Learning From Walter Williams

Compare our level of satisfaction with the services of those "in it just for the money and profits" to those in it to serve the public as opposed to earning profits. A major non-profit service provider is the public education establishment that delivers primary and secondary education at nearly a trillion-dollar annual cost. Public education is a major source of complaints about poor services that in many cases constitute nothing less than gross fraud.

If Wal-Mart, or any of the millions of producers who are in it for money and profits, were to deliver the same low-quality services, they would be out of business, but not public schools. Why? People who produce public education get their pay, pay raises and perks whether customers are satisfied or not. They are not motivated by profits and therefore under considerably less pressure to please customers. They use government to take customer money, in the form of taxes.

The U. S. Postal Service, state motor vehicle departments and other government agencies also have the taxing power of government to get money and therefore are less diligent about pleasing customers. You can bet the rent money that if Wal-Mart and other businesses had the power to take our money by force, they would be less interested and willing to please us.

The big difference between entities that serve us well and those who do not lies in what motivates them. Wal-Mart and millions of other businesses are profit-motivated whereas government schools, USPS and state motor vehicle departments are not.

In the market, when a firm fails to please its customers and fails to earn a profit, it goes bankrupt, making those resources available to another that might do better. That's unless government steps in to bail it out. Bailouts send the message to continue doing a poor job of pleasing customers and husbanding resources. Government-owned nonprofit entities are immune to the ruthless market discipline of being forced to please customers. The same can be said of businesses that receive government subsidies.

FREE or FAIR : Think about the First Amendment to our Constitution that reads: Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances."

How many of us would prefer that the Founders had written the First Amendment so as to focus on fairness rather than freedom and instead wrote: Congress shall make no unfair laws respecting an establishment of religion, or prohibiting the fair exercise thereof; or abridging the fairness of speech, or of the press; or the right of the people to peaceably assemble in a fair fashion, and to fairly petition the Government for a redress of grievances"?

Suppose a newspaper published a statement like "President Obama might easily end his term alongside Jimmy Carter as one of America's worse presidents." Some people might consider that fair speech while other people denounce it as unfair speech. What to do? A tribunal would have to be formed to decide on the fairness or unfairness of the statement. It goes without saying that the political makeup of the tribunal would be a matter of controversy. Once such a tribunal was set up, how much generalized agreement would there be on what it decreed? And, if deemed unfair speech, what should the penalties be?

The bottom line is that what's fair or unfair is an elusive concept and the same applies to trade. Last summer, I purchased a 2010 LS 460 Lexus, through a U.S. intermediary, from a Japanese producer for $70,000. Here's my question to you: Was that a fair or unfair trade? I was free to keep my $70,000 or purchase the car. The Japanese producer was free to keep his Lexus or sell me the car. As it turned out, I gave up my $70,000 and took possession of the car, and the Japanese producer gave up possession of the car and took possession of my money. The exchange occurred because I saw myself as being better off and so did the Japanese producer. I think it was both free and fair trade, and I'd like an American mercantilist to explain to me how it wasn't.

Mercantilists have absolutely no argument when we recognize that trade is mostly between individuals. Mercantilists pretend that trade occurs between nations such as U.S. trading with England or Japan to appeal to our jingoism. First, does the U.S. trade with Japan and England? In other words, is it members of the U.S. Congress trading with their counterparts in the Japanese Diet or the English Parliament? That's nonsense. Trade occurs between individuals in one country, through intermediaries, with individuals in another country.

Who might protest that my trade with the Lexus manufacturer was unfair? If you said an American car manufacturer and their union workers, go to the head of the class. They would like Congress to restrict foreign trade so that they can sell their cars at a pleasing price and their workers earn a pleasing wage. As a matter of fact, it's never American consumers who complain about cheaper prices. It's always American producers and their unions who do the complaining. That ought to tell us something.

SELF-OWNERSHIP : My initial assumption is that we each own ourselves. I am my private property and you are yours. If we accept the notion that people own themselves, then it's easy to discover what forms of conduct are moral and immoral. Immoral acts are those that violate self-ownership. Murder, rape, assault and slavery are immoral because those acts violate private property. So is theft, broadly defined as taking the rightful property of one person and giving it to another.

Let's look at some congressional actions in light of self-ownership. Do farmers and businessmen have a right to congressional handouts? Does a person have a right to congressional handouts for housing, food and medical care?

First, let's ask: Where does Congress get handout money? One thing for sure, it's not from the Tooth Fairy or Santa Claus nor is it congressmen reaching into their own pockets. The only way for Congress to give one American one dollar is to first, through the tax code, take that dollar from some other American. It must forcibly use one American to serve another American. Forcibly using one person to serve another is one way to describe slavery. As such, it violates self-ownership.

LIBERTY's THREAT : Bill Gates is the world's richest person, but what kind of power does he have over you? Can he force your kid to go to a school you do not want him to attend? Can he deny you the right to braid hair in your home for a living? It turns out that a local politician, who might deny us the right to earn a living and dictates which school our kid attends, has far greater power over our lives than any rich person. Rich people can gain power over us, but to do so, they must get permission from our elected representatives at the federal, state or local levels. For example, I might wish to purchase sugar from a Caribbean producer, but America's sugar lobby pays congressmen hundreds of thousands of dollars in campaign contributions to impose sugar import tariffs and quotas, forcing me and every other American to purchase their more expensive sugar.

Politicians love pitting us against the rich. All by themselves, the rich have absolutely no power over us. To rip us off, they need the might of Congress to rig the economic game. It's a slick political sleight-of-hand where politicians and their allies amongst the intellectuals, talking heads and the news media get us caught up in the politics of envy as part of their agenda for greater control over our lives.

Politicians preach the politics of envy whilst reaching into the ordinary man's pockets, through the IRS, and handing it over to their favorite rich people and others who make large contributions to their election efforts.
The bottom line is that it is politicians first and their supporters amongst intellectuals who pose the greatest threat to liberty.

WHY WERE DIVIDED : Most of the issues that divide our nation, and give rise to conflict, are those best described as a zero-sum game where one person's or group's gain is of necessity another's loss. Examples are: racial preferences, school prayers, trade restrictions, welfare, Obamacare and a host of other government policies that benefit one American at the expense of another American. That's why political action committees, private donors and companies spend billions of dollars lobbying. Their goal is to get politicians and government officials to use the coercive power of their offices to take what belongs to one American and give it to another or create a favor or special privilege for one American that comes at the expense of some other American.

The best thing the president and Congress can do to reduce the potential for conflict and violence is reduce the impact of government on our lives. Doing so will not only produce a less-divided country and greater economic efficiency, but bear greater faith and allegiance to the vision of America held by our founders – a country of limited government. Our founders, in the words of Thomas Paine, recognized that, "Government, even in its best state, is but a necessary evil; in its worst state, an intolerable one."

TAXES : Suppose your local politician tells you, as a homeowner, "I'm not going to raise taxes on you! I'm going to raise taxes on your land." You'd probably tell him that he's an idiot because land does not pay taxes; only people pay taxes. That means a tax on your land is a tax on you. You say, "Williams, that's pretty elementary, isn't it?" Not quite.

What about the politician who tells us that he's not going to raise taxes on the middle class; instead, he's going to raise corporate income taxes as means to get rich corporations to pay their rightful share of government? If a tax is levied on a corporation, and if it is to survive, it will have one of three responses, or some combination thereof. One response is to raise the price of its product, so who bears the burden? Another response is to lower dividends; again, who bears the burden? Yet another response is to lay off workers. In each case, it is people, not some legal fiction called a corporation, who bear the burden of the tax.

Freedom's First Principle

Freedom's first principle is: Each person owns himself. The transition from socialism to capitalism and the preservation of capitalism require what philosopher David Kelley calls the entrepreneurial outlook on life, which he describes, in part, as "a sense of self-ownership, a conviction that one's life is one's own, not something for which one must answer to some higher power'' (Kelley 1994: 4). Once we accept self-ownership as a first principle, we readily discover what constitutes just and unjust conduct. Unjust conduct is simply any conduct that violates an individual's property rights in himself when he himself has not infringed upon the property rights of others. Therefore, acts like murder, rape, and theft, whether done privately or collectively, are unjust because they violate private property. There is broad consensus that government-sponsored murder and rape are unjust; however, not as much consensus is reached regarding theft. Theft being defined as forcibly taking the rightful property of one person for the benefit of another.

For individual freedom to be viable, it must be a part of the shared values of a society, and there must be an institutional framework to preserve it against encroachments by majoritarian or government will. Constitutions and laws alone cannot guarantee the survival of personal freedom as is apparent where Western-style constitutions and laws have been exported to countries not having a tradition of individual freedom. U.S. articulation of the right to individual autonomy is enunciated in our Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by the Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.

That statement, which played such an important role in the rebellion against England and in the establishment of the U.S. Constitution, was the outgrowth of libertarian ideas of such thinkers as John Locke, Montesquieu, and Sir William Blackstone.

Even in societies with a tradition of freedom, such as the United States, the values supporting that freedom have suffered erosion and have proven an insufficient safeguard against encroachment by the state. As is so often the case, political liberty (democracy) has been used to redistribute income and wealth. The redistributive state, in turn, has had a stifling effect on economic liberty and has reduced individual freedom.

Ultimately, the struggle to achieve and preserve freedom must take place in the habits and minds of individuals. And, as admonished by the Constitution of the State of North Carolina (Art. I, Sec. 35), "The frequent reference to fundamental principles is absolutely necessary to preserve the blessings of liberty.'' It is those fundamental principles that deliver economic efficiency and wealth, not the other way around. Fundamental moral principles or values are determined in the arena of civil society. Values such as thrift, hard work, honesty, trust and cooperative behavior, based on shared norms, are the keys to improving the human condition and provide the undergirding for a free-market economy. Just as important are such social institutions as respect for private property, sanctity of contracts, educational institutions, clubs, charities, churches, and families. All those institutions provide the glue to hold society together in terms of common values and provide for the transmission of those values to successive generations. Too often informal institutions and local networks are trivialized and greater favor is given to the intellectual's narrow conception of what constitutes knowledge and wisdom.

The importance of informal networks such as friends, church members, neighbors, and families cannot be underestimated--as demonstrated in the following example of small proprietorships.[1] The critical determinants of a proprietor's success are perseverance, character, ability, and other personal characteristics. Banks seldom finance the establishment of such business. Most small businesses are financed through friends and family. The reason is that those are the people who have the lowest cost in acquiring the necessary information about the proprietor's characteristics deemed critical for success. Also, friends and family, who lend the proprietor money, have a personal stake in the business and have an incentive to moderate their likely bias in favor of the borrower. Clearly, a formal lending institution could query friends and relatives. However, the information obtained would have greater bias because friends and relatives would not have sufficient stake in the business to offset any personal bias they had in favor of the borrower.

Institutions and Wealth

F. A. Hayek refers to the rules of several property determined by traditions and values. Those rules consisted in what David Hume called "the stability of possessions,'' "transference by consent,'' and "the keeping of promises'' (Hayek 1984: 321). Nations that have respected the rules of several property have produced social and economic climates far more conducive to the welfare of their citizens than nations that have failed to respect property rights. People in countries with larger amounts of economic freedom, such as the United States, Canada, Australia, Hong Kong, Japan, and Taiwan are far richer and have greater human rights protections than people in countries with limited free markets such as Russia, Albania, China, and every country in Africa.

The role of private property and free markets in creating wealth is often overlooked. Factors such as natural-resource endowment, population size, and previous conditions (colonialism) are claimed to explain wealth. Yet those factors cannot explain human betterment. The United States and Canada have relatively small populations, abundant natural resources, and are wealthy. However, if low population density and abundant natural resources were adequate explanations of wealth, one would expect the former Soviet Union and countries on the continents of Africa and South America to be wealthy. Instead, the former Soviet Union, Africa, and South America are home to many of the world's poorest and most miserable people.

A history of colonialism is often given as an excuse for poverty but that is a bogus hypothesis. The world's richest country, the United States, was formerly a colony. Canada, Australia, and New Zealand were colonies--and Hong Kong remains a colony. A far better explanation of wealth are the values and traditions that produce the rules of several property. Economics is not an independent variable whose laws are unaffected by the institutional framework within which it operates. Economic efficiency is a by-product of pre-existing cultural and moral norms.

The Intellectual Defense of Liberty

All too often defenders of free-market capitalism base their defense on the demonstration that capitalism is more efficient in terms of resource allocation and, hence, leads to a larger bundle of goods than socialism and other forms of statism. However, as Milton Friedman frequently points out, economic efficiency and greater wealth should be promoted as simply a side-benefit of free markets. The intellectual defense of free-market capitalism should focus on its moral superiority. In other words, even if free enterprise were not more efficient than other forms of human organization, it is morally superior because it is rooted in voluntary relationships rather than force and coercion, and it respects the sanctity of the individual.

The wealth created by free-market capitalism also cultivates civil society. For most of human history, individuals have had to simply eke out a living. With the rise of capitalism and the concomitant rise in human productivity, people were able to satisfy their physical needs with less and less time. Economic progress made it possible for people to have the time to develop spiritually and culturally. The rise of capitalism enabled the gradual extension of civilization to greater and greater numbers of people. As the wealth of nations grew, people had the means to become educated in the liberal arts and to gain greater knowledge about the world around them. The rise of capitalism enabled ordinary people to attend the arts, afford recreation, and contemplate more fulfilling and interesting life activities, and engage in other culturally enriching activities that were formerly only within the purview of the rich.

Demystification of the State

A. V. Dicey (1914: 257) wrote:

The beneficial effect of State intervention, especially in the form of legislation, is direct, immediate, and so to speak visible, whilst its evil effects are gradual and indirect, and lie outside our sight.... Hence the majority of mankind must almost of necessity look with undue favour upon government intervention. This natural bias can be counteracted only by the existence, in a given society, ... of a presumption or prejudice in favour of individual liberty, that is of laissez-faire.

One can hardly determine the casualties of war simply by looking at survivors. We must ask what happened to those whom we do not see. Similarly, when evaluating interventionist public policy we cannot evaluate it simply by looking at its beneficiaries. We must discover its victims. Most often the victims of public policy are invisible. To garner greater public support against government command and control, we must somehow find a way to make those victims visible.

In all interventionist policy there are those who are beneficiaries and those who are victims. In most cases the beneficiaries are highly visible and the victims are invisible. A good example is the minimum wage law. After enactment of an increase in the minimum wage law, politicians accompanied by television crews readily point to people who have benefitted from the legislation. The beneficiaries are those with a fatter paycheck. Thus, the politician can lay claim to the wisdom of his legislation that increased minimum wages. Moreover, the politician is also a beneficiary since those now earning higher wages will remember him when election time comes around. By parading minimum wage beneficiaries across the stage, those who oppose minimum wage increases can be readily portrayed as having a callous, mean-spirited disregard for interests of low-wage workers.

A political strategy of those who support liberty should be that of exposing the invisible victims of minimum wage laws. We need to show those who have lost their jobs, or do not become employed in the first place, because their productivity did not warrant being employed at the minimum wage. We should find a way to demonstrate jobs destroyed by minimum wages such as busboys, gasoline station attendants, and movie ushers. We must show how marginally profitable firms have been forced out of business, though surviving firms may have the same number of employees. We should show how capital was artificially substituted for labor as a result of higher mandated wages and how firms have adjusted their production techniques in order to economize on labor. The particular adjustments firms make in response to higher mandated wages are less important than the fact that adjustments will be made.

A more dramatic example of the invisible victims of interventionist state policy can be found in the regulation of medicines and medical devices, as in the case of the Food and Drug Administration (FDA) in the United States. Essentially, FDA officials can make two types of errors. They can err on the side of undercaution and approve a drug with dangerous unanticipated side effects. Or they can err on the side of overcaution, not approving a useful and safe drug, or creating costly and lengthy drug approval procedures.

Errors on the side of undercaution lead to embarrassment and possibly loss of bureaucratic careers and promotions because the victims of unsafe drugs will be visible through news stories of sick people, congressional investigations, and hearings. However, errors on the side of overcaution, through extensive delay in the approval of drugs--as in the cases of propranolol, Septra, and other drugs--impose virtually no costs on the FDA. Victims of FDA errors on the side of overcaution are mostly invisible to the press, the public, and politicians.

Those victims should be made visible. Once the FDA (or some other approving agency) approves a drug widely used elsewhere with no untoward effects, we should find people who died or needlessly suffered as a result of the FDA's delay. For political efficiency we cannot simply offer intellectual arguments. We must get pictures and stories of FDA victims in an effort to appeal to a sense of fair play, decency, and common sense among the citizenry. But there is also a role for intellectual arguments in the sense of teaching people that any meaningful use of "safe'' must see safety as a set of tradeoffs rather than a category. The attempt to get a "safe'' drug means that people will die or needlessly suffer during the time it takes to achieve greater safety. That toll must be weighted against the number of people who might die or become ill because of the drug's earlier availability and attendant unanticipated harmful side effects. People should also be taught to understand that if a 100 percent safe drug is ever achieved, it will be the only thing in this world that is 100 percent safe.

Another area of state interventionism, which particularly applies to less developed nations, is restrictive import laws and regulations. Restricting foreign imports as a means to save jobs sounds plausible. Adding to the appeal of restrictive trade policy is the fact that its beneficiaries are highly visible while its victims are invisible.

Using an example of the American experience may suggest a political strategy. Most people fully understand that import restrictions raise the cost of products but may have little understanding of its systemic effects. Arthur Denzau of the Center for the Study of American Business found that "voluntary restraints'' on imported steel saved nearly 17,000 jobs in the steel industry. However, the higher steel prices, resulting from the restraints, led to a loss of 52,000 jobs in American steel-using industries. On balance steel restrictions led to a net loss of 35,400 jobs (Denzau 1987: 12). The process is easy to understand. Caterpillar Company uses steel to produce heavy construction equipment. Trade restrictions caused higher steel prices that in turn raised Caterpillar's production costs. Higher costs made Caterpillar less competitive in both domestic and international markets, which led Caterpillar to downsize its labor force. As a result, we see more Japanese and Korean-produced heavy equipment in the United States. Importing finished products, by the way, is just another way to import steel.

In addition to causing a net loss of jobs, trade restrictions are costly to consumers. According to estimates, the Reagan administration's "voluntary import restraints'' on Japanese cars increased the price of Japanese cars sold in the United States by $900 and increased the price of U.S. cars by $350, for a total cost to American consumers of $4.3 billion. That price tag translates into a cost of $200,000 per year for each job saved in Detroit (Tarr and Morkre 1984: 57). It would have been cheaper to have given each Detroit auto worker, laid off by freer trade, a check for $60,000 a year so they could buy a vacation residence in Miami. That way, collectively, we would have been better off to the tune of $140,000 per job saved. Of course, that policy choice would not have been politically feasible because the costs would have been apparent and taxpayers would have refused to pay for the free vacation. It is not only auto workers with whom the nation could have made the trade. According to the Federal Trade Commission, quotas on textile products from Hong Kong cost consumers $34,500 per year for each job saved for American textile workers earning $7,600 to $10,700 annually (Morkre 1984: 27).

Identifying the invisible victims of trade restrictions may suggest a political strategy to fight such restrictions. One such strategy is to organize companies adversely affected by import restrictions, such as steel-using companies in the case of the U.S. import restrictions on steel.

Justice: Process vs. Results

At the heart of most interventionist policy is a vision of justice. Most often this vision evaluates the presence of justice by looking at results.

Social justice has considerable appeal and as such is used as justification for interventionist statism. There are several criticisms of the concept of social justice that Hayek has answered well, but defenders of personal liberty must make a greater effort to demystify the term and show that justice or fairness cannot be determined by examining results. The results people often turn to in order to determine the presence or absence of justice are educational and occupational status, income, life expectancy, and other socioeconomic factors. But justice or fairness cannot be determined by results. It is a process question.

Consider, for example, that three individuals play a regular game of poker. The typical game outcome is: individual A wins 75 percent of the time, while individuals B and C win 15 percent and 10 percent of the time, respectively. By knowing the game's result, nothing unambiguous can be said about whether there has been "poker justice.'' Individual A's disproportionate winnings are consistent with his being an astute player, clever cheater, or just plain lucky. The only way one can determine whether there has been poker justice is to examine the game's process. Process questions would include: Did the players play voluntarily? Were the poker rules neutral and unbiasedly applied? Was the game played without cheating? If the process were just, affirmative answers would be given to those three questions and there would be poker justice irrespective of the outcome. Thus, justice is really a process issue.

The most popular justification for the interventionist state is to create or ensure fairness and justice in the distribution of income. Considerable confusion, obfuscation, and demagoguery regarding the sources of income provide statists with copious quantities of ammunition to justify their redistributionist agenda. Income is not distributed. In a free society, income is earned. People serving one another through the provision of goods and services generate income.

We serve our fellow man in myriad ways. We bag his groceries, teach his children, entertain him, and heal his wounds. By doing so, we receive "certificates of performance.'' In the United States, we call these certificates dollars. Elsewhere they are called pesos, francs, marks, yen, and pounds. Those certificates stand as evidence (proof) of our service. The more valuable our service to our fellow man (as he determines), the greater the number of certificates of performance we receive and hence the greater our claim on goods and services. That free-market process promotes a moral discipline that says: Unless we are able and willing to serve our fellow man, we shall have no claim on what he produces. Contrast that moral discipline to the immorality of the welfare state. In effect the welfare state says: You do not have to serve your fellow man; through intimidation, threats, and coercion, we will take what he produces and give it to you.

The vision that sees income as being "distributed'' implies a different scenario for the sources of income never made explicit. The vision that sees income as being distributed differs little from asserting that out there is a dealer of dollars. It naturally leads to the conclusion that if some people have fewer dollars than others, the dollar dealer is unfair; he is a racist, sexist, or a multi-nationalist. Therefore, justice and fairness require a re-dealing (income redistribution) of dollars. That way the ill-gotten gains of the few are returned to their "rightful'' owners. That vision is the essence of the results-oriented view of justice underpinning the welfare state.

People who criticize the existing distribution of income as being unfair and demand government redistribution are really criticizing the process whereby income is earned. Their bottom line is that millions of individual decisionmakers did not do the right thing. Consider the wealth of billionaire Bill Gates, the founder of MicroSoft. Gates earned billions because millions of individuals voluntarily spent their money on what they wanted--his products. For someone to say that Gates's income is unfair is the same as saying that the decisions of millions of consumers are wrong. To argue that Gates's income should be forcibly taken and given to others is to say that somehow third parties have a right to preempt voluntary decisions made by millions of traders.

When sources of income are viewed more realistically, we reach the conclusion that low income, for the most part, is a result of people not having sufficient capacity to serve their fellow man well rather than being victims of an unfair process. Low-income people simply do not have the skills to produce and do things their fellow man highly values. Seldom do we find poor highly productive individuals or nations. Those who have low incomes tend to have low skills and education and hence low productive capacity. Our challenge is to make those people (nations) more productive.

Another explanation of low income is that the rules of the game have been rigged. That is, people do have an ability to provide goods and services valued by their fellow man but are restricted from doing so. Among those rules are minimum wage laws, occupational and business licensure laws and regulations, and government-sponsored monopolies. Hence, another argument for free-market capitalism is that it is good for low-income, low-skilled people.

The Vision of Black Markets

We should always keep in mind the resiliency of markets. Despite the efforts of socialist regimes, markets tend to survive to one degree or another; they are an irrepressible part of human nature. As Adam Smith ([1776] 1976: 17) wrote, "It is the necessary ... certain propensity in human nature ... to truck, barter, and exchange one thing for another.'' During the 70 years of the Soviet experiment, with massive attempts to suppress markets (including jail, banishment, and death), markets in one form or another survived. The conditions for the formation of markets are always present and explain their resiliency. Those conditions are: (1) private ownership of property, (2) interaction between people who place different valuations on goods, and (3) individual will and self-interest.

Those conditions give rise to markets be they legal or illegal (black) markets. According to some estimates, up to 84 percent of the Soviet people purchased goods and services through the black market or fartsovshiki. The fartsovshiki was also a source of additional employment, and hence income, for as many as 20 million Soviet citizens (Galuszka 1989). According to Automotive News (1985), 60 percent of Soviet citizens used black-market mechanics for auto repairs and another 30 percent purchased gasoline and parts from black-market distributors.

Soviet officials could never eliminate black markets and one doubts that they wanted to. After all, the Soviet system may have survived as long as it did because some of its more uglier consequences were mitigated by the presence of black markets. Given the periodic shortages of life's necessities such as food and clothing, there may have been uncontrollable social disorder if Soviet citizens had to do without rather than have a black-market outlet to which they could turn to for relief.

The Soviet experience proves that man is by nature a capitalist. The transition from socialism to capitalism requires only that human nature be permitted to flourish.

Conclusion

The struggle to extend and preserve free markets must have as its primary focus the moral argument. State interventionists stand naked before well-thought-out moral arguments for private ownership of property, voluntary exchange, and the parity of markets. People readily understand moral arguments on a private basis--for example, one person does not have the right to use force against another to serve his own purposes. However, people often see government redistribution as an acceptable use of force. In a democratic welfare state that coercion is given an aura of legitimacy. The challenge is to convince people that a majority vote does not establish morality and that free markets are morally superior to other forms of human organization.

ECONOMICS : Part 1

Last fall semester, I didn’t teach for the first time in 37 years. No, I haven’t retired. It was my semester-off reward for two terms as department chairman at George Mason University. A break is well deserved after a chairmanship – a job not unlike that of herding cats.

During fall semesters, I typically teach our first-year Ph.D. microeconomics-theory course. Out of a love for teaching, I’ve decided to not completely take off but deliver a few lectures on basic economic principles to my readership. We’ll name the series “Economics for the Citizen.”

The first lesson in economic theory is that we live in a world of scarcity. Scarcity is a situation whereby human wants exceed the means to satisfy those wants. Human wants are assumed to be limitless, or at least they don’t frequently reveal their bounds. People always want more of something, be it more cars, more food, more love, more happiness, more peace, more health care, more clean air, or more charity. Our ability and resources to satisfy all those wants are indeed limited. There’s only a finite amount of land, iron, workers, and years in a lifetime.

Scarcity produces several economic problems: What’s to be produced, who’s going to get it, how’s it to be produced, and when is it to be produced? For example, many Americans, and foreigners too, would love to have a home or vacation home along the thousand miles of California, Oregon, and Washington coastline. Shipping companies would like to use some of it as ports. The U.S. Defense Department would like to use it for military installations. There’s simply not enough coastline to meet all the competing wants and uses. That means there’s conflict over coastline ownership and its uses.

There are several methods of conflict resolution. First, there’s the market mechanism – let the highest bidder be the one who owns and decides how the land will be used. Then there’s government fiat, where the government dictates who gets to use the land for what purpose. Gifts might be the way whereby an owner arbitrarily chooses a recipient. Finally, violence is a way to resolve the question of who has the use rights to the coastline – let people get weapons and physically fight it out.

At this juncture, some might piously say, “Violence is no way to resolve conflict!” The heck it isn’t. The decision of who had the right to use most of the Earth’s surface was settled through violence (wars). Who has the right to the income I earn is partially settled through threats of violence. In fact, violence is such an effective means of resolving conflict that most governments want a monopoly on its use.

Part 2

Which is the best method to resolve conflict issues surrounding the questions of what’s to be produced, how and when it’s produced, and who’s going to get it? Is it the market mechanism, government fiat, gifts, or violence? Before you attempt an answer – which I’ll give in the next lecture – be advised that it’s a trick question that easily traps many of my teeny-bopper sophomore students and even a few graduate students.

I personally believe that economics is fun and valuable. People who say they found it a nightmare in college just didn’t have a good teacher-professor. I became a good teacher-professor as a result of tenacious mentors during my graduate study at UCLA. Professor Armen Alchian, a very distinguished economist, used to give me a hard time in class. But one day, we were having a friendly chat during our department’s weekly faculty/graduate-student coffee hour, and he said, “Williams, the true test of whether someone understands his subject is whether he can explain it to someone who doesn’t know a darn thing about it.” That’s a challenge I love: making economics fun and understandable.

Which is the best method of resolving conflict over what’s produced, how and when it’s produced, and who’s going to get it? Among the methods for doing so were the market mechanism, government fiat, gifts, or violence. The answer is that economic theory can’t answer normative questions.

Normative questions deal with what is better or worse. No theory can answer normative questions. Try asking a physics teacher which is the better or worse state: a solid, gas, liquid, or plasma state. He’ll probably look at you as if you’re crazy. On the other hand, if you ask your physics teacher which is the cheapest state for pounding a nail into a board, he’d probably answer that the solid state is. It’s the same with economic theory, as opposed to economists. That is, if you asked most economists which method of conflict resolution produces the greater overall wealth, they’d probably answer that the market mechanism does.

The bottom line is that economic theory is objective or non-normative and doesn’t make value judgments. Economic-policy questions are normative or subjective and do make value judgments – questions such as: Should we fight unemployment or inflation, should we spend more money on education, and should the capital gains tax be 15 percent or 20 percent? It’s in the area of value judgments where there’s so much disagreement among economists.

Keeping the distinction between nonnormative and normative in mind is very important, so let me elaborate a bit. Take the statement: The dimensions of this room are 30 feet by 40 feet. That’s an objective statement. Why? If there’s any disagreement, there are facts to which we can appeal to settle the disagreement, namely getting out a measuring instrument. Contrast that statement with: The dimensions of this room should be 20 feet by 80 feet. Another person disagrees, saying it should be 50 feet by 50 feet. There are no facts to resolve such disagreement. Similarly, there are no facts to which we can appeal to resolve a disagreement over whether the capital gains tax should be 15 percent or 20 percent, or whether it’s more important to fight inflation or unemployment.

The importance of knowing whether a statement is nonnormative or normative is that, in the former, there are facts to settle any dispute, but in the latter, there are none. It’s just a matter of opinion, and one person’s opinion is just as good as another. A good clue to telling whether a statement is normative is whether it contains the words “should” and “ought.”

At the beginning of each semester, I tell students that my economic theory course will deal with positive, nonnormative economic theory. I also tell them that if they hear me making a normative statement without first saying, “In my opinion,” they are to raise their hands and say, “Professor Williams, we didn’t take this class to be indoctrinated with your personal opinions passed off as economic theory; that’s academic dishonesty.” I also tell them that as soon as they hear me say, “In my opinion,” they can stop taking notes because my opinion is irrelevant to the subject of the class – economic theory.

Another part of this particular lecture to my students is that by no means do I suggest that they purge their vocabulary of normative or subjective statements. Such statements are useful tools for tricking people into doing what you want them to do. You tell your father that you need a cell phone and he should buy you one. There’s no evidence whatsoever that you need a cell phone. After all, George Washington managed to lead our nation to defeat Great Britain, the mightiest nation on Earth at the time, without owning a cell phone.

Our next discussion will be a bit more interesting. We’ll talk about what kinds of behavior can be called economic behavior.

Part 3

There are four classes of behavior that can be called economic behavior. They are: production, consumption, exchange, and specialization. The discussion of specialization will be left to the next article.

Production is any behavior that creates utility, that is, raises the want-satisfying capacity of something. When a mill smelts iron ore, it raises the want-satisfying capacity of the material by changing its form. The metal’s want-satisfying capacity is raised further when it’s made into steel and the steel into rails, girders, and the like. Production also includes changing the spatial characteristics of a good. Navel oranges have no want-satisfying capacity for Philadelphians if the oranges are in California.

The person sometimes called the middleman or wholesaler changes the spatial characteristics of the oranges by moving them from California to Philadelphia, thereby raising their want-satisfying capacity to Philadelphians.

Consumption is easy. Consumption is simply the reduction of the want-satisfying capacity of something. When I eat a hamburger, I reduce its want-satisfying capacity. When I drive my car, I reduce its capacity to satisfy wants. By the way, if production is greater than consumption, the result is called saving. If it’s the opposite, we call it dis-saving.

Exchange is a bit more complicated; misunderstanding it leads to considerable confusion and mischief. The essence of exchange is the transfer of title. Here’s the essence of what happens when I buy a gallon of milk from my grocer. I tell him that I hold title to these three dollars and he holds title to the gallon of milk. Then, I offer: If you transfer your title to that gallon of milk, I will transfer title to these three dollars.

Whenever there’s voluntary exchange, the only clear conclusion that a third party can make is that both parties, in their opinion, perceived themselves as better off as a result of the exchange; otherwise, they wouldn’t have exchanged. I was free to keep my three dollars, and the grocer was free to keep his milk. If you think it’s obvious that both parties benefit from voluntary exchange, then how come we hear pronouncements about worker exploitation?

Say you offer me a wage of $2 an hour. I’m free to either accept or reject your offer. So what can be concluded if I’m seen working for you at $2 an hour? One clear conclusion is that I must have seen myself as being better off taking your offer than my next best alternative. All other alternatives were less valuable, or else why would I have accepted the $2 offer? How appropriate is it to say that you’re exploiting me when you’ve given me my best offer? Rather than using the term “exploitation,” you might say you wish I had more desirable alternatives.

While people might characterize $2 an hour as exploitation, they wouldn’t say the same about $50 an hour. Therefore, for the most part, when people use the term “exploitation” in reference to voluntary exchange, they simply disagree with the price. If we equate price disagreement with exploitation, then exploitation is everywhere. For example, I not only disagree with my salary, I also disagree with the prices of Gulfstream private jets.

By no means do I suggest that you purge your vocabulary of the term “exploitation.” It’s an emotionally valuable term to use to trick others, but in the process of tricking others, one need not trick himself. I’m reminded of charges of exploitation Mrs. Williams used to make early on in our 44-year marriage. She’d charge, “Walter, you’re using me!” I’d respond by saying, “Honey, sure, I’m using you. If I had no use for you, I wouldn’t have married you in the first place.” How many of us would marry a person for whom we had no use? As a matter of fact, the problem of the lonely hearts among us is that they can’t find someone to use them.

Part 4

In the last lecture, we discussed three of four kinds of behavior that can be called economic behavior: production, consumption, and exchange. We’ll turn our attention to the fourth – specialization.

Specialization is said to occur when people produce more of a commodity than they consume or plan to consume. Specialization can occur on an individual, regional, or national basis. Here are examples of each. Detroit assembly-line workers produce more crankshafts than they consume or plan to consume. Californian citrus growers produce more navel oranges than they consume or plan to consume. Brazilian coffee growers produce more coffee than they consume or plan to consume.

There are two requirements for specialization. There must be an unequal endowment of resources and trade opportunities. The unequal endowment part means that an individual has the skills or a region or nation has the kind of resource endowment of land, labor, capital, and entrepreneurial talent whereby it can produce certain things more cheaply than another individual, region, or nation.

For example, while it’s possible to grow wheat and corn in Japan, it would be an expensive proposition. Why? Because crops like wheat and corn use a lot of land, and Japan is relatively land poor, and its land is expensive. By contrast, the United States is land rich; hence, grain production is relatively cheap. Therefore, it makes sense for the United States to take advantage of what it can do more cheaply – specialize in grain production – and for Japan to specialize in what it might produce more cheaply – say, camera lenses.

In order for specialization to occur, there must be trade opportunities. It wouldn’t make sense for U.S. farmers to produce more grain than they consume or plan to consume if they couldn’t trade it. Neither would it make sense for Japanese producers to produce more camera lenses than they consume or plan to consume. That’s why trade opportunities are necessary in order for people to take advantage of specialization.

Imagine that the Japanese government imposed trade restrictions on U.S. grain imports. Japanese farmers could charge monopoly prices and enjoy higher income, and Japanese consumers would pay higher prices. Would you deem it an intelligent response for the U.S. government to retaliate against Japan’s trade restrictions by imposing trade restrictions on Japanese camera lenses, thus allowing American lens producers to charge monopoly prices and American consumers to suffer higher prices? Put another way, is it a smart response for the U.S. government to harm American consumers because Japan harmed its consumers?

Specialization and trade make people dependent upon one another for their everyday wants. How many of us make our own eyeglasses, cars, houses, clothing, and food? We get all those goods by specializing in what we do well, getting paid, and trading with others for what they do well. Through specialization and trade – we might call it “outsourcing” – we enjoy goods as if we actually produced them. By the way, those who call for independence individually, regionally, or nationally are asking us to be poorer. It makes no difference whether they’re calling for energy independence, clothing independence, or coffee independence.

Let’s look at just a few misleading statements about international trade. The United States trades with Japan. Does anyone really think that it is the members of the U.S. Congress who trade with their counterparts in the Japanese Diet? It’s really individual Americans trading with individual Japanese through intermediaries.

What about fair trade? If you purchase a Japanese-made camera lens on mutually agreeable terms, you’d probably conclude that it was a fair trade, or else you would have kept your money. An American camera-lens producer might call it unfair because he couldn’t sell you his lens at a higher price. Economic theory can’t answer a subjective question like whether it would be fairer if you had to pay a higher price; it can say that a higher price would result in your having fewer dollars for other things.

The next article will focus on one of the most important economic concepts – costs.

Part 5

Someone might have made you a gift of this publication. Does that mean reading this article is free? The answer is a big fat no. If you weren’t reading the article, you might have watched television, talked to your wife, or worked on your homework. The cost of having or doing something is what had to be sacrificed. While reading this article might have a zero price, it most assuredly doesn’t have a zero cost.

To reinforce the idea that price is not the full measure of cost, imagine that you live in St. Louis, Mo. The barber who cuts your hair charges $20. Suppose I told you that a barber in Charleston, S.C., would charge you $5 for an identical haircut. Would you consider the Charleston haircut cheaper? While it has a lower price, it has a much greater cost. You’d have to sacrifice much more in terms of time, travel, and other expenses in order to get the Charleston haircut.

People often erroneously think of costs as only material things, but that which is sacrificed when a particular choice is made can include clean air, leisure, morality, tranquility, domestic bliss, safety, or any other thing of value. For example, a possible cost of a night out with the boys might be the sacrifice of domestic bliss.

Costs affect our choices in many ways, and for the purposes of this discussion, we’re going to assume that all of the costs associated with a given choice are borne by the chooser.

Just about the most important generalization that we can make about human behavior is that the higher the cost of a particular choice, the less of it will be chosen, and the lower the cost, the more of it will be chosen. This generalization underlies the law of demand. For simplicity, let’s assume price measures cost while we hold everything else influencing choice constant.

The law of demand can be expressed several ways: The lower the price of something, the more will be taken, and the opposite is true for the higher price. We can also say there exists a price whereby one can be induced to take more or less of something. Finally, there’s an inverse (reverse) relationship between the price of a good and the quantity demanded.

Why do people behave this way? The answer, in a word or two, is that people try to be as happy as they can. For example, if, when the price of oil rises, people simply ignored the price increase, they’d have less to spend on other things and be less happy. If they sought substitutes for the higher-priced oil, they’d have more money left over, and they’d be happier. That’s why higher oil prices give people incentive to purchase more insulation, buy better windows, wear sweaters, and maybe move to a warmer climate. These choices, and many more, are substitutes for heating oil, allowing you to use less oil.

When people say a certain amount of one thing or another is an absolute must, that’s like saying the law of demand doesn’t exist and there are no substitutes. That’s untrue – consider a diabetic. Can he do without 50 units of insulin a day? The law of demand says that at some price, say at $1,000 a unit, he can. There’s always at least one substitute for any good, and that’s doing without the good altogether. In the diabetic’s case, no insulin.

While not having insulin has unpleasant consequences, it’s a likely substitute at $1,000 a unit. You say, “Williams, that kind of economic analysis is cruel!” It’s no crueler than the law of gravity that predicts that if you jump off a skyscraper you’re going to die. Both outcomes are unattractive, but it’s reality. Indeed, tragically, millions of our fellow men around the globe are forced to endure the unpleasant substitute for insulin.

In the next discussion, we’ll explore some interesting features of cost, choice, and the law of demand.

Part 6

My last article introduced the law of demand, which states that, holding everything else constant, the lower the price of something, the more people will take of it; and the higher the price, less will be taken. But there’s a bit of complexity we must add. It’s crucial to recognize that it’s relative prices that determine choices, not absolute prices.

Relative price is one price in terms of another price. Here’s an example; actually, it’s a trick I pull on freshman students. I say, “Suppose your company offered to double your salary if you’d relocate to its Fairbanks, Alaska, office. Would you consider it a good deal and accept the offer?” Some students thoughtlessly answer yes. Then I ask, “What if upon arrival you find out that rents are more than double what you’re paying now and the prices of food, clothing, gasoline, and other items are three and four times more expensive?” The end result is that, while your absolute salary has doubled, your salary, relative to other prices, has fallen.

A bit trickier example of how it’s relative prices, not absolute prices, that influence behavior comes with the observation that married couples with young children who can’t be left alone tend to choose more expensive dates than married couples without children. The couple’s income and tastes have little to do with their decision; it’s relative prices. Keeping the numbers small, say an expensive date, dinner and concert, has a $50 price tag and a cheap date, a movie, $20. The choice of the $50 dinner-and-concert date requires that the married couple without children sacrifice two and a half movies that they could have otherwise enjoyed.

The married couple with children must pay a babysitter $10 whether they go on the expensive or cheap date. With the cost of the babysitter figured in, the dinner and concert will cost them $60 and the movie $30. In choosing the dinner-and-concert date, they sacrifice only two movies. The dinner-and-concert date is relatively cheaper for the married couple with children, since they sacrifice only two movies compared to the married couple without children’s two and a half. Since it’s cheaper, we can expect to observe married couples with children to take more expensive dates when they go out. It doesn’t take economic analysis to come up with this. A husband might suggest, “Honey, let’s hire a babysitter and take in a movie.” The wife replies, “That doesn’t make sense. Since we have to pay $10 for a babysitter whether we go on a cheap or expensive date, why not get our money’s worth and take in a dinner and concert?”

How about another example of relative prices? Suppose today’s coffee price is $1 a pound, and you typically purchase two pounds per week. You hear news that a freeze in Brazil destroyed much of its coffee crop and coffee prices are expected to rise. What would you do, and why? I’m guessing you’d make larger coffee purchases now, but why? The average person would answer, to save money. That’s an OK answer, but it doesn’t tell the whole story. Once again, it’s the law of demand working. If coffee prices are expected to rise next week, that means coffee prices this week have fallen relative to those next week, and the law of demand says that when a price of a good falls, people will take a larger quantity. It works in reverse as well. If coffee prices are expected to fall next week, you’d buy less coffee this week. Why? Coffee prices have risen this week relative to next week.

You might be tempted to ho-hum this coffee analysis as oversimplification, but it is the basic principle underlying the complexities of futures markets such as the Chicago Mercantile Exchange, where people, as speculators, become rich, sometimes poorer, guessing about the future prices of commodities.

Part 7

There’s a reggae song that advises, “If you want to be happy for the rest of your life, never make a pretty woman your wife.” Mechanics have been accused of charging women higher prices for emergency road repairs. Airlines charge business travelers higher prices than tourists. Car-rental companies and hotels often charge cheaper rates on weekends. Transportation companies often give senior citizen and student discounts. Prostitutes charge servicemen higher prices than their indigenous clientele. Gasoline stations on interstate highways charge higher prices than those off the interstate. What are we to make of all of this discrimination? Should somebody notify the U.S. attorney general?

The fact that sellers charge people different prices for what often appear to be similar products is related to a concept known as elasticity of demand, but we won’t get bogged down with economic jargon. Think about substitutes. Take the reggae song’s advice about not taking a pretty woman as a wife. Pretty women are desired and sought after by many men. An attractive woman has many substitutes for you, and as such, she can place many demands on you. A homely woman has far fewer substitutes for you and cannot easily replace you. Hence, she might be nicer to you, making what economists call “compensating differences.”

It’s all a matter of substitutes for the good or service in question. Business travelers have less flexibility in their air-travel choices than tourists. Women generally see themselves as having fewer alternatives for emergency auto repairs. A man might have more knowledge about making the repair or be more willing to risk hitchhiking or walking. A prostitute might see a sailor on shore leave as having fewer substitutes for her services than the area’s residents. Motorists traveling from city to city are less likely to have information about cheaper choices than local residents.

Politicians seem to ignore the fact that when the price of something changes people respond by seeking cheaper substitutes. New York City raised cigarette taxes, thereby making a pack of cigarettes $7. What happened? A flourishing cigarette black market emerged.

In 1990, when Congress imposed a luxury tax on yachts, private airplanes, and expensive automobiles, Sen. Ted Kennedy and then-Senate Majority Leader George Mitchell crowed publicly about how the rich would finally be paying their fair share of taxes. But yacht retailers reported a 77 percent drop in sales, and boat builders laid off an estimated 25,000 workers. What happened? Kennedy and Mitchell simply assumed that the rich would behave the same way after the imposition of the luxury tax as they did before and the only difference would be more money in the government’s coffers. They had a zero-elasticity vision of the world, namely that people do not respond to price changes. People always respond, and the only debatable issue is how much and over what period.

This elasticity concept is not restricted to what are generally seen as economic matters; it applies to virtually all human behavior. When a parent asks his child, “How many privileges must I take from you to get you to behave?” that’s really an elasticity question. In other words, how high must the punishment price be for the misbehavior in order to get the child to take less of it? It’s easy to see how elasticity applies to law enforcement as well. What must be done to the certainty of prosecution and punishment to get criminals to commit less crime?

My next article will focus on property rights, a noneconomic concept that has a heavy impact on economics.

Part 8

Economic theory is broadly applicable. However, a society’s property-rights structure influences how the theory will manifest itself. It’s the same with the theory of gravity. While it, too, is broadly applicable, attaching a parachute to a falling object affects how the law of gravity manifests itself. The parachute doesn’t nullify the law of gravity. Likewise, the property-rights structure doesn’t nullify the laws of demand and supply.

Property rights refer to who has exclusive authority to determine how a resource is used. Property rights are said to be communal when government owns and determines the use of a resource. Property rights are private when it’s an individual who owns and has the exclusive right to determine the non-prohibited uses of a resource and receive the benefit therefrom. Additionally, private-property rights confer upon the owner the right to keep, acquire, and sell the property to others on mutually agreeable terms.

Property rights might be well defined or ill defined. They might be cheaply enforceable or costly to enforce. These and other factors play a significant role in the outcomes we observe. Let’s look at a few of them.

A homeowner has a greater stake in the house’s future value than a renter. Even though he won’t be around 50 or 100 years from now, the house’s future housing services figure into its current selling price. Thus, homeowners tend to have a greater concern for the care and maintenance of a house than a renter. One of the ways homeowners get renters to share some of the interests of owners is to require security deposits.

Here’s a property-rights test question. Which economic entity is more likely to pay greater attention to wishes of its clientele and seek the most efficient methods of production? Is it an entity whose decision-makers are allowed to keep for themselves the monetary gain from pleasing clientele and seeking efficient production methods, or is it entities whose decision-makers have no claim on those monetary rewards? If you said it is the former, a for-profit entity, go to the head of the class.

While there are systemic differences between for-profit and non-profit entities, decision-makers in both try to maximize returns. A decision-maker for a non-profit will more likely seek in-kind gains such as plush carpets, leisurely work hours, long vacations, and clientele favoritism. Why? Unlike his for-profit counterpart, he doesn’t have property rights to take his gains. Also, since he can’t capture for himself the gains and doesn’t himself suffer the losses, there’s reduced pressure to please clientele and seek least-cost production methods.

You say, “Professor Williams, for-profit entities sometimes have plush carpets, have juicy expense accounts, and behave in ways not unlike non-profits.” You’re right, and again, it’s a property-rights issue. Taxes change the property-rights structure of earnings. If there’s a tax on profits, then taking profits in a money form becomes more costly. It becomes relatively less costly to take some of the gains in non-money forms.

It’s not just businessmen who behave this way. Say you’re on a business trip. Under which scenario would you more likely stay at a $50-a-night hotel and eat at Burger King? The first is where your employer gives you $1,000 and tells you to keep what’s left over. The second is where he tells you to turn in an itemized list of your expenses and he’ll reimburse you. In the first case, you capture for yourself the gains from finding the cheapest way of conducting the trip, and in the second, you don’t.

These examples are merely the tip of the effect that property-rights structure has on resource allocation. It’s one of the most important topics in the relatively new discipline of law and economics.

Part 9

We’re all grossly ignorant about most things that we use and encounter in our daily lives, but each of us is knowledgeable about tiny, relatively inconsequential things. For example, a baker might be the best baker in town, but he’s grossly ignorant about virtually all the inputs that allow him to be the best baker. What is he likely to know about what goes into the processing of the natural gas that fuels his oven? For that matter, what does he know about oven manufacture? Then, there are all the ingredients he uses – flour, sugar, yeast, vanilla, and milk. Is he likely to know how to grow wheat and sugar and how to protect the crop from diseases and pests? What is he likely to know about vanilla extraction and yeast production? Just as important is the question of how all the people who produce and deliver all these items know what he needs and when he needs them. There are literally millions of people cooperating with one another to ensure that the baker has all the necessary inputs.

It’s the miracle of the market and prices that gets the job done so efficiently. What’s called the market is simply a collection of millions upon millions of independent decision-makers not only in America but around the world. Who or what coordinates the activities of all these people? Rest assured it’s not a bakery czar.

There are a number of ways to allocate goods and services. They include: first-come-first-served, gifts, violence, dictatorship, or lotteries. When the price mechanism performs the allocation function, we realize efficiency gains absent in other methods. The price mechanism serves as a signaling function. Prices rise and fall, reflecting scarcities and surpluses. When prices rise as a result of higher demand, this acts as a signal to suppliers to expand output. They do so because whenever the price exceeds the costs of production, they stand to gain. They ship the goods to those with the highest willingness to pay.

Let’s look at just one of the baker’s needs – flour. How does the wheat farmer know whether there’s a surge in demand for bakery products? The short answer is that he doesn’t. All he knows is that millers are willing to pay higher wheat prices, so he’s willing to put more land under cultivation or reduce his wheat inventory. In other words, prices serve the crucial role of conveying information. Moreover, prices minimize the amount of information that any particular player involved in the process of getting flour to the baker needs in order to cooperate.

What if politicians thought that flour prices were too high and enacted flour price controls in the wake of a surge in demand for bakery products? Would wheat farmers put more land under cultivation? Would millers work overtime to produce more flour? The answer is a big fat no because what would be in it for them? The result would be flour shortages, but the story doesn’t stop there because mankind is ingenious about getting around government interference. If there were flour price controls, we’d see black markets emerging – people buying and selling flour at illegal prices. That’s always one effect of price controls. Another would be the corruption of public officials who know about the illegal activity but for a price look the other way.

In 302, the Roman emperor Diocletian commanded, “There should be cheapness,” declaring, “Unprincipled greed appears wherever our armies ... march.... Our law shall fix a measure and a limit to this greed.” The predictable result of Diocletian’s food price controls was black markets, hunger, and food confiscation by his soldiers. Despite the disastrous history of price controls, politicians never manage to resist tampering with prices – that’s not a flattering observation of their learning abilities.

Part 10

In 10 short articles, there’s no way to even scratch the surface of economic knowledge. I’ll simply end the series with a discussion of a few popular sentiments that have high emotional worth but make little economic sense. I use some of these sentiments as a teaching device in my undergraduate classes.

Here’s one that has considerable popular appeal: “It’s wrong to profit from the misfortune of others.” I ask my students whether they’d support a law against doing so. But I caution them with some examples. An orthopedist profits from your misfortune of having broken your leg skiing. When there’s news of a pending ice storm, I doubt whether it saddens the hearts of those in the collision repair business. I also tell my students that I profit from their misfortune – their ignorance of economic theory.

Then there’s the claim that this or that price is unreasonable. I used to have conversations about this claim with Mrs. Williams early on in our 44-year marriage. She’d return from shopping complaining that stores were charging unreasonable prices. Having aired her complaints, she’d ask me to go out and unload a car trunk loaded with groceries and other items. Having completed the chore, I’d resume our conversation, saying, “Honey, I thought you said the prices were unreasonable. Are you an unreasonable person? Only an unreasonable person would pay unreasonable prices.”

The long and short of it is that the conversation never went over well, and we both ceased discussions of reasonable or unreasonable prices. The point is that whatever price a transaction is transacted at represents a meeting of the minds of both buyer and seller. Both viewed themselves as being better off than the next alternative – not making the transaction. That’s not to say that the seller wouldn’t have found a higher price more pleasing or the buyer wouldn’t have been pleased with a lower price.

How about your parents’ admonition that “Whatever’s worth doing is worth doing as well as possible”? That’s not a wise admonition. I tell my students, often to their amazement, that it might not be worth it to try to get the best grade possible in economics. Let’s look at it. Say they have biology, physics, English, and economics classes. They work their butts off in economics, earning an A, but spending so much time studying economics takes time away from other classes – and they wind up earning an F in biology, a C in physics, and a D in English. That makes for a semester grade point average of 1.75. They’d be better off, in terms of grade point average, if they spent less time studying economics, maybe earning a C, and allocating more time to biology and English and thereby earning a C grade in all their subjects. They’d have a higher grade point average (2.0) and wouldn’t be on academic probation.

Another example: You ask your wife to have the house as neat and clean as possible when you return from work. You return, and the house is immaculate. You compliment her, saying, “That’s a great job, honey. What’s for dinner, and where are the kids?” She responds, “I don’t know where the kids are, and there’s no dinner prepared, but the house is immaculate.” Just as getting the best economics grade possible is nonoptimal, so is doing the best job possible cleaning the house.

Then, there’s “You can never be too safe.” Yes, you can. How many of us bother to inspect the hydraulic brake lines in our cars before we start the engine and head off to work? Doing so would be safer than simply assuming that the lines were intact and driving off. After all, prior to launching a space vehicle, the people at NASA make no similar assumptions. They go through a countdown of all systems, taking nothing for granted. Erring on the side of overcaution is costly, and so is erring on the side of under-caution, though for a given choice, one might be costlier than the other.

April 11, 2006

Walter E. Williams is the John M. Olin distinguished professor of economics at George Mason University, and a nationally syndicated columnist. These articles originally appeared in Freedom Daily.

Copyright © 2006 Future of Freedom Foundation