Minimum wage, again Wednesday, Jun 23 2010 

A little less than a year ago, I wrote a rather long post about the minimum wage. I explained the “textbook model” of the minimum wage, which many students just beginning to learn economics are taught. The basic neoclassical model tells us that a minimum wage set above the equilibrium wage in a market creates a surplus of labor or, in other words, unemployment. I disputed some of the assumptions on which such an argument rests, for example, elastic demand for labor, the “one-sector” model, perfectly competitive markets, equal bargaining power, etc. I also looked at empirical evidence that suggests that the minimum wage may in fact be beneficial for employment or, in the very least, may only have a modest employment effect (primarily for teenagers). Finally, I looked at some ideological or pragmatic reasons why people support the minimum wage and why it is more favorable than other redistribution policies (e.g. welfare). Rather quickly, this post became the most looked at article on this blog, and remained that way for quite some time. Today, it remains the second most-read post I’ve written.

Last month, King Banaian, a professor and chairman of the economics department of SCSU, wrote about about a study that concluded people who accept “enlightened economics” are more conservative than they are liberal. These “economically enlightened” folk were required to believe, for example, that a minimum wage necessarily decreases employment. I disputed this type “enlightened thinking.” Dr. Banaian has again made another post about the minimum wage, this time explaining why a minimum wage is bad policy (it prevents people from coming to “mutually agreed” wages below the minimum wage) and how there is a “consensus” among economists about this issue.

In the first post, I responded by saying there is quite a bit of evidence in support of a minimum wage, even if neoclassical theory provide none. One of the most famous example is research done by Card and Krueger, who found that the minimum wage had positive effects on employment. This seems quite stunning, considering the standard neoclassical model predicts just the opposite. So, quite naturally, one becomes rather suspicious of this research, but I think a careful review of the literature will show that the underlying conclusions that Card and Krueger come to are solid and are supported by additional research. Of course, one wonders how increasing wages can, in fact, increase employment levels. It seems counterintuitive. David Switzer, a professor of economics at SCSU, said it “goes against all of neoclassical economic thinking.”

Fortunately, neoclassical economics (as well as a little bit of intuition) does provide us with an answer. It isn’t, after all, beyond one’s imagination that an employer might actually pay its laborers a wage below the market clearing (i.e. equilibrium) wage. A firm seeking to maximize its profits has this incentive if it has the ability to do so. One scenario that might bring this about is one in which the labor market is oligopsonistic. Oligopsony is a fancy word to describe markets where there are few buyers and many sellers. (A related term that is perhaps more familiar is monopsony, where there is only one buyer and many sellers; this is the opposite of monopoly, which is one seller and many buyers.) In the case of oligopsony, the small number of firms can distort the wages in a market (in a similar way a monopoly can distort prices in a market), such that wages can be set below the equilibrium wage. Oligopsonistic labor markets reduce the welfare of laborers and creates deadweight loss. Under such circumstances, raising the wage that employers must pay their labor actually increases employment, reduces deadweight loss, and increases efficiency in the market. (A simplified graphical representation of monopsony can be viewed here.) So, in this case, the minimum wage has some extraordinary benefits.

The question becomes whether particular low-skilled labor markets are oligopsonistic or not. If the New Jersey fast food industry was oligopsonistic in 1992, that might explain Card and Krueger’s findings. However, as Dr. Banaian points out, the research in this area is not robust and is still “very young.” He may well be correct, in which case it would be helpful to look at empirical evidence and other areas that are more thoroughly understood. As I said earlier, a little bit of intuition might be able to help us explain why the effects of minimum wage may not be consistent with the standard model. In a 2008 study, David Metcalf explores why the minimum wage in Britain has “had little or no impact on employment.” Some of these include changes in hours, tax credits, compliance issues (part of the two sector model that Gary Fields discusses in previously noted research), productivity changes, price changes, reduced profits, and so on. He also considers the existence of “modern monopsony” (oligopsony) “very likely” in British labor markets. I defer you to Metclaf’s research for a more thorough discussion on how these variables can effect employment levels following a minimum wage hike. Suffice it to say, how these variable change does have an effect on employment, and may help explain why the minimum wage might have “minor negative effects at worst.”

In fact, that’s what most research has concluded. The conclusion that I support is that the minimum wage has a modest adverse effect on employment, primarily for teenager workers. It may even have positive employment effect for older cohorts, consistent with research by David Neumark and Olena Nizalova. (Neumark, keep in mind, is a fairly notable labor economist who opposes the minimum wage.) I think this is what a majority of the published literature out there reports (I can provide plenty of references, if needed), and the reasons explaining these findings are quite reasonable. That isn’t to say that there is a “consensus” against the minimum wage, as Dr. Banaian contends there is. He thinks I am “wrong on this point in terms of where the profession is on the literature.” A few years ago, The Economist, the main establishment journal, actually printed an interesting story on the issue. They wrote, “Overall, economists have become less worried about the job-destroying effects of a modest hike in the minimum wage. . . . Today’s consensus, insofar as there is one, seems to be that raising minimum wages has minor negative effects at worst.” There’s a wealth of research to support these views, as I stated earlier. What there is not is a consensus against the minimum wage, as Dr. Banaian contends there is.

In defense of his position, Dr. Banaian cites research by Neumark and William Wascher, which stated, in its abstract no less, “Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage.” Even more stunningly, Dr. Banaian readily confessed these facts in a post on his blog post he made in 2006, stating, “Both studies find a lack of consensus on the minimum wage, which I simply find shocking.” He finds the lack of consensus among economists “shocking,” but he at least acknowledges the fact. Today, he has shrunk from the issue and maintains that there, in fact, a consensus. He cites, for example, a 1996 survey by Robert Whaples, which suggested that there is a consensus among labor economists that the minimum wage decreases employment. That’s already been established. What Dr. Banaian conveniently does not do is refer to Whaples’ 2006 survey of PhD economists from the American Economic Association, which found that only less than 47% of them disagreed with a minimum wage policy. Though he readily mentioned it four years ago, perhaps the 2006 Whaples study is too inconvenient for the Minnesota House Representative hopeful in 2010.

The question, then, becomes less about the employment effects of the minimum wage, since there does seem to be some agreement on that issue. As one study by the U.S. Congress revealed, “Historically, defenders of the minimum wage have not disputed the disemployment effects of the minimum wage, but argued that on balance the working poor were better off.” That’s always been at the heart of the issue. Richard Freeman, one of the foremost labor economists and a professor at Harvard, writes in a 1994 study, “The question is not whether the minimum distorts market outcomes, but how its distortionary effects compare with those of other modes of redistribution, or with the benefits of redistribution.” He concludes that the minimum wage is a decent redistribution tool for four primary reasons that are typically ignored in the textbook models. I think his conclusion is consistent with what a majority of Americans believe. An overwhelming majority, usually over 80%, support the minimum wage. People support policies that help those who work (you need to work to earn the minimum wage), compared to those that help non-workers (e.g. welfare). They also are comfortable with redistributing their income via higher prices to help the most disadvantaged of workers. As Gary Fields keenly points out in a 1994 study, “One’s views about the desirability of a minimum wage ought to depend on more than the size of the unemployment effect alone.” I think he’s correct.

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Innovations Tuesday, Mar 16 2010 

There’s been some talk about innovations recently. “Innovation” is defined as “The act of introducing something new” by the The American Heritage Dictionary. Not only are innovations new things, but they are also useful things. Innovation is one of the greatest sources of wealth creation and increased productivity. Thus, the importance of innovation is critical to the study of economics. In fact, there is an entire doctrine of economics, called innovation economics, that explores the relationship between innovation and economic growth. The pioneer of this doctrine was Joseph Schumpeter, author of Capitalism, Socialism and Democracy. According to innovative economics, the primary source of growth is not the accumulation of capital, but rather innovation, particularly innovation that increases productive efficiency. Thus, the incentivizing of innovation is what’s critical for an economy. In this sense, Schumpeter thought capitalism was the best mode of production because it incentivized innovation the most. Today, several prominent economists have used the theories of innovation economics to explain the growth of economies.

What is absolutely clear is that innovations are beneficial. How beneficial they are compared to other sources of growth could be debated, but it’s generally widely agreed upon that innovations provide a benefit to society. For example, King Banaian, the chairman and a professor of the economics department at SCSU, says entrepreneurship, which is a major source of innovation, is a positive externality and “may do more to relieve poverty than social organizations.” It’s a positive externality because “the value of this is not captured as much by entrepreneurs themselves as by society at large.” For example, with the invention of Windows, society was benefited far more than Bill Gates was benefited. (In other words, the price one pays for innovations does not reflect the true benefit it brings.) Basically everyone agrees innovation is great for society.

However, there are also problems with the current system of innovation, or the environment in which innovation occurs. One issue that I’ve highlighted on this blog before is that of copyrights and patents. Patents and copyrights are tools used to incentivize innovation and entrepreneurship. However, as I mention in the post, patents and copyrights create what are basically government-granted monopolies. As very elementary principles of microeconomics show, monopolies are economically inefficient. This can have significant impacts in the real world. For example, “economic inefficiency” might be translated into “hundreds of thousands of Africans dieing.” That’s precisely the consequence of patents in the medical industry, which keep prices high and poor people out of the market for life-saving drugs. Thus, I think it’s important to keep in mind the real world implications when we use technical and theoretical jargon like “market inefficiency”; it has real effects.

Essentially, the argument I made in that previous post is that government interference in the market creates an inefficiency (one that has dire effects) and that government-granted monopolies are not the solution for incentivizing innovation, particularly in the medical industry. I raised this point in Dr. Banaian’s post, and I got derided for it. I was told I was “only looking at one side of the issue.” After all, there’s a benefit that patents and copyrights bring, in that they do incentivize innovation, which we’ve all agreed is a positive thing. I’ve acknowledge that. If patents and such do lead to the creation of innovation and entrepreneurship, then that is a positive thing. We might even agree that the positives of this “intellectual property” outweigh the negatives of them. But that still doesn’t mean that patents and copyrights are the best option to choose. That’s an important point to keep in mind.

What I believe is “only looking at one side of the issue” is ignoring the more harmful consequences of this type of government interference. If some of the consequences of patents truly are harmful, even if there is a net benefit, we should ask ourselves if there is a way to mitigate the harmful aspects of our incentives for innovations without mitigating the positive aspects of our incentives. If there is, then we ought to choose that option.

Even though I do believe government-granted monopolies (i.e. the result of patents and copyrights) are quite harmful, that doesn’t mean government should necessarily get out of the way. I still agree innovation and entrepreneurship should be incentivized and rewarded. After all, if we accept the arguments coming from innovation economics, innovation is the key to economic growth. So how do we incentivize innovation without the harmful effects of patents and copyrights? There are different ways, but one idea that is proposed by Joseph Stiglitz, a Nobel laureate at Columbia University, is what he calls “prizes, not patents.” One of the problems with the current system (what I call the “profit motive“) is that it does not incentivize the allocation of scarce resources into areas that are not profitable for private, profit-maximizing firms—even when there’s a tremendous social benefit in doing so. (In other words, public goods are underproduced in free markets.) One example is in the production of life-saving drugs for illnesses and diseases that afflict much of the Third World. A majority of the populations that are afflicted by these life-threatening conditions are poor, so there’s not a lot of profit to be found in selling them drugs. A prize system, which is discussed in more detail in Stiglitz’s book Making Globalization Work, would help mitigate this problem by offering a reward or financial incentive to those who produce important innovations, like life-saving drugs. Not only would it incentivize innovation, it would direct resources into areas that would otherwise would not be profitable but are still a great benefit to society. Explains Stiglitz, “Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people.”

There are other ways governments can be (and, in fact, are) critical in the introduction of innovation, which is through development that comes straight out of the state sector. CNN has an interesting article about the three most important “innovations that changed America.” The reader is asked to pick the most important of three, which are “1. The building of the interstate highway system, 2. The blanketing of the United States with coast-to-coast television, 3. The introduction and spread of the Internet.” Voting is now over, but 58% of readers chose the Internet, 29% picked television, and 14% picked the interstate system (numbers were rounded). I would agree, the introduction and spread of the Internet was the most important innovation that changed not only America but also the world. But where did the Internet come from? It came out of the state sector. The Internet was developed by the public, and it was later transferred to the private sector so that private firms could make a profit off it (that’s why we pay for Internet today). What about the interstate system, which is “often said to be the biggest public works project in the history of the world,” according the CNN article? It’s basically the same thing. This great innovation in logistics was created by the state, as I was quick to point out in a previous post on transportation subsidies. In television, it may be less clear, but the government still played an important role, particularly in broadcast television and the introduction of communication satellites. What this suggests is that, while (private) entrepreneurship is an important source of innovation, so too is the public sector.

In fact, a great deal innovation comes from the state sector. The Internet and the interstate system are two very important examples, but there are many others. In particular, high technology either comes from or is critically supported by the state sector. Science and innovation are symbiotic, and a lot of science is funded by the public. MIT, for example, is a source of great innovation; while a private university, MIT receives are great deal public subsidies, particularly through grants under the guise of military contracts. Public universities are also responsible for a great deal of innovation in both technology and ideas. This is what we should expect. If entrepreneurship and innovation is a positive externality, as Dr. Banaian contends it is, then we should expect that it would be underproduced in a free market. This image from Wikipedia shows this concept graphically. If private markets underproduce important innovations, then it suggests the state could play (as it currently does) an important role in either producing or incentivizing these innovations, e.g. through Pigouvian subsidies.

Unfree news Saturday, Feb 27 2010 

Note: This a much longer version of a letter I submitted to the University Chronicle in response to Kyle Stevens. It did not appear in this week’s edition, but perhaps it will next week’s in the edition following spring break (darn!). I’ll update this post with a link if it is.

Update: I was expecting my letter to be published in this Monday’s edition of the University Chronicle. It seems the opinions editor is unaware of any reason why it was not published in this edition and promised to publish in next week’s edition and upload it online as soon as possible. I’ll post another update with a link as soon as there is one.

Update 2: The letter was published in this week’s edition of the University Chronicle. You can read it online here.

In an opinion published in the February 22 edition of the University Chronicle, Kyle Stevens argues that The New York Times charging readers to see articles on their Web site is “good news.” People who do not subscribe to the newspaper will have to pay a fee to get unlimited access to NYT online articles sometimes in early 2011, according to Stevens. Though Stevens admits “this does not qualify as ‘good’ news” for the general public, he says “this is ‘great’ news” for the media industry. The reason, he argues, is that when The New York Times began to provide free news on their Web site in 2007, small papers like the St. Cloud Times had “to play the same game.” In other words, other newspapers also had to provide free content in order to effectively compete in the market. Apparently, the news industry couldn’t survive off of this model, and now with this change “maybe the news industry can be saved,” says Stevens. This “fee-to-see format,” says Stevens, “makes so much sense that I cannot believe it has happened.”

Does it make so much sense?

We know that a free and vibrant press is a cornerstone of civic society and liberal democracy. The spread of information, knowledge, discussion is essential for any healthy society. The question is whether we want to limit this dispersion or if we want to make it as free and vibrant as possible.

Knowledge is what economists call a “public good” in the technical literature. Thomas Jefferson wrote that ideas have a “peculiar character” in that “no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening mine.” In economics, that is the idea of a non-rivalrous good. Your possession of knowledge does not hamper or diminish mine. Therefore, we ought to spread knowledge and ideas as widely as possible. Yet, setting up fees to read the news does not accomplish this goal. Hampering the spread of knowledge creates an economic inefficiency. There is a better outcome, which is to make the news as dispersed as much as possible, to share it freely. Therefore, making the news more expensive does not generate a favorable outcome, and Stevens acknowledges this when he states “this does not qualify as ‘good’ news” for the general public. Yes, it might help a handful of private corporations maximize their profit (as Stevens correctly points out), but it does not benefit the whole of society.

Helping large corporations maximize their profits often does not produce the most economically efficient or socially desirable outcome. As many media critics are quick to point out, the interests of large corporate media are not aligned with the interests of a vibrant and democratic society.

In this sense, the ownership of the media has a substantial influence on the output of the media. This is a core thesis of the propaganda model developed by Herman and Chomsky in their 1988 book, Manufacturing Consent, as I’ve discussed in an earlier post. Our dominant source of information is increasingly being controlled by fewer and fewer large multinational corporations. That has an effect on the output, and we experience it on a daily basis. The propaganda model has strong explanatory power.

Explains John Nichols, “The primary one is that the people who own most of the newspapers are not interested in civic or democratic values. They’re interested in commercial and entertainment values, and primarily to make a lot of money.” And it these large oligopolistic corporations that are being subsided and supported by government, through copyrights, Communications Act of 1934, and so on. Furthermore, according to Robert McChesney, this is “encouraged by the corruption of the U.S. political system, in which politicians tend to be comfortable with the status quo and not inclined to upset powerful commercial media owners and potential campaign contributors. The dominant media firms enjoy the power to control news coverage of debates over media policies; this is a power they have used shamelessly to trivialize, marginalize, and distort opposition to the status quo.”

The pre-capitalist Framers of our nation readily understood that the media are to function as a prevailing counterbalance to corporate and state power. In other words, the media are meant to give the people an independent voice. Now, however, we cannot speak of corporate influence on the media, because the media are the huge corporations. They are one and the same. And when you think of the media as agenda setters, which they are, the result is what’s been referred to as a “democratic deficit,” namely because “it was understood that if you just let wealthy people run the media system, it would serve only wealthy people, not viable democratic self-government.”

Well, now there is a crisis that is widely recognized, especially by people like Stevens and those in the media businesses, particularly in the printed press. It’s been referred to as the “death of newspapers.” Small, independent newspapers, local papers, and even some of the big dailies, are closing down or firing thousands of journalists each month. The problem is real and it’s a threat to a healthy democratic process. The reasons for it are numerous and fairly apparent. The real question is what we should do about it. Stevens offers one solution, which is to make the big newspapers like The New York Times less accessible to the general public so that smaller papers like the St. Cloud Times can have a chance. I don’t think this is the optimal solutions for the reasons I’ve already laid out. But there remains a definite problem where the printed news media are struggling to stay alive. It seems reasonable to make people charge more for good journalistic news, because it’s not free to produce. You have to balance the budget somehow.

There are alternatives to increasing charges (which is not likely to save the printed press), and two leading media scholars offer some in their book, The Death and Life of American Journalism. The subject of their book deals with the problems of the current state of affairs in the media and journalism, and how we can overcome the current crisis that the media face. This was also the subject of a fascinating interview the two authors had that aired on PBS last month. Had I not watched that interview last month, I probably would have thought nothing of Stevens’ letter. But Nichols and McChesney offer an alternative to Stevens’ argument, which I think is both sensible and pragmatic. What they suggest is subsidizing independent journalism. I can’t do their proposal much justice here, so I implore you to listen to the interview or buy their book (both of which I linked to above).

Obviously, the idea of a government subsidy makes a lot of people uneasy, and not just right-wingers who want to see the government disappear. There are concerns by people who think the government getting involved in the media would be akin to something like state media or, at the very least, government meddling in the generation of opinions and ideas. This, too, would be very unhealthy for a democracy. These concerns are addressed by Nichols and McChesney and they offer solutions to prevent any of this from happening. And the reason they urge a government subsidy for journalism is for the same reason that the Founding Fathers were very aware of. A free press is meaningless without a vibrant press. This was instantly recognized by the key Framers of the United States. So, for example, there were debates in early American history about how to subsidize the press, to ensure the democratic process flourished. And the government offered many subsidies to the press, one of the primary ones being postal subsidies. Congress debated how little presses should be charged for postal services. James Madison, the Father of the Constitution, thought the debate was nonsense. He thought there should be no charge, that it should be completely subsidized by the government, because anything less would interfere with the free flow of ideas and opinions, which, again, was recognized as the cornerstone of liberal democracy. Madison wrote, “Whatever facilitates a general intercourse of sentiments, as good roads, domestic commerce, a free press, and particularly a circulation of newspapers through the entire body of the people … is favorable to liberty.”

In order for there to be liberty, there needs to be a free press in addition to a vibrant press that offers a whole range of ideas. Madison and other key Framers understood this well. It’s the only way that independent voices could actually challenge, for example, state power. It’s how the abolitionist press stayed alive even during the years Congress banned any debate about slavery. Journalism and democracy are intimately linked, and so it is our imperative that we support it to its fullest. If one role of government is to protect and ensure democracy, as some libertarians might agree it is, then there exists an obligation on its part to protect and ensure independent journalism, in the same way it ensured it during the early years of the republic. One idea that Nichols and McChesney offer is vouchers or tax write-offs for citizens to give money to independent news sources. Again, you can read their book or listen to their interview for a more in-depth discussion. When you look at the subsidies the early republic offered to the press as a percent of the GDP, it would translate into roughly $30 billion in today’s money. Moreover, when you look at the places recognized as the freest and most open democracies in the world, where the press is rated as the most independent and freest, it’s places like Finland, Norway, Sweden, and so on, where they also offer roughly $30 billion in subsidies. It is in this way that vibrant, healthy, and independent news is ensured and maintained. Writing for the CATO Unbound blog, Paul Starr says, “we should be open to the idea” of public subsidies for journalism. I also think we should be open to the idea as a viable and pragmatic alternative to Stevens’ solution, to ensure that independent journalism can survive, that it is vibrant and healthy, and that it can continue to challenge corporate and political power.

What’s wrong with government intervention? Saturday, Feb 6 2010 

Many things, the neoliberal will answer. Many neoliberals believe government intervention in markets result in inefficiencies. Interferences make the market unfree. Of course, free markets allocate resources efficiently, so you reduce inefficiency when the government interferes. That’s a fairly typical argument. You can look at all sorts of neat equilibrium models and graphs that might show this to be the case (particularly when you accept the assumptions on which they are based).

One problem that government can introduce is the reduction of competition. Competition within markets is believed to achieve better results (economic efficiency) than when there’s no or little competition. For example, society is better off when there exist perfect competition within a market than when there’s a monopolistic firm that exerts market power. (Perfect competition doesn’t actually exist in the real world, but it does in theories, so we restrict ourselves to theoretical discussion.) So government is decried for making markets less efficient. But, quite curiously, this criticism is very selective. We can’t have government enforcing a minimum wage, for example, because that creates an outcome that diverges from the market equilibrium (i.e. creates an inefficiency). At the same time, however, we need copyrights and patents to protect our works and government needs to protect this.

As I said, it’s selective and actually fairly ideological. One opposes government when it suits one’s beliefs and one supports government when it suits one’s beliefs. When you oppose it and when you support it is often reliant on your ideology. So let’s look at copyrights, which are widely supported by anti-government right wingers. It’s a form of protection. It’s something the government provides to producers that results in less competition. In other words, it makes the market less efficient. The technical term is called a “government-granted monopoly.” It provides the exclusive right to a firm or individual to produce something. If I want to produce (or reproduce) it, I’m not allowed to. Keeping to neoclassical economic theories, society is made worse off. Those on the right like to rail against “coercive monopolies,” but not this coercive monopoly. In this case, we need government. Specifically, we need government to protect our monopolistic power. So you can’t even begin to talk honestly about “free markets” when you’ve got government enforcing monopolies, yet “free markets” remain to be hailed.

So why do right-wingers support copyright? There are reasons. One reason to support government intervention is because free markets are inefficient. (You probably won’t it hear stated in this way.) It’s stated that copyrights, patents, and so on are required for innovation. If I can’t get the sole right to write a book (or this blog post), I won’t write it. That’s the argument. If people can simply copy a song file and torrent it to everyone for free on peer-to-peer networks, then I’ve got no incentive to produce the song. (Note: I wrote a letter to the University Chronicle in 2007 in support of music copyrights.) If we accept this, then we should probably accept that free markets aren’t perfect and require government intervention to work properly. That might be reasonable to accept. But should we really accept the argument that copyrights and such are necessarily required to incentivize production? Are copyrights really what incentivized the great works of Shakespeare, Mozart, Michelangelo, or Newton? Actually, they didn’t exist back then. And when you actually look at copyrights today, particularly in the music industry, it’s the not the original creator that retains those rights. Many famous creators of “intellectual property” actually forfeit their rights to corporations, usually even before the product is created. In fact, nothing I write on this blog is copyrighted; yet, I continue to write. Maybe nobody wants to reproduce what I write, but look at Wikipedia, the content of which is not copyrighted and yet forms the basis for one of the most successful Web sites and encyclopedias in the world.

However, there can also be very dangerous aspects of copyrights. When you simply say “the market becomes less efficient,” that’s one thing. But what this might actually translate into in the real world is hundreds of thousands of Africans dieing. That’s a consequence of patents. When you simply talk of it in terms of “efficiency,” you sort of remove the moral dilemmas of what’s actually being talking about. This is one of the criticism Joseph Stiglitz, a Nobel laureate at Columbia University, levels against patents for medicines and vaccines. In his book Making Globalization Work, Stiglitz devotes a chapter for an idea he calls “prizes, not patents.” Explains Stiglitz in the Post-Autistic Economics Review, “But the patent system not only restricts the use of knowledge; by granting (temporary) monopoly power, it often makes medications unaffordable for people who don’t have insurance. In the Third World, this can be a matter of life and death for people who cannot afford new brand-name drugs but might be able to afford generics. For example, generic drugs for first-line AIDS defenses have brought down the cost of treatment by almost 99% since 2000 alone, from $10,000 to $130.” For more of Stiglitz on intellectual property and medicines, please see this video or read the article I just linked to.

Stiglitz’s proposed solution is setting up a prize for developers who develop important life-saving drugs. He writes:

There is an alternative way of financing and incentivizing research that, at least in some instances, could do a far better job than patents, both in directing innovation and ensuring that the benefits of that knowledge are enjoyed as widely as possible: a medical prize fund that would reward those who discover cures and vaccines. Since governments already pay the cost of much drug research directly or indirectly, through prescription benefits, they could finance the prize fund, which would award the biggest prizes for developers of treatments or preventions for costly diseases affecting hundreds of millions of people.

Of course, the patent system is itself a prize system, albeit a peculiar one: the prize is temporary monopoly power, implying high prices and restricted access to the benefits that can be derived from the new knowledge. By contrast, the type of prize system I have in mind would rely on competitive markets to lower prices and make the fruits of the knowledge available as widely as possible. With better-directed incentives (more research dollars spent on more important diseases, less money spent on wasteful and distorted marketing), we could have better health at lower cost.

I think it should be clear now that government-granted monopolies are not the only way to incentivize production and there a lot of problems in the way contemporary copyrights are constructed. With the greater success of copyleft and open source in recent times, I think it’s time we begin to contemplate alternatives. The dispersion and sharing of knowledge—e.g. the very purpose of university—is of paramount importance to society. We should not be trying to restrict it through government interventions.

A comment on the recent Supreme Court decision Saturday, Jan 23 2010 

Recently, the Supreme Court ruled in Citizens United v. Federal Election Commission that corporations (and labor unions) can spend unlimited amounts of their money on elections. Essentially, the Supreme Court ruled that corporations can run campaigns. Many have lauded the decision as a great defense of First Amendment rights.

Is it? “Freedom is awaking from its coma today,” declares conservative Rush Limbaugh. Dr. Spagnoli, writing on his blog, states, “there’s no reason to deny corporations [free speech].” This is because “free speech [is a human right],” he says. I agree with Dr. Spagnoli, free speech is a human right. But are corporations humans?

As it happens, corporations are not people. They are social constructs, entities created to carry out specific functions. However, as I discussed in a earlier blog post, Are corporations individuals?, corporations slowly became considered “persons” through a series of judicial rulings. There is no law that says corporations are humans. It’s not anywhere in the Constitution. The Fourteenth Amendment was passed after the Civil War to give rights to people, specifically the newly freed slaves. It declared, “No State shall … deprive any person of life, liberty, or property, without due process of law.” It affirmed the rights of people. It was there to protect blacks from the evils they had endured under the brutal regime of slavery that had oppressed them for centuries.

Well, corporate lawyers were very savvy, and they began to say, “look, corporations are persons.” Corporations deserve the protection that was meant for freed slaves. In fact, when you look at the history of it, it’s very perverse. According to work done by Doug Hammerstrom, of the 150 cases involving the Fourteenth Amendment heard by the Supreme Court up to Plessy v. Ferguson, only 15 involved blacks. The other 135 were brought by corporations. This is the exact opposite of what we would expect to happen. However, through a series of activist decisions by judges, which has no basis in law, corporations gained personhood. Richard Grossman proclaims, “600,000 people were killed to get rights for people, and then with strokes of the pen over the next 30 years, judges applied those rights to capital and property, while stripping them from people.”

So now they can say corporations deserve the rights of flesh-and-blood persons, like the right to free speech; the ability to sue others; the right to “life, liberty, or property”; the right to own other businesses; the right to run campaigns; and so on. But there’s nothing inherent to a corporation that says its a person and deserves the rights of flesh-and-blood people. That’s only come about through very perverse judicial activism (e.g. Santa Clara County v. Southern Pacific Railroad). Moreover, there’s nothing in economic theory that says corporations ought to be treated as persons. That corporations should run campaigns has got nothing to do with capitalism. There’s nothing about efficiency that says corporations should be allowed to do this. In a free and competitive market, it wouldn’t happen.

Anyone who argues that corporations should be treated as persons and have the same rights would also have to accept that corporations should also then be allowed to run for office, hold office, to vote in elections, and so on. But no one agrees with that and for obvious reasons. Moreover, Dr. Spagnoli does not say that only corporations should have the rights of persons. He also says, “corporations, trade unions etc.” should not be denied the right to free speech. Well, what does “etc.” constitute? If a corporation is a person, why not a sports team? Can a townhome association be considered a person under the Fourteenth Amendment? Why not?

What happened before corporations were granted the rights of persons? They were chartered by the state to carry out some function that was meant to serve the public good. They had a specific charter, their shareholders were accountable, they had limited rights, they were regulated, and so on. That they should be running campaigns was completely unfathomable, particularly to the Founding Fathers, who were vary wary of corporate power. Within this framework, corporations had moral obligations to the communities they served. With judges granting corporations personhood, however, the moral obligations we ascribe to flesh-and-blood persons was not ascribed to corporations. The moral obligations and social responsibility that corporations have, according to people like Milton Friedman and Ayn Rand, is to serve their own interests. The only obligation corporations are to have is to maximize profits. These are not the same type of moral obligations we think flesh-and-blood people have. Most decent people, ignoring extreme ethical egoists, believe we ought to consider what happens to other people, that we have an obligation not to harm others, that we should not rape the environment, that we should not ignore grave injustices, that we should treat flesh-and-blood people as ends rather than means, and so on. Even those who support corporate personhood do not ascribe these moral obligations to corporations. These are very special types of “persons” indeed.

Should people have the right to free speech in a democracy? Yes. Are corporations people? No.

The cost of production and living standards Saturday, Nov 7 2009 

Updated below

There’s an interesting discussion at the SCSU scholars blog regarding capital and labor (click comments). Classical economic theory tells us that firms are (or at least seek to be) profit-maximizing (whether or not that is true will be ignored here). Profits, remember, are revenues minus (economic) costs. So one way firms can increase profits is by lowering the costs of production. Classical analysis states there are three factors of production: land and natural resources, labor, and capital (sometimes referred to as “the means of production”). It follows, as Dr. Banaian points out, that when the cost of labor relative to the cost of capital goes up, firms will substitute capital for labor when possible. That is, firms will attempt to increase profits by using the cheaper factor of production. (Of course, the decisions a firm can make in the long-term and in the short-term differ, but that will be ignored here. It is also important to note whether the market for labor and capital are perfectly competitive; it’s dubious, but I assume they are here for simplification.) Theoretically, a firm can look at their isocost and isoquant curves to determine the cost-minimizing combination of labor and capital, but we don’t need to get into that level of technical analysis.

Anyway, we might just assume firms will choose to replace capital with labor when it becomes cheaper to do so. Does this make cheap labor a bad thing, as “spencer” posits? He claims the move to labor-saving capital has been the key to rising standards of living (apparently the “liberal” position). Therefore, labor-intensity is a bad thing and high capital-to-labor ratios are a good thing. I don’t think it matters. In my mind, and I’m sure in the firm’s, what matters is what’s cheaper. If the cost of production is lower by increasing capital, then increase capital. If the cost of production is lower by increasing labor, then increase labor. That’s how I see it. That’s how you increase profits, which is assumed to be a good thing. Still others disagree, arguing that labor retention is a higher moral obligation than profit maximization (apparently the “conservative” position). In particular, the “radical perspective” in labor relations sees a conflict between capital and labor wherein organized labor fights against their exploitation by capital. The importance of the mobility of labor and the mobility capital is highlighted here, with the argument that capital is mobile and labor is more immobile (for example, a firm can lower wages just by threatening to move its manufacturing).

What I want to focus on, though, is the point that spencer makes. It reminded me of a passage I read from “Cannibals and Kings” by Marvin Harris (I’ve referenced the book on previous occasions—see here). Here is a somewhat long passage from pages 266-271—the end of Chapter 14 (“The Origin of Capitalism”) and the beginning of Chapter 15:

Capitalism, then, is a system that is committed to an unbounded increase in the production in the name of an unbounded increase in profits. Production, however, cannot be increased in an unbounded way. Freed from the restraints of despots and paupers, capitalist entrepreneurs still have to confront the restraints of nature. The profitability of production cannot expand indefinitely. Any increase in the quantity of soil, water, minerals, or plants put into a particular production process per unit of time constitutes intensification. It has been the burden of this book to show that intensification inevitably leads to declining efficiencies. That declining efficiencies have adverse effects upon the average standard of living cannot be doubted.

What must be made clear is that environmental depletions also lead to declining profits. The relationship is not easily understood because, according to the laws of supply and demand, scarcities lead to higher prices. Higher prices, however, tend to lower consumption per capita (the market symptom of declining living standards). Profits can be sustained temporarily if the drop in per capita consumption is compensated for by an expansion in total sales based on population growth or the conquest of international markets. But sooner or later the curve of rising prices caused by environmental depletions will begin to rise faster than the curve of rising consumption and the rate of profit must begin to fall.

The classic entrepreneurial response to a fall in the rate of profit is exactly the same as under any mode of production that has been overintensified. To compensate for environmental depletions and declining efficiencies (which manifest themselves as falling rates of profit), the entrepreneur seeks to lower the cost of production by introducing labor-saving machines. Although these machines require more capital and hence usually have higher start-up costs, they result in lowering the unit cost of production.

Thus a system that is committed to perpetual intensification can survive only if it is equally committed to perpetual technological change. Its ability to maintain living standards depends on the outcome of a race between technological advance and the relentless deterioration of the conditions of production. Under the present circumstances, technology is about to lose that race.

Chapter 15: The Industrial Bubble

All rapidly intensifying systems of production, whether they be socialist, capitalist, hydraulic, neolithic, or paleolithic, face a common dilemma. The increment in energy invested per unit time in production will inevitably overburden the self-renewing, self-cleansing, self-generating capacities of the ecosystem. Regardless of which mode of production is involved, there is only one means of avoiding the catastrophic consequences of declining efficiencies: to shift to more efficient technologies. For the past 500 years Western scientific technology has been competing against the most rapidly and relentlessly intensifying system of production in the history of our species.

Thanks to science and engineering, the average standard of living in the industrial nations is higher than at any time in the past. This fact, more than any other, bolsters our faith that progress is inevitable—a faith, incidentally, shared as much by the Comintern as by the U.S. Chamber of Commerce. What I want to emphasize here is that the rise in living standards began only 150 years ago, while the race between rapid technological change and intensification has been going on for 500 years. During most of the post-feudal epoch, living standards hovered close to pauperdom and frequently fell to unprecedented depths despite the introduction of an unbroken series of ingenious labor-saving machines.

I’ll leave analysis of the above excerpt up to the reader (keep in mind this was written in 1977).

Update: The Becker-Posner blog has a post about the recent upshoot in production vis-a-vis higher unemployment. Dr. Becker, an economics professor at the University of Chicago, argues that the increase in productivity is, in the long-run, a good thing despite the higher unemployment. His argument is that it will ultimately lead to higher employment, in the same way the advent of the computer, the Internet, biotechnology, or supermarkets have. He is assuming here, like “spencer” does at SCSU Scholars, that technological advances have been the source of the recent spike in productivity.

Posner’s response, however, is that technological innovations have not been the cause of increased productivity over the past two quarters. “More likely they have been due to old-fashioned cost cutting spurred not by technological advances but by economic distress. The only explanations I have seen offered for the productivity surge is cutting wages and working the workers harder. I have found no suggestion of any technological change that might be responsible for such a large, sudden surge in productivity,” he states. The optimism, then, that Dr. Becker displays seems to be unfounded. If firms are merely adapting to the dire economic situation simply by old-fashioned cost-cutting techniques, the spurt in productivity is not likely to last and not likely to result in increased employment.

Libertarianism. What’s in a name? Sunday, Nov 1 2009 

I just got done reading an excellent article by Kerry Howley in Reason, a libertarian magazine. I think the article raises some very thought-provoking questions concerning libertarianism.

What exactly is libertarianism, and what does it entail? Is it, as the article asks, the opposition to coercion and authority only by the state? Or does it entail opposition to other forms of coercion and authority outside of the state, such as that coming from cultural norms, societal practices, traditions, or other institutionalized structures and conventions? If libertarianism is concerned with liberty, particularly individual liberty, do we define it only as liberty from the state? Are there other ways individual liberty is restrained that libertarians ought to care about? Are there practices and norms all people calling themselves libertarians ought to fight against, “even if no one has bothered to codify the rules in an Important Book and call them ‘laws'”?

A central question for left-libertarians or leftist anarchists is whether private power is just as bad (or even worse) than state power. To them, the answer is a resounding “Yes.” This is why, for example, they oppose capitalistic economic orders that act to propagate “unaccountable private tyrannies” (corporations) and private property. Traditionally, libertarianism was associated with these leftists. Today, and most notably in the United States, “libertarianism” is associated with rightist libertarians—those who advocate free markets and the protection of private poverty. American libertarianism, most closely associated with the Libertarian Party, is very much a part of the Lockean imagination. To quote Ayn Rand:

The right to life is the source of all rights—and the right to property is their only implementation. Without property rights, no other rights are possible. Since man has to sustain his life by his own effort, the man who has no right to the product of his effort has no means to sustain his life. The man who produces while others dispose of his product, is a slave.

These are profound remarks. According to Rand, “Those who advocate laissez-faire capitalism are the only advocates of man’s rights.” Similarly, as Murray Rothbard states, “Capitalism is the fullest expression of anarchism, and anarchism is the fullest expression of capitalism.” As Howley explains, however, free markets and anti-statism are only one part of the story. “It’s possible to be an anti-government zealot with no interest whatsoever in individual liberty,” she writes.

According to Howley, “libertarians for whom individualism is important cannot avoid discussions of culture, conformism, and social structure. Not every threat to liberty is backed by a government gun. . . . when a libertarian claims that his philosophy has no cultural content—has nothing to say, for instance, about society’s acceptance of gays and lesbians—he is engaging in a kind of cultural politics that welcomes the paternalism of the mob while balking at that of the state.” As I said, I think this raises many interesting questions. Particularly, if we see a social injustice that we perceive to be limiting the individual liberty of certain people, is it our moral obligation to attempt to change that? If a particular society’s mores dictate that women should be restricted to the confines of the home, is it the libertarian’s job to fight against it? Importantly, would that not entail forcing our cultural preferences and ideals on others whom we might consider “backward”? As the response by Todd Seavey to Howley’s article strongly proclaims, “Freedom’s Just Another Word for Kerry Howley’s Preferences.”

Truly, all libertarians should be concerned with the exercise of authority, in any context. As the left-anarchist Noam Chomsky posits, “The core of the anarchist tradition, as I understand it, is that power is always illegitimate, unless it proves itself to be legitimate. So the burden of proof is always on those who claim that some authoritarian hierarchic relation is legitimate. If they can’t prove it, then it should be dismantled.” To wit, it is not enough to simply confront political and economic orders that restrict individual liberty; rather, it is required of us to oppose even the social and cultural orders that act similarly, working under the basis that power is illegitimate by assumption. Writes Howley, “In turning so definitively from the left, libertarians denied themselves a powerful vocabulary with which to engage discussions of individualism.” Even those libertarians concerned with free markets and other rightist agendas ought to concern themselves with other institutionalized forms of coercion and authority. The answer to the question “Are Property Rights Enough?”, I believe, is “No.”

Your own thoughts about the nature of libertarianism are invited.