Incentives Matter

By Russ Roberts

Towards the end of the 18th century, England began sending convicts to Australia. The transportation was privately provided but publicly funded. A lot of convicts died along the way, from disease due to overcrowding, poor nutrition and little or no medical treatment.

Between 1790 and 1792, 12% of the convicts died, to the dismay of many good-hearted English men and women who thought that banishment to Australia shouldn't be a death sentence. On one ship 37% perished.

"The government decided to pay the captains a bonus for each convict that walked off the boat in Australia alive." How might captains be convinced to take better care of their human cargo?

The Reality of Markets

By Russ Roberts

You're sitting in your house and it seems unusually chilly for a hot summer day. The air conditioning is roaring away. You get up and check the thermostat. When your suspicions are confirmed—someone has turned the thermostat way down—you know what to do. You adjust the dial to a more comfortable setting and go back to your reading.

Or suppose you're heading out to run some errands and when you open the door, it's raining. There's no switch to turn to off, no dial to set to "dry." You go back inside and grab a raincoat or an umbrella.

It's easy to divide the world we experience into these two types of phenomena—things like the temperature in your house that are the result of human activity and human intention and things like the rain outside that are not the result of human activity or human intention.

A Marvel of Cooperation: How Order Emerges without a Conscious Planner

By Russ Roberts

One of the great virtues of economics is how it illuminates the unseen and the hidden. Frederic Bastiat, in his classic essay, What Is Seen and What Is Not Seen, analyzed the economic consequences of a simple act of vandalism, the broken window. We see the broken window. We see or can imagine the consequences of the broken window—more money for the glazier. What is harder to see and imagine is what is not seen—the economic activity that will not take place because the window must be fixed.

This simple example is a fundamental reminder of the scarcity that constrains our choices at a point in time. Bastiat used the metaphor of the broken window to critique policy recommendations whose promises of success often ignored the inevitable scarcity that must always apply at a point in time—resources used for one purpose can no longer be used elsewhere.

But Bastiat had another insight about the seen and the unseen that is less appreciated than his classic metaphor of the broken window. In Chapter 18 of Economic Sophisms, Bastiat asks why is it than no one goes to sleep anxiously in Paris, worried about whether there will be bread and other items available for purchase in the morning:

Presidential Economics: What Leaders Can and Cannot Do about the State of the Economy

By Russ Roberts

The Presidential campaign season is about to go into full swing. The conventions are coming, to be followed by a barrage of advertising and then almost certainly, we will have debates. Much of the focus will be on Iraq and American foreign policy, but inevitably, the economy and its performance over the last four years will play a crucial role in the campaign.

John Kerry will focus on the mediocre performance of the economy, particularly the job market, in the first part of the Bush Administration. Bush will tout the performance of the economy over the last year or so as long as the job numbers continue to be rosy through the fall. Implicit in this discussion are two strange assumptions. The first is that the President “runs” the economy. The President hardly even runs the government. He certainly cannot direct the fortunes and failures of millions of workers, managers, investors and entrepreneurs. The second implicit assumption is that the success or failure of the President depends on his ability to “stimulate” the economy, as if the economy were an engine that simply needed a different setting for its carburetor or as if it were a lazy steer that needs prodding to speed its way on a cattle drive.

This presumption that the President is somehow in charge gives both the incumbent and his challenger something to talk about. All failings become the focus of the challenger. Why didn’t the incumbent do a better job of stimulating the economy? The incumbent points to anything good that happened during his watch as being part of his policy design. I don't think we're all Keynesians now, but it's alarming to hear George Bush explain that his tax cuts stimulated the economy by putting money into the hands of consumers so that they can spend it and create jobs.

Is Bethlehem Steel the Canary in the Economic Mine Shaft?

By Russ Roberts

Bethlehem Steel recently announced that it was declaring bankruptcy. Bethlehem Steel? What's next, General Motors? That's the impression I got from friends who were alarmed by the announcement. When a legendary company like Bethlehem Steel goes bankrupt, the whole economic system could be at risk.

Should we be alarmed that an American icon like Bethlehem Steel has declared bankruptcy?

After all, Bethlehem Steel was founded 97 years ago. Until 1997 it was part of the Dow Jones Industrial Average and had been there ever since the average was expanded to 30 stocks in 1928.

Do "Big Box" Retailers Harm the Quality of Life?

By Russ Roberts

Near where I live is a charming little stretch of shops called "the Loop" that caters to students and the university community. There are bars and restaurants and a gorgeous restored movie theater from the 1920s and a bike shop and a juice bar and a used book store and a vintage clothing store and a used CD store and you get the idea. In many ways, it's much nicer than it was when I moved here a dozen years ago. The stores are a little more upscale and everything is cleaner and nicer as older buildings have been renovated.

The Loop is about a ten-minute walk from my house. We love being able to walk there and we're happy it's nicer than it was when we first arrived. But in another dimension, the Loop is not as nice. Two wonderful stores have gone out of business and have not been replaced: a lovely independent bookstore called Paul's Books, and Smith Hardware, one of those phenomenal hardware stores where the owner and his daughter knew everything from bird seed to PVC pipe. Paradoxically, the best way to describe Smith Hardware is the smell. You can't convey smell in print or online, but it doesn't matter. You know what a hardware store like Smith Hardware smells like. It's that mix of mulch, bug spray, and who knows what else.

How Safe is that Trucker in the Window?

By Russ Roberts

You might have noticed that Mexican trucks have been in the news lately. Who wins and who loses when Mexican trucks are allowed to carry cargo into the United States?

The New York Times reports that a NAFTA dispute resolution panel has ruled that NAFTA requires the U.S. to let Mexican trucks into the United States. President Bush has said that the U.S. will comply with the ruling. Mexican trucks have been excluded from freely traveling throughout the U.S. since 1995 when President Clinton decided to keep them out on safety grounds.

According to the Times, "Union officials voice fears that Mexican truckers, who often earn one-fourth as much as unionized American truckers, will take American jobs. And consumer groups, noting that 41 percent of Mexican trucks failed American inspections at the border, argue that the trucks will endanger Americans."