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The Ultimate Chain Letter
By Russ Roberts. | June 21, 2005
From the Hoover Digest
The other day I had to get some important tax receipts to my accountant. He’s in St. Louis, it was getting close to April 15, and it was very important that the papers didn’t get lost. To give my accountant plenty of time, I wanted the papers to arrive the next morning.
So what did I do? My first choice was to get on a plane and deliver the letter myself. Too expensive. Too much time.
So I did the next best thing. I went down to the airport and found someone headed to St. Louis. I told her how important it was for my accountant to have my receipts by the next day. Fortunately, she seemed really nice. She said she’d be happy to help me out. I sealed up the envelope, and she promised not to open it after I left.
I guess I’m naive. I know it was foolish to trust a stranger with something so important, but she seemed very honest. She smiled a lot, but I suppose a good thief could learn to do that.
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No dice, she said, but not to worry. She’d make sure they were good people like her—people who wouldn’t open my envelope. People who wouldn’t steal my credit card numbers off the receipts. People who wouldn’t throw the package away just to avoid the hassle of delivering it. Really, it would turn out fine. Besides, she wasn’t sure in advance who would be available to help so I would just have to hope for the best.
It seemed nuts, but by now it was getting late. I had to trust her. There was no other way to get the job done. I didn’t have any other options.
I gave her some money. She didn’t object. Maybe she had done this before.
I slept like a rock that night. I’ve always thought people are basically good.
How about you? How would you have felt that night, knowing that your crucial package was in the hands of strangers, strangers you would never see and whose honesty and unreliability were unknowable?
Maybe I should have worried more. How much did I give her? A lot less than it would have cost to get the package there myself—19 bucks. That’s all she asked for. Besides, if she pulled it off and got the package to my accountant, I’d have a story I could tell for the rest of my life.
Truth is, I never gave it a second thought. I trusted that strange woman at the airport. I’d never seen her before in my life, and I’d never see her again. But I felt somehow she’d come through for me.
And she did. I called my accountant the next day, and sure enough, he had received my letter a few minutes before 10 o’clock.
A miracle? A lucky break for me? Or maybe a dangerous lesson that might cause me to rely naively on strangers in the future?
None of the above. My trust wasn’t a miracle or a lucky break. And I’m a little less naive than you might think.
That stranger I entrusted with my financial secrets was standing behind a FedEx counter wearing a FedEx uniform.
It changes everything doesn’t it? You go into a FedEx, give a stranger $19, and you can walk out without a worry in the world, knowing that your package is going to get there by 10 the next morning.
I never worried that the woman behind the counter might open the package after I left the office to see what I was sending or enjoy its contents. I didn’t worry that the man or woman who would touch the package next might open the package to see what was in it. I didn’t worry that the myriad of people who might come into contact with my package would check it out to see if there was anything in it worth stealing.
I also never worried for an instant that one of the people who would come into contact with my package might just decide it was too much trouble to deal with and throw it away.
Total strangers I would never see. What word best describes my lack of worry? Was it trust? Faith? Confidence? And what was the source of my contentment as I left my package behind?
It wasn’t trust. The chain of people who interacted with my package was long, and there was no way to interview each of them to explore if they were reliable. So how could I trust them? Never saw them. Never would. The woman behind the counter seemed like a decent enough soul. I trusted her in some sense. But it’s certainly the wrong word to describe her coworkers who brought my package safely to St. Louis. I can’t say I trusted them. I knew nothing about them.
Faith? Seems too open-ended. Faith comes from having used FedEx before and knowing that it always gets the job done. There’s a little of that. But I wasn’t even worried the first time I used FedEx.
Confidence seems like the right word. Confidence born of an understanding of how the division of labor works in a modern economy. What Hayek called the extended order of human cooperation.
You can see the miracle of the modern economy if you contrast FedEx with a different system, one where I actually find a real stranger, who seems honest, down at the gate at the airport on the way to St. Louis. Here, I say. Take this money and this package. And don’t worry if you need some help taking the package the last few miles. Take it part of the way, and give the package and some of the money to the next person on the promise that each person will keep the chain unbroken.
Who could be confident that such a gambit would succeed?
So what’s different about FedEx? On the surface, there’s no difference. I’m expecting somehow that a lot of strangers are going to come through for me and keep their promises. Yet everything is different.
When I use FedEx there are consequences of failure if the strangers let me down. There are feedback loops that reward excellence and punish dishonesty or failure. These feedback loops create accountability.
FedEx tries to hire honest, pleasant people who smile when you talk to them. They fire rude people who consistently lose packages or steal them. It honors and rewards people who do their job well. And why does FedEx try so hard? Part of the answer is reputation. But why does FedEx try so hard to keep its reputation intact? Competition is part of the answer. But there is more to it as well.
Even those feedback loops that keep the FedEx employees honest work best when people feel guilty about being thieves and slugs. Does capitalism work best when people are basically honest, or does capitalism help create the virtues that make it work well? Probably both.
The system works so well that we hardly notice it or appreciate the marvel of it. The smiling FedEx employee is always behind the desk waiting to take my package onto St. Louis. A stranger delivers my paper every morning to my driveway. I don’t even know what he or she looks like. Strangers built my car, wove my clothes, and filled the prescription for the antibiotic that cured my wife’s pneumonia this past winter. A myriad of strangers working together in some research lab in a location unknown to me discovered that antibiotic.
We think nothing of it. It has become natural to us to rely on those we do not see and cannot examine for their honesty, reliability, or excellence. Yet, most of the time, this extended order of human cooperation fulfills our expectations that the products and services we want will be waiting for us when we want them.
We understand the role of competition in sustaining this system. Having alternatives helps create accountability and raises the costs of failing to meet our expectations. But we often fail to understand or notice the resulting cooperation among strangers whose coordinated actions within and across companies serve us.
Surprisingly, relying on strangers beats relying on friends. We don’t have enough of the latter if we want to enjoy the standard of living with all of its material and nonmaterial satisfactions. Relying on friends or relying only on our family would lower our standard of living back to the level of subsistence. Self-sufficiency is the road to poverty.
Relying on strangers also frees up our friends to specialize in being friends and do what friends do best. I don’t want to buy a shoulder to cry on from the low-cost seller behind a counter. I want friends and families to give that out of love. But my friends and family have more time for comfort and delight because the extended order of human cooperation out in the marketplace means I’m not expecting them to sew my clothes or forge a car for me.
Relying on strangers creates the extraordinary web of cooperation that is the modern economy. A world where the division of labor and specialization—the fruits of trade and trust enforced by the feedback loops of price, profit, and competition—can let me send a package from Washington to St. Louis for about an hour’s worth of work for the average American worker.
What a lot of confidence can be bought for only $19. And this marvel of cooperation works even though most of us are oblivious to it and know not how it works. But appreciating the marvel may help us remember the value of the system of prices and profits that holds it together.
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No Such Thing as a Safe Drug
By Russ Roberts | January 11, 2005
From National Public Radio's Morning Edition
The truth is, there’s no such thing as a safe drug. Every drug has side effects. It’s only a matter of degree. And there’s usually a tradeoff between safety and effectiveness. Powerful drugs are more likely to have side effects. Everyone who undergoes chemotherapy understands that life is about tradeoffs—about the likely costs and likely benefits.
Cautiousness is always in order when you introduce a powerful drug into your body. You don’t want to die from a dangerous drug. But you also don’t want to suffer or die because the right drug is not available.
In this world of imperfect safety, why do we give the FDA the authority to make these choices for us? The FDA is the ultimate one size fits all solution. If arthritis makes my life a living hell, why can’t I decide to take on a greater risk of a heart attack? The choice between pain and risk should belong to me and my doctor.
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Instead we are heading in the wrong direction, demanding that the FDA become even more cautious and careful in protecting us from harm. If FDA approval is harder to get, then drugs will be safer. But the unintended consequence will be to make it harder to get FDA approval for drugs that can save lives. The unintended consequence will be losing the drugs that we won’t discover because it’s simply too expensive to go looking for anything other than a blockbuster.
Those costs are in the future. But some of the unintended consequences have already appeared. Vioxx has shown promise fighting colon cancer. But clinical trials using powerful painkillers to fight cancer and Alzheimers are now at risk, all the findings and benefits potentially wasted.
The search for perfect safety is a mistake. After all, there’s an easy way to avoid the side effects of so-called dangerous drugs. Don’t take any drugs. We all understand that this is ludicrous. It is just as ludicrous to demand that the FDA establish an arbitrary standard of risk arbitrarily labeled as safe. The world would be a healthier place if patients and their doctors were allowed to make their own decisions on what is too much risk and what is safe enough. Let the FDA continue to provide information about the risks of drugs. Let the people decide what we put into our bodies.
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The Great Outsourcing Scare of 2004
By Russ Roberts | April 22, 2004
From the Hoover Digest, Spring 2004
People are worried that Indians are going to take away all of America's good jobs. The "outsourcing" of call-center and software coding jobs to India has been a tough pill to swallow for an educated workforce. The alarmists, from presidential candidates to think tank economists, see a dim future for America if nothing is done to arrest the flow of jobs from West to East.
The level of fear reminds me of an earlier time. In the early 1990s, Japan was thought to be the great threat to the American economy. Japan was strategically pursuing a policy of stealing America's jobs. America was being hollowed out. Back then, Amazon was a river and Spam was a food, sort of, anyway. The focus was mainly on manufacturing jobs, which back in the early 1990s were more numerous than they are today.
I remember a Frontline documentary from those days. It's a wonderful world we live in. A few hits on Google and I was able to find the Frontline web site and a description of the documentary: Losing the War with Japan Frontline looks at the challenge Japanese-style capitalism poses to the U.S. market. The program examines three industries--automobile, video games, and flat panel displays used in computers.
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Economics takes a different view--trade is mutually beneficial. Both parties benefit and the pie gets bigger. But there was a second part to that documentary that I haven't thought about for a decade. It comes back to me now in the alarm over outsourcing. The documentary paid a lot of attention to Nintendo. Nintendo was accused of the nefarious strategy of keeping all the best jobs, the creative jobs designing new games, in Japan. The lousy jobs were relegated to America. And as an example of those lousy jobs the Americans were given, we were shown American kids answering the phones, giving advice to gamers who had questions about how the games worked. A call center!
So in 1991, the world was going to hell in a handbasket because we'd be stuck with the call center jobs. In 2004, the world is going to hell in a handbasket because we're losing the call center jobs. Hard to understand how both of those arguments can be right. At the heart of these fears is a theory about how nations prosper--the key is to get the good jobs. Ross Perot had a simple way of expressing it. He said it's better to make computer chips than potato chips.
In this mistaken theory of how jobs affect our standard of living, wages depend on the title on your business card. If somehow the foreigners corner the computer chip market, we're left peeling potatoes for minimum wage, if we're lucky. The problem with this theory is that, if a nation's skill level is low, making computer chips makes you poorer, not richer. It's like me at 5' 6" deciding to be a basketball player because basketball players have high salaries. Or Haiti trying to jump-start its economy by creating a domestic pharmaceutical industry sector because pharmaceuticals are very profitable.
Ironically, perhaps, the potato chip business in America is rather high tech. Perot's slogan makes you think of a bunch of folks with potato peelers standing over vats of hot oil. In fact, a potato chip factory (like virtually everything else in a high-wage economy) uses a high ratio of capital to labor. Basically a truck dumps a bunch of potatoes into one end of a highly customized and sophisticated piece of machinery run by a computer. Bags of potato chips come out the other end. Designing and building that machine, along with the software that makes it tick, are not exactly what Perot had in mind. Our wages don't depend on our job titles but on our skills and the amount of capital we have to augment those skills. Opening our economy to trade in goods and services allows us to use our skills and capital as productively as possible.
There are two ways to get things in life. The first is to make them for yourself. The second is to let someone else make it for you and trade for it. When others can make something more cheaply than you can make it for yourself, it makes sense to outsource it. You specialize in what you do most productively and swap for the rest of your desires. That specialization creates wealth. If Indians have low wages and can write computer code more cheaply than Americans, it makes sense to import that code. It's no different from importing inexpensive televisions from abroad and saving our resources for other things we can do more effectively.
It's no different from finding a new production technology that lets you produce at lower cost. It's about getting more from less. That's the true road to wealth. Make the pie bigger by getting more from less. That's the story of the last 100 years of economic progress in America. We've found ways to get more from less. Imagine a world where Indian tech workers were really cheap. Cheaper than cheap. Free.
Suppose India decides to give us free software and run those call centers just out of kindness. Would it ever make sense to refuse the free software in order to preserve high-wage jobs in the software industry? Oh no, not the free software, must be a trick.
Refusing inexpensive software is no wiser. It makes us poorer as a nation, not richer. Imagine reacting that way to high-quality Japanese cars. Imagine refusing to allow Japanese imports into the United States in order to preserve the size and wages of the auto industry. With less competition, the quality of American cars would fall. But the real loss would be all the resources we'd have to devote to cars--all the people and capital and technology and managerial talent--when there would be a less expensive alternative. Savings those resources is what allows us to create the new jobs that come from lower-cost automobiles. In 1900, 40 percent of the workforce was in agriculture.
Technology, figuring out ways to get more from less, allows us to produce more food today with only 2 percent of the workforce. That transition was hard on a lot of farmers, but their children and grandchildren live in a better world because of those changes. The lower costs meant higher profits at first for those farmers who stayed in business, but competition among farmers forced them to share the gains with the rest of us. The result is that food is dramatically cheaper than it was. That means more resources are available to make the myriad of products that we have now in addition to having the food.
The same transition will take place with today's computer programmers who lose their jobs to Indians. There will be personal challenges as workers look to find new jobs. Some new jobs will be created because businesses will have access to less-expensive software. Other opportunities will come along because cheaper software means more resources will be available elsewhere to create new companies and new products. The skeptic wants to know now what the new jobs will be. What if there aren't any?
OK, says the skeptic, I accepted the argument for trade when we outsourced the assembly line jobs or the textile jobs. Those were the bad jobs. But the computer jobs? Those are the jobs we wanted to keep! Those were the good jobs. We went from a manufacturing economy to a service economy to an information economy. There's nothing left! We're going to have to go back to the "bad" jobs, flipping hamburgers and doing each other's laundry. What sector will come along if we've used up all the information jobs? I don't know, but I'm sure it will be something that uses creativity and knowledge. This uncertainty frightens people.
If we can't think of what the next generation of jobs will be, how can we be confident that something will indeed, come along? Think about that farmer back in 1900. Imagine telling him that in 100 years, farm jobs will only be 2 percent of the workforce. Two percent! What jobs could possibly come along to replace the farming jobs? Well, you explain, there will be jobs at Federal Express and Motorola and Intel and Microsoft and even General Motors. The farmer won't even be able to even imagine the products that those companies will make. Imagine being told a decade ago that some people would make their living writing software for iTunes at Apple. What's iTunes? Oh, it's a place where people download music into their iPods. What is downloading music?
Just think how much the world has changed in only 10 years, all the jobs we couldn't have imagined that are now here. Back in the early 1990s, when people were up in arms about Japan, we ignored the alarmists. We mostly kept to our naive policy of letting people buy freely from around the world. It turned out fine. The alarmists were wrong.
Japan didn't steal our jobs or ruin our country. Employment in the United States grew steadily, as did wages, helped in part by imports from Japan and the rest of the world. Japan, in the meanwhile, has stagnated. My guess is that today's alarmists will turn out to be wrong as well. There's another interesting parallel to the early 1990s. Then and now, the critics of open markets claimed a new paradigm. In the early 1990s, the new paradigm was the unique partnership in Japan between industry and government that supposedly threatened our standard of living.
Today it's the loss of software jobs, the alleged last frontier of employment. But the real reason those arguments have popular and political traction is that both today and in the early 1990s, we're coming out of recessions with sluggish employment growth. When the economy warms up and the jobs come, the worries about outsourcing will fade into the background.
A final thought. Can you imagine how strange our worries about outsourcing must sound to India? Hearing us complain about their low-wage competition is like listening to the Yankees complain that the Red Sox signed Pokey Reese to a contract. You don't know who Pokey Reese is? That's the point. It's the Red Sox who have it rough. But baseball is a zero-sum game--when the Yankees win, the Red Sox have to lose. Unlike sports, international trade makes both sides better off. Outsourcing lets Americans get less-expensive software and the Indians get better wages and the chance to buy more American goods. It's a good deal for both of us.
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The Bagel and the Index Fund
By Russ Roberts | January 20, 2004
(From Business Week Online)
After a good year for the stock market, a lot of investors are feeling it's safe to get back in the water. And despite the recent scandals, a lot of money will be going into mutual funds as the economy and market continue to recover. But which funds should you consider?
Study after study finds that indexed funds are superior to managed funds, particularly over a long period of time. In the face of this evidence, why do so many investors still turn to managed funds? Maybe it's because a lot of people still feel just a little bit foolish buying an indexed fund. How smart can it be to let a computer run your portfolio? How hard can it be to find a manager smart enough to outperform a mindless algorithm?
The emotional and intellectual appeal of managed funds comes from our daily lives, where managing things usually trumps a strategy of letting things take care of themselves. It's good to organize your monthly bills rather than picking one up whenever you think of it and paying it. It's good to keep your children away from a hot stove rather than letting them discover the dangers of life by trial and error.
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ARMY OF BAKERS. Such real-life experiences can mislead, though, when it comes to some financial decisions. To understand the virtues of an unmanaged indexed fund, consider the world of bagels. Did you ever stop to wonder how it is that in Washington, D.C., where I live, and in every other city of any size in America, bagel shortages never happen?
I know—you're not impressed. What's the big deal? But think of the army that has to work together to have that fresh bagel waiting for your random appearance at the local bagel shop. Who coordinates that team? Who told the farmer to grow enough wheat? Who made sure there were enough mills to grind the flour, enough trucks and truck drivers to move it around the country? Bagels have no czar. No one is managing the process. How can bagels be plentiful without someone being in charge?
When the Super Bowl rolls around each January, no one sends out a directive to the flour mill to tell them to grind extra flour for hot dog buns and sub rolls. The Super Bowl comes and goes without a shortage of hot dog buns, and still, there are plenty of bagels.
TOO MUCH KNOWLEDGE. The bagel market doesn't work perfectly. Sometimes a baker will have an oversupply of one flavor or another. Sometimes I might have to make two stops to pick up enough bagels if I decide to throw a brunch for 50 friends on the spur of the moment. Would the system work more smoothly if someone were managing it?
Strangely enough, the imperfect, unmanaged marketplace outperforms the conscious planning of experts. The Soviet Union was famous for managing its economy into failure. Go to Cuba where everything is managed, and you'll find everything but despair in short supply. The only times America has sustained shortages is when the government controls prices. In the 1970s, we had gasoline shortages with price controls and an energy czar.
Why can't a conscious planner do a better job than the unconscious marketplace? The simple answer is that planning for things of that magnitude requires too much knowledge dispersed in too many different brains spread across too much space and time.
BEST STRATEGY. Coordinating that knowledge requires more than an expert with a supercomputer because the nature of that knowledge is often intangible and can't be reduced to digital information. In the marketplace, prices encourage people to do on their own what a coordinator or planner would have to figure out and command. When demand goes up, prices rise and tell suppliers to produce more. Shortages and surpluses are self-correcting when prices are allowed to adjust freely.
Once you understand how the bagel market, while imperfect, functions smoothly without a manager, you can begin to appreciate the wisdom of buying an indexed fund. Prices, after all, capture information. The best stocks end up being more expensive than those with worse prospects. The expected return is that of the market as a whole. Bargains can't be identified in advance. Turns out the best strategy is to avoid the fees and tax consequences of managed funds and take the return of the market as a whole.
Those who are skeptical of indexed funds (and their skepticism is often self-interested) like to point out that one fund, Legg Mason Value Trust, has outperformed the S&P 500-stock index every year for the last 13 years. The indexers respond that with over 6,000 actively managed funds, surely some will outperform their benchmarks purely by chance. But because you can't know in advance which funds will be the lucky ones, you're still better off investing in indexed funds.
FOLLOWING A HUNCH. Thirteen years in a row—could it be pure luck? How can it be anything else? Right now, Amazon ( AMZN ) is Value Trust's single largest holding, almost 10%. Do you think fund manager Bill Miller knows something about Amazon that no one else knows? I doubt it. He's simply following a hunch the same way some bettors choose black in roulette or use their birth date for picking lottery numbers.
So the next time you're tempted to identify the hot manager in the hot sector, remember the humble but plentiful bagel. Rely on the wonders of the marketplace. You're likely to make more money, and you'll free the time you would spend picking the right fund for more rewarding pursuits that don't involve your wealth.
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Only a Game
By Russ Roberts | May 14, 2002
From Ideas on Liberty
A few years back we thought about building a deck or a porch on the back of our house. But we decided against it when the estimates started coming in. They were about double what the architect had told us it would cost. Double! Had the architect misled us as a way of encouraging us to proceed with the project? No, we had forgotten that six months earlier, the Mississippi had overflowed its banks and destroyed a lot of houses in the St. Louis area. Carpenters and builders didn't have the time to build a back porch or a deck. They had bigger fish to fry. To get them to build a porch, you had to pay a premium.
We delayed the project for a couple of years and prices came down. That delay was an example of the hidden benefit of high prices. When prices are high, the least urgent projects get delayed, freeing up resources for more urgent projects. The porch just isn't worth it. So the wood I would have used instead gets set aside to rebuild a washed away house. The carpenter I would have kept busy now works on building that new house.
That magical role of prices in directing resources is the bread and butter of economics. But to the non-economist, high prices are just a form of gouging that ought to be stopped. It's wrong to let people profit from the distress of others.
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I think what underlies this difference in opinion between the professional economist and the man or woman in the street is deeper than just an understanding or misunderstanding about what works. There's a deeper issue here—the issue of what motivates behavior.
Non-economists tend to look at motivation as either being altruistic or greedy. Either you're motivated by profit or by the opportunity to help others. A lot of people are turned off by market-based solutions because using the market is so mercenary. Why would we want a social order based on greed? Why would we want to encourage some to profit from the hardship of others?
Where economists see resources whizzing around the country to help people in distress, non-economists see profiteering, gouging and bad morals.
Let's look a little more closely at natural disasters like the flood in 1994 or any of the various hurricanes that touch land and wreak havoc. After these disasters, prices of lumber and tools and the services of carpenters often spike upward and can remain high for a while. I've been told that when hurricanes hit and lumber prices go up, some people don't just ship their lumber to the devastated area—they load it into a truck and drive it there themselves.
Those are the people I want to think about for a moment. The people who know of the hurricane, hear of the high prices and load up their trucks with lumber they've purchased for their own use but who now realize they can make a killing by driving to say, Florida in the aftermath of a hurricane, and selling their lumber there.
What do you think is on their minds as they drive South?
As an economist, I assume those people are like the rest of us—a mixture of saint and sinner. Normal. Complicated. Full of all kinds of motivations, some base, some sublime. As they head down to Florida, I assume they're glad to make some money on their lumber. But I also assume they're glad to be part of helping people out. Glad to make money. Glad to be helping. Glad to make money. Glad to be helping.
Which is it? Profits or love?
It's both. They're not mutually exclusive. Presumably the high prices motivate some cold and heartless people to overcome their desire to spend the weekend counting their money and instead to head to Florida. But I also presume this is not the typical person driving lumber southward. The typical person is someone who wants the lumber for purely personal use—a nice deck or porch, some home repair project—but who now finds the incentive of the higher price attractive. That person drives down joyously knowing that the lumber is going to help someone who lost a house. The money is nice. And so is the intangible feeling of helping others.
Here's the key insight of economics—some of those folks who go down with a song in their heart because they know they're helping others would have stayed home if the price of lumber hadn't soared. It's hard to get in your car and disrupt your life and give up your lumber. The monetary incentive makes it easier. The higher price doesn't just induce the hard-hearted to go. It induces the altruist as well.
But if people are altruistic, won't they go without the monetary incentive? Sure, some will. Just not as many. You might be tempted to say that without the monetary incentive, only the saints will go. But even this misses the point. Some saints will stay home because they have saintly things to do at home. The monetary incentive applies to them as well. Even saints can do more good in the world when they have more resources than when they have less.
There's a final point to be made about letting the price of lumber rise. Go back to the porch I wanted to build in St. Louis after the flood of 1994. The flood never reached my neighborhood. Most of the damage was miles away, and after the news reports died down, I forgot about it the flood. I never saw the feverish rebuilding that must have been going on.
I had no idea that lumber and the time of carpenters had gotten scarcer. But I didn't have to know. When I saw the cost of a new porch we decided not to go forward. The higher price induced me, along with a lot of other would-be porch builders, to do a good deed. We gave up our lumber and carpenters to people who were willing to pay the premium. No one had to find me and give me a lecture on the benevolence of delaying my porch. I was induced by the invisible hand to be altruistic. How sad it is that people think economics is the study of money or that economists believe in elevating mercenary motives above compassion. The great insight of economics is that people make tradeoffs. The basis for that insight is a recognition that behavior is complex and that no one has a single-minded motivation or a single goal. When we talk about the role of prices in our economy, it's useful to remember that complexity.
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Profits vs. Love
By Russ Roberts | June 6, 2003
From the St. Louis Post Dispatch
[Thanks go to Lenny Alford for making the opening paragraph possible.]
The Redbirds are in Beantown. The year is 1967, I'm thirteen. A friend of the family, Lenny Alford, in a kindness that should never be forgotten, has given me his ticket in the bleachers for the sixth game of the World Series. Lou Brock hits a ball that I can still see. It's rising up and up and up and it looks for a moment as if it will keep rising and carry out of the park altogether and land miles away in Boston Bay. But it comes down near me for a home run that keeps the Cards in the game.
Unfortunately, I am rooting for the Red Sox.
I like the Cardinals. I've always liked the birds on the bat. A diversified portfolio is a healthy thing and the Cards are my National League team. But Cardinals-Red Sox? My heart turns eastward. I was raised in Lexington, Massachusetts. Cradle of the American Revolution and birthplace of Red Sox fans. So for the last two nights and again tonight, I'm rooting against the Cards in this distasteful inter-league play we fans must live with.
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There's something unseemly about caring so much. Or even caring at all. When we buy or sell a product in the marketplace, both sides win. If you don't like the deal you can walk away. But sports? Sports is what economists call a zero-sum game—for every winner there's a loser. You can only triumph by bringing defeat.
There are so many more important things to care about. And so I wonder whether to encourage my children to care even remotely as much as I do. Wouldn't they be better served to grow up thinking about baseball the way I think of symphony orchestras? It's nice to have a good one in town, yes. But when we lose a good cellist to a rival, I don't comb through the paper for information on who's going to take her place. Surely it is better to love Shakespeare and root for a cure for cancer and peace.
And yet baseball and sports have their rewards that do not come easily elsewhere. There is the drama of the unexpected that the greatest drama on the stage can never match. Lady Macbeth washes her hands every night unto eternity. But Roger Clemens's fate this weekend is up in the air.
Then there's the feeling of belonging that is part of sport. We rise as one when the ball goes out of the park, high five the stranger next to us and add our voice to the communal roar. That feeling of belonging taps into the longing in our souls for a cause greater than ourselves. It's a belonging based on an illusion. Rooting for the home team is not a fight for justice or holiness—it doesn't top singing "We Shall Overcome" at a civil rights rally or singing in a house of worship with people you see every week. But at the same time, it's relatively harmless. There are worse things than the cameraderie of strangers in the stands.
Finally, there is the ineffable relationship that sports plays in our lives with our sons and daughters. I can still see my Dad standing on a dusty mound in a deserted field, trying to sneak a fastball past his ten year-old son who's trying to improve. I've thrown thousands of pitches to my daughter and three sons. With God's help, thousands are still yet to come.
Alas, my oldest son is a Cardinals fan. Unlike his Dad, he was born and raised in St. Louis. He likes the Red Sox. But only as his American League team. I blame the Post-Dispatch sports section. Should have kept it out of the house. Last weekend he rooted for the Yankees! He was hoping they would help the Cards by beating the Cubs. What is the world coming to?
They say it's only a game. They're right, of course. But it still gets into our hearts and bones.
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No Picnic on the Prairie
By Russ Roberts | June 6, 2003
From the St. Louis Post Dispatch
You're stuck in traffic en route to that soccer practice, the radio blaring, cell phone ringing. You've had it. You're tired of the frantic pace of your life. You need to simplify. Live a more grounded, elemental way of life.
Five thousand families had similar thoughts. They wanted to be part of a PBS reality show where three families are chosen to re-create the life of homesteaders in Montana in 1883. No SUVs. No phones. No 9-to-5 grind. Just the quiet rural life in one of the most beautiful places on earth. A place where you can't count the stars because there are too many of them. A place to work the earth and eat what you've grown with your own hands and honest labor. Wood stoves and cotton pants.
The only intrusion of modernity would be the cameras and the availability of modern medical care. The result is six hours of riveting television that PBS calls "Frontier House."
Maybe they should have called it "Be Careful What You Wish For."
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But after watching the families struggle on "Frontier House," you learn what really made life difficult in 1883—the amount of time and effort it took to stay alive in a rural setting of near self-sufficiency.
It's hard work swinging an ax to chop the wood that keeps you warm, that heats your stove, that lets you cook. It's hard work swinging a long-handled scythe to bring in the hay for your milk cow and your horses. It's hard work lugging water in a barrel up from the river. Washing clothes requires all the major muscle groups in the back and arms. You sleep long hours because you have to. You're exhausted.
After watching the people on "Frontier House" living the simple life, you may feel a new affection for your furnace and your refrigerator.
There's not much time for nature walks in 1883 Montana. Today, we tend to romanticize nature. Nature in 1883 turns out to be an enemy as often as it is an ally. Mercifully for the participating families, the show ends before the arrival of winter. Still, they get a taste of one of the great boot camps of life—the 19th century.
A good chunk of the rest of the world still lives that way. But for those who live in America, "Frontier House" makes us count our blessings.
How did we get here from there? How did we come to a world where even the poorest Americans have a quality of life the people of 1880 would not have dreamed of?
At the heart of any explanation must be what Adam Smith called the "propensity in human nature to truck, barter and exchange one thing for another." Free markets. Capitalism. The grubby world of profit and loss—what used to be called commerce and we call business.
It is that world that created the appliances that make life easy. It is that world that helped create the wealth that lets so many of us afford those gadgets.
Many forces created that wealth and spread it widely—government regulation, our legal system, our nonprofit sector and tax policy all played a role. But the engine that makes it all possible is business.
Much of our culture sneers at business. Business is full of greedy, grasping philistines. We are told of the great power of corporations and the wealth of their executives. Under capitalism, the rich get richer and the poor get poorer.
People said the same thing back in the 1880s when they spoke of the corporate giants of their day—the robber barons. They lived like kings. The masses who lived on the farm or who crowded into the cities were desperately poor. The critics concluded that capitalism is cruel —it leads to a world where a handful of rich folks feast at the table; the masses survive on the crumbs. They could not foresee the rest of the story—the world of today where the average American, and even many of the poorest Americans live better than the robber barons of the 19th century.
Hardship in 1880 was surviving the winter. Today it's surviving without high-speed Internet access. Material well-being is no longer limited to the few. Capitalism is the source of that transformation.
There's still vast inequality in America today. Bill Gates has a much bigger house than I do. And many Americans struggle economically. But "Frontier House" puts those struggles into perspective. A snapshot of economic well-being doesn't tell much of the story. The real story unfolds over time.
The rich do get richer under capitalism. But so do the rest of us.
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No Fat Tax
By Russ Roberts | April 21, 2002
From the St. Louis Post Dispatch
I wish I weighed a little bit less. Or a lot less. And I often fear, to paraphrase Kingsley Amis, that I'm heading in the wrong direction, that inside of me is an even fatter me waiting to get out.
I'm not alone. A recent study found that 80% of the American people are overweight. Many of us seem to have trouble saying no to that second piece of pie, the super-sizing of fries and the longing to lay on the couch burning up as few calories as possible.
I have always thought of my weight as kind of personal. It often is. When I get my driver's license and the clerk ask my weight, I'm on the honor system. The clerk demands an eye test, but there's no scale. A confession—I take what I actually weigh and what I'd like to weigh and split the difference. So far, even the security people at the airport let me get away with this deception.
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According to the Surgeon General of the United States, obesity costs the United States $117 billion a year. It's reaching "epidemic proportions." He estimates that as many as 300,000 people may die prematurely due to obesity, approaching the death toll from tobacco.
There are two magic words in the Surgeon General's language—epidemic and tobacco. Using the word epidemic conveys the impression that obesity is a disease and therefore an appropriate concern of the nation's premier public health official. It suggests that personal choice and responsibility are irrelevant. And by invoking tobacco, he sets the stage for regulation and other intervention to help us get thinner.
I have a different perspective. For most of us, obesity is not a disease but a failure of self-control. It's in the same category as procrastination, impatience and many other character traits I try to improve. I don't want the government hectoring me to eat less and exercise more. I don't want the government using my money and yours to monitor my fat intake or the cholesterol allowed in the menu at the local fast food restaurant. And I don't want the government taxing fat on menus, at groceries or on my 1040 Form.
I don't have a problem with puritans who urge me to eat healthier foods or take smaller portions. There's something charming about exhorting others to be better. That's what preaching is all about. But preaching is best done on one's own nickel. That's why the Constitution forbids government establishment of religion. Otherwise you risk the road to tyranny where the government decides how we should lead our lives.
The government should stay out of other personal choices I make for the same reasons.
But if obesity causes health problems, doesn't that justify government's involvement? After all, if we taxpayers have to foot the bill for some of those higher health care costs, don't we have the right to intervene in each others lives?
This argument has been used to justify the on-going and growing regulation of tobacco. It's actually a lie. Smoking causes people to die earlier and relatively quickly, saving enough in Social Security expenditures to overwhelm the health care outlays. That actually justifies subsidizing tobacco rather than taxing it if you think that we should base public policy based only on the impact on government spending.
I think that logic is grotesque. But it's more than grotesque. It's dangerous. AIDS is a very costly disease, and some of those costs are born by taxpayers. AIDS is associated with certain sexual practices. Does that justify government regulation in the bedroom?
I don't think so. But my eating habits or yours don't justify the government's involvement in the kitchen, either.
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By Russ Roberts | May 23, 2000
Text from Morning Edition
The record-shattering performance of Tiger Woods at the U.S. Open has galvanized the Justice Department to examine his dominance of the game of golf.
According to lawyers involved in the case, Tiger Woods incredible success on the tour and his enormous earnings have reduced the amount of innovation and competition in the game. The anti-trust division claims his success has driven potential competitors into tennis and other sports.
At the heart of the case is the Tiger Woods 'operating system,' the superior coordination, stamina and concentration that makes him the greatest golfer in the world. Despite the thousands of hours of practice that honed this system, the government contends that past investments have no bearing on the current competitive environment.
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Woods defends brash remarks like these as 'normal operating procedure' in the industry. But government lawyers call such statements intimidating and say they stifle competition.
The second pillar of the Justice Department case is the alleged attempt by Woods to 'extend his monopoly' by freely dispensing smiles, good cheer and professionalism. Many golfers feel that this 'giveaway' puts them at an unfair disadvantage in the market for endorsements. As one member of the professional golfers' tour put it: "He's the best golfer in the world and he gets to be a nice guy, too?"
It's a foregone conclusion that the 24-year-old Woods will be declared a monopoly. Now the focus is on likely government remedies.
One suggestion is to ban Woods from courses that are particularly suited to his game. That might include any place with grass, greens and tees, a Justice Department lawyer said.
Another idea is to give Tiger's unlisted home telephone number to competitors so they can call him at late hours, disrupting his sleep habits and making him a crankier and less likeable fellow.
But most of the attention now centers on splitting Tiger in two. The Justice Department is struggling to implement the breakup in a sustainable fashion. One remedy would leave Woods physically intact but split his golf game into two separate enterprises. Woods would be allowed to drive off the tee, but others golfers would finish the hole.
Critics contend this would compromise the game of golf and punish the fans who love to watch Woods play. But competitors insist that Woods' market dominance requires a special kind of handicap to level the playing field.
Whatever the outcome, lengthy appeals are assured. A final resolution is expected about the time Woods moves on to the Senior Tour.
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If You're Paying, I'll Have Top Sirloin
By Russ Roberts | May 18, 1995
From the Wall Street Journal, 5-18-95, Reprinted in The Libertarian Reader, David Boaz, editor, Free Press, 1997
As Congress prepares to try to cut spending, I am reminded of an evening last fall at the St. Louis Repertory Theater, our local company. Before the curtain rose, the company's director appeared and encouraged us to vote against a ballot proposition to limit state taxes. He feared it would lead to reduced funding for the company.
I turned to the woman sitting next to me and asked her if she felt guilty knowing that her ticket was subsidized by some farmer in the "boot-heel" of Missouri. No, she answered, he's probably getting something, too. She seemed to be implying that somehow, it all evened out.
I left her alone, but I wanted to say, no it doesn't even out. If it "evened out" for everybody, then government spending would really be depressing: all that money shuffled around, all those people working at the IRS, all those marginal tax rates discouraging work effort just to get everybody to get the same deal.
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This destructive justification reminds me of a very strange restaurant.
When you eat there, you usually spend about $6—you have a sandwich, some fries and a drink. Of course you'd also enjoy dessert and a second drink, but that costs an additional $4. The extra food isn't worth $4 to you, so you stick with the $6 meal.
Sometimes, you go to the same restaurant with three friends. The four of you are in the habit of splitting the check evenly. You realize after a while that the $4 drink and dessert will end up costing you only $1, because the total tab is split four ways. Should you order the drink and dessert? If you're a nice person, you might want to spare your friends from having to subsidize your extravagance. Then it dawns on you that they may be ordering extras financed out of your pocket. But they're your friends. They wouldn't do that to you and you wouldn't do that to them. And if anyone tries it among the group, social pressure will keep things under control.
But now suppose the tab is split not at each table but across the 100 diners that evening across all the tables. Now adding the $4 drink and dessert costs only 4¢. Splurging is easy to justify now. In fact you won't just add a drink and dessert; you'll upgrade to the steak and add a bottle of wine. Suppose you and everyone else each orders $40 worth of food. The tab for the entire restaurant will be $4000. Divided by the 100 diners, your bill comes to $40. Here is the irony. Like my neighbor at the theater, you'll get your "fair share." The stranger at the restaurant a few tables over pays for your meal, but you also help subsidize his. It all "evens out."
But this outcome is a disaster. When you dine alone, you spend $6. The extra $34 of steak and other treats are not worth it. But in competition with the others, you've chosen a meal far out of your price range whose enjoyment falls far short of its cost.
Self-restraint goes unrewarded. If you go back to ordering your $6 meal in hopes of saving money, your tab will be close to $40 anyway unless the other 99 diners cut back also. The good citizen feels like a chump.
And so we read of the freshman Congressman who comes to Congress eager to cut pork out of the budget but in trouble back home because local projects will also come under the knife. Instead of being proud to lead the way, he is forced to fight for those projects to make sure his district gets its "fair share."
Matters get much worse when there are gluttons and drunkards at the restaurant mixing with dieters and teetotalers. The average tab might be $40, but some are eating $80 worth of food while others are stuck with a salad and an iced tea.
Those with modest appetites would like to flee the smorgasbord, but suppose it's the only restaurant in town and you are forced to eat there every night. Resentment and anger come naturally. And being the only restaurant in town, you can imagine the quality of the service.
Such a restaurant can be a happy place if the light eaters enjoy watching the gluttony of those who eat and drink with gusto. Many government programs generate a comparable wide range of support. But many do not. How many Americans other than farmers benefit from the farm subsidy programs? How many Americans other than train riders derive benefit from the Amtrak subsidy?
People who are overeating at the expense of others should be ashamed. That shame will return when others are forced to cut back too. This requires deep cuts and an end to the government smorgasbord where the few benefit at the expense of the many.
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