I have been complaining for a long time about people complaining about food prices in Yemen. Most of the time, the only solution that people come up with is that the government should do something. It turns out that the government had done something, it had fixed the number of importers of food into the country. This is what allowed weird pricing to go on in the country.

According to this article, it sounds like the Yemeni government wasn't the only one to blame. The way the article is written, it sounds as though Australia had only "licensed" one company to import wheat into Yemen. Now they are opening it up to other companies. When are countries going to stop meddling where they are not needed? Why does one need to be licensed to sell wheat to people in Yemen? With any luck, competition will be allowed to do its work and help people out there...

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libertarian, yemen, free trade, food

With the price of various grains going up, there has been a general cry for more supply. Some people have taken to claiming that we are doomed, there are now too many people to support on the Earth. That's nonsense of course, there is an enormous amount of potential for more food production. A lot of the developing world could supply much more food. Many of those countries' economies are based around agriculture, but they are incredibly inefficient at it. Most of those farms are literally based on the "40 acres and a mule" concept. That needs to change, not only in order to feed everyone, but in order to get those economies on track.

Agribusiness is the answer. In 1900, 40% of the American work force worked in agriculture. Now, it is around 2% even though we produce much, much more food than before. With the use of automation and machinery, it takes far fewer people to raise food. Of course, as we lost all of those farm jobs, the standard of living and the economy dropped through the floor, right? Umm, no, it went up and up. If people are not required to toil in fields, they can do something else. If given a chance, people will think of something to do. We have seen a similar thing happening in the manufacturing sector. It takes far fewer people to make many more things. That's good. A human doing what could be done with a machine is the definition of a wasted resource.

Africa could be feeding most of the world if efficient farming methods were used. Zimbabwe used to be a model of efficient farming, then Mugabe took land from the productive farmers and distributed it many more less efficient farmers. It was a political/racial decision, but the men that received the land did not know how to use it efficiently. Zimbabwe now has to import most of its food. They went from being the "breadbasket of Africa" to being one of the poorest nations in the world in 10 short years by going away from the agribusiness model. The distribution of land into smaller farms was a disaster for the economy as a whole and it made those farmers much worse off.

So why do so many organizations try to promote small farms? The world bank, numerous NGOs and charities make this a primary goal. Why not try to foster good property rights so that land owners can sell or rent their land to much more productive farmers? Everyone would be much better off. Freeing resources to be used for the most productive uses is one of the keys to a well performing economy.

There have been some complaints that the gas price is rising here in Yemen. The "official" price for 20 liters of gas is 1200 YR, that's about $1.14 a gallon. Recently, there have been complaints that places are refusing to do 20 liters for that price, they "demand" 1800 YR instead. That's a 50% increase, and that's got to mean something. The government owned stations are still pumping at the official price, but if other stations can get away with charging 50% more, then I predict that the government stations will have long lines if not actual shortages. There's no stopping prices, if price is rising, either supply is dropping or demand is increasing. In either case, there is less gas than there is demanded... The last time the government tried to raise prices there were riots. The same thing happened in Iran when they tried to raise the price of gasoline. As the price for gas keeps going up, governments (and especially ones like Iran and Yemen) can afford subsidies less and less. That's one of the big problems with subsidies, people quickly become accustomed to the low prices and it doesn't take too long before they feel entitled to them. When are governments going to learn?

The republican candidates are campaigning in Michigan for tomorrow's primary. I don't know why I'm still surprised, but I am. Every year, politicians promise that they'll do things to improve the economy, to improve people's standards of living. Just once, and especially in Michigan, I'd like someone to say that they aren't going to do a damn thing for a particular state. It should not be the federal government's job (and therefore everyone's money) to help a place that has consistently shot itself in the foot. It's one thing if every state is in bad shape. I could at least understand the argument that the feds should do something about it, but one state? C'mon...

If Michigan's wants to improve, it will have to do it on its own. If the people think that the state is underperforming, they should take a look at some of the states that are doing well and then model their approach on the successes of those states. Instead, they engage in wishful thinking. It's time that things changed in Michigan, and it's time for the people of Michigan to do something instead of blaming other people (the Chinese, the Indians, etc.) and expecting other people to solve their problems.

Michigan, heal thyself!

CNN did a little story about Yemen's "Queen of oranges." You can read it here. It's a nice story, a poor woman from Yemen's rural area does well and is now wealthy. She flies to various parts of the world and does lots of business. It's great, she had to work through a lot of cultural problems to get to where she is and deserves all of it. Unfortunately, this article also gives us a glimpse of some of the major economic problems that Yemen has. You'll notice that she is one of 8 licensed fruit brokers in Sana'a. Why does one need a license to be a fruit wholesaler? Why does the government need to be involved at all? It's one thing to need a business license (for tax purposes), but it's another to have a special permission to sell fruit.

It's another revenue stream for the government of course. Like most economies that are not doing well, the Yemeni economy is burdened with way too many bureaucratic thumbs in the pie, let's not even talk about the various government people taking their own, private cuts of the business... . One wonders how many more people (and women in particular) would become successful if it was easier to start a business there. Make it easier to start a (legal) business, and you'll see improvements.

I previously covered the ideas behind the practical reasons behind economic conservation. There are several ethical/moral reasons as well. Even though many people see rationing by price to be greedy, not very nice, and even immoral, I think that it is the opposite. Price rationing is not only the most effective way of rationing a scarce resource, it is also the most just and most moral way of doing it.

One of the insights into the economic way of reasoning is that there is a difference between market interactions and interactions between friends and family. Economists do not actually auction off dessert or TV time among their children even though that would be the market savvy way of doing things. We aren't interested extracting our producer's surplus from the consumers in our own house. We value love more than any "profits" that we could possibly get in those situations. Where many people get screwed up is they try to apply those same values to the world at large. If everyone were indeed friends and loved one another, it might work. In reality, love is scarce and it's impossible to know everyone let alone love them. So how do we keep a society functioning and growing? Through market interactions. Where there isn't love, the market can distribute resources to where they are needed. Adam Smith wrote that it was not through love that the butcher and baker provide us with food, it is due to their own self interest that they provide these services.

Hayek wrote an entire book about this idea, it's called "The Fatal Conceit." What was the fatal conceit? It was that we can treat the world at large as if they were our family. There is little worry about treating our family like the outside world, but the warning that he gave us was that if you try to treat society like your family or your family like society, you will ruin both. It's pretty obvious that the way to avoid most of the catastrophic societal ills is to make that society as wealthy as possible. History (and all the theory in the world) has shown us that that wealth is created through distributing resources through market activities.

The reaction allowing prices set by market operations being "unkind" or "soulless" comes from falling under the conceit that we need to treat everyone as if they were in our family. When I say "we" I am talking about policy set by the government. If any particular individual decides to treat everyone as if they were in his family and accepts the ensuing poverty, then that's their decision. The key is that we cannot have policy set as if we were all one big family depending on love to get by. The result would be the total collapse of the wealth creating and situation improving mechanism that society enjoys. The US is fantastically wealthy, even its "poor" citizens are doing very well, and it is due primarily to our historical division between market operations and charity. The government allows us to pursue what we think is our best option, the overall result is prosperity.

When people use the government to help certain people (usually through price manipulation like subsidies, tariffs, etc.), it is succumbing to the idea that we aren't being nice to that group. In reality, there is no "us" that is "doing" something to those people. The market works a certain way, and if left alone, it will give people the incentive to change behaviors. When the government decides to take people under its wing, it is just taking money from one set of people and giving it to another with all of the associated incentive warping consequences that government actions are so famous for. You have to be very careful of the "Killing the goose that laid the golden egg" syndrome. By systematically "helping" people, or trying to show "love" through the government, you risk the functionality of at least parts of the system that is the best way of alleviating the very problem you're trying to cure.

It is very important to understand that no group can "love" or "care," those are emotions and only individuals have those things. Groups only have actions and the decisions of the leaders (if there are any). Any time a group coerces someone into doing something (and the government is, as far as I can tell the only group that can do this), it leads to all sorts of consequences even if the group accomplishes the goals that the leaders spell out. Those consequences will divert resources (money, time, attention, etc.) away from things that individuals care about and funnel them into what the leaders of that group think are important. The only thing this can lead to is the disruption of the mechanism that creates wealth and is the best way of alleviating those problems. Hayek goes into significantly more detail of course, he's got an entire book about it, but this is the executive summary...

The bottom line is that if you think there is a moral reason for doing something or distributing resources, it is up to you to get it done without forcing everyone else to go along with you. I'm willing to admit that there are always people that slip through the cracks in even the best functioning society. Drug addicts, mentally ill people, totally disabled people, etc, all need help, and I think that all people should help them. There's a big difference between that thought and forcing everyone to help them. Given enough resources, I might indeed be able to adequately take care of those types of people, but it would take away from other things. If the government is not involved, things will be run much more efficiently and more will be accomplished with less money. The things that are not done because of the forced donations are benefits that have essentially been taken away from people. That in itself seems morally questionable, but there's another level to it as well. If you're the type of person that thinks about morality as opposed to just ethics will have some sort of payoff from doing the "right thing." Whether it is getting into heaven, accumulating good karma, or just getting the satisfaction of helping someone, you are the one that needs to do it if you want to do the "moral" thing.

For me, "having a soul" involves doing the things that make people as a whole better off. That in itself will minimize the number of people that are helpless and need help. By taking care of the others with my own resources (as much as I can) instead of forcing others to do what I think is right, I will have helped accomplish both the better overall situation and helped the unfortunate. And yes, I am counting on people to step up and help out of their own pockets. I don't think that this will be a problem because if there was less government fiddling, there would be more money available to do this stuff AND I believe that most people are good. If decisions about morality are left to many people instead of a few, better results will result, what can I say, I'm an optimist:-)I can't see another morally correct way of going about things....

That's what Dana wrote to me in response to this post. Now part of that is just Dana humor, but there is an element of honesty to that statement, it's a common response to economic reasoning. Many people, when presented with economic principles, don't think the arguments through and critique them, they have an instinctive reaction against it. The thought "But that just isn't very nice," pops into their head. This still taints the memories of people like Margaret Thatcher and Ronald Reagan despite the many positive things they accomplished, people remember them as being "not nice."People's gut feelings are important, at least as far as their willingness to listen goes. I think that the "soulless" perspective of economics is warped and unfair.

I'll tackle the "practical" advantage of economics first, cause that's easy... The post that brought about that reaction was about conservation, there's little doubt that price rationing is an effective way of reducing consumption. If something costs more, less is used, no debate, it works. Some people complain that that method is "unfair," that it affects the "poor" more than the rich. It's true that the poor always have less leeway when it comes to buying things, and they will have to make hard decisions before the rich do. It is not true that the rich are unaffected. As something's price rises, everyone will have to weigh whether or not it is "worth it" to continue consuming that product. There's this idea that the rich don't pay attention to prices, that they buy whatever they want whenever they want. There are a few people in the world that are capable of doing that, but there aren't enough of them to justify screwing up policy for. The rich are certainly price sensitive, take Bill Gates for example. Imagine that he's hungry and he sees a hot dog vendor and thinks that's a good idea. He asks for one and the vendor says, "That'll be $40. There's a hot dog shortage..." I'm willing to bet that there's a good chance that Bill wouldn't buy that hot dog even though $40 is nothing to him. If he was really hungry, and he was really craving it, then there's a better chance of him buying it, but that would hold true for anyone. The point is that everyone values things at different amounts, I could buy gum for $8 a pack, but I never would, gum isn't worth much to me. Someone that really loved it would probably go ahead and buy it (although they would end up buying less) because they wanted it.

Price is the only way people really understand the scarcity of something. People do not respond until they really "feel" the impact of the scarcity. You can trumpet the shortage of water all you want, exhort them to conserve all you want, you will not see a substantial reduction of water usage until the price changes. There are some people that are very worried about that, they conserve as a matter of course. It is part of their identity, it is part of their world view. Most people do not think about it too much, they just have too many other things to worry about. The only way to get them to conserve is to make them aware of the scarcity at the time of consumption. Since most people don't live right next to the reservoir and can't see the shortage, you need another way of bringing it to their attention. With a higher price, you make people think about their consumption, even the conservationists think about it. the beauty of it is that they don't even have to care about water conservation, worrying about money conservation will accomplish the same thing.

For most things, competitive pressure keeps the prices as low as possible, but people still have to face the question of is it worth it to me or not. If there ends up being a scarcity of something for some reason, the question of who gets what becomes very important. In an ideal world, we would all know who needs things the most and we would all willingly allow those people to buy at the normal price and the rest of us would go without. In the real world, there is no way to know who needs gas, water, or even land the most. The ONLY way to weed out the people who really want something from the people that would just like to have it is by using price rationing. With the vast majority of things, there is indeed enough to go around, we only need to trim the excesses of consumption in order to maintain supply (golf courses in Arizona for example). There are some things, real estate in Manhattan for example, that are so scarce that only the wealthiest people/companies can afford it. That may not be fair in some people's eyes, but how else do you divvy up that scarce land among millions of people and not screw whoever owns that land? If something is indeed incredibly scarce, most people are going to have to go without it, the owner is unable to know who wants it the most, and is unable to give it to everyone, so the highest bidder wins.

"But it isn't fair!" Alright, explain to me why Beluga caviar is not a common food staple. "Well, it's expensive, it's a luxury item." Ok, it is, but the reason that it is a luxury item is because it is expensive, not the other way around. Imagine a world where Beluga caviar is in abundance, maybe each fish has enough eggs to feed 100 people and they produce it 100 times a year. On top of that, the fish didn't need to be killed for it, it was in an external sac that could just be cut off each time. People had, for millennia, eaten it as a cheap, easily available food source. Everyone ate it, but then through some sort of catastrophe, that world became much like our own and Beluga caviar become as scarce as it is here. You can imagine the gnashing of teeth involved in the rationing of it. "Greediness," would be rampant as sellers kept raising the price until only the richest people could consume it. Eventually, people would turn to alternatives like peanuts, beans, etc. for cheap food, but they would always remember the "good old days" and blame rich people and Beluga fisherman for driving up the price. The real irony is it is they themselves that drove up the price due to their desire for the product.

"OK Isaac, but that was silly, no one cares about caviar, what about water, there is no alternative for that!" Fair enough, there isn't. The key to the water problem is that people in some areas consume more than can be replenished and so shortages happen. If it were priced properly, people wouldn't use as much and the shortages could be avoided. Also if the price were high enough, water would be brought to those areas and sold, thus increasing the supply. "But what about the poor?" Here's where I can turn around and call the people that say that are soulless. In their version of the world, they would keep the price the same (so that the poor can afford it), encourage people to cut back, and bang! no problem, right? In reality, you run out of water and there isn't any incentive for people to bring in more. Yes, in the economic way of doing things, the price goes up, but at least there is water to be had. The poor won't die of thirst either... Behind every statement that "The government has to do it otherwise it won't get done at all!" is a person that simply does not trust people. There isn't any reason to believe that people will not voluntarily step up and contribute to the cause. The only reason people don't do more is because of the attitude that "It's the government's job" Yes, there are greedy bastards out there, but people are, by and large decent. Barring government interference (don't get me started on African thugocracies), people will find ways of distributing aid where it is needed.

If there really isn't enough water to go around, if the world really does start to run out of water relative to the population, I don't see what could be done. people will die as the supply runs out. In those types of situations, it doesn't really matter what you think or what your political leanings are, there won't be a solution until more water can be delivered. In the meantime, there is enough water to go around (inconveniently located in the great lakes) so we need to price water properly to make sure we never reach the point of disaster. Accurate prices will allow the distribution of water world wide and prevent water crises form occurring, how much more soul do you need?:-)

So there's the practical defense of the economic way of rationing scarce commodities, for the ethical/moral reasons, see part 2.

I jumped into a discussion on a photo forum about a particular way of washing prints. Several people chimed in and said that it did work, but it wasted too much water, the implication being that he shouldn't use it. I piped in and said what I thought was a pretty obvious fact, water is not scarce everywhere. It certainly is here in Yemen, but it isn't in the entirety of the American NE. If the residents of Buffalo cut back water usage by 30%, there would be that much more water that is not being used in that area. They have an unbelievable amount of fresh water available, much more than can possibly be used. So if someone wanted to think "conservation first" in that area, they would indeed use less water, but to no effect at all. In the mean time, he might have forgone the use of a swimming pool, golf course, or the washing of fiber based paper and it wouldn't have helped anyone...

I did mention the fact that if one did want to conserve water, all you had to do was raise the price. One guy responded and told me that it was false, that you can't change consumer's consumption by raising the price. What? Price doesn't matter? He then told me that consumption has continued to rise despite the fact that prices are much higher now. Groan... Yes, people charge more money for things now, but the value of the money is considerably less now. In what economists call "real" terms, the prices of almost everything has continued to drop. It is the low "real" values that make people want to consume so much. He also told me that raising prices doesn't affect the total amount used, it just redistributes it to people with more money. OK, so the people with more money didn't buy it when the price was lower? If they continue to buy when the price rises and the "poor" people don't, well, that's a reduction of use isn't it? Isn't that the idea with conservation?

"But it isn't fair.." Aha! That's usually the real reason that people object to price rationing. It is true, at the margin, that poorer people are more likely to give up using the commodity as it gets more expensive. Once again, it is a reduction of use, so that is a point in it's favor. In places like the US, I can't think of a commonly used commodity that is beyond the price of anyone. If something were getting so expensive that very few people could afford it, it's probably for the best, that thing sounds incredibly scarce.

People often times overlook two very important aspects of price rationing. By raising the price, people are inspired to make more of that commodity available, and by raising the price, people look for alternatives. Gasoline/oil are a prime example of alternatives coming to the fore. As the price rises, other alternatives become more and more attractive. But there isn't an alternative to fresh water! That's where that first idea comes into play. If prices of water are allowed to rise in Arizona, it may eventually make sense for there to be a pipeline from one of the great lakes down to the Southwest, as long as someone could make money off of it, it's possible. There are any number of other methods as well, desalinization plants, trucking water in, etc. The key is that without higher prices, none of them are "worth" it. Higher prices will eventually make alternatives to the product available and/or a new way of getting that product to the people that value it most. Even if you think it's "unfair," this process is essential to driving growth and conservation.

Prices matter, demand curves slope downwards, conservation at all times doesn't always make sense. If conservation is the goal, some people will have to go without, or least without as much as they used to. We know that the vast majority of people will not alter their habits without some "pushing." It's far better to let them decide how much to cut back than it is for someone else to dictate to them how much they should use. Prices are great things, why are people so afraid of them?

What can I say? I'm trying out some ads from Google, I have no idea if I'll get any money or what kinds of ads I'll get on my site, but what the hell, I gotta try! What kind of economics type guy would I be if I didn't try:-)

A group of us were talking about the negative effects of quat on this country. There are many, a stunning amount of money is spent on it every day, it uses an amazing percentage of this country's water supply (upwards of 40%), and it has a slew of health complications. A lot of people say that it also wastes a lot of productive time, but I think that's just an excuse for being lazy, there's no reason why you couldn't chew and work at the same time... Henry piped up and said that there are some positive attributes to quat as well. "Well, they aren't drinking..." That's true enough, if they turned to other, more dangerous drugs like alcohol, this place would be terrifying. It's only the fear of going to hell that is preventing this place from totally disintegrating into an alcohol induced anarchy... So yeah, it could be worse but I think it's a stretch to call that a positive. Then he added, "And at least it keeps the money in the country."

There's some appeal to that view, but all you have to do is look a little closer to see how misguided it is. OK, so the money stays in the country, so what? First of all, if the money did go someplace else, that would mean that they either imported something or they invested the money someplace. If they import something, the odds are that they'd get something more useful than quat, so that's a benefit right there, the money won't be "wasted" on a drug. If they invest it, they would presumably get some sort of return on the investment, and that's always good. Most people are worried about imports, so let's look at that.

If the people of Yemen import something from Djibouti, Yemenis get some sort of product and someone in Djibouti gets some Yemeni Riyals. So the Yemenis have something that they use, probably food if it's from Djibouti, so that's a good thing. What are people going to do with Yemeni Riyals in Djibouti? Nothing, you can't do anything with Yemeni Riyals in any place other than Yemen. So, the Djiboutis send the riyals back to Yemen in exchange for something.

So now the Djiboutis are faced with the same options as the Yemenis had when it came to spending money abroad, but they are forced to do business with Yemen, it's the only place that will accept the money. The most common uses of money gotten through exports are either direct purchase of products, hiring of labor, investment in that country, or buying of that government's debt. None of those things are bad, and they are all a direct result of Yemenis importing some product.

From the importing countries' perspective, it's all positive (as it is from the exporter's view, but they have more at risk potentially). Even if the exporting country burned all of the money it got, preventing it from going back to the nation that imported it, it would still be good. If they burned the money, it would mean that the importing country got goods/services in exchange for little pieces of paper. Now that's a deal! The government can always print more money...

So it isn't obvious what the benefit is of "Keeping the money in the country." This is a really contentious issue in the US. There is some worry about all of the money we send to China (although no one seems to worry about all of the money we send to Canada). The Chinese have been getting a lot of our money, and they're using all of it. They are importing some goods made in the US, but they are mostly investing in capital here (buying equipment, property, etc.) or buying our debt. In an ideal world, we wouldn't have any debt to sell, forcing them to either invest more or buy more of our products. Reality being what it is, our government has been deficit spending like crazy, so the Chinese have had lots to buy. Imports are a good thing for both sides, don't be afraid of them. If you want them to buy more "stuff" from us, reduce the debt that we create...

Tami and I were talking about various things Yemen, and we drifted onto the topic of economics. I, of course, had several opinions to offer on the subject:-) I mentioned my two fantasies about this place, that someone would admit that even if the state of Israel had never been formed, this place would still be a mess, and the related point that it is the Yemenis that have screwed this place up and that they are the ones that will have to fix it. I doubt I'll hear those things...

We continued talking and I brought up the example of Estonia and how well they are doing. It's one of my favorite stories. After they were separated from the Soviet Union, they were a mess and dirt poor. The leader (whose name escapes me at the time) knew he had to do something, so he started reading. Fortuitously, he read Milton Freidman's "Capitalism and Freedom," thought that it made a lot of sense, and started to implement the polices that Milton outlined. His advisors told him that no one does these things, certainly not unilaterally, but the leader was too politically naive to understand why some people (and interest groups) would be against these policies. The end result has been a dramatic improvement in Estonia's economic status. It is now called the Baltic tiger...

Tami recoiled a bit at the mention of Milton, and I asked her why. "I dunno, it just sounds like anarchy to me..." That seems to be a pretty common perception of him and I'm not too sure where it comes from. Early on in his career, when asked what was needed for strong growth in a country he responded, "Free trade, sound monetary policy, and freedom." Late in his life, when asked the same question he replied, "Rule of law, rule of law, rule of law." Milton was a strong proponent of a functioning government. It was needed to secure the rights of the citizens. This is a basic libertarian principle, but many people seem to ignore or forget it. There is a big difference between libertarians and anarchists.

If nothing else, we should all give thanks to Milton Freidman for setting down what sound monetary policy is. His analysis of the great depression showed how critical the Federal Reserve is in avoiding, or at least minimizing, depressions and fighting inflation. Thanks to his economic insights, we have not had another massive depression. Odds are that we will never have another as long as his monetary policies are followed. Regardless of your political leanings, you have to like that...

The latest issue of the Yemen Observer has an article that amounts to little more than the paper mocking the government. The headline reads, "Crisis? What crisis? Government still thinks gas situation stable." The article describes how prices of propane gas tanks, which are used all over the country for cooking among other things, have risen dramatically over the last 5 or 6 months. Prices are hitting 1000 riyals (as opposed to the 500-600 from 6 months ago) and people are waiting in long lines to get the tanks. The vendors blame the government (which provides the gas) and the government is blaming the distributers. The paper seems to be happy assuming that either the incompetent government or greedy distributers are to blame, but doesn't bother to look into the matter at all.

The article is rather maddening because important details are missing. Are people standing in lines for tanks at 1000 riyals? Or are people avoiding the lines by paying 1000 riyals? The government claims that its price to the vendors has not changed, it is still 400 riyals. So this leads to some interesting conclusions. If people are waiting in line, that means that the gas in under-priced. Surely the combination of prices that are "too high" and waiting in line do not seem to jibe. Queuing is a classic example of underpricing, see the cap on gas prices in the US during the 1970's as an example. If you want to get rid of the lines, you need to raise the price of the gas. How much do you need to raise it? Just enough so that people do not think that it is worth standing in line for. The only reason to stand in line is if you think that it's a great deal or you (along with several thousand of your friends) want to consume a lot of it due to the low price. If it is no longer a bargain, or if it is high enough that you cut back on your use, *POOF* no more lines. I have a feeling that the going rate is well below 1000 riyals but that some people are willing to pay that price in order to avoid standing in line. The upside to all of this is that I haven't heard the annoying CLANG CLANG CLANG of the gas sellers walking through the streets. They bang the tanks with a wrench to announce their presence. I guess that people are now willing to go to them instead of them delivering at a higher price.

And I don't want to hear any, "But people HAVE to have it, they are forced to pay the higher price so they can cook!" bullshit. Charcoal is cheap. Yes, it is a bigger pain to use, and that is why people prefer using gas, but it is an option. If you can't afford 1000 riyals for gas (and many people can't), 50 riyals for a bag of charcoal sounds pretty good. Grills are pretty low tech to make, I really don't think that it's beyond anyone to make one...

So do we blame the government or the distributers? It's possible that the distributers are deliberately keeping supplies low thus forcing up the price. Unless there are only a few distributers, and it's a distinct possibility, I doubt that they are doing that. It would just be too difficult to organize all of them and keep the price up. Left to their own devices, someone would start discounting to get more business and others would have to follow suit. If there are only a few distributers, the solution is to open up the market and let competition take over. It wouldn't surprise me if the government has only "allowed," ( i.e. given) contracts to some cronies of some important bureaucrat. These licenses to make money are very common in these sorts of governments. In any case, I haven't heard of a glut of propane that is not being bought by suppliers, so I doubt that this is happening in any case.

The important thing to keep in mind is that even with the higher prices, no one is having trouble selling propane. It sounds like that the distributers are trying to sell gas at the going rate. Perhaps they are feeling the heat of consumers' ire and that is preventing them from charging the actual market clearing price, hence the lines due to the lower price. That rate is determined by the demand of consumers and the supply. The government claims that the supplies have not changed, so that implies that the demand has. That, combined with the falling value of the dollar/riyal might just be all the explanation that is necessary. To misquote another blogger I read a while back, high gas prices are not a crisis, no gas is. If you try to sell gas at below the going rate, you will face long lines and shortages. it is much better to simply raise the price than it is to try to "force" a market to do your bidding. Let people make up their own minds about what to do with the price and let the producers and distributers try to maximize their profits. Usually, I'd say that the government being the supplier would really mess things up, and it might, but the Yemeni government is pretty good at sniffing out revenue streams. While not as good as a for profit company, they'll approximate one due to the corruption involved and the dire state of the government's coffers....

I just listened to the latest podcast from econtalk and it was pretty good. Arnold Kling talks about what is driving the costs in healthcare. By his reckoning, it is primarily due to many more procedures being available these days and because we are very insulated from the actual costs out of pocket, we use too many of them. He talks about various procedures being more cost effective than others and the fact that we have very little incentive to separate the high benefit procedures from the low benefit ones. He, along with many other economists, see the current problem with our health system as being an incentive problem as opposed to a healthcare one. Going to a single payer system would magnify the incentive problem and bureaucrats would make decisions on what procedures to offer in order to keep the costs under control. Kling offers a different alternative, make people bear more of their actual medical bills. In 1960, people paid .50 out of pocket for every dollar they spent on healthcare. Today it is down to about .15 out of every dollar. Doing this would eventually result in lower costs, higher wages, and possibly make more people take care of themselves. Give it a listen, it's an interesting piece.

The results are coming in and oil companies are posting lower profits this year than last year. Oil is at an all time high, so how can they have lower profits? it's pretty simple, oil companies are subject to economic forces. It turns out that supply and demand still hold true, who would have thunk it? The conventional wisdom is that people will pay "anything" for gasoline, so any increase in oil prices are passed along to the consumers in full. If it costs an extra 85 cents per gallon to manufacture the gasoline, they'll just tack it on the price at the pump and people will buy it. The obvious question is if people would have bought the gasoline for an extra 85 cents a gallon, why didn't those "greedy" oil companies do it before the costs went up?

Here's the scoop, gasoline, like any other product, is priced at the highest price it can be and still be sold in the quantities that the company needs. What that price is is determined by the combination of consumer demand and how much product the company has to sell. That's it, the cost of manufacturing is only tangentially related to the quantity that the company has to sell, but the customers really don't care what it costs to manufacture. The higher oil prices are cutting into the companies profits because they cannot arbitrarily raise the price to cover expenses (or for any other reason). They have to offer the gasoline at the price that consumers are willing to pay if they want to sell it. So the difference is taken out of the profits in order to keep the price where it needs to be.

The punchline here is that gasoline is just like any other product, as prices go up, people buy less of it. The oil companies can't get around this, so when faced with rising costs, their profit goes down. They are not magic money making machines, they have to offer a product at the prices that people want in order to make money. Things have been good for them in the recent past, not so good in the more distant past (1980's-1990's) and now things are starting to get back to where gasoline is the lower profit margin item that it was before. I've written about the demand side of the equation here, one of these days I will put up a simplified version of the supply side of things...

Tami and I were talking the other night and she happened to mention how she makes sure to go to Citgo gas stations when she's at home. Citgo gets it's oil from Venezuela either mostly or totally. I cringed visibly and expressed my hatred for Chavez and his policies. I really do believe that Chavez is going to run that country into the ground and cost millions of people their lives or at least the chance to climb out of poverty. She had a response that was very straightforward, logical, and surprisingly I had never thought of it before. "So it's better to give money to the Saudis?" Hmmm, now that's an ugly choice, a Marxist dictator or an autocratic monarchy. Come to think about it, none of the major suppliers of oil are exactly upstanding places. Venezuela, KSA, Iran, Nigeria, Iraq, Russia, etc.

If there were a way to pick where you were going to get your oil from, and there's only one place, Citgo, that allows you to do that, I'd have to go in the following order. From best to worst I'd say it's Iraq, Russia, Nigeria/Venezuela, Iran, and then KSA bringing up the rear. I still think that Chavez is awful, and dangerous, but he's not as evil as some of the other options I suppose. Talk about a complex decision strategy, do you shoot for the middle evil in order to exclude the worst, or do you take your chances of funding the worst in order to have a chance of funding the better options? I think I'd have a tough time choosing a Citgo on purpose, but I wouldn't feel as bad about it now if I had no choice.

I'm pretty much an optimist when it comes to long term economic outlooks for the US. I assume that we will do what we need to do to be competitive in the world wide market. With any luck that will involve some things like implementing a flat tax, reducing the corporate tax, and going to a private social security plan. Yeah, I know, but I'm thinking really long term:-) Many countries have done these things, or are about to, especially eastern European countries.

In any case, Im pretty confidant that we will do what we need to in order to "Keep up with the Joneses." I do have some worries though. No, it's not about income disparity or environmental issues, it's about monetary policy. There has not been a world wide monetary standard in a long time. All countries used to be on the gold standard, but I don't think that there are any that do that now. It used to be that every denomination of currency was backed by a certain amount of gold (or silver). This means that the government could only print or circulate as much currency as it had in reserves. Today, we have what is called "Fiat" money, the government could print as much of it as it likes. The value of the currency is determined by simple(!) supply and demand. The more money the Fed puts into the system, the less any particular bill will be worth. The opposite is also true. The nice thing about the gold standard is that it restricted what the government could do with monetary policy. They couldn't intentionally deflate the currency or even just screw it up. By having the currency backed by something, it limited the government's impact and allowed the actual economy to do its thing.

Why does this matter? Since the entire world is using fiat money, it isn't out of the realm of possibility to have a world wide currency crisis. If America's dollar value really melts down, they are going to take a bunch of other countries with them. Many other countries have either pegged their currency to the dollar (like Yemen) or have just started to use US dollars as the local currency. Additionally, if the US dollar tanks, and I mean really tanks, we would no longer be able to afford the products from China or Europe. So their economies would feel it as well... We gotta hope that the Fed keeps their head and doesn't allow that to happen...

There are a handful of practical issues with going back to the gold standard, not least of which is that the government doesn't want to give up any control. Milton Freidman had some alternative ideas about stabilizing the currency. He suggested 100% reserve banking and an automatic, rules based mechanism (as opposed to using the discretion of the Federal Reserve) as possible remedies. I'm not really sure how they work, but he was pretty bright when it comes to things like this. In any case, I would eventually like to see some sort of stabilizing mechanism introduced. The recent weakness of the dollar brought this to my mind, I can only hope that our "leaders" get their financial act together before I really have to start worrying about monetary issues...

I just finished listening to the audiobook version of Mark Skousen's "The Making of Modern Economics." It was a good overview of the history of economic thought starting just a little before Adam Smith up to the late 90's. This time period captures all of the really big events, "The Wealth of Nations," Marxism, the marginal revolution, Keyensism, the Austrian school sorting things out (as usual), and culminating with Milton Freidman's Moneterist revolution and getting back to Adam Smith's ideas of freedom being the basis of economic prosperity.

The book has as it's main theme the idea that Adam Smith got it basically right and throughout the years people have either added more understanding to his basic model (Mises, Hayek) or have taken us down what looked like a promising path but ended in failure (Marx, Keyenes). I think that this is basically right and history certainly seems to back that up. I knew quite a bit about a lot of the bigger names but this book filled in some of my gaps when it came to people like Shumpater, William Bates Clark, and Malthus.

For the non-economic minded among you (what?), I'll give the you the punch line. If we hadn't listened to Malthus (there is a limited amount of resources and we're all doomed), and if the marginal revolution had come about a litte earlier, we could have saved millions of people. Marx had a lot to do with it, but his fatal flaw from a theory point of view was his labor theory of value (I'm ignoring the equally powerful, but much more involved Hayekian critique of central planning). Marx (among others at the time) thought that the value of any given thing could be found based on the cost of the labor that went into it. His whole theory sprang out from that. It wasn't until the marginal utility theory came around to explain subjective value that economists could point out the problems with socialism in general and marxism in particular. But it was too late, Marxist ideas had taken hold and millions upon millions of people paid for it.

Marx is an obvious wrong turn in history, but Keynes may be more pernicious. Keynes was the economist that popularized the notion of government interference being the only way to get out of depressions. He assumed that capitalism was inherently unstable and used the great depression as evidence. His solutions flew in the face of traditional (classical) Adam Smith inspired economics. Deficit spending, massive government projects, and a hatred of saving were the outcomes of his theories. Keynes' ideas took hold and basically ruled the roost for the next 40 years.

When you listen to Keynes, you end up with England in the 1970's. High unemployment, low to no growth, and government debt spiraling out of control. Maggie Thatcher (with some help from Hayek) cleaned that place up... It wasn't until Milton Freidman's ideas came into popularity did things start to come around. He proved that the great depression was caused by incompetent monetary policy, not any inherent instability of capitalism, and used that as a springboard to dismantle Keynes' theories.

Government incompetence and/or ignorance is another theme running through not only this book, but history in general. The great depression is a great example. The crash itself may very well have been a bubble popping, but the blame for the depression that followed can only be laid at the feet of the government. Milton Freidman showed that the Fed shrunk the amount of money in the economy by a third, thus plunging the country into depression. The Smoot-Haley tariffs caused an amazing amount of damage, and FDR's directionless fiddling prolonged it for another 8 years or so. It wasn't until the war ended did we pull out of it. If they had left well enough alone and not screwed with the money supply, the depression likely wouldn't have lasted nearly as long...

With Milton Freidman's contributions we may have seen the last bit of huge economic principles being introduced. There is still plenty of research into the finer points, but the big picture seems to have been pretty well explained. The hell of it is, Adam Smith pretty much did that way back in the 1700's, it's a shame that it took us this long to realize it...

Georgia is facing a problem with the current drought. They are running out of water and they don't seem to be able to come up with a way to fix the problem. This article tells, at length, the problems, the purposed "solutions," and the various groups involved in the fight. People are blaming the Corp of Engineers, a species of mussels that has some sort of protection, and too much growth in the area. I've got a much simpler explanation and a very simple remedy for their problem. Raise the price of water. The reason they are running out of water is that they have not been pricing it properly. There is a finite supply of fresh water, if it is underpriced, people will use too much of it. If you want to limit how much water is being used, if you want people to conserve water, if you want people to fix leaky toilets and water heaters, raise the price. Everyone will pay attention if their water bill doubles or triples, and I guarantee that water use will fall. Pass more "You can only water your lawns twice a week," laws and I'm sure not much of anything will happen. If the price is allowed to "float," with the supply of water, you'll never have to worry about water shortages again.

This is assuming that all people face the same prices. Frequently, businesses like agriculture, gold courses, and others get special (low) prices. Of course they are the largest consumers of water as well... If you are worried about "the poor," you can figure out a way not to charge them the extra amount. The key is to make sure that the largest percentage of water users feel the price increase. Viola, no more water shortages!

My housemate came back from the internet cafe in a rotten mood. He had been reading the news and it made him really upset. The cost of the wars in Iraq and Afghanistan are swelling to over 2 trillion dollars, and some people estimate that we reached "peak oil" reserves 3 years ago... OK, the wars are a disaster, and I don't know what else to do but get mad about that, but peak oil? What a crock.

The idea behind peak oil is "OMG, there's less oil available, we're screwed!" That's a summary of the stance, and I think it's pretty accurate. It's ridiculous on a couple different levels. We'll never run out of oil. That's right we will never run out of oil. There's a couple of reasons for that. The concept of peak oil was first brought up in the early 1900s. It was observed that there was not enough oil for the then current needs to be met in 10 years time. Well, guess what, more reserves were found. In more recent times, peak oil was again a worry. There wasn't enough oil to go around in the decades to come! Well then the shale sand up in Canada added another source of oil, and when the price of oil rose above $50 a barrel, Venezuela's reserves went online. They went from a minor player in the petroleum market to having the largest reserves in the world within the space of 10 years.

So, as prices rise, more and more oil is found. That's one reason not to worry too much about running out of oil. Another reason is that when "Peak oil" theories are thrown around, they are talking about the "light sweet crude" grade of oil. That is the stuff that has the least amount of junk in it and is the easiest to refine into various useful products. There is an enormous amount of "sour" reserves. That's oil with more impurities in it. Last I heard, the reserves of these sour grades is almost unimaginable. At some point, it will be economical to use these grades with more refining instead of the light sweet crude.

OK, so reserves keep growing as prices go up. That'll be fine for the foreseeable future. If additional refining is needed, and nothing interferes, the cost of that refining will be minimized through compitition. There is a finite amount of oil in the ground, and we do use it at a much faster rate than it is created, there's no getting around that. That part of the peak oil theory is basicly correct, although I think that it's blown way out of proportion. The part of peak oil that drives me crazy is the tacit belief that we'll just stand around and watch the oil be used up until it's all gone. The idea is that we'll run out of oil and the entire world will grind to a halt. The people that worry about this really don't understand how markets work. As the price gets higher and higher, new ways will be found to find oil, new ways to conserve oil will be found (thus conserving the existing supply), and substitutes will be found. There are already substitutes available in the form of electricity and alternative fuels. This is why we'll never run out of oil. At some point it will be so expensive that no one will want to use it. There will be a transition to some other type or types of fuel and oil, like whale oil, will be a historical curiosity.

All of the peak oil gnashing of teeth is really fear of change and a general distrust of people and their ability to adapt and thrive. It's a really unnecessary and, IMO, obnoxious abject pessimism. Things will change, people will figure out how to use something else. Environmentalists the world over should be cheering the rise in oil prices, it's the quickest way to have alternative fuels become viable. Where's Julian Simon when you need him?

tags technorati : economics peak oil julian simon alternative energy

It seems as though every issue of the local papers have a story on corruption. It is a problem, there's no doubt about that. The reporters always end their piece with a lament that the government is not doing enough to combat corruption. They clamor for new laws to break the back of the corruption here. Maybe new laws need to be passed, but not the ones that they are thinking of.

The result of too many laws being passed to "protect us" can be seen in the US. Many people (myself included) do not like the amount of influence that large corporations, people with money, and special interest groups have with lawmakers and the resulting laws that favor them. But what to do? Many people want laws aimed at corporations and special interest groups in order to prevent this from happening. The problem with that approach is that as long as lawmakers are going to make laws that affect special interest groups, the groups will have the incentive to influence the lawmakers. This isn't always a money thing either, often times it is votes that the highly motivated groups promise the politician and lawmakers will always respond to that.

The underlying assumption is that these problems come up because there are evil, greedy people in the government. I do think that's part of it, but it is not the driving force. People need to understand that government is a human institution and it is naive to think that it will work in the way that we think it should or that it will always do what is in the public's best interest. Humans respond to incentives, and politicians have a set of incentives that are similar to everyone else's in some ways, but very different in others. One set of incentives that they have is to be reelected. This causes them to do many things that cause problems for many many people. Things like farm subsidies, price controls, "anti-rich" regulations, and maybe most noticeably deficit spending are examples of them doing what they need to do to get reelected at everyone's expense. It is the incentive structure that we have now that makes lawmakers so responsive to special interests and very few lawmakers are able to resist those temptations. Term limits are an ideal way to try to combat this, if they are not worried about being reelected, they have a much better chance of not responding to those incentives to be reelected.

Corruption has a similar cause. It is the incentives to be corrupt that are the main problems. Evil people will be evil most of the time, but if regular people are tempted to be evil, only a certain number will be able to resist. There are many possible incentives to be corrupt (it may be the easiest way to get money, it may be the only stable way to live comfortably, it may be the only way to succeed in that country) and those are what need to be addressed if you want to make a dent in the corruption problem. In a country like this, there is also the additional problem that the ability to be corrupt is a strong incentive to join the government! If new laws are going to be passed in order to combat these problems, they will inevitably need to be ones that limit the power of government. The trick is to create the incentives to get those laws passed. Political economy is dicy, and it has the pronounced effect of making one very cynical about the political process in general...

I'm salivating over these books. I have been waiting for a collection like this, and it looks like a great one...

Well, I think I was right about the corn subsidies screwing things up. The latest copy of the Yemen Observer has a representative of some trade group defending the rise in wheat prices. He mentions that the EU, Russia, and Australia had lower than expected harvests, but he says that the corn subsidies caused a decline in the US production of wheat. I know this isn't "proof," but I think that it shows corroboration of my theory. The representative expects the market to correct itself early next year, but until then, we're going to have to live with higher wheat prices...

In addition to wheat, the cost of propane has gone up as well. It has almost doubled in the past month. Once again, people are blaming "greedy" distributers. I'll have to do some digging, but I'm willing to bet that it is the same forces at work here as there is in the wheat market. The op-ed in the paper says that the government should subsidize the price of propane, through Ramadan if not indefinitely. The current price is the equivalent of $3.50 a tank. I'm guessing that it is already subsidized. So the problem is either that distributers are colluding and driving the price up artificially, or maybe, just maybe there is enough increased demand during ramadan that the gas is now worth more and this is the actual market clearing price.

Another interesting thought is that the government gave all government employees an extra month's salary as a bonus for ramadan. If you add money to the money supply, you devalue it, it's the same thing as inflation. I didn't think that this would make much of a difference, but many people that have jobs here have them through the government. Maybe there was more money injected into the system than I thought? One other thing that could have happened is that businesses could have raised their prices because they knew that there would be more money circulating in the system. This is a well know macro economic issue, businesses will raise prices as they think their cliental can pay more. We don't see this too much in the US anymore, but it still takes place in places where the governments announce across the board pay raises. Usually, the government is trying to combat the effects of inflation by paying people more in order to afford things. Of course the combination of adding more money to the supply and the news that there will be more money circulating just drives prices up again. It's a vicious circle...

The Millennium Challenge Corporation has granted the Yemeni government 20.6 million dollars in order to fight corruption. Ummm, that sounds a little dubious. If the government is misusing funds, why would you give them more money? There's even the promise of more funds in the future. The Yemeni ambassador to the US said, "The decision is a recognition of Yemen's achievements in the regard, and it is an important step towards preparing Yemen for full membership of the program whereby the country will receive even more support annually." Wow, talk about bad incentives. Many economists (and political commentators in those countries) blame the dependance on foreign aid on the inability of the country to improve. There is undoubtedly more to this story, the papers here give just the most superficial treatment to stories, but it still sounds worrying to me.

Increases in the price of wheat are really putting the pinch on a lot of people here in Yemen. I just read an article that talks about Jordan feeling the pinch as well. Everyone knows that the price of wheat world wide has gone up, but both of these countries claim that the prices are rising faster than the world wide price. I've talked about wheat prices in Yemen here, here, and here. I'm sure that the problems plaguing Jordan are similar to the ones in Yemen. My question is, "Why is the price of wheat going up world wide?" Well, you might throw back at me, either demand has increased or supply has dropped. Yes, yes of course (that did pop into your mind, right?) but I'm wondering about the mechanism. The prices have risen by 30% or so, I can't imagine that demand has risen that much, that fast. I'm leaning more towards the supply side. The traditional culprit of wheat shortages has always been bad crops due to weather, pestilence, locusts, or something. That could have happened, but I haven't heard of any widespread problems like that. I have no evidence right now (I'm away from the internet and my friend Google right now) but I am eyeing some government interference as a likely problem. No, I am not a broken record, I just sound that way... The new subsidies for corn ethanol have really screwed up the corn markets, and we may be seeing it's effects on the wheat market as well. Here's my theory, the subsidies given to corn growers made corn a much more attractive crop to plant, so more people planted corn instead of wheat. And voila! much less wheat gets produced.

The hell of it is that if it weren't for another subsidy (or more correctly, price control) we could make better ethanol cheaper from sugar. The problem is that the sugar lobby has managed to keep the price of sugar artificially high for the last 30 years or so. I do believe that only two families control all of the sugar production in the US... The government has kept the price of sugar at about twice what it should be for the last 30 years, in other words, we have been forced to pay twice as much for sugar and it has gone directly into the pockets of a couple of families. "That's not a big deal, I hardly buy any sugar at all," actually, you buy quite a bit, mostly in the foods that you buy. Sugar is used in many, many prepared foods, and all of them cost more because of the price controls. Now, not only is our food more expensive, but the price control is making us pursue a worse alternative for ethanol. Aren't subsidies and price controls great?

If anyone has any information and/or links about my wheat scarcity due to corn subsidies theory, I'd love to see them, maybe especially if I'm wrong...

.. but you know, I did. Here as a matter of fact. It turns out that prices of wheat have continued to rise despite the fact that the government has fixed the price. Not only that, but the government, who is selling wheat for well below the going rate, has run out of it in some areas. The places that have not have very long lines for the wheat. The upshot? Dealers are charging, and getting a much higher price, sometimes twice the government's price... Surprise surprise. You mean that prices can't be arbitrarily set without consequences?

But wait, there's hope! The cabinet has amended a law and now allows foreign companies to import food directly into Yemen! This goes along with another change that they made 3 or 4 months ago allowing a company not owned by a Yemeni to operate within Yemen. Imagine! This is huge, and while it won't help Yemen this Ramadan, it surely will next time around. Of course there are people that caution that the foreign companies will monopolize the food market and may be put local companies out of business. We'll ignore their probable monetary interest and lack of evidence from around the world (concerning the negative impact of a foreign monopoly) and point out the obvious. If all the local companies did was to collude and artificially inflate the prices to consumers, why would you want to protect them? The editor of the Yemen Times said as much in their op-ed, it's good to see some common sense starting to spread. 2 months ago, you never heard of anyone talking about free trade, and now the promise of it has arrived, Hamdillila!

People sometimes ask me why my blog has the tone it does. This poster is why. This is a Greek communist election poster from the latest election. There's good news and bad news... The good news is that the communist party only got around 5% of the vote. The bad news is that the socialist party got around 35% of the vote.

Was no one paying attention to what happened in the Soviet Union? Hell, hasn't anyone paid attention to what has happened in Greece? This current government is the first non socialist government they've had since going to elections. That's 40 something years of awful economic policy. Guess what? greece is the poorest country in the EU and has some of the worst economic fundamentals as well.

People all over the world want to turn to socialism (and communism) when things are not good. They have to understand that socialism will never eliminate "unfairness," poverty, or lead to improvements in the standard of living. Socialist governments will make all of those things worse. Every economic theory makes that point and history has born them out. I will continue to trumpet the virtues of capitalism and rule of law in this blog until I no longer worry about seeing signs like this one anywhere in the world.

Of course I'm talking about the science behind it, not the effects... Steve Mcentyre over at climate audit (www.climateaudit.org) has finally been given the source code that Steve Hanson used for determining temperature time series that are used by many, many climate scientists. Despite the fact that Hanson works for the GISS (a division of NASA) and that his numbers were being used to shape policy around the globe, he was reluctant to release his methods. I won't get into what kind of shoddy science that is, but I have to give my 2 cents about his attitude. He has repeatedly said that climate science should be left to the professionals. that amateurs are more likely to be steered by agendas and not by science. Well, OK, I can see some of that argument, but the trouble is that most of his "science" isn't climate based at all, it is statistical. He wasn't just making theories based on the data, he was creating the data as well. After Steve reverse engineered some of his methods and showed how Hanson needed to correct figures, Hanson had little choice but to release his code.

By all accounts, it is a statistical nightmare. What Hanson was doing was using several sets of data and combining them, "adjusting" assumed biases in the measurements, and glossing over site irregularities all the time admitting that he was not a statistician. Folks, there are some serious problems with this, if he had only taken his own advice! He should have had statistical professionals go over his numbers and then he could use that data to theorize on what it means.

Some of the code is over twenty years old! It has routines for writing output data, REWINDING THE TAPE, and then using that output as an input for the next calculation. Fortran anyone? Anyway, there are some things in there that even I could see would cause problems. Converting from floating point calculations to integer in Fortran leads to some wild rounding errors, "correcting" obviously flawed measurements instead of throwing them out, and his method of calculating running averages is.... interesting. A recent study (also on climate audit) showed that only 1/3 of the measurement stations actually met with the standards that ensure accurate readings. There's a lot of things wrong, and this is the most often used set of numbers for determining if the planet is warming up. Keep in mind that most theories about CO2 driven global warming expect around a .7 increase due to man's CO2 contribution. SOme of the things that have been uncovered in Hanson's code show that he may have overestimated the warming by .2-.4 degrees! I highly recommend the site, the guys really know their statistics and they are doing a great job of trying to get less biased data to work with for climate change.

This is from a comment on a blog discussing Hugo Chavez. He is talking about socialists in particular and leftists in general... "Never will they recognize that in a system where rule is by force rather than law, the people most effective at using force are certain to rule." It's a good post overall, you can read it here.

Simon and I were walking to class today and we started to talk about cars. He started to to talk about how there seems to be very wealthy people here and poor people, and no middle class. I sort of agree with him, it really depends on how you're making the distinctions. There certainly is a Yemeni middle class, but in comparison to America's middle class, they are really poor. The people that are considered "poor" in the US would compare very well to the middle class here. Similarly, the ones that seem rich here don't hold a candle to the rich back home... The upshot is that we Americans have more money, that's no surprise. The real surprise, and one that is reinforced every day that I am here, is that our "poor" aren't doing too badly. Discounting the drug addicts and schizophrenics on the streets, our "poor" live much better than many, if not most, of the people in the world. Almost all of South America, Africa, and Asia have much more serious poverty issues than the US. It struck me today that I no longer really worry too much about our poor back home because they just don't seem that poor to me anymore. Income inequality is not a problem, absolute income is...

... that there is some concern over the price controls being implemented by the government. It came from some minister or other and was published in the Observer. He didn't have the same worries that I do though. I am worried about shortages in the near term, maybe not even making it through ramadan. The minister pointed out, quite correctly, that subsidies and price controls have long term consequences, and not good ones at that. His concern is a long term one. If the government insists on selling wheat at a loss, there won't be much interest from companies to import or sell it. It could be the worst of all worlds, the government could run out of wheat and there may not be anyone else importing it... The good news is that in a recent poll, over half the people that responded didn't think that the government could maintain the price throughout ramadan. It's good to know that most people realize that no matter what the government does, the market will rule... With any luck the price controls are only short term things, short enough to avoid shortages and short enough that companies will not leave the market. We'll see if the Yemeni government can avoid really screwing this up...

My teacher and I were talking about different countries and their economies. He asked if I thought if Yemen could ever be like the US. I think that Yemen's upside is going to look more like Canada or Australia, but they have a very, very long way to go. He lamented the fact that there aren't any arab countries with a good economy. I mentioned the UAE, Dubai and Abu Dhabi are some of the most prosperous regions on earth. "Yes, but it's a plastic economy. They don't have anything there but businesses, they don't make anything there."

As usual, he didn't notice the fact that they don't "make" anything, and yet they are fantastically wealthy. They make wealth, pure and simple. Really, when you think about it, wouldn't you want other people making stuff for you instead of making it yourself? There is nothing wrong in doing what you do best and allowing others to do what they do best, it's called trade and it will make you wealthy. Just look to the UAE for guidance. Don't be afraid of trade and don't be afraid of services, they're good things.

Arg. I was afraid this was going to happen, and now it has. The Yemeni government has imposed a price cap on the price of wheat. These things never work, and yet they have a huge amount of support from the general public, at least at first. When the shortages hit, people start to at least think about how things work economically. With any luck, they'll snap out of it before too long. I always wonder why governments choose to ignore all of the precedents that other governments have provided for them. Just in recent times places like Zimbabwe and Venezuela are poster children for how price controls don't work. Even the US figured this out. Remember the "Oil Crunch" in the 70's? Remember the long lines and shortages? There was never a world wide shortage of oil, but due to the price controls set down by the government, there wasn't enough gas to go around. We haven't had any experiments with price caps since then (excluding those damn "anti-gouging laws. They are so vague as to be useless, even as a cap), price floors are a different matter... My prediction is that there will be flour shortages by the middle of Ramadan...

There have been a number of protests and sit ins across the country this past week in order to highlight some ongoing problems. All the usual suspects were there, poverty, hunger, water shortages, child labor, refugee issues, etc. The common theme across all of them is the the government should do something. It even goes further than that, they all have as an understood axiom that all things flow through the government, the only reason they do not have what they need is because the government does not give it to them.

I hope that it's obvious what the problem is with that world view. The government can indeed give some things to some people, but only by taking them away from someone else. If the Yemenis want their economy to grow, they will have to start looking at themselves. What the sit ins should be about is the corruption, interference and cronyism that is preventing Yemen from clawing itself into a decent position. The government doesn't want to correct people's views on where prosperity comes from because then the people would start demanding that the government should get the hell out of the way...

On the other hand, the president did have a rather refreshing take on the water shortages in Ta'izz. People have been demanding that something be "done" to help alleviate the water problem. The president's response, "Water comes from the sky, not from the government." It is both astoundingly obvious and bound to go right past most of the people. There have already been op-ed pieces lambasting the president for this stance. Of course no one has any solutions to offer, if there isn't any water, there isn't any water. For once, I think I agree with the president on something...

In the latest Yemen observer, there are a couple of real "howlers" when it comes to economic things. There is an ongoing problem with wheat prices going up rather quickly. The world price of wheat has gone up significantly (due in part, no doubt, by the ethanol subsidy in the US making people switch to corn and lowering overall supply) and people claim that the price here has gone up more than it should. The headline of the most recent article is "Greedy businesses keep prices high," or something to that effect. The caption under the photo in the article says that merchants are selling wheat "for more than it's worth." Now it's one thing to ask for more money than it's worth (you won't get it) but it is impossible to sell it for more than it's worth short of doing it at gunpoint (and then I guess technically it would be called theft). If they sold it, it was worth the money they asked to someone...

The government is getting a lot of pressure to do something. Salah (the current president) and various other officials are clearly upset with the traders that are selling the wheat. The president even made the veiled threat that "We liberalized trade, but we can go back to the old way of doing things if we need to." He then announced that the government will now start to compete with these several traders in the wheat market. Presumably, this will lower the price. Hold on a sec., Why couldn't another company compete with the current traders and do the same thing that the government wants to do? They would also make quite a bit of money in the process. The reason of course is because the government has only licensed these 2 or 3 companies in the wheat trading business. Why you need a license to buy and sell wheat is beyond me. Well, the government gets a fee and/or other kickbacks I suppose, that's always a given here. Anyway, this is the perfect example of people blaming the "free market" for unwanted effects when in fact it is the government that is screwing things up by limiting competition. Now that they are officially getting into the market, I expect even more problems...

Keep in mind that most of the countries in the world operate like this. Barry Weingast talks about this in his upcoming book, "A Conceptual Framework for Interpreting Human History." I know, it sounds like a real page turner, but he does have some really important insights for growth economics. Most countries have a system where privileges are divvied up among a power base of elites. Of course, efficiency and competitivness never enter into the picture, so you get situations like we have here in Yemen. His idea is that these alliances are made mostly to avoid violence and armed conflict. I can certainly see that here, if favors were not granted to certain powerful people or tribes, they might fight back. I think that his insights go a long ways towards explaining how and why a leader would engage in economic practices that harm the country and why many countries can never get past their third world status, they do not want to go through any more violence...

Brink Lindsey made the comment "The political right has never gotten over the fact that the 60's happened and the political left haven't gotten over the fact that the 80's happened." He was discussing his book "Age of Abundance" on a podcast from Cato. He talks about how good the US has it and about how the "culture wars" have simmered down a bit and what it means to the US in the future. It sounds like a really interesting book, I'll add it to my must read list when I get back home...

Karl and I were talking the night before he left to go home. In several of our conversations I noticed that he had a fairly common bias when trying to figure out how to get things accomplished. "If the government doesn't do it, it won't happen," is a really common attitude. Almost without exception, the people that ardently believe in this are afraid of what people will do if left to their own devices. They see no hope of charity, care, or understanding from people. It's really a cynical viewpoint if you think about it. The alternative to allowing people to do what they want is to force people to do what the government, or in a best case scenario, what the majority of people want to do. They of course do this by forcibly taking money from us and forcing us to follow whatever program they come up with.

As you may guess, I feel that things should be left to people to decide for themselves first before any government involvement kicks in. This is rarely allowed to happen, there is usually some sort of regulations in effect for just about everything out there. Usually, it is the government interference that allows "market failures" to happen. For me, what defines a market failure is that everyone can do whatever they like and nobody is happy with the outcome. I had been a believer in the idea that market failures didn't really exist without govt. meddling. Living in Yemen has made me rethink some of those ideas.

Two examples of actual market failures that I have seen here are the unbelievable amounts of litter and the horrendous (and dangerous) traffic. I have no idea what's going on with the litter, seemingly everyone complains about it, but is unwilling to do anything about it. I once had someone lament how dirty Yemen is while he threw a wrapper on the ground! My only guess is that there is some sort of cultural bias towards littering or away from preventing it... The traffic example is a little easier to explain I think. There is relatively little enforcement of traffic laws here, so people drive however they choose, with disastrous results. There are constant traffic jams (usually caused by terrible parking in busy areas), intersections are both risky and harrowing, and the flow of traffic in general is incredibly slow. The noise of horns is deafening, and it leads to you tuning them out for the most part. My idea behind why the "market" for traffic running smoothly doesn't work so well is one of transaction costs. In any market, actors in it must be free to negotiate between themselves for the outcomes that they both want, for the ones they are willing to "trade" for. If the cost of doing the transaction is too high, it doesn't happen. Imagine trying to import a plow from England to colonial Virginia. It was far too costly in terms of time to bother with getting it from England, they just went down to the local blacksmith and got one instead. In the same way, traffic moves too quickly for there to be too many "negotiations" to occur. What results is the traffic that we have here. The government (through rules and enforcement) sets up the negotiations beforehand (right of way, traffic lights, etc.) so that no time is needed to figure out who should go where. Traffic tends to be much more efficient (more cars through a given area in a given time) and I believe safer with these negotiations taken care of in advance. So yes, we give up some freedom, but because there isn't a way for us to make transactions in the market otherwise, the government solution works fairly well.

Here's where my ideas get a little more difficult to think about. I do believe that people should be allowed to try interact among themselves first before relying on the government to "fix" things. The trouble is, as in the case of traffic here in Yemen, if you allow the market to do its own thing, I'm not sure you can "fix" it later on. I have no idea how the government could step in now and correct the big problems with traffic here. So maybe things like high transactions costs could be predictors in advance whether or not the govt. should be involved. There may be some other factors as well, but the possibility that people may be stupid or evil are not (IMO) good reasons to mandate government control over something. Let people interact with each other freely and usually good things will come about...

That's the title of the new book by Brian Caplan and it's making some waves. All of economics is based around the idea that people act rationally, that they act in their own self interest (which often times involves helping other people). Economics shows us what kinds of outcomes you can expect from various policies and it is assumed that people would pick the policy that leads to the best outcomes. The trouble is that the vast majority of people do not choose these policies, they chose the ones that lead to worse outcomes. They expect the politicos they elect to implement the policies they want and so we get a variety of programs that demonstrably hurt people but are very popular. Things like protectionist measures against trade, price controls (anti-gouging laws, minimum wage laws, rent control, etc.), measures to combat automation and outsourcing, and farm subsidies are some of the examples that spring to mind. All of these things hurt the public in general (even if they help certain, small groups) but they enjoy widespread support from the public. Why do people like what can be shown to hurt them?

Caplan postulates 4 biases that people seem to have had for all of history. Some of them may have been beneficial in our ancient past but get in the way today. The 4 biases are:

1) Fear of foreigners
2) Make work
3) Fear of markets
4) Undue pessimism about the economy

The fear of foreigners probably started in our primitive past where new tribes were seen as competitors in the zero sum game of hunting and accumulating women. Back then, it made a lot of sense to be wary of foreigners because the machinery of wealth creation had not come about. Unlike game hunting, wealth creation is not a zero sum game (one person wins only by beating another) so this fear causes us all sorts of problems today. Most of these fears are seen when topics of trade and immigration come up today.

The make work bias shows itself whenever you hear someone judging how the economy is doing by employment figures as opposed to actual production. A common worry today is that America is "losing" because we don't make as much stuff as before. That's false of course, America has never been more productive or made more stuff than it does currently. What people really mean is that there are far fewer people employed in the US manufacturing sector. This is a good thing, higher productivity directly relates to wealth creation. Whenever fears of outsourcing or automation come up, it is the make work bias rearing its head. Higher productivity is the source of advancement and continued growth, automation is a great thing.

People in general have an irrational fear of markets. I say irrational because we are surrounded by products and services that are brought to us at varying prices and quality levels by markets, but people refuse to trust them. Farm subsidies are a case in point. They have a fairly widespread base of support not only in rural agricultural areas but in urban ones as well. Most of that is driven by the fear that there wouldn't be enough food if we left it to the market. There are no shortages of other things that are only market driven, chairs, pencils, computers, concrete, vitamins, etc. As a matter of fact, relatively little food is subsidized and yet we have no shortages of the farm products that are not subsidized (chicken, beef, eggs, fruits and nuts of all kinds, etc.). When economists offer market solutions to things like education, health care, elimination of farm subsidies, etc. they are usually dismissed with the assumption that markets can't or shouldn't be involved despite the enormous evidence that they do indeed work. People simply do not believe despite what is in front of them. Part of that is the fallacy that "bad" motives must lead to bad outcomes. Economists make a distinction between self interest and greed, most people do not. Because most people in any given market are driven by a profit motive, the public at large assumes that nothing but bad things can come out of market processes. The facts of the matter are that inevitably, through the magic of competition, the people and firms that succeed are the ones that serve their fellow man the best. Yes, bad things can be done by bad people, but what else is new. Markets, if left to their own devices will provide us with the best services and products at the lowest prices.

There is also an ongoing feeling of pessimism about how the economy is going. This could be understood during times of high inflation and unemployment, but people are pessimistic even now. We have made enormous gains in the last 100 years in every way you can think of. We have better products, longer healthier lives, a cleaner environment, more freedom due to the dramatic drop in the costs of communication and transportation, and even more free time than in 1907. The real kicker is that things are better than they were even 30 years ago, but people don't acknowledge it despite living with all of the benefits of our ever progressing economy. It goes further than this, whenever something that comes up that could improve our standard of living (outsourcing, freer trade or automation) people point to it as evidence that we are getting worse off! Even if economists didn't do the research that they do telling us this, it would seem to be obvious that things are indeed (across the country) continually improving. There are some states that are shooting themselves in the foot (Michigan, New York, I'm looking at you) by continuing to use lousy economic policies. If they would simply look at why people are going to other states and start to emulate them, they too could enjoy economic growth and low unemployment...

So why do people cling to these things instead of taking research seriously? A lot of it has to do with clinging to a world view. In just about every other part of life, people either defer to, or at least take seriously the experts in the field. Many, if not most people cling to beliefs that they have no idea if they are true or not. The healthy way of dealing with things you don't understand is to be agnostic about it, listen to some experts and then do some of your own research. Instead, people tend to blindly believe in awful economic policies. It's to the point where a person in Mexico may vote against politicians that support freer labor markets, freer trade, and a reduced welfare state and then illegally move to the US to take advantage of the benefits that those things provide. It's sad to think that most people wouldn't think twice about that despite the obvious disconnect. Caplan's book sounds like it does a decent job explaining of why people turn away from things that actually help people and towards the tried and not so true... You can hear (and read) the interview with him here.

Just finished listening to some podcasts from here and I really enjoyed them (as usual). The first one was about outsourcing and trade in general and had some interesting tidbits. One thing I liked was his idea about economies of scale. Instead of talking about the efficiencies of returns to scale due to large purchases of supplies, etc. he posited that the efficiencies come from the continual use of human capital. Economists use the term "human capital" to describe the skills and knowledge that people have and use to produce stuff and services. His idea was that in a production environment capital is used all the time. If I decide to make an amplifier, my human capital involving cameras and Arabic aren't used. I can only use one skill at a time so anything I decide to make is inherently inefficient. If you get several people (or a lot) together and they specialize, human capital can be used around the clock leading to much greater efficiency. Well, I thought it was interesting...

He also brought up the idea that there are no longer the manufacturing jobs to employ a lot of the immigrants like there used to be. He used the example of the Endicott Johnson shoe factory in Johnson city to discuss his point. I used to wander around the old grounds of the EJ factory in Johnson city a lot back in my college days. Anyway, I don't think it's necessarily a problem, but it is interesting to see the difference between today's immigrants and the ones from years past.

When they started to talk about outsourcing, Russ came up with an interesting way of analyzing things. The usual issue is weather or not the decreased costs are "worth" the loss of jobs stateside. People sometimes have difficulty determining who comes out ahead in these sorts of deals. Imagine some product, like computer software, became totally free. Or imagine that a teleportation device was created. Both of these hypothetical situations would eliminate hundreds of thousands of decent paying jobs. Certainly the people that had those jobs would be worse off, but what about everyone else? It's pretty clear that everyone in the world would be better off with zero cost software and transportation. The thing that people usually forget is that the money that would no longer be spent on those things would be spent on something else, and that is what drives economic growth long term. The same general idea applies to automation and outsourcing. By making things less expensive (they can never be totally free), the world benefits and money is freed up to be spent on other ideas and services. It's a great way of putting things into perspective.

On another podcast, they were talking about recycling. It's interesting to think about the idea between resources and trash. In short, a resource is something that someone will pay you for and trash is something that you have to pay to get rid of. It turns out that aluminum cans are usually a resource and as such are worth recycling, newspaper is a bit of a wash, and glass is a real money loser. What that means is that is actually more expensive (in many cases) to make glass from old bottles than it is to make it from scratch.

Some people might say that it doesn't matter what it costs, we should reuse and recycle as much as we can, even if it loses money. These people tend to sneer at economists as being short sighted and resource hogs. The shame is that economists are the only ones that take all resources into account, most people that are rabid about recycling think that only the things we get out of the earth are important. Economists take into account time and alternative uses of human capital as resources, things that are frequently ignored by many people. It turns out that if prices are allowed to be set accurately (always easier said than done), it's easy to find the least resource-intensive product, it is the cheapest one. That's one more reason to allow prices to rise and fall on their own, it'll allow us to accurately determine the relative resource use of the products we use.

I really enjoy the 4th of july. Of all of the secular holidays, it's my favorite. I'm always amazed at the guys that signed the Declaration of Independence. Talk about putting everything on the line... Let me tell you, America is a wonderful place, it's good to know that I can always come back here and that I can get a job. Lots of places, hell, most places can't claim those two things. Yemen certainly can't. Despite it's shortcomings (nothing's perfect), America is the best place to be. For those of you that haven't read it recently, here's the Declaration of Independence. Keep in mind that the guys that signed this were signing their own death warrant, and the delivered it to the King!

Henry (my Scottish housemate) used a phrase that I have only heard uttered by people from the UK and Ireland. He said something about the "working class." I mentioned that in the US, we don't use that phrase and his response was, "What do you call them?" My thought was, who is them? It's a really telling thing I think... Americans really don't tend to think in those types of Marxist "classes," we do talk in real vague terms like poor, rich, and middle class, but not "working."

After all, everyone "works" in the US, even Bill Gates works... We've never had an aristocracy. For me, using the term "working class" is a little repulsive. It assumes that there is an entire group of people that are only good for a certain type of job. As the economy continues to change, there will be fewer and fewer blue collar jobs, the Brits will have to come up with a better description...

There was recently a meeting (seems like all they do here is have meetings) discussing the rising prices here in Yemen, especially food. The government took a lot of heat, but they managed to sidestep the main things that the government is doing. As Milton Freidman once famously said, "Inflation everywhere is always a monetary phenomena." What this means is that if everything goes up by 20% (to pick a number), it is because more money was added to the national money supply. The central bank does this through open market operations (in the US this is done by the fed buying and selling Tbills, This also affects the bond market and interest rates as well. I don't know if there is an equivalent vehicle in Yemen.) Typically, the devaluation of the currency (i.e. inflation)in a big way is done to engage in seniorage. That is the act of deflating the currency deliberately in order to pay back debts. If the government takes out a loan of a million dollars in the form of Tbills, it is very tempting to inflate everything in order to pay for it. In simple terms, the government just prints enough money to pay for it. Of course the more money that is in the system, the less any particular dollar is worth. Some people accuse China of doing this in order to keep their goods "cheap" on the international scene. If they are it is quite misguided. Devaluing your currency has some pretty bad effects on the people living in that country, living with inflation is never a good thing...

There is general inflation going on in Yemen, and the central bank is to blame. Nobody seems to have mentioned that though. Most of the criticism came in the great, "Why doesn't the government do something?" The government is doing something... it just isn't what you like. If this keeps up, I expect jobs to start offering to pay in US dollars, UAE dirhams, or Euros instead of Riayls.

Most of the clamor is over food prices. People claim that food has risen faster than the general level of inflation. People were clamoring for the government to keep watch on the private sector who is pricing things at supposedly unconscionable rates knowing that Yemenis will pay "whatever the cost" for food. That last part is forgivable but still makes me shake my head. If people are willing to pay anything, why aren't kabobs 1,000,000 dollars a piece? People aren't willing to pay anything, but they are willing to pay the prices that are currently offered. Participants in the meeting claim that the private sector is what needs to be watched since, and this is a quote, "There are only a handful of people that control the importation of food and they control the prices." AHA! I was right! There are only a handful of possible reasons for this. The first is that the companies are charging the competitive rate and prices will not fall unless the price of the supply drops. No one thinks that this is the case. Another possibility is that there is some sort of barrier to companies that want to compete in this market. Competition, especially from a foreign company, would cause prices to fall. The barrier would have to be made by the government. There isn't a business out there that can stop a competitor from opening unless they have bought protection from the government. If these companies have indeed raised their prices faster than the rate of inflation (and thereby boosting their bottom line), that is a very good business opportunity for someone else. Something is preventing those competitors from coming in and the government has it's fingerprints all over it. I do wish that basic econ was taught in schools...

Hayek is generally credited with the insight that the problem with socialism and command economies in general is that knowledge is widely dispersed throughout the population. Everyone knows something, and as a whole, we know much more than any small group or individual. Capitalist economies tend to extract this knowledge through price signals whereas command economies take their best guess but end up not having enough information to make the proper decisions.

A fascinating (to me at least) result of this is the ability of large numbers of people to properly guess random things like the weight of the horse that won the Kentucky derby. Several studies have been done on this and they always end up being within a pound or two of the actual number. There are other examples as well, but how do they work? The idea is a simple one. If people have an idea of the right answer, the "average" of their answers will converge on the correct one given enough answers. Now most people don't have a very good idea about the specific weight of horses, but we all know that they aren't 5 pounds, and we know that they aren't 5000 pounds either. So we have a good enough idea that we guess within a reasonable amount plus or minus around the actual value. This statistical "noise" cancels out with enough answers and you're left with the proper weight.

Things get even more interesting when you start dealing with "experts." It takes far fewer answers for the average to come to the correct number. This makes sense since we would expect that experts would have far less variance to their answers. How do you limit these questions to "experts?" The simplest way is to put some money on the line, make a bet. This keeps the people who really don't have a good idea from contributing and limit your answers to expert opinions. This is curious when dealing with the weight of horses, but it gets downright amazing when you start talking about policy issues, business decisions, and even presidential candidates.

Google has been using these sorts of "Prediction markets" with great success when dealing with internal questions, and there is a thriving market for presidential nominations. This may sound kind of strange, but it is a way of extracting knowledge from a dispersed population. Imagine if before the recent invasion of Iraq, a decision market was formed in the CIA asking what they thought the likelihood of WMD being in Iraq. If you allow anyone with some knowledge to contribute instead of a select few that may be guided by politics moreso than facts, you are much more likely to come up with the right answer. If people from not only the Iraq and middle east bureaus were allowed to vote but also anti-terrorism, Africa, nuclear proliferation teams, in short anyone that would have some sort of expertise on the proliferation of these sorts of things were allowed to vote, you would gain much more information than just following a handful of "experts" advice. There's a good chance that the opinion CIA-wide about the probability of WMD in Iraq would have been negative. Of course who knows if that would have changed anything....

There is a potential problem of course. If there is a systemic bias among the "experts", the results can be way off. It has to be systemic though, if only a few suffer from it, the results will wash out with enough contributers. I learned about this from a recent podcast from econtalk. There are some amazing examples given where this has worked very well. Of course the host gave a chilling counter example. he regularly holds seminars for the press and people up on capital hill. One of the questions he usually asks everyone is what percentage of Americans are paid the minimum wage. He claims that the median answer given to him is usually between 15% and 20%. The actual percentage is just below 3%. Clearly, this approach won't work with everything, but it has promise and is being used successfully in the business world.

In the same podcast they also discussed the Wikipedia phenomena. For those of you not familiar with it, Wikipedia is an online encyclopedia that is written by the people that read it. Anyone may contribute to it, and may edit whatever entry that they are reading. Most people never would have thought that this could work, but it does, and amazingly well. Errors are usually seen quite quickly and corrected. Once again, the idea is that everyone is knowledgeable about something, and our collective knowledge is far greater than any ad hoc group formed with the idea of writing an encyclopedia. The amount of knowledge out there is impressive, not just in depth, but in breadth. Wikipedia has articles on things that would never be in a regular encyclopedia, primarily because the publishers wouldn't think of including some topics. Even if they did think about it, they may not have access to people that know much about them. Wikipedia keeps growing, both in the number of topics it covers and the amount of information included on any given topic.

The CIA is using a variation of this, their own intellipedia. The idea is that people can post articles on whatever topic that they feel is important. People then read the articles and they can add to it or edit it as they see fit. The article can be edited and reedited numerous times until some sort of consensus is formed, either in agreement or in opposing camps. By allowing the free flow of information among all of the people there, topics can be fleshed out quite a bit more completely and quickly than if it went through the traditional editing process. It also allows people from widely differing specialties to offer their expertise. Even if an expert that has tangential interest only qualified one sentence in the report, that is information that wouldn't have been in there if done the traditional way. Once again, the idea is to take advantage of the dispersed knowledge that is out there. If enough people contribute, just about everything that is known about a topic can be gathered.

So why is it that people will buy all of the gasoline when the prices are lower than the "market clearing" price? Why don't people evaluate the situation and think to themselves, "Gee, there's not much to go around, I better cut back?" The answer is one of the more misunderstood, and I think one of the more interesting aspects of price. Many, if not most, people view prices as being fairly arbitrary and motivated out of greed. Prices are much more complicated than that. As a matter of fact, accurate price setting is critical to the proper functioning of the economy.

Prices are a reflection of the incidence of supply and demand. Even without going into the details, it should be pretty obvious that when prices are low, either there is a ton of supply, not much demand, or both. On the other hand, when prices are high, demand is high, supply is low, or both. Nobody goes around trying to calculate relative supply and demand for every item they purchase to make sure they aren't doing something they shouldn't be doing like taking gas from a hospital or ambulance. The reason is because price tells us everything we need to know. Accurate prices are the quickest, easiest, and most efficient way of communicating the relative supply and demand of anything. If the gas is very expensive, we know that there is a lot of demand and/or a low supply. The beauty of this is that no one needs to make that insightful leap, it is enough that when it gets too expensive, we no longer buy it and others with higher demands can then have access to it.

This explains why price controls (like anti gouging laws, rent control, minimum wage, price supports for dairy, etc.) are so dangerous. If there is a disaster someplace and gasoline is in short supply, the price needs to go up in order to signal the smaller supply to consumers. If the price is held down at "regular" prices, there isn't any signal that things are now different and that consumption should be different as well. Assuming a modicum of competition (and there always is with gas stations no matter where you are in the US), prices will come back down as the supply comes back to normal. The lower price signals to consumers that it is OK (and maybe even desirable) to consume more.

It works the other way too. If prices are made artificially high, producers will make more than is necessary. Not only are the higher prices a hit on the pocketbooks of the consumers, but the extra production is a waste of resources that could have been used for something whose actual demand is higher (i.e. is something that people actually want.) A perfect example is price supports for the dairy industry. They are allowed to set a higher price than what the market would bear (and a higher price than would occur if imports were allowed to freely compete). This causes us to not only spend more than we would otherwise, but they make too much milk. Luckily for the dairy industry, they also had the connections to make sure that they could not only set higher prices, they have Uncle Sam buy the excess.... Any other price floor (like the minimum wage or mandatory union hiring) or subsidy (like ethanol) has the same effect. Too much is made, more than the demand requires. It's a huge waste of resources.

In a market with competition and minus government interference, prices will adjust to balance out the supply and demand for that product. Gum, labor, gas, homes, and even babysitters will have their prices determined by the constant feedback of market prices. The thing to remember about this is that there is no one person, group, or company that can determine prices. That's right, you can't set whatever price you want on your home and expect to sell it. WalMart cannot set wages arbitrarily low and expect to get the people they want to fill the positions they want. It also means that you shouldn't be able to buy gas at $2.50 gallon right after a hurricane with no supplies coming for a while. If you can't get paid what you want, it's because either people don't particularly want what you have to offer or there are many people offering the same skills.

Price is a critical indicator of relative supply and demand and it is the prime determinant of weather someone decides to buy (or sell) something. You can't screw around with that without consequences....

It occurs to me that the efforts to make gouging illegal are really efforts to outlaw greed. If you are making policy, it is much more important to legislate against results instead of motivations. While it is certainly possible that a gas station owner might have a master's degree in economics and will raise prices to insure availability of product and stimulate resupply, it is far more likely that the owner will simply see an opportunity to raise prices and make a buck. In the former case, the owner is looking out for the good of the community, in the latter, the guy is just "being greedy." In either case, the results are the same. If we were actually worried about people's well being in emergencies, we would pass laws requiring business owners to raise the prices during emergencies. This would cause self imposed rationing of important resources on the part of consumers and will ensure the quickest flow of goods to the affected areas. Instead, what we are given are laws that are concerned with how people feel about the situation and ignore what the consequences of that law are. Ideally, the government would stay out of it altogether, but the law I suggested would do less damage. High gas prices are never a "crisis", but no gas certainly is.

"But people should react out of good intentions," yeah, that would be nice. Here's the thing, the saints that are in the situation will always rise to the occasion, the trick is to get the nonsaints and saints that are removed from the situation involved in doing good. Even if some gas station owners are willing to forgo potential profits and sell gas at the old price, will there be enough saints to understand the situation and only use gas when it is absolutely necessary? Sure, there are some businesses and people that will immediately flock to the affected area to help and bring supplies. Would more people come with supplies if they were poised to make some money at it? Would people in Georgia load up their pickup truck with plywood and drive to Florida after a hurricane if they were going to make 600-700 bucks doing it? You better believe it.. Trying to legislate morality is at best a fool's errand and at worse is an excuse to impose one type of morality over everyone (see anti gay laws for example). Yes, sometimes people do not have everyone else's best interests at heart, but as long as the results are the same as someone that does, who's business is it what people think?

economics gouging congress free trade