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.

Is Social Security in shambles? Saturday, Apr 10 2010 

The answer to this question requires some careful examination that goes beyond the platitudes that we are supposed to take as self-evident. What we’re constantly told is that Social Security is in shambles. It’s bankrupt. The elderly on Social Security are outpacing workers who contribute to it, and we’re headed for a crisis very soon. Even King Banaian, the chairman and a professor of the economics department at SCSU, says we suffer from “cognitive dissonance”; it’s “part of the angst that grips” us, though none of us “want to hear of big changes.” Ed Morrissey from the Hot Air blog says it was foolhardy to listen to those who “assured us that Social Security was safe for decades without reform.”

The reason for this maelstrom is because, as The New York Times reports, “the system will pay out more in benefits than it receives in payroll taxes” this year. The recession has claimed millions of jobs and, as a result, tax receipts are down. At the same time, the Baby Boomer generation is beginning to retire en masse and will be collecting their Social Security benefits. By 2016, “indefinite deficits” are expected. Naturally, we should be frightened.

Indeed, Social Security looks like it is in shambles. Save some major reforms, which may very well including privatizing the system, the entire program appears to be heading for collapse. In fact, we’re probably better off getting rid of it entirely.

That much seems like common sense. If you collect less than you handout, you’re eventually going to go broke and the system cannot continue as is. This common sense is what drives the usual iterations about how Social Security is doomed. But, as with everything claimed to be common sense and self-evident, we should force ourselves to ask if it’s true. The assumption, of course, is that you don’t question it. It’s easy to parrot what the demagogues and pundits are saying on television and blogs; it requires some effort to look a bit beyond the rhetoric and platitudes.

Is it true that a fiscal disaster is on its way? As it happens, it’s not. In fact, if we bother to compare our Social Security system to the pension systems of other highly developed nations, just as the OECD has done, we find that the United States has one of the least generous pension systems for the elderly. Yet the fiscal hawks keep pushing on us “the great deficit scare,” though prominent economist such as Robert Eisner have been telling us for a long time now how absurd their claims are. Eisner’s book is over a decade old now, but we can learn some valuable lessons from it. Moreover, Dean Baker of the Center for Economic and Policy Research warns that the policies deficit hawks want to push through, which are are not based on sound economics, would be much more devastating than any projected deficit.

It’s certainly true the American population is aging, and faster than the workforce is growing (or will be soon). In economics, the technical literature refers to this as the dependency ratio. It tells us the number of dependent people (children under the age of 15 and adults over the age of 65) for every 100 productive people (people aged 16 to 64). The United States does not have the largest dependency ratio—far from it, in fact. And when we actually bother to look, the dependency ratio is not currently at the highest it’s ever been (nor will it be for a long time). That was around 1965. There was a problem in the 1960s, a more significant problem than we face today, back when real GDP was almost a quarter of what it is today (i.e. when we were much poorer).

What did they do about it? Did they say the rights to a decent life in a highly developed nation simply “are not natural rights of the people,” and therefore we should just stop helping the young and the elderly find a more decent life? Actually, that’s not what they did. They increased expenditures. That’s how they dealt with the unprecedented dependency ratio, one we won’t come close to experiencing for a long time. The solution to the current “crisis” is the same. You increase expenditures to ensure disadvantaged people can still live a life that isn’t marred by poverty, sickness, and starvation—so that people’s basic needs are met. There’s a consensus in every rich and developed nation that safety nets are a society’s moral obligation. In fact, the world came together and agreed on the Universal Declaration of Human Rights, which affirms these rights, calling them “indispensable for [a person’s] dignity and the free development of his personality.”

When we actually look at the published literature, there is an almost unanimous agreement that there is no “crisis,” that the dangers of an aging society are being way overblown (it is argued, in fact, that an aging society is beneficial), and that the problems that do lie ahead are quite manageable (in the same way the bigger problems of the 1960s were managed). What’s pointed out is that any fiscal problem that might possibly arise is easily addressed. For example, the Social Security board of trustees report that future problems (because there isn’t one currently) could be remedied with a simple increase on the payroll tax. The estimated 75-year actuarial deficit for OASDI is just 2% of taxable payroll (so you increase it from something like 14% to 16%). The OECD also came out with a major report on easy solutions for any possible future problem that might occur with the pension system, none of which included abandoning the pension system. One reason is because it’s recognized that there is a moral obligation on our part and that there is in fact something that separates us from primitive animals that might simply “let nature take its course” (one of the more repugnant euphemisms I’ve heard).

So the solution, then, is quite simple. We don’t need to get rid of Social Security. Nor is there a need for “big changes” or major reform.

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.

Comment on subsidies Tuesday, Mar 9 2010 

One thing some people, particularly those on the right, love to complain about is rail transportation. They hate trains, light rails, and so on. The reason is because it’s usually quite highly subsidized by government. For example, Dr. Banaian, quoting the Freedom Foundation of Minnesota, says the Northstar line between St. Cloud and Minneapolis is costing us taxpayers $42 million annually to operate. That’s “when you take into account the amortized $317 million capital costs.” (To correct the FFM, the real number would be $38.5 million, because fares cover 21% of the 16.8 operating costs.) The reason is because fares cannot cover all of the cost, so taxpayers must subsidizes the difference. Therefore, rail should be abandoned. Since it’s not possible without government assistance, we should reject rail transport and complain when it’s subsidized.

That might be true enough, but no one bothers to take the next logic step, which would be to condemn other federally or locally subsidized modes of transport. In particular, they seem to ignore the fact that traveling by road is the most highly subsidized mode of transportation. For decades, auto manufacturers have been getting bailouts from the government, because they simply can’t survive in a free market. The biggest form of subsidization, however, comes from the construction of roadways. Road travel is only possible because of the production of these roads. Yet, everyone loves to complain about trains, not roads.

By the way, that’s all very purposeful. If we go back to what is perhaps the largest engineering and logistics project in human history—the interstate highway system, undertaken by one of the Republicans’ favorite heroes, President Eisenhower—it was a very deliberate government-financed displacement of the rail system. Rail used to be the dominant mode of transportation in the U.S. at one time, but that was put to end by automobile interests, which were attended to by the government. So, if we want to look at the history of it even closer, you’ll see a history of conspiracy–by General Motors, Firestone Tire, Standard Oil, Phillips Petroleum, Mack Trucks, and the Federal Engineering Corporation–which was meant to subvert the rail system for the conspirators’ interests (namely road transportation). It was literally a conspiracy, and they were were convicted. Government took over, and now that’s why suburbanization and road transportation have completely transformed the American landscape. All very purposeful and completely reliant upon the government. That’s one reason why if you compare the United States to Europe, transportation is completely different, and the reason why European transport is so much more efficient. That’s if you want to be honest about it.

When you actually bother to look at the numbers, rail is much more efficient than road travel. One reason is the fact that rail can carry so many more people than roads. For example, a typical freeway expansion costs about $20 million per mile for both directions. Several light rails have been built for less, but the typical cost is about $35 million per mile. At the same time, however, a light rail line can carry up to 20,000 people per hour, compared to a freeway lane’s 2,400 people per hour. So rails can carry a considerable amount more people than roads can. Thus, the cost per person carried can be significantly less for rail than it is road. The Transportation Research Board of the National Academies has done a considerable amount of research in this area. In our cause, the Northstar line was created with less than $8 million per mile, much less than half the cost of upgrading existing highways.

There are other benefits as well. Besides the enormous cost inefficiency of roads themselves, vehicles to drive on roads cost a considerable amount of money in addition to the costs required to maintain and operate them. These costs become even more exacerbated for people with disabilities who need to buy modified vehicles. Disabled people pay the same price (or even reduced prices) as people who are not disabled to ride the light rail. It’s no surprise that transportation costs are the second highest cost a household incurs after housing costs. The same study shows that households that use public transportation save a significant amount money than those that do not. Rail is also safer than road transportation. Light rails are quieter, less disturbing, experience network efficiency effects, increase local property values (highways have the opposite effect), and increase mobility for people unable to drive (e.g. youngsters, the disabled, or people too poor to afford driving). Critically, rail transport eliminates or reduces many externalities associated with driving, chief among them being pollution. Light rail has the potential to be many times more energy efficient than driving, which reduces pollution, including the emissions of greenhouse gases that associated with global warming (which has been described as the “greatest market failure ever“). Rail transport can also reduce congestion, which is another common externality associated with driving.

In all, it seems as if those who complain about rails really ought to be focusing their attention on road transport. Not only is it more highly subsidized by the government, it is also much less efficient in almost every respect.

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.

Is the government inefficient? Sunday, Jan 3 2010 

I found this passage somewhere on the Internet, unknown author:

This morning I was awoken by my alarm clock powered by electricity generated by the public power monopoly regulated by the U.S. Department of Energy. I then took a shower in the clean water provided by the municipal water utility. After that, I turned on the TV to one of the FCC-regulated channels to see what the National Weather Service of the National Oceanographic and Atmospheric Administration determined the weather was going to be like using satellites designed, built, and launched by the National Aeronautics and Space Administration. I watched this while eating my breakfast of the U.S. Department of Agriculture-inspected food and taking the drugs which have been determined safe by the Food and Drug Administration.

At the appropriate time as regulated by the U.S. Congress and kept accurate by the National Institute of Standards and Technology and the U.S. Naval Observatory, I get into my National Highway Traffic Safety Administration-approved automobile and set out to work on the roads built and maintained by the local, state, and federal departments of transportation, possibly stopping to purchase additional fuel of quality level determined by the Environmental Protection Agency, using legal tender issued by the Federal Reserve System. On the way out the door, I deposit any mail I have to be sent out via the U.S. Postal Service and drop the kids off at the public school.

After work, I drive my NHTSA car back home on the DOT roads, to a house that has not burned down in my absence because of the state and local building codes and fire marshal’s inspection, and which has not been plundered of all its valuable thanks to the local police department.

I then log on to the Internet, which was developed by the Defense Advanced Research Projects Administration and post on and FOX News forums about how SOCIALISM in medicine is BAD because government can’t do anything right.

What this passage is getting at is the myriad functions that government serves— sometimes unbeknown to the general public—and it only begins to scratch the surface. It would, I think, be pretty safe to say government is responsible for or at least crucially linked to the development of modern society, not free markets. That’s just a descriptive statement, and I believe the main point of the quoted passage. There are some, like those “on and FOX News forums,” who bemoan government and its supposed inefficiency, yet take for granted all the things it provides them (like roads and police protection).

The question, really, is an economic one. One issue that arises concerns what are called public goods. In technical terms, a public good is any “good that is non-rivalrous and non-excludable.” All non-rivalrous means is that when one person uses that good another person is not restricted from also using that good (e.g., when I log on to the Internet, this does not preclude you from doing the same). All non-excludable means is that no one wanting access to the good can be reasonably denied access to that good. A decent example might lighthouse beams that provide light to ships, regardless of which ship it might be (that is, it’s difficult to exclude other people from seeing this light). As the Wikipedia article points out, “there may be no such thing as an absolutely non-rivaled and non-excludable good; but economists think that some goods approximate the concept closely enough for the analysis to be economically useful.” (The economic idea of public goods, by the way, was developed by Paul Samuelson, the pioneering Nobel laureate who died just three weeks ago.)

The problem that arises is that public goods are not produced efficiently in “free markets.” They’re under-produced. This causes what is called market failure; the market does not operate efficiently. The reason for this is because you can’t make a profit off of it, or not very much the closer the good approaches the concept of a public good. If a good produces a benefit to society that the creator of the good cannot profit from, there’s little economic incentive to produce such a good. That’s standard neoclassical economic theory, anyway. The idea is tied to what are called externalities. A positive externality is something people benefit from, e.g. clean air, but those who benefit from it don’t necessarily have to pay for it. An example I get from Milton Friedman, the great free-market thinker, is that when I plant a pretty garden in my front yard, other people get to experience the benefit of it without having to pay or do any work for it. Again, these are under-produced in free markets, according to standard theory, because there is not enough economic incentive to produce these things.

Well, one solution has been to have the government produce goods for public use, which is where the entire passage quoted above comes from. The result is that we all get to benefit from government involvement in the market place. I get the ability to tell the precise time because the government has taken the initiative to keep accurate account of time—something theory tells us profit-maximizing corporations would be unwilling to do.

At the same time, however, as the story above illustrated, people still bemoan government and its attempts to provide for the public good. The market is great, it will provide us all the things we need, and it will do so efficiently, they might say. The socialist might respond by pointing out that this is not necessarily true, and point to things like externalities and asymmetric information, which exist nearly everywhere, and conclude the market rarely works efficiently. For this reason, we need the government to provide for the public good, particularly when the unfettered market cannot. The right-winger (if they’re not Austrian) might concede that things like externalities and asymmetric information exist but posit that the government still ought not get involved because that would constitute an abridgment of our freedom, is coercive, evil, etc. The question becomes harder. Indeed, for many the question is not only economic but also ethical. At this point, I think most people begin to ask what the right balance is between market forces and government involvement. The question is left unanswered and, in mind, the answer remains to be seen.

Keynes vs. the Chicago school of economics Tuesday, Sep 15 2009 

I just finished reading a very good article in The New York Times Magazine by Paul Krugman, an economics professor at Princeton University and the recipient of the Nobel Prize in Economics in 2008. It’s pretty long, but I think it’s well worth it. In it, Krugman discusses the questions of how economists got it so wrong, of how they failed to predict the current recession, of how contemporary macroeconomics has been so illusioned. He points to the prevailing economic belief (among both freshwater and saltwater economists) in an “idealized vision of an economy in which rational individuals interact in perfect markets,” that is, the Chicago school of economics that embraces the efficient market hypothesis. Krugman contends that people do sometimes act irrationally and that markets are not always efficient or perfect—ideas that I myself have come to accept despite the SCSU academe that tends to dismiss such notions. What he propose as a solution to the current problem in macroeconomics is a reversion to Keynesian economics and a heavier reliance on behavioral economics. I can certainly agree with him on many of his points, but I doubt I can do the article justice here so I advise people read it on their own.

America’s brand of socialism Friday, Jul 3 2009 

Excuse the long period of time of inactivity. I’ve just been busy with other activities; in addition, Iran’s election has been dominating the news. There’s not a lot of things I have to say about that which has not already been said by plenty of people (namely: Iranians should have the right to peacefully assemble and protest their government, be free from coercion and violence, and to freely voice their opinions; that the vote-counting process was suspect and that Iran should conduct a recount; and that the U.S. government should not interfere).

Instead, I want to talk about what many want to refer to as “socialism in America.” See, for example, this post by King Banaian, a professor and the chairman of the economics department at SCSU. In it, he argues that America’s economic policy is most accurately described as “interventionism” rather than flat-out “socialism,” as some people have suggested. I would not call it flat-out socialism either. People who simply throw around the word “socialism” use it as a scare word of sorts, to draw emotional responses from people wary of government intervention. If we try to use that loose definition of socialism, however, it would be impossible to name any country that exists or that has ever existed that wasn’t socialist. So that doesn’t seem correct (unless you want to call every country a socialist one).

I prefer to think of socialism that has varying degrees of intervention. Stalinism, for example, might be approximated at one of the spectrum where the state has total control over political and economic systems. Current-day America would be on the opposite end, where the state is moderately involved in economic matters, mostly through regulation. We could say it’s a weak form of socialism. This brand of socialism now includes the bailouts of Wall Street, Big Bank, and the automotive industry, highlighted in Bush’s final months in office and continued through Obama’s current presidency. It’s important to look at the characteristics of America’s socialism, which is sometimes referred to as “socialism for the rich and capitalism for the poor.”

This form of socialism has long been seen as a criticism of America’s “capitalist” system. It is sometimes also referred to as “privatizing profits and socializing costs”; “lemon socialism”; “crony capitalism”; “corporate welfare”; or, as I referred to it as during the Wall Street bailouts, “Wall Street socialism.” There are an equal amount of euphemism to defend this policy, such as “trickle down economics,” “too big to fail,” “lender of last resort,” etc.


There has been constant refrain all throughout, however, which is that the state ensures big business is being protected, often at the cost of others not a part of corporate America (sometimes referred to as “Main Street,” as opposed to Wall Street). Some use this to explain the “rich getting richer and the poor getting poorer,” i.e. wealth or economic inequality and disparities. One way this is achieved is through privatizing corporate profits and socializing their costs. We saw this, for example, with the bailouts of AIG et al. at the expense of tax payers. Such actions by the state create what are called moral hazards, meaning corporations such as these are being shielded from risk (of failure) and so act differently (more riskily).


One problem is that power is being concentrated in unaccountable and unresponsive institutions (both non-governmental and quasi-governmental) such as the Federal Reserve (see, e.g., this and this post by Dr. Banaian). These institutions are unwilling to sacrifice themselves or succumb to market forces. This is why, for example, President Bush came out and admitted he had to “abandoned free market principles to save the free market system.” (Remember the old arguments that we have to abandon freedom in order to be free?) Another problem, of course, is unresponsive and non-participatory democracy in America, which I have discussed here.

This has been going on for a long time, of course. But this trend was especially marked during the Reagan era—an era that spoke a lot about free trade and laissez-fair economics, but one that rarely practiced it. Take, for example, when then-Treasury Secretary James Baker boasted to business groups that the Reagan administration has offered more protection to American business than any post-war presidency. (In reality, it was more than all of them combined.) As it happens, President Clinton was also unusually popular with Corporate America for being a Democrat—the reason being his unwavering protection of big business (NAFTA being a big part of that). This is, of course, all while the benefits of free markets are being touted. Never mentioned is the fact that America’s prosperity has been a product of state intervention, trade interference, and market distortions on massive scales completely unnatural to a truly free and capitalistic market. This has continued into the present with the bank, insurance, airline, and auto bailouts seen under both Bush and Obama.

The dominate message being relayed to the American people is that in order for big business, and therefore the American economy, to survive, it must be subsidized, protected, and bailed out by the state. Incidentally, this is why a national health care system has finally entered the political discourse. For decades now, Americans have placed the health care system as a top domestic priority, with most wanting some sort of nationalized system. Prior to this campaign, such a thing was described as “politically impossible”—never mind that it was what most of the population wanted. In 2008, that was different; we saw Edwards, Clinton, and Obama bringing up the issue. What changed? It certainly wasn’t public opinion. What changed was that manufacturing industry in America was being crippled by the soaring costs and so began supporting such a system. It is only through the process of it becoming a problem for a major sector of American capital and corporate interests that it enters the political agenda of the leadership in this country. Naturally, what will happen is that the costs will be socialized but their profits will continue to remain privatized.

That’s American “capitalism” in practice.