Friday, June 28, 2013

Protecting Fellow Americans from Immigrants

Those who are against immigration because they want to "protect their fellow Americans" should first figure out which Americans they are talking about, certainly not those Americans who want to employ immigrants, or those Americans that want to use the services of immigrants, or those Americans who want to buy products made by immigrants.

The opponents of immigration often point to the "other side of the coin". These critics often claim that immigration leads to increases in crime rates, fewer jobs for the home population, and more burden put on services such as schools, health care and public housing. These claims are, for the most part, mistaken.

First, it is important to differentiate between (1) privately arranged immigration and (2) subsidized immigration. The first originates from private arrangements between the home population and immigrants, and the latter is when the government uses tax money to fund immigration programs. Case (2), in fact, may be labeled as forced or haphazard immigration because the government is using the money taken from the home population to invite people into the country even though there are no actual guarantees that any resident of the home country has any intention of cooperating with these new immigrants.

Increases in crime rates, raised as a concern by the critics of immigration, tend to be prevalent in places where immigration is subsidized by governments (i.e., case (2) above). This is often the case with so called political or asylum immigrants. These immigrants gain access to other countries by applying to those countries' government agencies. Once they get approved as political asylum seekers, they often end up as recipients of government welfare payments because the purpose of their arrival wasn't economic in the first place.

In this case, immigrants come to places where they may not welcomed by the home population. This may create tensions, even hatred, and conflict. The increases in crime rates are a consequence of the discoordination between the needs of the domestic population and government policies. The government simply lacks the time- and-place specific information on the needs of particular individuals within the home population, and how these needs match the desires and skills of the new immigrants.

Immigration that has its origins in private arrangements between the home population and immigrants (i.e., case (1) above) has far less potential to create conflict. An illustration of this is the reduction in crime rates in areas where Eastern European immigrants settled in Western Europe after the Eastern European countries joined the EU. These immigrants came to Western Europe because they saw new, unused employment opportunities, which were often communicated by family members, friends, or other potential business partners. These private arrangements were made only after all the involved parties have made sure immigration is a good fit for them. All the involved parties have the time- and place-specific personal information needed to find a good match between a new immigrant and the needs of the local community.

The argument  about fewer jobs for the home population is another misconception. Economic logic implies that immigration creates new economic opportunities. People want to move to other places because they expect to find jobs there, except when they expect to be recipients of government welfare programs. People who make private employment arrangements tend to be entreprising individuals who avoid government welfare programs. These individuals generally create new jobs that have never existed before. These new jobs come into being due to the unique sets of skills, preferences, and entrepreneurial abilities that  those particular immigrants posses.

For example, one of my first jobs as an immigrant was construction site clean-up. This was a new business model where a clean-up contractor sends crews of two people to construction sites. All clean-up crews in the Kitchener-Waterloo area were composed of new immigrants, mostly Serbian, Croatian, Bosnian, and Romanian. It is easy for me to understand why this business model would not be attractive to Canadians. The amount of income one could earn in this job was similar to the amount one could receive in welfare payments. None of us, however, wanted to live on welfare. We wanted to start vibrant, productive lives, and one does not start such a life on a welfare program. We wanted to show that we have the will to advance, the energy, persistence, and resilience needed to do any job. You don't show that by being on a welfare program.

It is true that these new unique jobs sometimes make some old "domestic" jobs obsolete. Our clean-up crews, for example, replaced some of the previous on-site personnel. But the only reason why these old jobs become obsolete is because the new jobs satisfy the needs of the home consumers and employers better. Thus, arguing that new immigrants should be barred from entering the country to work on their new jobs implies barring the domestic consumers and employers from enjoying the benefits of the unique skills that these new immigrants can provide.

There are certainly people who will, in the short run, be hurt by immigration. Those are people whose skills will become irrelevant after immigrants show they are more capable in certain activities. This implies that a portion of the home population will have to innovate and find new opportunities. Some people don't like to innovate, so they would rather vote for anti immigration laws.

Another worry of the critics is that new immigrants bring more burden on schools, hospitals, and public housing. This view is mistaken too. These services are provided by the government, and thus, people have a tendency to measure only the expense, and not the benefits. Were schools and hospitals private businesses, they would welcome new customers. Would you say that there is more burden on car dealerships because new immigrants want to buy more cars, or that there is more burden on the car repair shops because new immigrants want to fix their cars? Surely, if the owners of car dealerships and repair shops are willing to serve new immigrants, the benefits of serving them must outweigh the additional "burden".

Thus, we have to conclude that immigration that originates from private arrangements between the home population and new immigrants is beneficial to everyone, except to those who do not like to innovate, learn new skills, and find new opportunities. On the other hand, immigration organized by governments, which do not have the time- and place-specific information about the needs of the domestic population and the new immigrants, creates social discoordination and conflict. Immigration is a good thing if it is a consequence of voluntary exchange between consenting individuals.

Monday, June 24, 2013

When you shouldn't be mad about mediocre service

Sometimes we feel like there are industries in which all firms do a mediocre job. It is tempting to get annoyed or even mad in those situations and to say something like this: Even I could do a better job, if I only put some time into it! Just recently, I felt like that when I took my car for polishing at a local auto body repair shop. They didn't do a bad job; they just didn't put that extra effort that I initially expected. Later, I realized that no body shop would put that extra effort. This indicates that putting that extra effort is not profitable for those businesses.

This is a perfect example for applying our economics theory. I was not happy with the service, but, in retrospect, I know that I would not try to do the polishing myself even if it meant far better quality compared to what I received from any auto body shop. It would just take too much of my time to do the job "right." What does this mean? This means that my time is more valuable to me if I used if for doing something else, say, writing about economics, than if I used it to polish my car. So, even the mediocre service I received was good enough to keep me from doing the polishing job myself. The auto body shops don't need to do a better job than I ever could; they just need to do as good of a job as it is sufficient to keep me from becoming self-sufficient in my car polishing needs.

This is what we economists call the law of comparative advantage. Even though I am better than any auto body shop both in writing about economics and in car polishing, I chose to devote all my time to writing, and to let them provide me with the car polishing service. I am better off this way than if I used some of my writing time for car polishing. This is the beauty of specialization, or--letting others do something for you instead of you doing it yourself. Specializing in some activities and letting others do other activities for you makes you better off even if you can do everything better than anyone else. This is why you should not be mad if the best you can receive on the market is mediocre service, as long as the service is not bad enough for you to decide to do the job yourself.

The nice capitalist Joe

How many times have you heard the familiar line that employers are evil and that they exploit their employees? I have heard it may times, but I am yet to find evidence to support this claim as a general rule. On the other hand, during all of my experience as an employee, I have found ample evidence to the contrary--that employers constantly look for ways to improve the work conditions, if for no other reason, then for the sake of keeping their employees from going to some other employer with better work conditions.

Let's not forget that employers work on two fronts: (1) they are trying to attract consumers to buy their products by making products better than the competitors' products, and (2) they are trying to attract employees by offering better work conditions than the competitors.

I don't need to search much to find an antithesis to the myth about evil capitalists that exploit their employees. I find one of the best examples in one of my former employers. He (let's call him Joe) was running a construction site clean-up business at the time. The work conditions weren't great, but they were good enough to keep us from looking for work elsewhere. We worked in teams of two. Each team had an old pick up truck that was falling apart, several plastic buckets, two shovels, and a few brooms. We picked up and cleaned all the construction site crap no one wanted to touch.

The work was hard but the guys were fun. We didn't really care that our truck was falling apart, or that we had rudimentary tools and iffy safety conditions. What we cared about was that no one bosses us around and that we get paid. And that's what we got. If we did a good job, we would get called to come back tomorrow to the same construction site. If we didn't do a good job, Joe would have to find some other site. Since we didn't want to hear Joe's nagging about how hard it is to find a good site, we tried to do a good job, and we generally did. When we didn't, it was because we hated the site manager more than Joe's nagging. However, we knew that Joe's efforts would not be limitless and that, at some point, he would rather fire an employee than try to keep finding new sites for him.

To an outside observer, superficial examination of our work conditions would probably indicate that we were being exploited by our boss or by the construction companies that were using our services. It is only a little step between seeing "injustice" being done to employees and asking the government or the courts to do something about this "injustice." In our case, we were smart enough not to ask that the "injustice" be fixed. First, we didn't see any injustice happening, and, second, even if we asked for better work conditions, we probably wouldn't get them because then the whole business wouldn't be profitable.

Joe now owns a restaurant. I love to go there once in a while with my family. Besides the great food, friendly staff and the pleasant atmosphere, it is always nice to see Joe. He always stops to talk to me and my wife for a while and to play with our kids. He never misses to ask how things are at the university and never misses to say he is glad when things are going well. Although I never said it to Joe, I think he knows I am glad his business provided the first money and self esteem to jump start all the good things that happened afterwards in my life.

Friday, June 21, 2013

What is excludability?

David Henderson critiques Mankiw's exposition of excludability. Mankiw uses public roads as an example of non-excludable goods. Henderson argues that the non-excludability of public roads is an artifact of the legal arrangement in which the government makes it illegal to exclude others from using public roads. This implies that non-excludability is not some inherent property of roads. Henderson further argues that the definition of excludability is not a legal one. He uses Samuelson's definition where a good is non-excludable if "there are no low-cost ways of excluding people". From this, Henderson concludes that excludability is a technological characteristic of goods. Goods are then non-excludable because some of their technological characteristics that make it too costly to exclude others from using them.

I am sympathetic to Henderson's aim of pointing out the distinction between technical and legal aspects of excludability. However, if the definition of excludability is that "there are no low-cost ways of excluding people", I would not limit the definition to being only a technological one. The cost of available technologies depends on the value individuals within society ascribe to them. So, for example, if it is technologically possible to exclude someone, but people choose not to because it is too expensive, that means excludability is not only a technological characteristic, but also a characteristic that depends on preferences. Subjectivists like Ludwig von Mises would probably go even further and claim that it is entirely up to our preferences whether or not something will be a low or a high cost alternative because preferences determine value.

Another issue to consider is that the legal environment and cost can't be disentangled. Costs of performing various exclusion activities depend on our expectations of what other people consider as an acceptable exclusion technique. My cost of excluding someone from driving my car is different in a society that adheres to the property rights regime compared to a society in which property rights violations are seen as nothing to worry about. In a society that punishes property rights violations, I may not have to invest as much in protecting my car from theft compared to a society in which car theft is something people accept as normal. For an example of a society in which car theft was a normal everyday event, one can just go back to my home country, former Yugoslavia, in the 1990s.

So, we have to conclude then that, to define a benchmark for excludability, we need to assume a specific legal arrangement in which people operate. Then we can look at the technical properties of different goods and how people value those technical properties. Since people are free to form their values as they wish, excludability and non-excludability of different goods will ultimately depend on people's values, expressed within a given legal framework.

Monday, June 17, 2013

An anti-war mental exercise

Imagine someone you love, say, your child. If you don't have children, you can imagine someone else you love. For me, this exercise works best with my children. Now, imagine a person you love disfigured by an explosion, bloody and lifeless. The best effects are achieved if you perform this mental exercise while you are looking at the person you love.

If you are terrified by the prospect of your mental exercise becoming reality, then you should also be terrified of wars because this is what wars do to people you love. So, whenever you get carried away by thinking about the strength and glory of "our" army, bring back the image of the disfigured body of the person you love. This is what armies do--they kill people you, or other people, love. If you say--yes, but we do it in self-defense, you are implying that it is justified to kill someone's child. If you say--yes, but we had no other way of defending ourselves, you are still saying that it is justified to kill someone's child. Now, imagine I say that to you--sorry, but I had no choice but to kill your child (or someone else you love). What would your response be?

Sunday, June 16, 2013

Nothing to hide?

If the fact that you have "nothing to hide" makes it ok for others to spy on you, does that mean that, since you don't need every room in your house at all times, I can come and use those spaces when you don't need them?

If the fact that some people don't want to offer their life on a platter to others implies they have something (bad) to hide, does the fact that you lock your house when you are not in it make you a selfish, exploitative person? After all, I could use your house while you are away, and you wouldn't even notice someone was there. You have nothing to lose!

Saturday, June 15, 2013

Why everyone should know some economics

Everything you do affects others. More importantly, everything others do, eventually affects you too. For example, if others believes policy x is good, and they support that policy, that policy will more than likely affect you. If other people don't actually understand the consequences of that policy, they may think it is a good policy when it may actually not be as good as they thought it would be. In fact, the policy may achieve quite the opposite of its intended goals.

People who do not understand a policy may cause unintended consequences by supporting it. This is why you should be interested in understanding at least the basics of economics. And, once you understand these basics, if you want to prevent others from harming you by trying to help you, you will probably want to share your knowledge with them. These are some of the commonly misunderstood (or, not understood at all!) policies that would find their place on my list of policies that everyone should understand:

1.  Minimum wage laws:
- Do minimum wage laws help the poor?

2. Immigration policies:
- Do immigrants take "our" jobs?

3. International trade:
- Does importing mean fewer jobs for "us"?

4. Illegal employment:
- Is illegal employment bad for the economy?

5. Environment:
- Is government legislation the only way to protect the environment?

If your answer to any of these questions is yes, you may be one of those that will hurt others by trying to help them. Why? Because basic economic theory teaches us that minimum wage laws may in fact hurt the poorest members of society; that immigrants create new jobs for everyone; that importing means more of some other jobs for us; that illegal employment is a way of saving resources; and that government legislation is often inferior in protecting the environment compared to market solutions. You don't believe me? Excellent! I dare you now to do some research (on the internet or wherever) and prove me wrong. Good luck!

You do believe me? Excellent. I now dare you to explain this to someone who doesn't agree with my claims! If you are not sure you can explain, you don't understand the economic rationale behind the explanation well enough. In that case, I dare you to do some research and see if you can then explain these concepts to others. If you change your mind in the process, then you can use this knowledge to prove me wrong. Remember, you are doing this for your own good. You want to protect yourself from being harmed by those who think they are helping you when in fact they are hurting you because they don't understand the consequences of their actions. Good luck!

Friday, June 14, 2013

Socialist Yugoslavia (1945 – 1992) as a Failed Response to Mises and Hayek: A Survivor’s Experience

Socialist Yugoslavia (1945 – 1992) as a Failed Response to Mises and Hayek:
A Survivor’s Experience

Handout for the Mises Meet talk
March 22, 2012

Predrag Rajsic

·         As most Yugoslavians did, I too cried, when the Yugoslavian dictator Tito died in 1980, but I cried for a different reason—I was a baby, and babies cry a lot. Other people cried because they thought “only he could keep the country afloat.” These people apparently knew something that the economists arguing that Yugoslavia proved Mises and Hayek wrong did not.

·         I grew up in a credit bubble fueled by loans from the IMF

·         When the repayment time came, there was nothing to extract from the bankrupted economy

·         Interprovincial accusations of who stole whose money became ever louder

·         And you  probably know the rest from the war news in the 1990’s

This should make a pretty clear case that Yugoslavia was a failed economic project

However, in the 1970’s and 80’s, there were claims that Yugoslavia was a proof that decentralized, worker-managed “market socialism” is a viable alternative to Hayek’s and  Mises’s arguments in favour of private ownership of mans of production.

Mises’s and Hayek’s argument:

·         No single mind has all the time- and place-specific information dispersed among many individuals needed for economically feasible (rational) planning of the whole economy

·         Market prices provide information to individuals that make their individual plans fit into the total pattern of production

·         Private ownership of the means of production gives individuals the incentives to use these means based on the time- and place-specific knowledge they possess

How was the Yugoslavian economy structured?

·         Markets for consumer goods

·         Worker-managed firms

o   Workers vote on decisions

§  elect managers

§  how to divide profits

§  how much to reinvest in the company

o   But the worker “owned” firm capital assets could be sold and bought only at the state-determined prices, and only to the state or to other worker-managed enterprises

§  Structure of production not determined through he use of time- and place-specific dispersed individual knowledge but by a state order

o   When leaving the firm, a worker cannot claim any of the capital assets of the firm

§  No incentives to vote for reinvesting

§  Strong incentives to vote for wage increases

·         which would then be used to invest in private goods: cars, household items (electronics, furniture), farm equipment, home renovations, vacations, etc.

·         stealing the firm equipment or products  in collaboration with the management was not uncommon

·         MALINVESTMENT—unsustainable structure of production

§  Wages determined by the kind of labour performed, not by the market demand for specific kinds of labour (labour theory of value)

·         incentives to advance through the ranks just to get a desired wage

o   decided by voting in worker assemblies

o   incentives to please the “opinion makers”

o   getting a desired job becomes a consequence of political entrepreneurship rather than economic entrepreneurship

o   to advance through the ranks, you need to be a member of the Communist Party—respond to the desires of the communist oligarchy  

§  unskilled and unqualified people often in key positions

·         As a result, by the 1970’s many firms are insolvent—subsidized by the central government by using the profits of the successful firms, taxes, international loans, and by printing money

·         By the mid-1980’s state imposed reinvestment standards (and thus wage cuts) to keep afloat the crumbling industrial complex, trigger rampant worker strikes.

·         By the 1990—double digit daily inflation

Thursday, June 13, 2013

Value, Wealth, and Economic Success

Excerpt from: Measuring the Immeasurable

Wealth is a meaningless term without the concept of value. If we know that the purpose of human action is to satisfy one's needs and wants, then the material wealth of two different individuals (let alone abstract entities such as nations) cannot tell us much about the satisfaction of their needs and wants. Wants and needs are subjective, unknown, and immeasurable by an outside observer.

We should thus be careful when interpreting empirical observations related to the quantity of goods and services produced in an economy. This is not to say that the GDP cannot tell us anything about a region. It simply means that GDP cannot tell us much about some of the most important economic concepts, such as value and economic success.

Most of today's economists endorse the subjective theory of value. According to this theory, the value of anything exists only in the mind of an individual. Thus, values held by two individuals cannot be compared except by observing an act of exchange. And even then, we can only make somewhat obvious statements — for instance, that in his exchange Jim values good A more than x dollars, while Janis values good A less than x dollars. To take it a step further, stating that Jim values good A more than Janis values good A simply lacks logical meaning.

There is no unit of measurement for value and no apparatus that can compare how much something is worth to two different individuals. This is the principle of the interpersonal incomparability of utility. Individual value scales cannot be superimposed and quantitatively compared. Since subjective value cannot be objectively measured, it cannot be objectively added, divided, or multiplied across individuals. Consequently, GDP is not a measure of "aggregate" value.

For example, if Jim's income is $4,000 and Janis's income is $1,000, does this mean that Jim's wants and needs are satisfied better than Janis's? We don't know. Likewise, if Jim tells you that, on a scale from one to five, his level of happiness is three, and Janis tells you that her level of happiness is four, this does not tell you that Jim is less happy than Janis — because Jim's level three and Janis's level three are not the same subjective state of mind.

Any comparison of subjective states requires the same frame of reference. Even if we know that one individual can buy more goods with his or her income than another, it does not follow that we may compare the two individuals' respective satisfaction. Not only do we not know what each person wants to buy, but even if we knew what each wanted to buy, we have no way of measuring how much satisfaction each one enjoyed in doing so. (This is one of the basic postulates of neoclassical economics, formally articulated by Carl Menger in his treatise Principles of Economics.)

The dubious nature of value measurements becomes even clearer when we note that many voluntary exchanges could never be included in the GDP. For example, friendship is a direct exchange of highly specific services that does not involve an exchange of money (and thus cannot be recorded or taxed in terms of money). However, the provision of friendship is a productive activity like any other. The service is provided to other people because they value the service in the same way they value eating apples or watching a movie. Yet who can tell us the aggregate value of friendship produced in Argentina in 1998?

Another, even more obvious example is this article. The exchange between its author and the Ludwig von Mises Institute did not involve any exchange of money, and it will not be recorded as a productive activity in either the Canadian or the US GDP. However, both parties benefited from the production and exchange of the article. (It is my hope that there is a third party that will benefit as well — the readers.)

If one adopts the position that the satisfaction of one's needs and wants is the ultimate purpose of human action, then the economic success of one's actions can only be measured by ascertaining the degree to which one's needs are satisfied. But, since satisfaction cannot be measured outside the frame of reference of the given individual, the success of one's actions cannot be evaluated by anyone other than the same person whose actions are being evaluated.

Tuesday, June 11, 2013

Edward Snowden and the Free Rider "Problem"

We are all free riding on the back of what Edward Snowden did a few days ago. In economic theory, a free rider is one that benefits from the actions of another person but never compensates that person for those benefits. The public's reaction to Snowden's admission of  the NSA recording online activities of millions of internet users was overwhelmingly positive. Thus, we can assume that most people think they benefited from Snowden's actions. However, Snowden himself stated that these actions were not motivated by the expectation of a future payback (monetary or whatever) by the public. In fact, he was well aware that he would be punished by those in power who wanted to keep this information secret. So, he expected no monetary payback. On the contrary, he expect all sorts of hardships, and he still went and did what he did.

The curious thing about the free rider "problem" is that students of economics are taught that one of the roles of governments is to fix this "problem". Typical examples include education, healthcare, roads, and national defense. It is argued that, since these services benefit many people who would not necessarily have to pay to receive these benefits were they provided by a private company, there would be strong incentives for private providers to "undersupply" the service. In other words, the argument is that, due to the free rider "problem", these "public" goods will be undersupplied or not supplied at all in a private system. The "solution" is that governments use tax revenues to pay for the services prone to the free rider "problem" and offer the service to everyone at no charge.

We can learn two things from Snowden's case. First, it does not follow that, if there is a free rider "problem", the service will be undersupplied or not supplied at all to the public. We are witnesses that Snowden overcame the free rider problem of epic proportions without fussing much about it. In fact, if we go  a few years back, Bradley Manning overcame a similar free rider problem when he gave up his freedom for the sake of providing valuable information to the public. Julian Assange is another person that did something similar recently.

But, it is not only recent history that is full of people who solved free rider problems that the standard economic theory would classify as unsolvable. The list is long, and I am sure each of us could compile his or her own list. Just to name a few on my list, let's remember social activists like Martin Luther King, Nelson Mandela, and Mahatma Gandhi, scientists like Nikola Tesla, Galileo, and Copernicus, artists like Orwell, Hemingway, and Bukowski. These people overcame all sorts of personal hardships just to provide the public with services it would later enormously appreciate. These notable individuals did what they did largely without expecting monetary compensation for their services. Thus, the free rider "problem" may not be a problem at all if there are individuals who are willing to solve it.

The second thing we can learn from the Snowden case is that, in many cases, governments not only avoid using the tax money to support and compensate these people who wish to solve the free rider problem, but, in fact, governments use tax money to chase them down, prosecute them, torture them, and imprison them. Only in cases when governments see that, year after year, these brave people enjoy growing support of the public that cannot be silenced, they change their methods.

So, not all free rider "problems" are apparently the same in the eyes of governments. Some, like education, roads, police and military service, seem to have much more favorable position in the eyes of governments than the service of providing timely and accurate information about the activities of these same governments. What is it that makes the difference? I have my own answer to that question, but, unlike those individuals I listed above, I am not brave enough to provide this information while knowing that there may be negative consequences, and knowing I would not be financially compensated for those consequences. I will leave this free rider problem to someone else to solve.

Friday, June 7, 2013

Limits of the Non-Aggression Principle

Sandy Ikeda writes about "Limits of the Non-Aggression Principle". I think his discussion is informative, but it fails to acknowledge (1) that there are different theories of property rights that are outside the libertarian tradition and (2) the logical extension of the non aggression principle to freedom of contract and freedom from contract.

There at least five distinct theories of property rights: classical liberal, utilitarian, pragmatist, legal positivist, and modern libertarian. The bundle of sticks metaphor applies to the progressive movement, and this includes utilitarianism, pragmatism, and legal positivism. Thus, if we are talking about the disagreement about the "property rights regime" we are stepping outside of the libertarian theory of rights. Then, by definition, the side that comes outside the libertarian theory of rights will claim that the non aggression principle is not enough.

If we decide to stay within the libertarian theory of rights, then we can extend the non aggression principle to derive the concepts of freedom of contract and freedom from contract, as elaborated by Randy Barnett in his paper "The Function of Several Property and Freedom of Contract". Then, I don't se a reason why the non aggression principle, understood as freedom of ownership and freedom of and from contract, would not be sufficient to classify all human action in two separate categories (i.e., right and wrong). I have provided examples of this here and here. Also, some of the inadequacies of utilitarianism are shown here and here.

Thursday, June 6, 2013

If libertarianism so good, why hasn't it been tried before?

Salon asks the question in the title and seems to imply there is only one answer. However, this question has at least five possible answers--we can call them hypotheses:

1. It (libertarianism) is not really good and people know this and that's why it hasn't been tried before. Libertarianism is a terrible philosophy that no decent human being would support.

2. It is good, but not enough people realize it's good, and that's why it hasn't been tried before. Most people misunderstand libertarianism and think it is what it really is not.

3. It is good in the long run for most people, and most people are aware of this. However, people are unsure what sacrifices they would have to make in the short run to persuade those in power who oppose libertarianism to leave power.

4. It is good, but most people (wrongly) believe that libertarianism, even if it is a well intended ideal, it is just that--an ideal that can never be reached, utopia.

5. Most people's beliefs are a combination of 2., 3., and 4.

Claiming that answer number 1 is the only possible answer is a logical fallacy. We could apply this question to many events in the past and we would understand its absurdity. Imagine a person who is proposing a change X compared to the status quo. If we used Salon's logic, we would say to that person: If change X is so great, how come no one figured out the greatness of X before? Jonathan Finegold Catalan used the development of modern democracy as an example of X, but we can use many other events. For example, if an inventor came with a research proposal to a funding agency, and the funding agency said: if your invention will be so great, how come no one implemented it before, we would all say that this is absurd. Using that logic all human history would have to happen at the moment of the Big Bang.

I lean towards answer number 5. However, all those interested in answering the question in the title of this post themselves should carefully check each of the above hypotheses against reality. They may also try to come up with their own hypotheses.

Wednesday, June 5, 2013

How I, an Immigrant, Stole Canadian Jobs

I immigrated into Canada in March of 2001. I was 22 then. The first thing that was on my mind was how to steal a job from a fine young Canadian worker. Before I ended up stealing a place at a university from a fine young Canadian student with an A average and with a longish list of academic awards, I stole a below-minimum-wage under-the-table job from one construction worker, then from one night shift heavy duty cleaner at a car parts factory, then from one after-hours office cleaner, then from one part-time truck loader, and finally, I stole a job from one fine Canadian assembly line worker at a car factory. My most recent theft was that I stole a job from a decent Canadian PhD economist writing about heterodox schools of economics, ethics and law, and other social issues. And how did I do all this stealing of Canadian jobs? I put a gun to the heads of all these fine Canadian men and told them: "Move away; now I am going to do your job." So, be careful, maybe I'll steal your job too.

Tuesday, June 4, 2013

Dear Future Student of Austrian Economics

Every once in a while, I get an e-mail from an undergraduate student asking where in Canada he or she could pursue a graduate degree in Austrian economics. While no economics department in Canada offers such a degree, there are students within "mainstream" departments who take the initiative to use the Austrian approach in their studies. Since I was one of those students, some of you may find it useful if I shared my experience.  This letter is intended for all those interested in incorporating a great deal of Austrian economics into their master’s thesis or a doctoral dissertation while pursuing a graduate degree within a “mainstream” economics department.

First, let me say a few words of caution. Most of what I will say here are my subjective impressions based on what I thought was implied in certain situations and based on non-verbal cues. Although I consider these to have been extremely useful insights for me, I can’t guarantee either their objective truthfulness or general applicability.

Some of the main insights I gained through my studies are that, along with pursuing a formal degree in mainstream neoclassical economics, I was in the business of obtaining two more implicit and informal degrees: in Austrian economics and in communication.

The key here is to understand that if one wants to pursue Austrian economics in a predominantly non-Austrian environment, he or she needs to master the regular curriculum to the same level, if not better, than the other students. This is because, among most of the faculty, your interest in Austrian economics will be considered a liability. You need to earn some extra points so that the majority non-Austrian faculty are willing to swallow your Austrian tendencies. Of course, no one will say this openly, except, perhaps, your advisor to you when there is no one around. But, since I have never heard any of the non-Austrian faculty actually stating their preferences about my Austrian tendencies, this claim is one of those unprovable subjective impressions I mentioned in the opening.

In my view, the best move in the direction of persuading the non-Austrian faculty that you are a valuable asset to the department and a good master’s or doctoral candidate is to be good, if not excellent, at math. This was one of my selling points. However, I have to note that I was good at math not because I wanted to use it to buy a permission to do Austrian economics, but because I like math. However, since my math marks happened to be high, this insured me against being accused of flirting with Austrian economics to avoid math. I taught a math Camp course for the incoming masters and PhD students one year, and I was asked to teach it the next year too, but I had to refuse because I was focusing on preparing my dissertation defense.

However, like many Austrians, I think math should be used with extreme caution when expressing economic concepts. Mathematical language is highly metaphorical as an exposition device in economics. Textual logic is often a more accurate and persuasive means of conveying economic ideas. But, unlike many Austrians, I believe that math too can be a powerful communication technique if it is understood and applied appropriately. So, if there is a take home message here, it would be that one should not shun math just because he or she believes the mathematical language may not be the most appropriate for expressing economic concepts. Give it a chance and see what it does for you.

I gave math a chance and realized that one can use it to demonstrate some of the strengths of the Austrian insights. My main approach was to translate some of Hayek’s ideas about knowledge and Coase’s ideas about perfect competition into a mathematical language and then pinpoint places where, as a function of the translation process, I had to make heroically unrealistic assumptions. Then, I explained the logical consequences of those assumptions in the context of the Canadian agricultural markets. Eventually, I was able to convince my audience that there is something important we are missing if we ignore Hayek’s and Coase’s warnings about assuming too much.

When it comes to my remark that you will also be obtaining a degree in communication, this particularly refers to learning how to communicate with your advisory committee and how to persuade them that your ideas are worth pursuing. Most of them will be unfamiliar with the literature you are interested in. They will probably know something about Hayek, and maybe something about Mises, but most of them will likely consider Mises’s and Hayek’s works as a part of economic history. Their position will likely be that Mises’s and Hayek’s ideas are arcane, and that the contemporary mainstream neoclassical literature is far more sophisticated.

I struggled with this for a while until I found a solution that worked for me. What worked is that, along with the contemporary mainstream neoclassical literature, I referred to contemporary Austrian works, but without labeling them as Austrian. Then, I indicated that all of this contemporary literature stems from some earlier literature, and this is where I talked about Samuelson, Sraffa, Coase, Mises, Hayek, Menger and others, but I generally avoided labeling them as anything other than economists. This may echo Friedman’s idea that the only revelant kinds of economics are good economics and bad economics.

In the beginning, it didn’t do me any good to talk about the failure of the former USSR or the perverse incentives within the government. Somehow, this was a red flag that I was being an ideologue, and not an economist. The way I got around this is the famous frog in the pot approach. I would start with a concept or a theme that most of my colleagues were familiar with and generally agreed on. For example, I would use a situation where economists don’t know what the price of labor would be if minimum wage laws were abolished. Then, I would use small steps to show how the issue most economists were familiar with related to the problems of, say, the economic calculation and the incentive problems in socialism. In this case, minimum wage laws are making it impossible for all the willing workers and employers to express their subjective preferences through market exchanges. So, we can use Hayek’s insights about prices and knowledge to conclude that interventionism constrains the dissemination of information within society.

As I was moving toward the middle and the end of my degree, I realized that the main quality I needed was perseverance. And I needed more of it than “regular” students who already know that getting your degree is a matter of perseverance and attitude as much it is a matter of intellectual ability. There were moments when I felt I was talking to a wall and moments when I felt others are intentionally trying to misunderstand what I write and say. I decided not to make any decisions during such moments. Instead, I would find something else to do for a while. My wife is a great listener, so I would sometimes (and “sometimes” is probably a great understatement!) share my frustrations with her. She always made sure that I knew she had great faith in my ability to overcome those challenges. Eventually, all those challenges seemed small and simple.

I also realized that, whenever it seems that someone doesn’t understand my idea, it is my job to make those ideas more understandable. It is then implied that you have the utmost respect for those that don’t understand your position or disagree with you. With this respect comes the patience to invest all your energy in presenting your ideas in a way that those who disagree with you can appreciate the meaning and importance of those ideas. Thus, patience is a virtue, especially for graduate students with a strong interest in heterodox economics.

From all this, you can see that one needs a great deal of persistence and some “thick skin” to endure and overcome all these challenges. One might even ask: why do it if there are so many challenges? My answer is—because you love what you do, and because, by overcoming your challenges, you become a better person and a better economist.

Once you manage to persuade your advisory committee that your ideas are worth pursuing, and once you compile your first thesis draft, you are off to the races. I think they all appreciate that it is not easy to hold a minority position. So they will respect you for that. You will feel more and more of that respect as you progress towards the completion of your degree.  As a reward, once you graduate, you will be a firmly grounded intellectual with a clear idea of your strengths and weaknesses as well as the strengths and weaknesses of different economic approaches

Sunday, June 2, 2013

Whose justice is it anyway?

The concept of justice is generally perceived as a monolith, absolute distinction between right and wrong. However, we have all, at one point or another, witnessed a situation in which different individuals have conflicting ideas about what is right and what is wrong. These conflicting ideas often grow into violent physical conflicts, generally accompanied by intense emotions. Each side in the conflict sees the other side as immoral or even evil. This is, if not tragic, then at least unfortunate. These conflicts are most often a consequence of the fact that different individuals and groups of people implicitly adhere to different theories of justice. The trouble is that most of us are not even aware of the theory of justice that underlies our ethical convictions. The purpose of this post is to describe, as clearly as possible, the five most common implicit theories of justice used by different individuals and groups of people in today's societies. My aim is to make us more aware of our own and others' beliefs about right and wrong.

Classical Liberalism
Classical liberalism rests on the concepts of self-ownership, homesteading, and non-aggression. According to this theory, each person has the right to be the master of his or her own body. This right stems from the belief that each person has free will. The next step in the logic of the classical-liberal theory of justice is mixing one’s labour with nature—homesteading. One acquires legitimate ownership over the products of his or her own labour when these products are created by using resources that were not previously owned by anyone. In other words, natural resources belong to the one who finds them first. In cases when a resource is already owned by someone, another person can legitimately acquire this resource only through a voluntary exchange. The key feature of voluntary exchanges is that the exchanges are performed in the absence of physical aggression or threat of physical aggression. Actions that represent physical invasion of other people's property are,  according to the classical liberal theory of justice, unjust and thus should be stopped.

Utilitarianism rests on the concept of social welfare. Increasing total social welfare is the ultimate normative goal governing human action under this theory of justice. An action that increases social welfare is labeled as socially desirable. In this context, the use of state force to implement a policy designed to increase social welfare is considered justified. What is right is determined through a cost-benefit analysis. Many economists implicitly or explicitly subscribe to utilitarianism.

Utilitarians often invoke the bundle of sticks metaphor. Rights are like sticks in a bundle. Each person has a bundle of rights. According to utilitarians, some sticks can and should be transferred from one person to another if this transfer increases total social welfare. The use of force in implementing this transfer is justified under utilitarianism. This means that rights are transitory. The right to perform an action can be taken away from one person and given to another. Rights are thus in personam (in person). They are defined for each individual differently depending on the effect of these rights on total social welfare.

Pragmatism is based on the idea that conflicts within society should be resolved on a case by case basis. According to pragmatists, every conflict is different, and thus applying universal normative principles to all cases may not necessarily be the best way of reducing social conflict. However, by aiming to reduce social conflict, pragmatists develop a universal normative principle nonetheless. For pragmatists, reducing social conflicts is the ultimate normative principle that should be used to judge human action. If choosing between two actions, the action that leads to fewer social conflicts is considered to be justified.  

Like utilitarianism, pragmatism invokes the bundle of sticks metaphor and the concept of transitory, in personam rights. In this case, individual rights can be transferred from one person to another if this transfer can reduce social conflict. Thus, under pragmatism, individual rights depend on the effect of those rights on social conflicts.

Legal Positivism
Legal positivism is based on the idea that law should be studied as a positive rather than a normative discipline. Legal positivists look at the current laws of the land to determine whether or not an action is punishable under those laws. Thus, for legal positivists, current laws of the land are the ultimate normative principle. The limits of this normative principle are defined by whatever the current legislature is prepared to enforce. If an action is punishable under the current laws, then the person that performed the action did not have the right to perform it.

Like pragmatists and utilitarians, legal positivists use the bundle of sticks of metaphor and the in personam concept of rights. However, in this case, the content of the bundle of rights ascribed to each individual is determined by the current legislature. One’s rights are whatever the legislature says they are, and these rights can be taken away and given to someone else by this legislature.

Modern Libertarianism

Modern libertarianism has much in common with classical liberalism. Like classical liberalism, modern libertarianism is based on the concept of self-ownership, homesteading, and non-aggression. Unlike classical liberals, libertarians generally do not seek religious justifications for the origin of rights. The existence of free will is understood as an axiom--a self-evident truth that cannot be proven or disproven. Aside from the potential disagreement on the origin of free will and self-ownership, classical liberals and libertarians derive similar conclusions when it comes to the legitimate ownership of resources.

A Practice Example

A new factory opens in your neighbourhood. The factory specializes in spray painting of plastic car bumpers. Soon after the factory opened, the residents of your area notice a persistent smell of chemicals in their yards and homes. Some experience mild headaches while others strongly dislike inhaling the paint odour. A cost-benefit study with a 50-year time horizon has been conducted by a Harvard economist, who estimated a loss in utility to the neighbouring community caused by the paint odour to be, at most, $5,000,000. Also, a study by another Harvard economist indicated that it would cost, at least, $6,000,000 to change the factory production practices in a way that would eliminate the unwanted smell in the neighbouring community. The factory owner indicated that he/she will oppose any attempt to impose restrictions on the factory production practices because they satisfy the provincial and national standards prescribed by the Ministry of Industry. The community members are quite displeased with the situation, but are unsure of the likelihood of winning any potential legal battles. Use what you have learned about the five theories of property rights to determine whether the factory owner has the right to continue with the current production practices.

According to the classical liberal theory of justice, the factory owner _______________ the right to continue with the current practices because_________________________________________________________________________________________________________________________________.

According to the legal positivist theory of justice, the factory owner _______________ the right to continue with the current practices because ________________________________________________________________________________________________________________________________________.

According to the utilitarian theory of justice, the factory owner _______________ the right to continue with the current practices because ________________________________________________________________________________________________________________________________________.

According to the pragmatist theory of justice, the factory owner _______________ the right to continue with the current practices because ________________________________________________________________________________________________________________________________________.

According to the modern libertarian theory of justice, the factory owner _______________ the right to continue with the current practices because ________________________________________________________________________________________________________________________________________.

This exercise by no means implies that all theories of justice are equally coherent or valid. Its main purpose was to help us appreciate the underlying logic of our disagreements about right and wrong. There is more to be said on the strengths and weaknesses of different theories of justice, and this is something I intend to do in the future. Until then, let us focus on understanding the roots of our ethical disagreements.