The Science of Stimulus

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on January 16, 2008 in response to much talk about the the need to create a stimulus package to avert a recession. Audio is here.

Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.

But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?

Sunny Side Up

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on December 26, 2007. You can listen to it here.

I know the economic news doesn’t seem very cheerful these days. But a lot of it is blown out of proportion, stories and subplots designed to scare us, told by politicians and people with their own agenda. Let’s not let them push us around whether they’re on the right or the left, Republican or Democrat.

They always tell us the sky is falling. That’s the minimum standard for getting our attention in a busy news cycle. But remember that the sky usually doesn’t fall. We just move on to the next scare.

So my New Year’s wish for America is that we be skeptical of falling sky stories and that as a result we all sleep better.

Don't Fear Deficits

By Russ Roberts

From Ideas on Liberty, Vol. 50, No. 12, at FEE.org

At current tax rates, barring a recession, the federal government will run large and growing surpluses during the next decade and beyond. Yet, regardless of the identity of the new President or the character of the new Congress, we are certain to hear a great deal of talk in the coming months about deficits rather than surpluses.

Call it Ross Perot's legacy. He seems to have created a permanent fear of government debt and deficits within the hearts and minds of the American people.

This is quite an impressive achievement. Between 1970 and 1997, the federal government ran a deficit every single year. There were some good years and bad years over that time period, so why the fear of the deficit?

Between 1982 and 1996, the federal budget deficit exceeded $100 billion dollars every year. In eight of those years, the deficit exceeded $200 billion dollars. During that time, the American economy added over 25 million jobs.

During those years we listened to dire predictions of what those deficits were going to do to the economy. Sure, those Cassandras warned us, the economy is doing fine, but you just wait. You just wait!

We waited. Between 1982 and 1996, the economy got 50% bigger after taking account of inflation. But it's a house of cards, the worriers warned us! It's all going to come tumbling down. So now we've got surpluses. When is that house of cards going to fall apart? Are the effects of deficits so sinister that we have to wait even after the deficits have been reversed? Are deficits so insidious that their evil effects can be unleashed years and decades after the accumulated debt has been paid off?

I don't think so. So why did we get away with it? Shouldn't those deficits have harmed the economy? Shouldn't they have driven up interest rates and stifled growth?

It's hard to believe, but a deficit of $200 billion is "small" in a certain sense. It's hard to accept, but the budget deficits of the 80s and 90s had no appreciable effect on interest rates. In 1993, the first year of the Clinton administration, the deficit was $255 billion. In 2000 we are expecting a surplus of over $100 billion. But interest rates are higher than they were than when Clinton took office. They've bounced around. But there is no relationship between interest rates and federal budget deficits.

How can that be? When the federal government goes to borrow billions of dollars, shouldn't that drive interest rates higher? Isn't that what you learned in Economics 101?

Well, the poet (Alexander Pope) said a little learning is a dangerous thing. For an increase in demand to drive up prices it has to be a significant part of the market. If I decide to double my apple purchases, the price of apples will not rise. If the city of St. Louis doubles its demand for apples, there will be no significant effect on the price of apples.

When the U.S. government increases its demand for credit by $100 billion dollars, the effect is small in a world credit market that is many trillions of dollars.

There is another sense in which the U.S. budget deficit was small in the '80s and '90s. It was never so large as to alarm investors that we might not honor our debts. True, $290 billion seems like a large number. But the economy in that year (1992) was $6.2 trillion. The government collected over a trillion dollars in taxes. Were we spending more than we took in? Yes. But there was never a sense in which we were spending beyond our means.

A friend of mine asked me the other day whether the analogy of personal debt applies to the government. Isn't it bad to go into debt, to leave beyond your means? Doesn't that burden future generations.

I asked him if he owned his house. Yes, he said. Had he paid cash or borrowed the money from the bank? He laughed and admitted he had borrowed the money.

What, I asked, in mock amazement. Wouldn't it have been better to save up money and pay cash? How could he saddle his family with a mortgage?

The right question is how big a mortgage. Sure there's a mortgage so big that's it irresponsible. Sure, it's irresponsible to burden the family with mortgage payments that threaten the ability of the family to pay for food, education and health care.

But it would be just as irresponsible to pay for such an expensive house by paying cash, by putting money aside every year, money that would be unavailable for food, education and health care just to avoid going into debt.

It's the size of the house that determines whether the family is being responsible or not, not how the house is financed.

And the same is true for the federal government. What the government spends money on is usually going to be vastly more important than whether it finances the spending via taxes or bonds. A boondoggle ditch-digging project that achieves nothing but is fully paid for by taxes is much more harmful than a sewer project that is paid for with bonds.

So let's ignore the forecasts of surplus or the dire predictions of doom if deficits reappear because of a tax cut. All of those predictions are wild guesses anyway. Let's focus instead on the proper role of government and whether the money spent by government is spent wisely.

Nickel and Dimed and Quartered

By Russ Roberts

A friend of mine asked me the other day about Nickel and Dimed, Barbara Ehrenreich's experience as a low wage worker trying to make ends meet. She has a tough time. It's not easy living on the minimum wage. It's particularly hard to support a family of four on $10,000 a year. My friend wanted to know how a classical liberal devoted to limited government would view the challenge of the working poor.

My simple answer was that better education would go a long way toward helping the working poor in the future. But won't we always need people to do menial tasks, my friend wondered, people to wait on tables and work as janitors and dishwashers. Another variant on this point is the presumption that we need low-wage people willing to do those menial tasks and therefore, the entire capitalist system and our vaunted standard of living needs an army of low-wage people to support the rest of us.

In fact, if education were better in the United States, and more people were more productive, the higher wage alternatives would induce businesses and ourselves to look for ways of accomplishing unpleasant tasks using machines and technology in place of labor. That's precisely why the occupations of butler and housekeeper have declined so dramatically in the United States over the last 100 years. You'd think as we get richer as a society, more people would want to hire servants. But the rising wage of servants, a rising wage due to the higher productivity and therefore higher paying alternative occupations of potential butlers and maids, induces most of us to live without live-in servants. Instead we use vacuum cleaners and washing machines and dishwashers instead. Or if you can afford it, you hire a fraction of a servant, a cleaning service that comes once a week.

Deficits Don't Mean Disaster

By Russ Roberts

(from USA Today)

Is $422 billion a lot of money?

It is if we're talking about my mortgage. But for a U.S. economy of nearly $12 trillion, it's not particularly large.

The current deficit is smaller as a percentage of gross domestic product than it was in much of the 1980s and 1990s, those decades when the gloom-and-doomers told us that deficits would destroy our economy and our standard of living. Instead, the economy thrived, we added millions of jobs, and our standard of living rose.

The sky didn't fall then, and it won't fall now. But isn't it irresponsible for us to live beyond our means? Don't we punish our children if we borrow money today that they must pay back tomorrow?

It can be prudent to live beyond your means. You and I do it all of the time when we borrow money to buy a house. True, the mortgage payments may end up burdening our children. But paying cash is also costly. Imagine a would-be homeowner, allergic to debt, who insists on paying cash. That, too, means less money for the health and education of his children while he builds up his nest egg to buy the house.

A well-built house financed by a mortgage is an asset to your children. An extravagant lemon financed by cash punishes them. It's the size and quality of the house that matter — not how it's financed.

So it is with government spending. Funding for crucial infrastructure that is financed by debt is money well spent. Government subsidies to farmers are wasteful even when they're financed out of current taxes.

Both President Bush and Democratic presidential nominee John Kerry promise to spend more money. That money will come out of our pockets either today or tomorrow in the form of higher taxes. The timing of those taxes is less important than whether the extra spending yields benefits we could not achieve acting as individuals.

Harmful and unnecessary government spending burdens us and our children far more than the deficit.

The Locomotive in the Rain Forest

By Russ Roberts

(From Newsweek Japan)

Note: Newsweek Japan asked me (and others) to answer a series of questions on economics. Here is one on general economic policy. My essay on outsourcing is here.

Q10: In this age of uncertainty, what is the most credible and appropriate economic theory for governments to follow when making policy? Do you think Greenspan's monetary policies have been right?

We often talk about the economy as if it were an engine or locomotive that needs to be "stimulated" or "sped up" or "kept on track."

An engineer drives a locomotive and controls its speed. But the leader of a country doesn't steer the economy. Even a skilled central banker, an Alan Greenspan, doesn't run the economy. In the short-run, the Fed affects short-term interest rates. That's a pretty small lever for moving the world in a hurry. Parents have trouble getting their children to behave in desirable ways--how could it even be remotely possible for a politician or even a legislative body to steer the behavior of millions of consumers, investors, workers and entrepreneurs? Most of the time, the politicians are merely along for the ride.

Talking about stimulating the economy implies there's a gas pedal that just needs to be pressed down a little more forcefully. But most policies designed to stimulate the economy quickly take fuel from one part of the system in hopes of speeding up another part. It's like trying to raise the level of the water in a bathtub by filling a bucket from the back of the tub and pouring it into the front. In the short-run there is very little that can be done with fiscal or monetary policy to speed up an economy.

The long run is very different. In the long-run, we're not all dead. Our children and grandchildren are still around. What policies best serve them? The source of long-run growth is innovation. It's impossible to anticipate which areas are the best bets for improving the human condition. Better to let a thousand flowers bloom and let us choose among them as consumers and workers. In this view, the key to growth is whatever increases the number of flowers.

That's why I prefer a wilder metaphor for the economy--that of a rainforest. A rainforest is an incredibly complex place. Adding a species has unpredictable effects because the interactions between the plants, animals, soil and weather are too complex to understand with any precision. A person in charge of an ecosystem is at best a steward with no illusions about having an ability to "run" the rainforest. In the rainforest, you respect diversity as the way of the world. No one gardens an ecosystem. You keep the environment clean so that the natural competition and cooperation between species can work. You don't pretend to know how it will look in a year. And you're patient because you know that growth takes time.

The best stewards of the economy help create an environment for innovation. That means following policies that promote risk-taking and the accumulation of capital--policies that create stable prices, stable interest rates and the rule of law. Alan Greenspan is one of the most respected central bankers in history because of his ability--up until now at least--to contribute to that environment through stable prices.

Politicians are notoriously short-sighted. But that short-sightedness is a function of political institutions. In the democracies, we would be best served by asking less of our politicians in the short-run and more in the long-run. A little patience on the part of voters would lead to policies that let us plan for the future, save, innovate and flourish.

More than an Invention

By Russ Roberts

(From Tech Central Station)

Time Magazine has chosen the iTunes Music Store as the Invention of the Year. Invention of the Year? When you think of an invention, you think of the light bulb, the cotton gin, the airplane, the television, the transistor, the cell phone. But an online Music Store? That's not a "real" invention, is it?

For the pessimists, honoring a software program that does nothing more than transfer music from place to place is just another sign of America's decline, another step on the road to an all-service economy where America makes nothing. Another step toward an economy where all we do is sell cosmetics or french fries to each other or try to sustain our standard of living by doing each other's laundry.

I'm a little more optimistic about the future. OK, a lot more optimistic. Some very talented people designed that iTunes Music Store. It works beautifully. It lets me buy a single song for 99 cents or an entire album for just under $10. I can listen to a sample of the music in advance. I can discover new artists by looking at what else people bought who like what I like. When I buy music at the iTunes Music Store, it's easy to keep it organized on my desktop or loaded on my iPod. The confluence of the iTunes software with the iPod is one step closer not to an all-service economy, but one step closer to the world where all the music ever recorded is stored on a single simple portable device. Someday, that device will be embedded in my toenail and by doing some simple dance step, the song I want to hear will reverberate through my brain at the same time a holographic display of the artist performing it is suspended in midair.

Is that as important as the cotton gin? There's a temptation to conclude that the cotton gin is related to clothes and clothes are a necessity. iTunes is a mere luxury.

But the value of technology always depends on context. If you're naked and living in a cave, inventing clothes is a big breakthrough. Really important. A man who could skin a saber-toothed tiger and turn that skin into something that kept you warm had a very profitable product to hawk to his fellow cave dwellers. And like every profitable invention, his profits came from pleasing those he traded with. When every one is a nomadic hunter, the cotton gin is worthless. After farming was invented, it was much better to make clothes from something that grew from the ground rather than having to chase it. So cotton was a big deal. But you have to find a way to get rid of those nasty seeds. So in the nineteenth century, the cotton gin is the road to prosperity. It's also pretty obvious that in the nineteenth century, working out a concept for downloading music over the Internet still isn't terribly useful.

But in 2003, iTunes can be more profitable and enjoyable for humanity than a new way to work with cotton. We already are pretty good at cotton and shirt-making. Most of our shirts come from overseas and they're cheap because of technology that's already been developed that raises human productivity and lowers costs. There isn't much profit in making it a little bit better through some innovation. So in 2003, iTunes can be more profitable than a better cotton gin. If anything, it's a sign of our prosperity rather than a cause for alarm.

And while I like the convenience of iTunes and marvel at the aesthetics and ergonomics of the iPod, the iTunes Music Store is more than just a way of selling music. It's more important than just another music store opening at the nearby mall. By creating a profitable interface for downloading music via the internet, iTunes gives the musicians of the future an increased incentive to create new music and get it into listeners' ears with the click or two of a mouse. That's pretty important if you have a soul and music speaks to it. That's most of us.

We will never be reduced to only doing each other's laundry. That can only happen if laundry is all we know how to do. The road to prosperity in America will always rely on finding ways to leverage what we do best. And in 2003, what a lot of us do best relies on transferring information or using it in creative ways. Music lovers, rejoice.

Why Linux Is Wealthier Than Microsoft

By Russ Roberts

(From Business Week)

Sometimes I suspect Bill Gates doesn't sleep so well at night. Not out of any guilt over his billions or the alleged mediocrity of his product. No, I wonder whether he might actually worry about the competition. Not Apple (though that iPod MP3 player is a killer toy, and I'm cheerfully typing these words on an Apple (AAPL) PowerBook G4). No, I'll bet Linux and its creator, Linus Torvalds, cross Gates's mind when he's looking up at the ceiling late at night.

On the surface, Linus vs. Bill seems to be the ultimate David vs. Goliath contest. It appears to pit the man who cheerfully gives away his code against the guy who ruthlessly seeks every last penny for it. You'd expect Gates would squash Torvalds. Yet they have more in common than you might think. And the final score in their high-stakes rivalry could end up surprisingly close.

MONEY VS. ALTRUISM. For starters, the two face a similar challenge. Even their big brains are puny compared to the wisdom and knowledge spread throughout their organizations. In Gates's case, it's a huge, publicly held company. In Torvalds' case, it's a loosely connected but increasingly powerful network of software developers. Both men must find ways to motivate people to work together so knowledge can spread and have maximum impact on improving software quality.

Microsoft (MSFT) uses money to motivate. And no doubt about it, that's a powerful incentive. But others exist. The community of Linux users and developers is held together by pride and the thrill of working toward a common goal of a universal, free (or at least relatively inexpensive), elegant, bug-free or bug-resistant alternative to Windows, the world's dominant computer operating system.

Can the volunteers who work on improving Linux outperform employees dreaming of stock options? That's not to say Microsoft employees are motivated only by money. They, too, take pride in their work. Disdaining monetary incentives entirely would seem to cripple Linux and reduce it to a charitable organization. But charities work wonders. They can build a religious community or raise a barn or build a habitat for a neighbor.

Look at the progress Gates's personal foundation is making against malaria. Honda (HMC), I'm sure, would trounce the United Way's attempts to design and build a car. But I wouldn't necessarily expect Honda to do a good job at running a school for the blind. With some causes, passion and pride can outperform money.

GEEK FERVOR. Designing software may be such a cause. A lot of people are passionate about creating an alternative to Windows. In some cases, the desire to see Windows' dominant position threatened is its own passion. As a 21-year-old living at home, Torvalds created Linux in 1991 in Finland. He offered it for free to the world and made the source code available to anyone who wanted to alter it—as long as the tinkerer was willing to make the new additions available to the public as well. The result is a product embraced with religious fervor by the geek community and even penetrating the mainstream, running servers and other hardware.

Yet the rivalry is defined by more than motivation and incentives. Does Torvalds or Gates have more resources at his disposal? Gates, right? But that answer assumes that money is the most important asset. Even if money trumps idealism as a motivator, Torvalds has a bigger team—the millions who use Linux and continue to tinker with it. Potentially, he has more brainpower on his team.

Torvalds has another advantage. His organization is less organized than Microsoft. It's really a disorganization. At Microsoft, Gates is the head honcho. Torvalds is just Linux' gatekeeper. He's not really in control—he's called the project leader, the guru. That may appear to be a disadvantage. But remember the problem that every organization's leader faces: The team's smartest member, even if he or she is nominally in control, is vastly more ignorant than the entire network of people who compose the organization.

CREATIVE CHAOS. Being disorganized can actually leverage that knowledge more effectively than a command-and-control hierarchy. Innovation must rely on creativity generated by the mass of folks underneath. In a dynamic system, trial and error is a powerful force for change. A bottom-up system with a gatekeeper can be more innovative than the hierarchical system over which Gates reigns. It can generate a lot more trials, and a good gatekeeper can throw out the errors.

You would think being the head honcho allows Gates to plan. But Torvalds rightfully revels in not planning. He's counting on the marketplace's judgment of Linux and the wisdom of his disorganized organization as a better strategy. He may be right. And while Torvalds and Linux have recently faced legal issues about whether Linux might have some proprietary code embedded in it, that distraction is dwarfed by the time and energy Gates has devoted to battling the U.S. Justice Dept. That antitrust case clearly diverted resources away from innovation and making sure his organization was operating at top efficiency.

While Torvalds is a threat to Gates, Gates seems to be little or no threat to Torvalds. To hear Torvalds talk about it, he's having fun as Linux' guardian. His challenge is merely that of being an effective shepherd to a vast flock of very creative, un-sheeplike sheep. Regardless of the marketplace's final judgment, Torvalds probably sleeps a lot more soundly than Gates.

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Why Are We Losing Manufacturing Jobs?

By Russ Roberts

Audio

Politicians like to blame the loss of manufacturing jobs on the nefarious schemes of foreigners to steal American jobs and lower our standard of living. The real answer lies closer to home. And surprisingly, the shrinking of the manufacturing sector is actually a sign of America's economic health.

Consider how long this has been going on. In 1950, about a third of the work force was in manufacturing. For five decades, that percentage has fallen steadily. Today, manufacturing jobs are only 12% of the workforce. A trend that lasts fifty years isn't a trend. It's a tidal wave. And reversing that trend will mean understanding its source.

Globalization is part of the cause. But the driving force behind the changes of the last half-century is the incredible productivity and innovation of the manufacturing sector. Take a look at the automobile industry. Fewer people work in that sector but they're able to make a lot more cars. That's happening all over America, in any industry where you can use machines and know-how to make people more productive.

That transformation has meant hardship for some manufacturing workers and their employers. But overall it's been good for America—it's played a key role in the enormous growth in our standard of living. Our cars and refrigerators and washing machines and televisions last longer, work better and require less maintenance than they used to. And the average American worker can earn the money to buy those goods in a fraction of the time it took back in 1950. That frees up the resources to create the companies and the products we couldn't have dreamed of in 1950—new medicines, computers, cell phones and all the things we enjoy now but didn't have back then. And that's how we've been able to more than double the overall number of jobs in America in the last 50 years.

Contrary to conventional wisdom, our standard of living does not depend on manufacturing employment.

Manufacturers and their unions will tell us otherwise. But the only way we can revitalize manufacturing employment is put up some kind of barrier to innovation and competition. That will only serve to make the rest of us poorer.

On This Labor Day, the Glass Is Half-Full

By Russ Roberts

From the St. Louis Post Dispatch

(The original ran under a different title.)

What proportion of the U.S. labor force earns the minimum wage or less?

It's a good question for Labor Day and one measure of how you think the U.S. economy treats people. Some people see the glass as half-empty. Others see it as half-full. And the minimum wage question is one way to find out which side of the divide you're on.

I've surveyed lots of different people on this question: law professors, Congressional staffers, law students, journalists, undergraduates. The answers I get back tend to be pretty similar. The average answer is around 20%. And a lot of educated people think it's 40% or higher. That's not half-empty, That's barely damp.

Get your guess ready, because I'm about to tell you the answer. Most but not all employers are required to pay the minimum of $5.15 per hour. The Bureau of Labor Statistics (BLS) collects data on the 72 million Americans who are paid by the hour. They make up 60% of the labor force. In 2001, a recession year, the BLS estimates that three percent of that hourly work force earns the minimum wage or less. Three percent. You can make the number a little higher or a little lower depending on how you slice it. You can look at just full-time workers and the number falls to below two percent. You can look at just women and the number is four percent. But no matter how you slice it, most workers are much better off than most people think. In fact, half of the workers paid by the hour make more than $10 an hour, almost double the minimum.

Another good Labor Day question is why most workers make so much more than the legal minimum. Don't businesses try to pay their workers as little as possible? Why would they pay more than the law requires?

You might think that labor unions keep wages high. It's a tough claim to prove—less than 10% of the private work force is unionized. The same phenomenon appears if we look back in time. The proportion of the US work force that is unionized has been steadily falling for the last 40 years, yet America's standard of living is much higher than it was in 1960, even after correcting for inflation. How has that happened? Who's protecting the American worker? Why are wages and salaries in America so high?

Ironically, it's the profit motive, the so-called greed of corporations and business owners that protects the workers. That motive can lead to hardship when a company closes down a plant or lays off workers. But it's the same force that keeps wages high. Companies have to compete with each other to attract and keep workers. That means high salaries and benefits. Otherwise how do you explain the thousands of companies that pay well above the minimum? Are those the companies run by the nice guys?

I don't think most CEOs or business owners are any nicer or meaner than the rest of us. But to succeed in business you have to meet or surpass the competition. That imperative of the marketplace drives companies to improve their products and keeps prices down. And most of the time it protects workers. A company can't thrive if it has a reputation for being a lousy place to work.

So even though we have a minimum wage and labor unions, they don't have much to do with the high level of wages of the United States. It's hard to accept. You can't see the competition between companies that keeps wages up. And the system isn't perfect. Workers get laid off and left behind. Sometimes a company is run by a crook or a loser who treats his workers poorly. And our education system fails too many of our children and doesn't give them the skills they need to succeed in a competitive world.

That's why on this Labor Day in 2002, the glass is only half-full. Or maybe three-quarters full. But while you're savoring the holiday today, hoist a glass to the unseen force of competition that helps produce prosperity. And while there is still work to be done to make life better, there is much to be thankful for.

Deficit Spending and the U.S. Economy

By Russ Roberts

Audio (click to listen/download)

Savings vs. Debts

By Russ Roberts

Audio (click to listen/download)

Take My Used Book, Please!

By Russ Roberts

From the Wall Street Journal

The Author's Guild is mad at Amazon—the online bookseller. Getting mad at the river might have been more productive.

It seems that Amazon is helping its customers sell—kids, cover your ears—used books. With increasing frequency, when shopping for a book at Amazon, you'll find that in addition to offering new copies at those phenomenally low prices, they might even offer a price if someone out there has decided to ditch their once-new copy for a little bit of cash.

This upsets the Author's Guild, which supposedly represents the interests of writers. The Guild thinks it awfully naughty of Amazon to encourage people to buy used books. After all, authors don't make royalties on used books. What in the world was Amazon thinking?

Next thing you know, the Guild will be picketing libraries. You sell a copy of your book to a library and they have the nerve to let more than one person read it. Can you imagine? If the book is really popular, maybe five, ten or even 100 people might read it. (The sound you hear is the author weeping softly as those 100 readers yield only a single royalty payment.)

What's an author to do? Authors have been known to get on the Amazon site and check their sales rank. Authors of America unite! The next time you check your sales rank and a used copy pops up as an option, buy it. When it arrives in the mail, bury it in the ground or burn it. Certainly don't let anyone read it. Then you can sleep easy knowing that the next person who searches for your book won't have a used copy to choose from.

When you're done at Amazon, get on www.bookfinder.com and find all the other used copies available on line. Buy those too. Burn em. Boy, are you going to be happy. Then get in your car and scour all the used book stores around the countryside. Buy any copies of your book that you find there. Next, it's off to the local libraries. I won't encourage you to steal books from the library. But you might want to misfile your book so readers can't find it. That way they'll all go and pay full price at Amazon.

There's only one problem with this strategy. It might actually result in fewer people reading your book. Most authors I know, including yours truly, write for all kind of reasons. Nobody writes to maximize the number of full price sales. In fact, most of us wish our publishers would charge lower prices so more people would read our books. We're not just interested in money. We're interested in truth and spreading it. We're interested in fame and glory. We actually want people to read our books and to hear our voice.

Most of us love Amazon because it helps people find out about our books and avoids the hideous distribution system which works fine for Clancy, King and Grisham but not so smoothly for the rest of us. And some of us are smart enough to realize that not every reader who hears about our book is willing to buy it, even at Amazon's discount prices.

I can't speak for all of my fellow authors, but I'm happy to see a used copy of one of my books for sale. (In fact, if you can find one at your local bookstore or on the Web, please help yourself.) I may be sad that someone wanted to part with the little gem, but I'm thrilled to know it might find a home where it may be loved and cherished, and perhaps even read.

I, Pepsi

By Russ Roberts

From Ideas on Liberty

One of Frédéric Bastiat's great insights into understanding economics was to distinguish what is seen from what is not seen. Searching out the unseen is in many ways the essence of economics.

A soda bottling plant may seem like a strange place to do economics, but come along with me and take a look at what is seen. Here's what a typical plant might look like. The first thing you notice is the size. It's an enormous room—it feels like a football field with a big roof. At one end of this enormous room are rows and rows of finished soda in liters and cans, on pallets, stacked to the roof, ready to be loaded onto trucks. Then there are rows and rows of empties ready to be filled. And there is a massive roller coaster-ride structure that takes the empties into the filling room and back out to be assembled into six packs and cases.

The filling room is walled off in glass from the rest of the facility. The empty cans enter through a gap in the glass and are loaded onto a giant roulette wheel-like structure with a diameter of maybe ten feet. The empties ride along the edge of this wheel and over 100 nozzles come down and fill them with soda. Then they're spun off the wheel to be pushed into six packs.

And here an amazing thing happens. Right after the just-filled cans are spun off the wheel, you want to make sure that the can is filled correctly. Sometimes the nozzles that fill the cans get clogged. Have you ever opened a can of soda to find it only half-filled? I'm sure it has happened, but for most consumers, it must be a once-in-a-lifetime or never-in-a-lifetime experience. So someone must have figured out a way to keep partially filled cans from being packaged with the full cans.

But how? Nothing really complicated, it turns out. A device shoots a gamma ray of photons through the can at just the right height, and a crystal sensor on the other side counts how many photons get through. If too many get through, it means the can wasn't filled correctly. So the can gets thrown off the line to prevent it from joining a six-pack. Remarkable, isn't it?

That the beam automatically detects a partially filled can is a great feat of engineering. But it also identifies which nozzle filled the can so that it can be cleaned out. Amazing.

Skeleton Staff

Only a handful of people actually work in this factory. It basically runs itself. The main job of the workers is to make sure everything is running as it should.

Here's how well it runs. A state-of-the-art facility with two filling lines working can fill over 1.5 billion cans of soda in a year. Yes, 1.5 billion. How many people are necessary to produce those billion and a half cans? Maybe 10 or 20 people, depending on the facility and whom you count as production workers. Twenty people can take over one billion empty cans and get them filled and put on a pallet, ready for shipping.

Imagine taking everything out of the factory so it's just a shell. Take the ten smartest people in the world. Tell them they have total freedom. What is the best way to fill and package cans of soda? Tell them they can use as many workers as they want. They can design and build any machine they want, as long as it fits in the space. Then tell them that whatever the cost of the machinery and the people they hire, it's got to come out of the revenue they receive from selling the soda at say $3 a six-pack. Of course, that's the retail price. They'd really have to get by on maybe $1.50. They couldn't do it. It would take them a millennium just to design and build the machinery, and even then, they wouldn't get it right.

It appears to the eye that ten people produce a billion cans of soda in a year. That is what is seen. What is unseen is the labor that goes into the machinery that helps those ten workers get the job done. Think about the machine that fills the can or the one that checks if it's full. Someone had to think of it and design it and build it and improve it. It's more than one person. It's an army of people. And that's only one tiny part of what produces the can of soda you drink for a mere 50 cents.

Imagine what a soda would cost if you didn't have that technology. Simple answer: a lot more. Imagine how many people would be working in bottling plants if we didn't have that technology. Simple answer: a lot more.

How did it happen? Who drove the innovation in the soda business? Coke and Pepsi, of course. And others. But who decided how fast the progress would go and what innovations were worth pursuing? Who decided that the present level of innovation wasn't good enough? Who decided how much better things would get? Who decided how few jobs to put in the bottling plant and how many to put designing the laser and the assembly line itself and even the building down to how many doors on the loading dock and how high to make the ceiling?

No one was in charge. And that is the greatest unseen phenomena, the marketplace itself. We don't see the competition and striving that transformed the bottling plant and every aspect of the industrial world. All we see are the results.

A little over 40 years ago, Leonard Read wrote his essay "I, Pencil." (If you have never read it, you can read it online at: www.econlib.org/library/Essays/rdPncl1.html.) In "I, Pencil" Read makes the point that no one knows how to make a pencil. He describes the vast knowledge it takes to make something as simple as a pencil. He describes the incredible coordination among all the suppliers who have to combine to make a pencil. All those people were unseen beyond the factory. Read knew that every product had armies of unseen helpers who in the background helped produce the goods that we enjoy.

Read was talking about a pencil at a particular point in human history. But as Don Boudreaux pointed out in his column last month, take any product and there is a second level of unseen helpers, those who help invent and design and produce the technology that improves the product over time.

What a world we live in. Look for the unseen and marvel at it.

Nothing Left to Buy?

By Russ Roberts

From Ideas on Liberty

America is now in the middle of an unparalleled economic expansion. In the fourth quarter of 1999, the economy grew at the frenetic rate of 6.9 percent. The Dow climbs upward. Even some so-called serious people have started to wonder if the business cycle has been abolished.

I think we'll manage to have a recession someday. But barring a major war or unforeseen catastrophe, the future, meaning the next 20, 50, or 100 years, looks very bright. The source of that optimism is the inexhaustible font of human creativity and innovation channeled by a mostly free-market system. And the system is fueled by a capital market that is richer and more flexible than it has ever been.

All of this is encouraging, but in the modern era, every silver cloud has a dark lining. One of the new concerns of the day can be found in a recent headline in the New York Times: "Nothing Left to Buy?" The theme of the article was that with the new riches people are accumulating via the Internet and high-tech go-go stocks, people are running out of things to buy. All the extravagances have been exhausted.

This is not the first story I've read with this theme. The usual example is a Manhattan or Silicon Valley party where the host can't find enough incredible items to awe the guests. There's the ice-carved centerpiece, the rock star hired to entertain the guests, the rented Picassos on the walls, and so on. In the Times piece, one older rich guy, worth a mere $890 million, bemoans having to deal with having his own plane. The new guys, the dot-com kids, have fleets of planes. Ah, the vicissitudes of life.

I remember as a young man asking my father what Jackie Kennedy would find of interest about Aristotle Onassis. One factor he mentioned was that Onassis had a lot of money. But doesn't she already have a great deal of it? I asked. Yes, he explained patiently, but more is preferred to less. A giant diamond ring is nice. Two are better. Jetting to an island paradise on a whim is nice. Owning one is better. Or two or three.

This seminal truth about human nature is the central tenet of economics, along with there being no free lunch. Economics is the study of infinite wants clashing with finite resources. Not just very big wants. Infinite wants.

But some people have raised the possibility that even the rest of us, the great unwashed, may find our wants sated by our wealth. At a 3 percent growth rate, income doubles every 24 years. In a mere century, if the economy can grow at the fairly modest rate of 3 percent annually, we'll be 16 times richer than we are now. Sixteen times. Over the past century, real per capita GDP has grown about sevenfold. If we could have avoided the Great Depression and a few other economic potholes, we could have managed that 16-fold increase over the past 100 years. Surely, claim the pundits, if we were 16 times wealthier than we are now, we'd all be left trying to figure out what way-out chic décor we could add to our parties. We'd have solved the economic problem of infinite wants and finite resources. We'd have everything we could possibly want. Food, clothing, and housing would take a tiny fraction of our income, and we'd spend the rest on empty toys and impressing our guests with our decadence.

Every Man a Gates

Steven Landsburg in his book Fair Play, notes that at even 1.5 percent annual growth in real income, in 600 years the average American family will live as well as Bill Gates, on about $2 million a year. And that's $2 million in today's dollars, not inflated ones. Most folks find this calculation absurd, but as Landsburg points out, the average family of today lives better than the richest king of the year 1400.

The king's meals may have been served on gold plates, but he didn't have a flush toilet or penicillin or a microwave, let alone a car or a VCR or an iMac. Those meals on the gold plates probably had more bacteria and with his arteries choked with cholesterol from all that mutton, he died young. Cardiology in those days was a bit primitive.

But if we could all live like Bill Gates, won't we be just sitting around with nothing to buy except a few wild indulgences? Will all our economic problems be solved?

To see the absurdity of this claim, go back 600 years ago to a shepherd on the land of that wealthy king. Imagine telling him that the average man in 600 years would live better than a king. Well, he'd ask, what would he spend his money on? You'd have everything. What would you buy, a gold shepherd's crook? A roof with extra thatch? Twice as many sheep? It would be impossible to spend all that money!

Today, we're in the same darkness with respect to the future as that shepherd. He couldn't possibly imagine what the world would be like in 600 years, and neither can we. What will we spend our money on when we all make $2 million per year? I don't know but it will be pretty amazing stuff. It will be whatever human creativity manages to come up with in the next 600 years. New medical devices, new entertainment products, new ways to travel, to live, to share information, to sing, to dance, and to dream.

Most of us probably won't be around to enjoy it, but who knows? Maybe we'll grow faster than 1.5 percent and get there sooner. And some of those innovations will surely extend our life spans, even possibly in ways that make being old a lot more pleasant than it appears to be now. I can't wait.

In Praise of the Oh-So-Dependable Cardboard Box

By Russ Roberts

From St. Louis Post-Dispatch

When you think of the greatest inventions of all time, you think of the wheel, movable type, electricity. When you think of the greatest inventions and products of the 20th century, you think of plastic, the transistor, the mass-produced car, the passenger plane, the radio, the television and the computer.

But don't forget the cardboard box. It's the anti-wheel, the non-wheel, the un-wheel. Form follows function: the wheel is round; the box is square. The wheel is designed to go. The box is designed to stay right there, thank you very much.

Going is often superior to staying, but the power of the box is its stability. More importantly in today's world, the shape of the box provides stackability combined with protection. It's easy to pack a lot of peaches into the back of a truck. If you want to arrive with peaches rather than peach nectar, boxes are indispensable.

According to the Fibre Box Association, America produced 395 billion square feet of corrugated cardboard in 1998. Corrugated cardboard is the stuff used in virtually every box that's used for shipping.

It's basically everything other than the thinner cardboard used to hold cereal or tubes of toothpaste.

Almost 400 billion square feet is a lot of cardboard. How many boxes is that? If you use a standard size of a square box -- a foot and a half long, wide and deep -- that's the equivalent of more than 40 billion boxes. That's a lot of boxes.

Over 70 percent of the corrugated cardboard produced every year gets recycled. That's more than 28 million boxes. The other 12 million boxes are in my basement to make sure that my wife and I always have the right size on hand. Actually, you probably have a few in your basement as well.

They're great for storage and perfect for when you have to move.

We marvel at e-commerce and the technological achievements of our age. But as of now, you can't download a bicycle or a shirt over the Internet. Ultimately , someone has to load the goods on a truck and bring them to your door. And when they do, they arrive in a box.

Without the box, there's probably no Amazon.com, no Lands' End, no L.L. Bean.

Put the cardboard box up against its parent, the wood crate, and count the advantages. The box is cheaper to produce, lighter to ship and you can stack it flat before and after it's been used. Imagine the cost of using wood crates to ship everything. Imagine the challenge of breaking down those wood crates and disposing of them.

Or imagine the cost of shipping a bicycle fully assembled in a way that would allow it to arrive unharmed. Think what that would add to the cost of everything in our lives. If a truck or a train or a plane can't carry bicycles in boxes, then the bicycles have to be strapped down in such a way that they can't be damaged. That means fewer bikes can be shipped per trip and that means that the delivery cost of each bicycle goes way up.

The cardboard box lowers shipping costs dramatically.

So what? Is it such a big deal to have cheap shipping? It is a very big deal.

Cheaper shipping means lower prices and that means we can have a little more of everything. Because cardboard boxes lower the cost of shipping, food and wine get to the grocery at lower cost. Competition among grocery stores forces them to pass some of those cost savings on to us. So wine and food are less expensive than they would otherwise be. That means you can have more candlelight dinners with your spouse. That means extra potatoes for the hungry kids at your table or more money leftoverafter potatoes to buy them music lessons.

Because cardboard boxes lower the cost of shipping, insulin gets delivered to the hospital safely and cheaply and medical devices are less expensive.

Because cardboard boxes lower the cost of shipping, Amazon.com only loses its shirt and not its whole outfit when it ships me books at 20 to 30 percent off. Cheaper books mean more reading, which means a more interesting life.

So when you're breaking down all those annoying boxes left over from the holidays, be grateful for the good they do as well.