism Unbound.)

Prior to industry, people had to walk wherever they went; the lucky few had horses and carriages (which left stinking, pestilent messes in city streets). Steam-powered boats and trains, then petrol-powered automobiles, gave mobility to the masses. Today we can ride by helicopter to a far-away hospital if we need urgent medical care. We can jet around the world in the time it used to take to traverse a state. A relative recently flew to Europe for discretionary health care.

In the good old days, often you were luckier if you did not have access to a doctor with his leeches and concoctions. If you got an infection, often you would die. Today advanced machinery can scan your bones or peer into your heart. We have access to mass-produced drugs effective at alleviating a wide range of ailments. We have access to heart surgery and advanced cancer treatments.

At America’s founding, roughly 90 percent of all working people farmed. Eking a living from the dirt without the aid of tractors and trucks, irrigation pipes, and modern fertilizers imposed severe hardships. Today less than three percent of the workforce raises all our food—freeing up the labor of others to provide our other wants and needs.

Prior to industry, people made their few items of clothing by hand. With industrial production of cotton clothing, the masses could afford to buy clothes and subject them to the rigors of routine cleaning. Today, we can clothe ourselves modestly for perhaps a couple hour’s worth of labor.

True, industrial progress requires legal stability and relative freedom. Capital formation—the development of the tools and machines that expand our productivity—drives our improving standard of living. People don’t invest in capital when others loot or destroy the products of their effort. The prosperity of capitalism derives from the political protection of people’s rights. To the degree we stray from that standard, we undermine our prosperity and threaten our futures.

If you value your high standard of living and your potential to live into your 70s and beyond, live in gratitude for the industrial revolution—and help protect its future.

Fun with the Dismal Science

I presented this talk September 10 for a Liberty Toastmasters meeting oriented toward humor. Funny isn’t usually my thing, but I had a go with the “dismal science.” So, yes, I’m exaggerating certain points; however, most of the underlying ideas are based in real economics.

I’ve written about the potty-training story from Freakonomics before, as well as the discussions about alien invasions from economists and environmentalists. Bastiat’s essay about the candlemakers is reproduced inThe Economics of Freedom.

Alien Invasions: Where Economic and Environmental Insanity Meet

“You’re traveling to another dimension. A dimension not only of sight and sound, but of mind. … Your next stop: the Twilight Zone.”

If the Onion covered the Twilight Zone, you’d end up with the sort of actual headlines we’re seeing today.

Consider the first headline, from Time“Paul Krugman: An Alien Invasion Could Fix the Economy.” What Krugman said was this: “If we discovered that space aliens were planning to attack, and we needed a massive build-up to counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump would be over in 18 months.” He actually referenced the Twilight Zone.

And thus Krugman, a Nobel-winning economist, commits the simplest of economic fallacies, what Bastiat in 1850 called the broken-window fallacy, a type of the error of accounting for the seen but not the unseen.

The next headline comes from the land of environmental nuttiness, from the Guardian“Aliens may destroy humanity to protect other civilisations, say scientists: Rising greenhouse emissions could tip off aliens that we are a rapidly expanding threat, warns a report.” (For context, read the report from NetworkWorld.)

For any consistent leftist, this creates a paradox of unprecedented proportions. For clearly the solution is to expand CO2 production as rapidly as possible, so as to exacerbate global warming and incite an alien invasion, so that we can “stimulate” the economy and reelect Barack “The Chosen One” Obama in 2012.

(Hat tip to Aaron Bilger for blending the two stories.)

The Folly of ‘Buy Local’ Campaigns

Grand Junction’s Business Times quotes my dad Linn in an article today exploring a “buy local” campaign.

The article by Mike Moran cites the May 27 Free Press column by my dad and me on the topic and also summarizes our review of Bastiat.

My dad told the paper, “When you start ‘buying locally’ and not buying the best for the lowest cost, the allocation of resources gets distorted.” Specifically, the article goes on to review, spending more for the same product made locally makes the purchaser poorer and deprives other local businesses of the residual.

Moroever, Moran reviews, different “buy local” campaigns begin to compete for business. Certain Grand Junction businesses may benefit from a “buy local” campaign within the city, for example, but other businesses may lose if customers elsewhere also “buy local.” The result is that people in various communities spend a lot of time and energy depriving their neighbors of business. Meanwhile, consumers foolish enough to play along get hammered with higher prices.

Now, sometimes buying locally makes sense. For example, due to the soil, climate, and large river, the Grand Valley grows excellent peaches, grapes, and other fruit. Thus, it can indeed make sense to buy those products locally, especially considering the reduced transportation costs. It also makes sense for Grand Valley producers to export their products elsewhere, such as Denver markets. Yet, somehow, the “buy local” crowd in Junction doesn’t complain when Denver residents purchase those items from across the pass.

Many types of services cannot be provided at a distance. For example, my dad used to manage properties for a living, a job that requires extensive on-site labor. That’s simply not the sort of job a person can hire done by somebody living at a distance. But other sorts of services can be purchased at a distance; for example, one of my friends once worked at a national hotel calling center out of Grand Junction.

An interesting exercise would be to figure out how many businesses in Grand Junction export goods or services to other cities, states, and countries, and how many Grand Junction businesses depend on spending by travelers. Yet the hypocrites preaching “buy local” hardly complain about locals selling their goods or services elsewhere or doing businesses with people from out of town.

The basis of trade is comparative advantage. Different people and different regions should make what they’re good at, and exchange their produce for the goods and services others are relatively good at providing. The only thing the consumer should worry about is finding the best products at the best prices.

What’s the Real Price Inflation?

Recently economist Bruce Yandle wrote, “Inflation doubled from 1.1% in the fourth quarter to 2.2% in the first quarter, but that’s when they take out food and energy prices. For real people, inflation is 3.8% (including food and energy prices).” (We can appease the Austrians by distinguishing price inflation from monetary inflation.)

But I wonder if even that figure is wildly understated for at least some consumers. Consider some examples from my local grocery store:

* I noticed that the same package of sausage dropped in size from 16 to 14 ounces, a 14 percent price increase.

* Milk has gone from $1.99 per gallon to $2.69, a 35 percent increase. June 1 Update: I notice that milk is now on sale for $2.29, so a 15 percent increase.

* Whereas a package of cream cheese used to go on sale for $1 per package, the new sale price is $1.25, a 25 percent increase.

* I’ve been able to find fewer good markdown deals lately, which I take to be a combination of more people looking for them and grocers fighting tighter margins. A non-markdown item easily can cost double.

The wealthy, who already spend a ton of money on food, easily can reduce their spending with marginal shopping changes. But I suspect that, for lower-income shoppers, the real pain of inflation is considerably higher than the official figures indicate. These are also the people probably last in line for wage hikes or even getting hired.

And, according to one source, the April rate is 3.16 percent.

Why Spending More for Local Goods Harms the Economy

The following article by Linn and Ari Armstrong originally was published May 27 by Grand Junction Free Press under the title, “Channel 11 piece peddles economic nonsense.” Stay tuned for a related update about the views of Denver mayoral hopeful Michael Hancock.

If Bernie Lange had taken to the airwaves to promote therapeutic magnetic underwear or report alien anal probes, he rightly would have been laughed off the station. But apparently peddling economic nonsense fits perfectly well with the editorial policies over at Channel 11 News, the local NBC affiliate.

Last week the station broadcast the segment “Made In America,” a silly editorial masquerading as news that falsely argues buying overpriced American products creates jobs. Spending less for the same products made overseas, Lange intones sinisterly, costs Americans not only jobs but “billions in lost dollars.” That’s due to “the multipliers,” you see.

Thankfully, French economist Frédéric Bastiat* exposed Lange’s brand of foolishness way back in 1845 in his “Candlemakers’ petition.” To update the example, consider an obvious way to create jobs galore for manufacturers of light bulbs and the electricity required to run them. Simply block out all sunlight from your home. Board up all the windows. Think of all the American jobs we’d create if we all followed that one simple step. Say no to extraterrestrial sunlight!

Or consider the blight of foreign-made bananas and coffee. Scandalously, Americans tend to buy both those products from Central and South America. Think of all the American jobs we could create if we bought those goods only from U.S. suppliers, or better yet Colorado suppliers.

Impossible, you say? If you check out the web page of Denver Botanic Gardens, you will discover the center currently grows bananas, coffee, and chocolate right here in Colorado (as one of our friends pointed out). No doubt we could grow all those things locally if farmers spent enough on greenhouses and heaters.

Sure, the products would cost more, but just think of “the multipliers!” We could add billions upon billions of dollars to our economy just by spending more on the goods we consume every day. Indeed, by Lange’s logic, the more we spend, the more we prosper!

Clearly there’s something wrong with Lange’s reasoning. To get a better idea of the problem, consider Bastiat’s wisdom about the seen and the unseen. Bastiat writes, “The bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”

What Lange sees are the manufacturing jobs lost. What Lange ignores are the exporting jobs created and the additional wealth made possible by trade.

Lange sees that spending more money on American-made products would contribute to the paychecks of American workers. Lange ignores the fact that spending more money on the same goods would deprive other businesses of those dollars. If you spend more money on toys and household items, you have less to spend with the local fruit grower or massage therapist.

Let’s get back to basics. Why should we trade at all? Why shouldn’t each individual produce everything he needs, all by himself? The answer should be obvious: everyone would become horrifically poor, and only a tiny fraction of today’s population would manage to survive at all. Just imagine making all your own clothes, growing all your own food, building your own shelter, and acting as your own dentist.

By trading, we benefit from other people’s skills, expertise, accumulated machinery, and natural advantages. Why does Lange think it’s any different when we trade with people in other towns, other states, or other nations?

China features lots of cheap labor. We would be fools not to take advantage of that. America, on the other hand, features lots of complex machinery and other capital goods made possible by industrialization and relative economic liberty. That’s why (as the CIA reports) per capita product in China is around $7,400 annually, whereas in the United Statesit’s $47,400.

If we stop buying stuff that China’s relatively good at making, that means we have to make stuff that we’re relatively bad at making. Such a policy is self-destructive. Buying cheap goods from China and elsewhere allows American workers to specialize on the things they make best.

Of course, it is worth looking into artificial reasons why some American companies move overseas, including high tax rates and business-crushing union policies. We should also explore the reasons for continued high domestic unemployment, particularly the Obama administration’s policies of blowing out the deficit and meddling in the economy. But let’s fix the underlying problems, not succumb to economic fantasies.

We doubt very seriously that Bernie Lange or anyone else at Channel 11 makes much of an effort to buy only American-made goods. And they’d be foolish to do so. Trade is all about specialization according to one’s strengths. We hope, therefore, that Channel 11 sticks to reporting the news and leaves the economic commentary to people like Bastiat.

* Note: I was paid a modest sum to help run Liberty In the Books, which has reviewed select works of Bastiat.


Elisheva Hannah Levin commented June 2, 2011 at 8:35 AM
I agree, should the local goods be identical to those from elsewhere. After all, I enjoy coffee as much as most Americans do. My caveat, is that often locally produced food is fresher and/or is produced in ways that make it tastier than mass produced food that is shipped in. And in many cases, such as the one of corn-fed beef in CAFO’s, the real cost is obscured because the federal government subsidizes the production of the corn heavily, and the cost to defend oil sources (need for transportation of feed and of product) is never factored in. Since this makes the American food supply chain an artificial economy, most people do not really know what the true cost of “cheap” food is, and how they are paying for it.
Sadly, although the term “free market” should be a redundancy, the understanding of the term “market” is so poor for most consumers, that we have to say it. Free markets, for all goods, across all boundaries produces a vital economy.

Freaky Unintended Consequences

I’m a fan of the Freakonomics books, though I don’t always agree with them. (I’ve written about them a couple times before.) The documentaryof the same name includes some material not found in the books.

I enjoyed this line: “You can teach a kid just as much at a grocery store as you can at a museum, maybe more.”

But perhaps the most poignant new story from the film is of Steven Levitt’s experiences potty-training his daughter. As he relates the story, his wife for months had trouble getting their daughter to use the toilet. So he figured that, as an economist, surely he could come up with an incentive structure to encourage potty training.

So Levitt decided to offer his daughter a bag of M&Ms if she’d use the potty. Immediately she did so. And for a couple of days, she consistently used the potty in exchange for M&Ms.

But on about the third day, Levitt’s daughter said she had to use the potty, and she went a very small amount in exchange for the M&Ms. She immediately said she needed to go again, so she went a small amount for another bag of M&Ms. Levitt points out that his incentive structure had encouraged his daughter, in three short days, to develop excellent bladder control. What it had not done is accomplish his purpose of getting her to use the potty normally.

The moral of the story? If a genius-level economist can screw up the incentives to potty train his daughter, why do so many people think that politicians and unelected bureaucrats can centrally control vast swaths of our economy?

Mark Udall, Meet Henry Hazlitt

A few days ago Grand Junction’s Free Press published an article by by dad and me about Henry Hazlitt and Frederic Bastiat. We wrote, “forcibly transferring wealth from some people to others does not in itself ‘stimulate the economy’ or ‘create jobs.'” Hazlitt reminds us to remember the unseen, the jobs destroyed by taking wealth away from those who would otherwise spend or invest it according to their own best judgment.

Senator Mark Udall needs to read Hazlitt’s classic, Economics In One Lesson. If he did, perhaps he would refrain from making idiotic statements such as following, from his July 21 newsletter:

“Abound Solar, a Loveland-based manufacturer of thin-film solar panels, received a $400 million federal loan guarantee to aid in its expansion, which will help create hundreds of new jobs to help our local economies.”

Udall points to the seen, the jobs created at the solar panel factory, but he forgets about the unseen, the jobs destroyed by sucking that wealth out of the private economy. When the federal government guarantees loans, it diverts those investment dollars away from some developments and toward others. (If the solar panel company were indeed the best investment, then it could attract those dollars without federal assistance.) What is unseen are all the businesses that will no longer be able to get loans, expand their operations, and hire people.

Furthermore, federally manipulated loans are bound to be less productive than free-market loans, because those who answer to politicians and bureaucrats are serving a political agenda, not solely a productive one. Thus, Udall’s program actively destroys wealth by diverting resources away from more-productive uses to less-productive uses.

So the next time you hear some politician such as Udall claim that he is “creating jobs” by forcibly transferring resources, remember that what he really means is that he is destroying wealth.

Hazlitt and Bastiat Answer Today’s Economic Fantasies

The following article originally was published July 23 by Grand Junction’s Free Press.

Hazlitt and Bastiat answer today’s economic fantasies

by Linn and Ari Armstrong

According to today’s great economic fantasy, the way to make everybody better off is to forcibly take money away from some people and give it to others. Such legalized theft is what many of today’s celebrated economists call a “stimulus package.” We call it Fraudonomics.

Unfortunately, such economic “stimulus” sophism often breaks down the walls of common sense and shows up in the writings of self-serving activists and pretentious newspapermen.

Take a few recent examples. The Denver Post’s editorial board recently claimed that corporate welfare for solar panel producers “will provide immediate jobs.” In a separate opinion, the Post argued that declining to pay people more not to work “could hurt the U.S. economy.” (Those with a lick of common sense will notice that paying people not to work tends to induce more people not to work.) An activist group opposing tax-cut measures on this year’s ballot claims those measures “could cost jobs” by cutting government spending.

Now, it is possible to offer other arguments for corporate and personal welfare and against tax cuts, and we will be happy to rebut those arguments elsewhere. Here the point is simply this: forcibly transferring wealth from some people to others does not in itself “stimulate the economy” or “create jobs.”

The 20th Century’s greatest common-sense economist, Henry Hazlitt, addresses this point beautifully in Economics In One Lesson. This is a book that you owe it to yourself and your children to read and promote. Give copies to your elected officials. We’ve often longed to see an essay contest for high school and college students about that book. Hazlitt counsels us to remember the unseen as well as the seen.

Let us say that some misguided politician robs a thousand dollars from Peter and gives the money to Paul to “stimulate” Paul’s budget. If you only look at Paul, this seems like a pretty good deal. Paul might spend that money on a new pair of sneakers, a concert ticket, new tires, and a restaurant meal. All of the businesses where Paul shops see a corresponding increase in revenues, and in turn they buy more from their suppliers.

But look at the unseen. Look at Peter. Peter no longer has his thousand dollars. He can no longer use that money to put food on his table, support his family, and invest in his business. All of the businesses where Peter would have shopped lose out, as do their suppliers.

It is easy to see the “jobs created” by Paul’s spending. It takes a little common sense to remember the jobs lost by forcibly taking wealth away from Peter.

Moreover, forcibly transferring Peter’s wealth to Paul actively destroys wealth. The bureaucrats charged with the transfer take a sizable cut to fund their bloated budgets. Paul’s incentive to work hard takes a hit, as does his ability to plan for his economic future. This remains true when applied to the economy as a whole: so-called “stimulus” programs destroy wealth and hurt the economy.

While there is not yet an essay contest for Hazlitt’s book, Students for Liberty has launched such a project for one of Hazlitt’s key inspirations, the 19th Century French economist Frederic Bastiat, author of classic works such as The Law and Economic Sophisms.

High school and college students may register for the essay contest, with a $1,000 top prize, by December 1; see http://tinyurl.com/bastiatproject. Just by registering, students receive a free book with selections by Bastiat.

Bastiat’s 1845 essay on candlemakers remains the greatest, most hilariously satirical annihilation of economic protectionism of all time. Bastiat argues that, if we’re serious about protecting certain businesses at the expense of competitors and consumers, we ought to block out the sun to help the candlemakers. Much of Bastiat’s analysis also applies to so-called “stimulus” spending; read it for yourself at http://bastiat.org/en/petition.html.

Another of Bastiat’s classics is his 1850 essay on the seen and the unseen, the work toward which Hazlitt says he owes his greatest debt. You can find it at http://tinyurl.com/bastiatseen. In this essay, Bastiat explains the “broken window fallacy.” Does not breaking a window “keep industry going?” “What would become of the glaziers if no one ever broke a window?”

Bastiat answers: “Your theory stops at what is seen. It does not take account of what is not seen. It is not seen that, since our citizen has spent six francs for one thing, he will not be able to spend them for another. It is not seen that if he had not had a windowpane to replace, he would have replaced, for example, his worn-out shoes or added another book to his library.”

Americans should return to the common-sense wisdom of truly great economists such as Hazlitt and Bastiat. Our economic future depends on it.

Review Questions for Murray Rothbard’s ‘What Has Government Done to Our Money?’

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover Murray Rothbard’s What Has Government Done to Our Money?

Note: Because paginations differ across editions, here page numbers corresponding to the 1990 edition (ISBN 0945466102) are used with titles of Rothbard’s sections.

Reading I: Through Page 54 (Parts I and II)

1. Does a voluntary exchange indicate an equality of value among the goods exchanged? (Page 16, “The Value of Exchange”)

2. How did money arise? (Pages 15-20, “The Value of Exchange” through “Indirect Exchange”)

3. What are the key limitations of barter? (Pages 16-17, “Barter”)

4. Why did gold and silver displace other commodities as money? (Pages 18-19, “Indirect Exchange”)

5. What is the significance of the fact that money is a commodity? (Pages 19-20, “Indirect Exchange”)

6. What economic advances does money facilitate? (Pages 20-21, “Benefits of Money”)

7. Originally, to what did the names of currencies refer? (Pages 22-24, “The Monetary Unit”)

8. Why does Rothbard endorse private coinage? (Pages 25-29, “Private Coinage”)

9. In Rothbard’s view, what is the proper supply of money? (Pages 29-34, “The ‘Proper Supply of Money”)

10. What is the consequence of an increase or decrease in the supply of money? (Pages 32-34, “The ‘Proper’ Supply of Money”)

11. Does hoarding of money on a free market present a problem? (Pages 35-39, “The Problem of ‘Hoarding'”)

12. For what legitimate reasons do people increase or decrease their cash reserves? (Pages 35-36, “The Problem of ‘Hoarding'”)

13. Why does Rothbard disapprove of the phrase “circulation of money?” (Page 37, “The Problem of ‘Hoarding'”)

14. Should government promote stable prices? (Pages 39-40, “Stabilize the Price Level?”)

15. Can a free market accommodate more than one currency in the same region? (Pages 41-43, “Coexisting Money”)

16. How does a free market in money lead to the exchange of paper receipts, token coins, and checks? (Pages 43-46, “Money-Warehouses”)

17. What is Rothbard’s case against fractional reserve banking? Is his case sound? (Pages 47-53, “Money-Warehouses”)

Reading II: Page 55 to 111 (Parts III and IV)

1. What is the primary difference between the way private individuals and government acquire more goods and services? (Page 55, “The Revenue of Government”)

2. Why does Rothbard write, “Counterfeiting is evidently but another name for inflation?” (Page 56, “The Revenue of Government”)

3. How does counterfeiting (or inflation) transfer wealth from some to others? (Page 57, “The Economic Effects of Inflation”)

4. Which groups are most harmed by inflation? (Pages 57-58, “The Economic Effects of Inflation”)

5. What is the impact of inflation on business calculation? (Pages 58-59, “The Economic Effects of Inflation”)

6. How does inflation discourage “sober effort,” penalize thrift, and encourage debt? (How does this pertain to the modern housing crisis?) (Page 59, “The Economic Effects of Inflation”)

7. How can inflation morph into hyper-inflation? (Pages 59-60, “The Economic Effects of Inflation”)

8. How can inflation cause a business cycle? (Page 61, “The Economic Effects of Inflation”)

9. Before widescale banking and paper receipts for money, how did governments inflate the money supply? (Pages 61-64, “Compulsory Monopoly of the Mint” and “Debasement”)

10. What happens when a government attempts to impose “bimetallism” to control the exchange rate of commodity moneys? (Pages 64-67, “Gresham’s Law and Coinage”)

11. How do legal tender laws act to further devalue the money supply? (Pages 67-68, “Gresham’s Law and Coinage”)

12. How does granting banks the government privilege of “suspension of specie payment” contribute to inflation? (Pages 69-72, “Permitting Banks to Refuse Payment”)

13. How did central banking arise, and what did it do to the money supply? (Pages 72-76, “Central Banking: Removing the Checks on Inflation”)

14. By what mechanisms does the central bank inflate (or deflate) the money supply? (Pages 77-79, “Central Banking: Directing the Inflation)

15. Why do central banks go off the gold standard, and what is the result? (pages 79-84, “Going off the Gold Standard” and “Fiat Money and the Gold Problem”)

16. How does central banking interfere with international trade? (Pages 84-87, “Fiat Money and Gresham’s Law”)

17. What were the basic steps in the U.S. government’s monetary policy over the last two centuries? (Pages 90-111, Part IV)

Review Questions for Andrew Bernstein’s Capitalism Unbound

This set of review questions is part of the Liberty In the Books program, a monthly discussion group. These questions cover Andrew Bernstein’sCapitalism Unbound.

Reading I: Through Page 60

1. How does Bernstein distinguish today’s American economy from laissez-faire capitalism? (Page x)

2. How did American colonists oppose British economic controls prior to the revolution? (Pages 2-5)

3. In what ways did the U.S. Constitution protect individual rights? (Pages 6-8)

4. In what ways does capitalism protect economic liberty? (Pages 9-10)

5. What is statism, and what are some key historical examples? (Pages 10-14)

6. What is the relationship of “human rights” and “civil rights” to individual rights? (Pages 14-15)

7. What fantasy have enemies of capitalism promoted regarding living conditions before the Industrial Revolution? (Pages 19-20)

8. What were the actual economic conditions of pre-industrial Europe? (Pages 20-22)

9. What were the special problems regarding sanitation and house fires in pre-industrial Europe? (Pages 22-24)

10. What was Thomas Malthus’s theory of population? Under what conditions is he right, and when is he wrong? (Pages 24-26)

11. What is the relationship between intellectual freedom and material prosperity? (Pages 26-28)

12. Who are some of the heroes of the Scottish Enlightenment, and what were their accomplishments? (Pages 29-34)

13. What was the impact of the work of James Watt and Matthew Boulton in the clothing industry? (Pages 34-35)

14. What were the major industrial advances in the fields of metals, agriculture, and transportation during the early industrial era? (Pages 35-37)

15. How do people improve their material conditions, and how did the industrial revolution illustrate this? (Pages 38-41)

16. What is the connection between free minds and free markets? (Pages 41-42)

17. What were the economic impacts of the Northern Securities Company, what was the response by the federal government, and how did this response mark a turning point in American history? (Page 41)

18. What were the advances in communications, construction, technology, and transportation in 19th Century America? (Pages 44-49)

19. What were Andrew Carnegie’s achievements in transportation and steel production? (Pages 49-51)

20. What were John Rockefeller’s achievements in oil production? (Pages 51-52)

21. Were American industrialists “Robber Barons?” Why have they been described as such? (Pages 53-57)

22. Why does Bernstein write, “freedom is fundamentally freedom of the mind?” (Pages 57-59)

23. Why, in Bernstein’s view, has capitalism so often been denounced despite its profound benefits? (Pages 59-60)

Reading II: Pages 63 to 131

1. Why do so many intellectuals denounce capitalism? (Pages 63-66)

2. What is the connection between altruism and collectivism? (Pages 64-68)

3. Why does a welfare-state mixed economy dominate Europe and America? (Pages 68-70)

4. What does selfishness mean? (Pages 71-72)

5. What is a value? What is a sacrifice? (Pages 72-74)

6. How can values be objective? (Pages 74-77)

7. What is the relationship between reason and survival? (Pages 78-80)

8. Why is productiveness a virtue? (Pages 80-82)

9. Why is “cynical exploitativeness” not in one’s rational self-interests? (Pages 82-84)

10. How is rational self-interest necessary for benevolent goodwill? How does self-sacrifice undercut goodwill? (Pages 85-90)

11. How does capitalism protect one’s right to life? (Pages 91-93)

12. What is socialism? (Pages 97-98)

13. How did the West prop up socialist systems in the 20th Century? (Pages 99-100)

14. What were the results of 20th Century socialism? (Pages 98-102)

15. Does socialism allow a rationally planned economy? (Pages 103-106)

16. What is a coercive monopoly, and how do such monopolies violate individual rights? (Pages 107-110)

17. Can unions exist under capitalism? On a free market, what are unions prohibited from doing? (Pages 110-115)

18. What is the relationship between unions and employment? (Pages 110-115)

19. What are the harms of inflation? (Pages 115-116)

20. What caused and prolonged the Great Depression? (Pages 117-123)

21. What caused the modern housing bust? (Pages 123-130)

Liberty In the Books Web Page

I’ve finished the Liberty In the Books web page (for now). Seehttp://tinyurl.com/libertybooks

The readings cover basic economics, health policy, the Great Depression, the housing bust, and antitrust. I’ll continue to add new review questions as the Denver group progresses.

I hope that the web page encourages others around the country to start similar reading groups. I also hope the review questions are useful for independent study. So tell your friends!