A Favorite Joke

One of the author’s favorite jokes was usedProbably. to illustrate the issue of incentive incompatibility in one of the popular economics books by one of the author’s favorite liberalNow that those who purloined that word have sufficiently soiled it by their actions that they no longer wish to be associated with it, can we have it back please? We’ll restore its honor and bring usage in the modern English-speaking world back into conformance with history and the rest of the world. economics professor bloggers.Now, not that one. The other one. David Friedman’s popular books on law and economics, Hidden Order and Law’s Order, are on par with Landsburg’s fine work in the genre. They are wonderful introductions to the subject for the intelligent layman, but will contain details and connections which will enlighten even the well-versed. Friedman’s more recondite The Machinery of Freedom (now available in a new edition and for free!) had, along with his father’s Capitalism and Freedom, had a formative influence on the author when he was a boy. It did not quite convert him from minarchism to anarcho-capitalism, but convinced him that it was a serious possibility. At present, one desires merely to shrink the government to a size that it could be drowned in a bathtub, to be followed with a long and interesting discussion about whether one proceed along that line.

Investment Advice Is Bad

Note: Please see the opening note there. It applies here too.

A large number of papers, journals, websites, and even television channels are devoted to the subject of dispensing investment advice to the general public regarding which stocks or other securities to buy or to sell. If one finds such discussions entertaining, these may be good venues to visit. However, if one expects to earn money, all of these are completely useless. All that almost everybody needs to know about investing in capital markets follows here:

The Economist vs. The Armchair Economist

Some random googling brought to one’s attention a controversy from 2011 involving same-sex marriage, one’s favorite blogger, the most inconsistent—for good or ill—magazine in the world, and the most infuriatingly inconsistent—for good and ill—writer for that magazine. Somehow one had missed the entire kerfuffle at the time. But it is never too late to weigh in on it, perhaps throw in a few personal observations on the value of personal observations, and score the melee!

How U.S. Natural Gas and Electric Markets Were Liberated

Since the 1930s U.S. wholesale markets for natural gas and electricty, today totaling over $400 billion annually, are subject to comprehensive regulations that set every price. These laws and regulations remain in effect. Yet, today, electic and gas prices are largely set by free markets, just like those of other commodities. How can this be?

In (Limited) Defense of Professional Cartels

Past posts have decried professional cartels, like those of the legal and medical professions, and obliquely praised economists for not having much of one. Here, however, it is argued that—while they are still clearly bad and ought to be abolished—they are not quite as bad as one might naively imagine.

What Type of Irrational Are Ohioans?

In a few weeks, Ohio will vote on not one, but two, constitutional amendments on marijuana legalization. The first, sponsored by a group of private citizens, would legalize recreational and medical marijuana. The second, sponsored by the state legislature, would constitutionally bar the first. The reason these amendments are brought to the attention of the gentle reader is not to comment on the drug war—the views of the author on which are predictable and better stated by others—but rather a few curious features.

Health Care Is Like Other Services

Note: Please see the opening note there. It applies here too.

One frequently hears the argument that there can be no markets in health care. Those who so argue strenuously deny that they are Communists (or some other form of collectivist) and disclaim any intent to generally abolish the capitalist mode of production. It is just that health care is so very different from all other goods and services that—for just this little special case covering 18% of the U.S. economy—we need to adopt a collectivist approach.

To draw this distinction two differences are invoked: one with a grain of truth but far from justifying collectivism; the other, entirely spurious.

Health Care Costs Money

Note: Please see the opening note there. It applies here too.

The provision of health care requires the services of doctors, pharmacists, nurses, medical researchers, and their various managers. These services are not free for all of these people have alternative uses for their time, labor, and effort—leisure or other work. Many of these people are well-off, and so are willing to pay a high opportunity cost for leisure. Many of them are also quite intelligent and well-educated, and so have the option of other professions with high salaries they must forgo if they work in medicine. Ever since the Phoenicians invented money, the preferred means to induce these people to work in medicine has been remuneration in excess of these high opportunity costs. So health care will not merely cost money, but a lot of money.

Insurance Is Bad

Note: This and one or more follow-up posts contain nothing that the smart and well-informed regular readerAfter all, these readers had the wisdom and good taste to visit here. will not already know. But a surprising number of people without florid mental deficiencies and with a number of certificates indicating that they at least spent a substantial number of years in educational institutions seem to unaware of these facts or at least have them readily slip their mind in certain settings. Rather than explaining these facts over and over again, these posts will do so once and for all; in the future, one can then just refer such to these pages. The regular reader is invited to just skip these posts or just read them for the snark and jokes, as per usual practice mostly in the footnotes. Mostly.Incidentally, mostly also appears to be the author’s six-year old daughter’s new favorite word. Last night she asked her father for help closing some buttons on her, or rather the author’s borrowed, shirt. You see I am not really an expert on buttoning. So you think I am an expert on buttoning? Yeah. Mostly.

Insurance is a bad deal; the expected dollar value of getting insurance is always negative. In other words, on average everybody will always be better off not getting insurance.

This is not because insurance companies are run by Evil White Men who probably are Any Rand fans and beat their wifes. It would be true if all insurance companies were non-profits staffed, from the claims adjuster to the CEO, exclusively by angels who refused any salary beyond the minimum wage and performed their often-demanding jobs with perfect skill. Nor is it because, speaking candidly, of some neoliberal sophistry. It is not even because of economics. It is because of simple accounting:

Insurance companies do not have magic money-printing presses in their basements.If they did, why go through all the hassle of running an insurance company, rather than just the presses? Hence, their inflow of cash—the premiums—must on average over the long run at least match the outflow of cash—payouts to policy holders and operating costs, like employee salaries. As the operating costs are larger than 0, it follows that, on average, the amount the insurance company receives in premiums from each policy holder must exceed the amount it pays out to this policy holder.

Why Appliances Are Getting Steadily Worse

It is a commonly heard impression that most appliances just aren’t as good as they used to be. Even high-end washers don’t wash, showers don’t clean, driers don’t dry, refrigerators don’t cool, and toilets don’t flush as well as the average model did thirty years ago. That this is not just a case of the nostalgic fallacy can readily be confirmed by anyone with access to older, but still functional appliances.

Less well-known is the cause of this decline. The technology to make effective appliances has not be lost. No rare or no longer extant raw material is needed for their construction. Nor has the Great Appliance Maker Cartel finally gotten its act together and started to foist off ever shoddier products at ever higher prices.

In Defense of Local Governments’ Corporate Subsidies

It is commonly observed, and commonly criticized, practice of businesses when deciding where to locate a major new facility to demand subsidies from the localities. By playing the local governments of potential sites against each other, the businesses often manage to be granted substantial special tax breaks and other favors.

This is widely seen as disgraceful. Why should big corporations be able to bully local governments into granting them special favors that others in the area do not enjoy? Does this not require additional taxes on or reduced benefits for the unfavored? There are few practical proposals on how this practice could be eliminated—how could it be without eliminating the ability of localities to set their own tax policies?—but across the political spectrum there is agreement on the perniciousness of the practice and local governments are urged from all quarters not to give in to such demands.

This reaction is understandable and indeed many of the businessmen and politicians who engage in this practice do appear to be of more unsympathetic character than average for their respective species. But this reaction is also wrong. Under current legal conditions, this sort of rent extraction is often economically efficient and just.

Never Reason from a Price Change

The title is one of the favorite and oft-repeated sayings of Prof. Scott Sumner of The Money Illusion and EconLog. Yet, it bears repeating for many financial journalists and even economists too often ignore it with predictably confused results.

Taxes on Income, Red and Green

Prof. Landsburg recently posted a draft of his contribution to a FestschriftThe reader is urged to read the whole thing because, quite apart from the subject of this post, it has much news even for some who fancy themselves well-informed on the subject. For example, the author, while a reader and admirer of both McCloskey and the Greats of the Chicago School, had not known that he (as she then was) had been such a prominent and electrifying figure in it. for Prof. McCloskey:

Journalists—even bright and thoughtful journalists like Michael Kinsley—frequently justify the taxation of capital income with an appeal to the principle that everything ought to be taxed equally.

…

The notion of a general principle that everything should be taxed equally is pure blather, of exactly the sort that McCloskey warned us against at every turn. And if there were such a principle, it would still be incumbent on us to figure out exactly what the principle entails before jumping to any conclusions.

Why the Author Is a Lawyer, Not An Economist

The titular question is one sometimes asked of this author. For it was through his interest in economics, including the reading of the works of the economist depicted on the left, that he first had an inkling that law might be a suitable profession.The works of the other person depicted also admittedly had an influence. While the author many years later had the good fortune to meet and work with the person on the left, he has not been so fortunate with respect to the person on the right.

In Defense of the Sunk-Cost Heuristic

One of the perennial bugaboos of introduction to economics courses¹ is the sunk-cost fallacy. The fallacy goes generally like this:

Economic Illiteracy Grows at Twice the Rate of Inflation

A common trope in economics reporting is to claim that this or that figure had risen at some multiple, usually double, of the rate of inflation. For example, the New York Times reported:

The Paradox of the Lying Judge, Part 2

Another post discussed what is commonly called the Paradox of the Unexpected Hanging. The conclusion was not that the judge might have been lying, even though he turned out not to be, and that the lawyer's argument is somehow flawed for not taking that possibility into account. The conclusion was that the judge most definitely was lying (or, used synonymously here, mistaken).

The Paradox of the Lying Judge

In the discussions of the pirate puzzle an interesting point was raised when Robert Murphy of Texas Tech mused¹ that there may be an analogy to what is conventionally called the Paradox of the Unexpected Hanging.

How an Alien Can Predict Humans

Imagine you were an alien come to visit the earth to find out what makes humans tick. The purpose of your mission is determine what the humans will do in the future and, in particular, if in time they are likely to become a threat to your civilization. If so, your civilization will put an end to the human one before it becomes a threat.

Voluntary and Involuntary Unemployment

A recent post defined and used the term involuntary unemployment in the standard economic way. A person is involuntarily unemployed if and only if:

1. The person is unemployed; and
2. there exists a wage \(w\) for which that person would be willing to work; and
3. there exists somebody else that would be willing to pay \(w\) for that person's services.