Friday, June 27, 2008

Where Are the Gas Lines?

The next time you hear someone complaining about how “speculation” is driving up oil and therefore gasoline prices, ask him what exactly it is that he misses about this:

In the story Silver Blaze , Sherlock Holmes mischievously asks Inspector Gregory to give some thought to the dog that didn’t bark – which is now taken to mean any incident that doesn’t happen and is therefore informative in some non-obvious way. An event that is currently not happening, despite very high oil prices, is long gas lines a la the 1970s. I can remember when I was a schoolboy listening to my mom talk about having to go to bed early so that she could get up at 5:00 the next morning and go buy gas before it ran out for the day. (Back in those days gasoline stations generally did not have convenience stores, and were not open around the clock.)

The primary reason today’s moms and dads in America do not suffer that fate is that oil and gasoline prices were deregulated at the onset of the Reagan administration. This meant that when gasoline became harder to get, prices could go up and tell people that the consequences of their choosing to use gasoline were higher than they used to be. And so at a time when rapidly growing economies in the developing world have much higher demand for oil, and when more and more of the world’s oil supply is under the control of governments , whose incentive structure causes them to postpone needed investments, extract the oil as fast as possible to keep the electorate pacified so that they will still be in power when they wake up tomorrow, and replace skilled managers with political cronies, gasoline is always there when we want it.

Of course, we have to be willing to pay the price that the vendor is asking, which is much higher than it used to be. This is, in an almost magical way, solving the problem of greater competition for less oil in the only way that it can be solved – not through a gigantic central-planning apparatus, or showboating congressional hearings, or legislation against the usual suspects, but by allowing individuals to decide whether a given use of a given amount of gas at a given time in a given place is worth the sacrifice or not. Americans are thus making what economists call marginal adjustments – they are one at a time buying fewer and fewer SUVs, they are deciding whether that extra trip is really necessary, they are riding buses and trains more to work and driving cars less. Higher prices are leading to less consumption, just like a blackboard model predicts.

But another development that has made it easier to reconcile all the people who want gasoline with the difficulties of providing it to them is the vast increase in the complexity of the oil trading market since the early 1970s. Back in those days, oil was generally produced by big Western oil companies, who made long-term contractual commitments to governments who due to blind luck happened to preside over the territory where the oil could be found. But the shortfalls of the 1970s generated a vast market in oil futures and other financial instruments that maybe it easier both to hedge against unexpected supply disruptions and to inform potential buyers farther in advance that consumption of oil in the future would be more (or less) costly than they thought.

It is thus especially irritating, if not exactly surprising, to hear politicians, few of whom have ever had to solve a problem remotely as complex as the problems that oil company managers solve every day, going on and on about how “speculators” are driving the price of gasoline up. People who talk this way do not generally have a precise theory of how exactly this happens. Presumably, the chain of causation has a “speculator” buying an oil futures contract secure in the knowledge that the very act of his doing so will drive the price up, allowing him to sell that contract later and make money. Oil “speculators” in other words have some sort of mysterious license to make money that the rest of us are too dumb to catch on to.

But for every oil “speculator” who buys an oil contract on the assumption that he will make money off it later, there is another “speculator” who is selling the contract on the assumption that he will lose money if he keeps it, because the price is headed down. Each trader is reacting on the basis of some data that he possesses, and only the future will tell which one is right. It is true that the decision by one “speculator” to increase his offer for an existing contract applies pressure to increase the price. It is equally true that this increase informs anyone who wants to pay attention that oil will be more expensive than he previously thought, giving him incentives to economize on its use. “Speculators” who make money at any particular moment in time are being rewarded for the things they thought they knew that are true, and those who lose money are being punished for the things they thought they knew that are in fact wrong. They are behaving no differently than the student who chooses to take my class or not on the basis of what he expects to gain, than the young family deciding whether to buy a particular house because they think the neighborhood is either good or going to get better, or the voter who decides whether or not a particular politician merits his trust. All of them are gambling, and the essence of gambling is not knowing everything about the future that we wish we knew.

The collective force of what oil "speculators" know that is in fact true is a kind of free gift to the rest of us, who are able to plan our lives more effectively with this new information about whether gasoline is likely to be more or less dear in the near future. The consequence of going after “speculators” (for example, by limiting their creativity in the kinds of contracts they create) is that they reveal less of their private information, making it the oil market function less effectively. Whenever “speculators” are blamed, and that blame is successfully encoded into the law, bad things happen. Politicians, of course, generally advance their careers by pointing fingers, and so social disasters are like manna from heaven to them. In rain or shine, politicians will always get theirs . It is those of us stranded out here in reality, who actually have to make sacrifices (whether paid as money or time in a gas line) to get things like gasoline who have to bear the consequences of this kind of decision-making.


Monday, June 23, 2008


Sara Rimer writes in The New York Times of a Harvard faculty member who thinks that Harvard students are spending their lives badly:

A prominent education professor at Harvard has begun leading “reflection” seminars at three highly selective colleges, which he hopes will push undergraduates to think more deeply about the connection between their educations and aspirations.

The professor, Howard Gardner, hopes the seminars will encourage more students to consider public service and other careers beyond the consulting and financial jobs that he says are almost the automatic next step for so many graduates of top colleges.

“Is this what a Harvard education is for?” asked Professor Gardner, who is teaching the seminars at Harvard, Amherst and Colby with colleagues. “Are Ivy League schools simply becoming selecting mechanisms for Wall Street?”

The students alas, knaves that they are, seem to be increasingly attracted to the corporate life for financial reasons, leaving public-"service" jobs going begging.

But this raises a profound philosophical question. What is the "worth" of any particular vocation? Economists way back in the 19th century recognized that attempting to define the objective worth of any particular good is pointless. Rather, the value of a good is simply whatever it is worth to the person who holds it, or wants to. And so a term like "public service" is silly. It implies that some jobs -- the jobs that, for example, Professor Gardner thinks need doing in greater quantities -- are underpriced, while Wall Street jobs are overpriced.

Along these lines, a recently minted student named Adam M. Guren is quoted as saying that “[a] lot of students have been asking the question: ‘We came to Harvard as freshmen to change the world, and we’re leaving to become investment bankers — why is this?’ ” Leave aside that the world is full of people who want nothing more than to be left alone by the sorts of people who go to Harvard to change the world. It turns out that investment bankers generally do a lot more to change the world than all the king’s horses, all the king's men, all of his social workers, all of his AmeriCorps volunteers combined. Every major corporation that provides the things we depend on to keep civilization running got help at some point from some investment banker, who helped get scarce resources from where they were to where they could do more good. This is precisely why investment bankers make so much money. Why do social workers and teachers, in contrast, make so little? There are a variety of reasons, having to do with the number of people who can do those jobs, the fact that those who hold them take much of their compensation as greater leisure time or job security, and other things that don't much apply to investment bankers. Every trader in the marketplace is serving something greater than himself by creating value for those he trades with. The world positively needs our best and brightest to go into investment banking, entrepreneurship, and the other activities that move civilization forward. That Harvard's new president, Drew Gilpin Faust, failed to recognize this and therefore devoted an entire commencement speech to this non-problem, make it clearer than ever how much Larry Summers is missed at the helm of the world's most famous university.

If I were the language dictator I would permanently retire the term "public servant," at least when it is used as a synonym for "politician" or "bureaucrat." People go into such work, or work for charities and the like (and something tells me that going into missionary work, despite its low pay, is not the sort of public service Professor Gardner had in mind), because what they get out of it is worth what they put into it. So too with investment banking; neither can be intrinsically said to be more useful for society than the other. The less we hear of sanctimonious politicians and intellectuals urging Americans to avoid the "corporate" life and to instead yoke themselves to the causes those politicians and intellectuals favor, the better off we will be.

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Thursday, June 19, 2008

But Why Do Gays Want to Get Married?

The Supreme Court of California has decided that same-sex marriage (I at least give thanks that it’s not called “same-gender marriage”) is a right guaranteed by the constitution of that state. It is probably not what the people who drafted the relevant provisions had in mind when they drafted them, but let it pass. Here's what the head of one pressure group said about the decision, and the onset of marriages that followed:

“This is the beginning of a vision of what it means to live in a nation and a state that says we value one another as equals,” said Kate Kendell, the executive director of the National Center for Lesbian Rights.

This is a justification for constitutional upheaval worth thinking about. I can understand legalization of gay marriage on grounds of contractual freedom and equality before the law. Federal and state law privileges heterosexual married couples in all sorts of ways, and I have some sympathy for the argument that this represents discrimination. I also have sympathy for the argument that the purpose of marriage is to bind parents to children, and that removing that foundation stone will change society in ways that we will not like. This is why such marriage is so common in time and place. (To the self-styled "progressive" of course, all of history is a prelude of barbarism; centuries of tradition contain no wisdom that we will lose by overturning them.) On balance though, I think that the equality before the law argument is stronger, and I think the best way to resolve this problem is the separation of marriage and state. Let all religious denominations decide the rules under which they will declare people married, and let all (or at least most) people in love stipulate any contractual terms they like, with those terms to be enforced by the state like any other contract. Grant no particular government favors to any particular arrangement.

But I am much more interested in the rationale for the current trend to legalize gay marriages. The most common term that is used by the media and various courts is "recognition" of gay marriage , and this is suggestive. It assumes that gay marriage already exists as a prior moral imperative, and all we are doing now is forcing the law to accept that. The reason to legalize gay marriage, in other words, is to have the state validate the perfectly legitimate romantic desires and commitments of gay men and lesbians. Ms. Kendell's remarks above also strike this theme - legalized gay marriage is an expressive statement about what society "values."

What does it say about our society in 2008 that social movements have formed to try to attain emotional satisfaction from government? This is not a healthy sign for a free society. We long ago passed the moment when it was accepted that the state could annul individual freedom on the ground of some higher public purpose involving income equality, some assertion about the nature of fair treatment, etc. But we have now crossed a bridge where the state and its powers are to be used merely to make statements about what is socially acceptable and what is not -- to do nothing more than to engage in self-expression so that certain individuals and society are not just equal but feel equal. Gay marriage is apparently primarily about allowing gay and lesbian couples to have the sense that society values them as much as it does heterosexual married couples. (To assert that a society rather than an individual can "value" something is to make a category error, but again let us move on.)

I view gays as generally born, not made; I have no particular trouble with people of the same sex falling in love, in getting the same benefits from their employers as heterosexual couples do, provided only that the employers voluntarily agree to provide them. But I view this whole controversy, like most, from the viewpoint of individual freedom. And the news there is bad; no society that uses government for these kinds of purposes will remain free for long.

Tuesday, June 17, 2008

Shanghai Surprise

The Shanghai Stock Exchange Index has lost 52.4 percent of its value since Oct. 17, 2007, a substantial rout. As far as I can tell no one outside of China seems too worried about it. Perhaps it is just an overdue correction, perhaps it is the government's goal to pop a bubble (monetary policy has been tightening for some time), and perhaps the rate of stock ownership in China is so low that, as many suggest, it doesn't amount to much.

Or perhaps not. We shall see.


The primary force driving regulation of business in the United States, a trend that has grown without remorse since the latter half of the 19th century, is the belief that businesses are able to dictate terms -- to their workers, to their suppliers (themselves often other businesses), to society at large. This makes acceptance of the principle of equality before the law difficult. In my introductory economics class, we often discuss anti-discrimination laws. I pose the question I once read somewhere, which goes something like this: if it is alright to prohibit employers from refusing to hire someone because of that someone's race, sex, etc., is it all right to prohibit employees from refusing to work for someone because of that someone's race, sex, etc.? Without question, the primary objection students raise to this analogy is that employers and employees are different. In particular, employers have "power" over their employees through their ability to withhold something of value -- namely, the job.

Except when they don't. Employees have the ability to withhold something of value too -- their work. Sometimes, that is a thing of tremendous value, all the more so when workers are in great demand. At a time of overall economic difficulty in the US, The New York Times reports that in Iowa, workers are calling the shots:

Last year, the state added nearly 13,000 nonfarm jobs, in part because of growth in ethanol and wind energy, and lost 3,300 people from the workforce. With statewide unemployment at 3.5 percent, compared to a national rate of 5 percent, nearly everyone who wants to work and can work has a job. “We’re looking for ways to grow our population,” Ms. Buck said.

For workers like Brando Guerrero, 25, a sales analyst at Nationwide Insurance in Des Moines, the jobs shortage means companies “have to sell themselves to potential employees, because there are so many opportunities here.”

“Do they have a free gym, dry cleaning, Starbucks on site?” he said. “What are they doing to make the community better? And once you’re there, companies know they have to promote you to keep you. We’re a little spoiled in our opportunities here.”

(As an aside, the article remarkably goes on to describe this as a negative phenomenon, as something with the potential to crimp Iowa's growth.)

As I have argued elsewhere, "power" is a word that is thrown around a lot because it gets people excited during election season, but appears to have no objective meaning in a political context. We can do a little better by invoking the idea of "coercion," which (following the economist Paul Heyne) is the ability to get someone else to do something you want by limiting his options, in contrast to "cooperation," which is the ability to get someone else to do something you want by expanding his options. This corresponds roughly to the economic idea of elasticity of demand, which measures the closeness and availability of substitutes for what a particular seller is offering.

Seen this way, businesses have relatively little power in any free society. I once heard a colleague argue that Microsoft has tremendous power over her because its buggy software, in combination with its widespread use in our university, limits her ability to do her work. But the very existence of Microsoft software gives her options that she didn't have before, and in any event there are always alternatives for a particular task to Microsoft. "Power" only enters the equation if someone requires her to use a particular type of software -- if her employer, for example, requires her to use Microsoft software or lose her job (which it does not).

Only government in this sense has power by its very nature. And so struggling to combat someone else's "power" is really a way of using the government to force someone else to live for your ends rather than theirs -- in other words, for you to exercise power over them - by increasing their taxes, by threatening them with punishments if they don't follow the regulations you have persuaded the government to draft, etc. This constant war of all against all is the essence of politics and government, and anathema to individual liberty. Government is a necessary evil -- it must provide the lighthouses, defend the borders, build the dams, etc. But sometimes the evil part is more important than the necessary part. And in most modern societies, the desire to use government to redistribute opportunity, cloaked as the desire to cancel someone else's imaginary "power," has correspondingly become the most pressing threat to freedom in the world's most advanced societies.

Thursday, June 12, 2008

Life in the Old Amendment Yet

I owe Adam Liptak, who covers law for The New York Times, an apology. For awhile he has been running a series on American legal exceptionalism, the ways in which we do things differently from most other advanced industrial democracies. Most of them have made the U.S. come off looking bad – articles about our penchant for choosing judges by election, our high prison population, etc., contrasted to the more modern way things are done elsewhere. I thought to myself that if he really wanted to see what makes the U.S. different, he might look at its solid grounding in individual liberty – the idea that the rights of the individual, not the needs of society, are the foundational principle here. Would he, for example, write about the way other societies have substantially pruned back the freedom of speech?

Well, he has. The article notes the Mark Steyn trial catastrophe, and notes that it would be impossible here. To my surprise and delight, the comments to this point are overwhelmingly supportive of freedom of speech. True, a few clever ways of gutting civil liberties are conjured up. (One poster named Tiziana argues that speech should not violate the (imaginary) “right to his/her honor, his/her personal and family intimacy and his/her right to his own image (the right to be white, yellow or black, fat, old, ugly or gay)”). But given that the Times is a left-wing paper with a left-wing audience, it is reassuring to see that on the left too there are many who believe that we ought to be a country that believes that the remedy for undesirable speech is more speech.

One could quarrel with some of the details of the article – the print headline on the jump page carelessly refers to what is under discussion as “words of hate.” It is the creation of an arbitrary category of speech called "hate speech" that generates the problems - attention is diverted to whether or not something said qualifies as such, and since those on the receiving end of criticism tend to litigate much more aggressively than those who do not, putting these questions into the legislative arena (or a quasi-judicial one where the traditional rights of defendants do not hold, such as the Canadian human-rights tribunals, is so dangerous) tend to result in an ever-more expansive definition of "hate speech." (This is why the requirement that a defamation plaintiff prove falsity and damage is so important.)

Still, and in contrast to exam answers I get more often than I would like from my students, the belief in freedom of opinion appears to be still breathing.

Wednesday, June 11, 2008

A Million Little Problems

There was a letter in yesterday’s Wall Street Journal (no longer available online) by Kenneth Lee of Rayton, MO, responding to this piece by Amity Shlaes on the Great Depression and why it was Great. The author argues:

Amity Shales is just guessing that her economic theory about the Depression is valid. She cannot recreate all the factors that led to the Depression, or account for the utter despair that engulfed us. Unfortunately, FDR didn’t have the luxury of do-overs. He had one chance to act and the fate of a nation hung in the balance.

But that is exactly the problem. One of the greatest problems of the triumph of modern macroeconomics is the belief that “the economy” is a simple uniform chemical solution, one that reacts to government policy (the introduction of a precise amount of a new substance) in perfectly predictable ways. In fact “the economy” is the sum total of a constant stream of decisions by hundreds of millions of people within our borders, more and more linked to the choices of people outside it. When by crude aggregate measures “the economy” goes bad, it is not necessarily amenable to cures by macroeconomic nostrums such as a “stimulus package.” Instead, “the economy” consists of assets (including human capital) and decision-makers, with each of the latter possessing unique goals while facing different and constantly changing prospects. At a moment some geographic jurisdictions seem to be characterized on average by diminishing prospects, even as some are characterized by the opposite.

The Great Depression was not one big problem, it was a million little ones. A decade of rapid technological change after World War I was in need of sorting out, and the stock market crash of 1929 was the least imperfect way of doing that. Some experiments turned out to be successful, others failed. The trouble with FDR arrogating unprecedented power unto himself to solve the One Big Problem was that he was not betting his own money, and had only very crude tools to impose on everyone at once. The fact that he constantly changed his mind – the value of the dollar against gold would be up one week, down one next, depending on what FDR had for breakfast, rules for what kind of business conduct was and was not permissible set (and constantly re-set) by his monstrous NRA - made entrepreneurial planning considerably more difficult. Business owners, never knowing what the rules of the game were going to be tomorrow, recognized that they would be fools to invest today. When FDR made a mistake (and everything he did was likely to be a mistake, given what he knew and what he had incentives to know), it could not help but be a massive one. Something to think about the next time someone proposes a major government solution to this or that economic “crisis.”

I hope to live long enough to see the day when the history of the Great Depression and why it lasted so long taught to most of us in school incorporates this idea.


Monday, June 09, 2008

Remember Free Speech?

It may surprise you to know that in Canada news magazines are apparently not private property. Such is the only conclusion that can be drawn from watching the show trial of Mark Steyn at the hands of the British Columbia human rights tribunal, which is I suppose the farce to Stalin’s tragedy. For those of you not familiar with the case, Mr. Steyn wrote a best-selling (both in Canada and the U.S.) book called America Alone: The End of the World as We Know It. I reviewed it as part of my survey on the literature of Euro-doom, and its basic thesis is that because of demographic factors and insipid multiculturalism, Europe is likely to become an Islamist land. This in turn is a thing to be mourned because of the retrograde nature of the Islamist culture being imported into the old gray continent. The language is often rollicking, the sort of thing likely to draw scolding in faculty lounges. And now, apparently, it is actionable.

Excerpts of the book were printed in the Canadian newsweekly Maclean’s, which was subsequently pusued before several human rights tribunals (much as ambulance chasers down here look for the plaintiff-friendliest jurisdictions in which to file their claims) on charges of, as I understand it, making it likely that Canadian Muslims would be exposed to hate. Remarkably, the plaintiffs asked for the right of reply in Maclean’s – not as a letter, but as an article of equal length to Mr. Steyn’s book excerpt. Even more remarkably, as I understand it, the BC tribunal has the power to order this remedy.

The magazine’s lawyers have done the common law and its traditions proud (see its publisher scold a human-rights tribunal rep by having the audacity to mention, you know, centuries of Anglo-American legal heritage here) by mounting a vigorous defense. But the battle is already lost. In the last day of Maclean’s live-blogging of the event, lawyers for the magazine are already arguing on the turf of censorship:

Now going through the relevant provision of BC human rights code: anything that “is likely to” expose members of identifiable group to hatred or contempt. Based on Sect. 13.1 of federal human rights code. Invoking the Supreme Court’s Taylor ruling — both sides agree on this — with its definition of hatred: “extreme ill will and an emotion that allows for no redeeming qualities” in the person at whom it is directed. Also involves “unusually strong and deeply-felt emotions of detestation, calumny etc.” Intent was clear in definition — that definition was meant to be reserved for only the most extreme cases, and not to chill expressive activity.

Must be an objective test of whether hatred present — central question of law. Citing case law: It’s not how particular individuals understand a message that qualifies it as hate speech — must use an objective approach, ie the reasonable person standard.
Collins decision (actually decisions — there were two cases) are “of uncertain value.” Made clear in the text of these decisions that tribunal considers itself an administrative tribunal and and as such is not bound by previous decisions, ie precedent does not have the same weight as in regular courts. So Maclean’s suggests tribunal not emulate approach followed in those decisions, which applied “unnecessarily complicated” tests In balancing free speech against other concerns.

This reminds me of the jurisprudence that goes on over eminent domain, government regulation of the labor market and other longstanding infringements of the rights to property and contract down here. The fundamental principle – that these are second-tier freedoms, to be circumscribed as necessary in the name of the public interest – is now well-established in American law, and free speech appears irrevocably headed down that road in Canada. That it is not in the U.S. is said to be a function of the First Amendment, but absent eternal vigilance the First Amendment too is just paper.