Last night was obviously Snowmaggedon, and I hope everyone is staying safe out there as some of the roads are still nasty. The previous night, Wednesday, we hosted the second Show-Me Institute Saint Louis Book Club meeting of the year. We discussed the classic The Road to Serfdom, by Friedrich Hayek. The central theme of the book is that fascism is a natural outgrowth of socialist central planning. Hayek’s desperate wish was to warn the western nations, especially England and the U.S., not to pursue the path of central planning. Hayek believed that a descent into fascism was more likely than it seemed to his audience: the citizens of non-fascist western nations in 1944.

But all that just makes the book sound like a dated warning against something no one really advocates anymore, right? Well, the book has staying power because of two timeless features which are perhaps separate sides of the same coin: Hayek explains why the price system not only works, but is the best system possible for maximizing individual welfare while also making a strong case for individual liberty and limited government, which Hayek calls (using the connotation of his time), liberalism.

It was a wonderful meeting and a rousing discussion. Book club meetings start at 7 p.m. and usually wrap up about 8:30 or 9 p.m. But Wednesday’s meeting did not end until shortly after 9:30 p.m. — we all had so much to discuss. Here are some of the topics and ideas we discussed:

• Whether a person’s concept of what is possible constrains their action.
• The important distinction between freedom and power: what it is and why it is important that they not be confused.
• This wonderful quote from Adam Smith (introduced roughly by Hayek): “[the regimentation of economic life puts governments in a position where] to support themselves they are obliged to be oppressive and tyrannical.”
• Where Hayek drew the line on the proper role of government and how that might undermine his overall message of liberty.
• Whether market competition is inherently violent (hint: it is not).
• Whether a legal system is necessary for competition, and David Friedman’s “the discipline of constant dealings.”
• The contradiction and ugliness of “competitive socialism.”
• An extended interlude about “Little House on the Prairie.”

The reading for next month is The Machinery of Freedom, by David Friedman, another classic. Friedman is an economics and law professor with a Ph.D. in physics, and the son of free-market titan Milton Friedman. From the Amazon description: “This book argues the case for a society organized by private property, individual rights, and voluntary co-operation, with little or no government.” I am looking forward to some excellent discussion on this one at our March meeting, so please join us if you can (date of meeting to be announced, check here).

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Waters notes that Rep. Craig Bland (D-Kansas City) has long been sponsoring obesity legislation, hoping to promote scholastic nutrition and even set up a state commission to deal specifically with Missouri’s ever-expanding girth. Frankly, I’m partially to blame for the state’s higher obesity statistics. As a bona fide fattie of amplitudinous proportions, I single-handedly nudged the statewide average ever-so-slightly higher than it was before I moved here in mid-2007. The ready availability of excellent Missouri barbecue hasn’t helped matters since.

But here’s the thing: My waistline is not the government’s fault. Not even slightly. And if I’m to exorcize my own edible demons, the solution won’t arrive in the form of political hectoring. I know how to lose weight — I’ve done it before, and one of these days I may just escape the clutches of my La-Z-Boy long enough to do it again. The point is, living a healthier life is no mystery, even for the corpulent; everybody knows how to eat less and exercise, even if they’d rather while away the hours with a can of Pringles in one hand and their TiVo remote in the other (any similarity here to my own life is purely coincidental). Ultimately, it’s a personal choice. Waters recognizes this:

Jawboning in opposition to overeating is fine, but I’m not sure I want to spend public tax dollars. Is anyone in Missouri unaware of the “obesity problem?” Is it an official problem the state should undertake with additional commissions and boards?

The report blames rising food costs, lack of exercise and bigger portions. This makes sense, but where is the correction except in the habits of private eaters?

I’d like to weigh less, sure. But as an economics enthusiast, I believe in the supremacy of revealed preference. The economist David Friedman encapsulated this principle nicely in a brief aside to his price theory textbook:

Economics Joke #1: Two economists walked past a Porsche showroom. One of them pointed at a shiny car in the window and said, “I want that.” “Obviously not,” the other replied.

In economics, preference is revealed through behavior. If the first economist had really wanted that Porsche, he would have bought it, perhaps by giving up other luxuries. Instead, his actions reveal that he’d rather spend his money elsewhere — or, even, that he’d rather spend recreational time strolling with a friend instead of working overtime, or taking a second job, to save up enough money to buy the Porsche.

It’s a joke, so the example is appropriately extreme — but the principle holds. My own actions indicate that I’m more fond of that extra helping of Pad Thai than I am of possessing a wardrobe that couldn’t double as a fleet of pup tents. If I’m going to change, it’s my own responsibility, perhaps with encouragement from friends and family. The government shouldn’t be in a position to intervene at all.

The post The Fatted Gaffe appeared first on Show-Me Institute.

Issue: Light rail would be dangerous for riders because it attracts criminals and would lead to a wave of crime.

Fact or myth: Big myth.

Earlier this year, consultants for Kansas City Mayor Mark Funkhouser raised a “concern over crime” on light rail. Then Randal O’Toole, working for Missouri’s libertarian-leaning Show-Me Institute, called light rail dangerous and said it “has by far the worst crime record in the transit industry.”

As proof, O’Toole and other light rail opponents cited some fights and stabbings on the Portland, Ore., MAX system, including one story that quoted a police sergeant saying “the MAX has been a living nightmare for us.”

Yet those critics can’t name another city where crime has been a problem on light rail besides one section of Portland’s system.

Overall, light rail’s crime threat is inflated because few crimes occur on mass transit systems.

After another Star piece made a similar argument earlier this year, I first responded by pointing out that comparing the statistics only makes sense if you do so in comparable terms:

Just looking at the robbery statistics for 2005, there were 535 incidents reported on buses and 377 on light rail. When considered in terms of robberies per passenger mile, it’s as though there were nearly 4,840 robberies on light rail in comparison to those 535 on buses. (Or, alternatively, it’s like there were about 42 robberies on buses in comparison to those 377 on light rail.) I could show similar comparisons for almost any of those measurements of transit crime.

In other words, the rates of violent crime, in general, only seem lower for light rail because there are far fewer miles of light rail track than there are miles of bus routes. But if both are considered in comparable terms, light rail is far riskier.

Focusing on homicides doesn’t get you much in the way of meaningful statistics, true, but as we’ve seen recently in St. Louis, the relatively unrestricted access to MetroLink trains and stations makes it a more attractive target for those looking to cause trouble. From the Riverfront Times:

In recent weeks dozens of those same teens have been implicated in violent attacks that have hospitalized people working and living near the light rail stations in the Loop and the nearby DeBaliviere neighborhood. On July 26 a group of at least twenty teens assailed a family as they left the platform at the Forest Park-DeBaliviere station. That same night another group, according to police, attacked a person at the Delmar station.

MetroLink officials contend that the same group of teens was involved in both attacks. Moreover, the transit agency vigorously denies that the commuter train has anything to do with the assaults in the Loop or the spike in shoplifting and juvenile misconduct at the Galleria.

“What we do for the Galleria is take them their employees and shoppers,” stresses Metro spokeswoman Dianne Williams. “With the Loop incidents, we and our passengers were the victims. These kids aren’t traveling there by Metro. They’re coming by car or walking. They’re not coming by Metro.”

Police testimony, however, tells a different story. The two seventeen-year-olds implicated in the group assault of the family were apprehended on the MetroLink platform. The teens told police they were on their way to their homes in Jennings and St. Louis City after spending the night hanging out near Loop restaurants and bars.

Several teenagers who gather at the Galleria and in University City connect MetroLink with the rowdy behavior. “We used to hang out in the Galleria, but when MetroLink opened it got too crazy there,” notes Johnnie Fields, a senior at Gateway High School who met with friends on the sidewalk of Delmar Boulevard on a recent weekend.

Now, I wouldn’t go so far as to say that light rail is causing crime — rather, crime that might have occurred elsewhere migrates to areas with rail stations because they can make easy targets. Or, in other words, the potential costs involved in committing crime are lower than they might be somewhere else. As the economist David Friedman points out in his work on the economics of crime:

Economists approach the analysis of crime with one simple assumption—that criminals are rational. A mugger is a mugger for the same reason I am an economist—because it is the most attractive alternative available to him. The decision to commit a crime, like any other economic decision, can be analyzed as a choice among alternative combinations of costs and benefits.

Light rail stations generally have easier access and less oversight than buses; you don’t have to pay the driver. Fare inspectors and a stronger police presence can help combat that problem for rail, but that can amount to a cost that isn’t generally tallied by rail supporters.

At any rate, as I argued in a later blog entry, Randal O’Toole’s study for the Show-Me Institute didn’t focus on crime:

Crime on light rail systems is touched on only briefly in the full Show-Me Institute light rail study. Out of approximately 150 paragraphs of text (not including endnotes, pull quotes, etc.), I count seven that mention crime at all — one paragraph in the executive summary, five paragraphs on page 5, and one paragraph on page 23. In fact, the one mention of crime in the executive summary comes toward the end of a litany of reasons why light rail isn’t a worthwhile investment. In that list, O’Toole mentions crime 9th out of a list of 11 reasons — and even then, only after first mentioning safety statistics. Clearly, while light rail’s crime level in relation to buses is worth mentioning, it’s not one of the study’s primary arguments.

The real arguments against light rail are much more concrete and practical in nature. I’ll list them again here, because they deserve repeated exposure:

• Light rail is expensive, typically experiencing high cost overruns;
• Light rail has a much lower ridership capacity than freeway lanes;
• Light rail costs much more to operate than buses;
• Light rail requires years of advance planning, with no guarantee that transit needs or preferences will remain static during that time;
• Few regions have actually seen increases in per-capita ridership after constructing light-rail lines;
• Most regions see the share of riders using transit for travel actually decline after constructing light-rail lines;
• Light-rail lines that operate in city streets significantly increase traffic congestion;
• Light rail is particularly ineffective in municipalities without high concentrations of downtown jobs — like Kansas City;
• Light rail is usually less energy efficient per passenger mile than passenger cars;
• Light rail does not stimulate urban development without huge additional government subsidies.

I haven’t seen any of the anti–light rail ads that have been produced as part of the new campaign in Kansas City, but I hope they include some of these compelling reasons to reject rail as an urban transit solution.

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My objection to Justin’s objection is that using aggregate utility — or "efficiency" — as a method of measuring a policy’s worth is not particularly controversial among economists. As the economist David Friedman pointed out, it’s an old solution to the problem of measuring a policy’s overall cost or benefit to the people it affects:

A little over a hundred years ago, an economist named Alfred Marshall proposed a solution to that problem. It is not a very good solution. It is merely, for many although not all purposes, better than any alternative that anyone has come up with since. The result is that economists, in both law schools and economics departments, continue to use Marshall’s solution, sometimes concealed behind later and (in my view) less satisfactory explanations and defenses.

Marshall’s argument starts by considering some change—the imposition or abolition of a tariff, a revision of the tax code, a shift in tort law from strict liability to negligence. The result of the change is to make some people better off and some worse off. In principle, one could measure the magnitude of the effects by asking each person affected how much he would, if necessary, pay to get the benefit (if the change made him better off) or prevent the loss (if it made him worse off). If the sum was positive, if total gains were larger than total losses, we would describe the change as an economic improvement; if it was negative, an economic worsening.

Several things are worth noticing about this way of evaluating changes. One is that we are accepting each person’s own judgement of the value to him of things that affect him. In measuring the effect of drug legalization on heroin addicts we ask not whether we think they are better off with legal access to heroin but whether they think they are—how much each addict would pay, if necessary, to have heroin made legal. A second is that we are comparing effects on different people using dollars as our common unit—not dollars actually paid out or received, but dollars as a common measure of value, a way of putting all costs and benefits on the same scale.

Justin, in his disagreement, says that he opposes smoking bans not because they decrease the overall level of utility, or "happiness," but because "they are a direct infringement upon personal liberty." This is a fine normative sentiment, and one I share myself, but it’s not an economic position. An economist would ask whether a particular infringement on personal liberty is likely to make people better or worse off. Fortunately, honest economic analysis shows that individual freedom, in the vast majority of cases, increases aggregate utility — precisely because of the decentralized feedback loops that markets provide:

People often argue that wide-ranging government restrictions on our freedom are necessary to promote efficiency. But economic efficiency is impossible without freedom because it is not the narrow concept many accuse it of being. It is about increasing value as determined by the diverse and subjective preferences of hundreds of millions of individuals. The only way people can effectively communicate information about their values to those best able to respond is through the freedom to engage in market transactions for whatever and with whomever they choose.

The opposition that most people have to infringements on personal liberty stems from their instinctual recognition that such infringements make people, in general, worse off — by using an approximation of utility as a value judgment. Freedom is such an important concept because it tends to maximize aggregate utility — just another way of saying that freedom, by and large, promotes human happiness and flourishing. If freedom didn’t have that going for it, people would value it much less, if at all, as an abstract ideal. (Indeed, some economists insist that concerns of efficiency need to be balanced with "equity," which tempers their support for individual liberty; Ludwig von Mises wrote a nice rejoinder to this tendency.)

All that said, I’m not a utilitarian in the sense that it’s an absolute value, and that supposed measures of aggregate utility can always give us a useful analysis of policy (and not all free-market economists agree about the utility of efficiency as a valid economic concept). As Justin aptly noted:

Maximizing aggregate utility is not necessarily a good thing. Abusing certain minority groups might “maximize aggregate utility” if the benefits to the aggregate abusers outweigh the negatives of the abused. That’s why utilitarianism is a dangerous value judgment, especially for governments.

Economists who use efficiency as a general guide still acknowledge its weaknesses, such as this one. Remember, in the quote above, David Friedman noted that the Marshallian solution "is not a very good solution. It is merely, for many although not all purposes, better than any alternative that anyone has come up with since." Another economist, Paul Heyne, pointed out that it’s a concept that works best in the aggregate:

Critics of economic efficiency contend that it is a poor guide to public policy because it ignores important values other than money. They point out, for example, that the wealthy dowager who bids scarce milk away from the mother of an undernourished infant in order to wash her diamonds is promoting economic efficiency. The example is strained, not least because the pursuit of economic efficiency almost always makes milk available to the infant as well as the dowager. Most economists would agree that such dramatic examples can remind us that economic efficiency is not the highest good in life, but that does not mean that we should discard the concept.

The moral intuitions that enable us to arbitrate easily between the child’s hunger and the dowager’s vanity cannot begin to resolve the myriad issues that arise every day as hundreds of millions of people attempt to cooperate in using scarce means with varied uses to achieve diverse ends. Moreover, the remarkable feats of social cooperation that actually make wholesome milk available to hungry infants far removed from any cows would be impossible in the absence of the monetary values that express and promote economic efficiency.

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The price of an item isn’t just what you pay for it in cash. The true price, to you, of a bag of groceries includes things like driving to the store, time spent browsing the shelves, waiting in line, effort expended pushing the cart, etc. The more difficult it is to get the thing you’re buying, the higher the real cost — regardless of what it says on the price tag.

Ticket-scalping policies are usually adopted out of a desire to keep prices down. If scalpers buy all the tickets for an event at face value, then turn around and sell them at a high markup, consumers are worse-off, right?

Not quite.

The real price of a consumer good is just a measurement — an intersection of supply and demand. If a baseball team sets the price of its tickets much lower than the real price that the market will bear, it hasn’t made the extra cost vanish. The team has simply shifted the cost in some way, perhaps by giving people an incentive to camp out all night in the rain so they can be first in line. The time and effort spent waiting in line is all part of the price of the ticket.

There was an excellent example of this sort of cost (which I linked to earlier this month) when a county in Virginia tried to sell several iBooks at $300 below market price. The result? "Mothers clutched their children for protection, people screamed as they were knocked to the ground, a stroller was demolished, cars inched through the crowd…" Economist Alex Tabarrok noted:

You can get rid of the market but you can never get rid of competition.  Goods not allocated by market prices have to be allocated somehow and so long as goods are scarce there will be competition to obtain them, if not by outbidding competing buyers with money then by outbidding them in time spent waiting in line, doing political favors or some other method.

What happened in Henrico county is the same type of thing that happens when there is a price control.

Controlled prices rise above the nominal price tag, despite all efforts to keep them low. Tabarrok goes on to point out:

It’s very important to notice that that the shop owner gets your money but does not get your time. Thus, money expenditures are a transfer but time expenditures are a waste.

The best way for our hypothetical baseball team to keep real prices low is to sell tickets for what they think the market will bear. And the best way for politicians to keep real prices low is to get out of the way — let people trade, sell, give away, or destroy the tickets they’ve legally purchased.

Another critical point to consider is that markets for used merchandise affect the price of new merchandise. Economist David D. Friedman, in his book Hidden Order: The Economics of Everyday Life, provided an example:

Once, in the middle of a conversation with an economics editor who knew very little economics, I mentioned the resale market for textbooks. Instantly her eyes, and those of her colleagues, lit up. If there was one part of the economy they knew and hated, it was that market. Their reason was simple; every time a student bought a secondhand copy of one of their textbooks, they lost the money they would have made selling him a new copy.

I put the following question to them: Suppose an inventor walks in your door with a new product—timed ink. Print your books in timed ink and activate it when the books leave the warehouse. At the end of the school year, the pages will go blank. Students can no longer buy secondhand textbooks. Do your profits go up—or down?

Their answer was "Obviously up—we want it." Mine was "possibly down." To see why, consider a simplified version of the problem. Textbooks last two years. New textbooks sell for $30; used textbooks for $15. The cost to a student of using a textbook for a year is $15; either he buys a new one for $30 and sells it at the end of the year for $15, or he buys a used one for $15 and throws it out at the end of the year.

If the publisher switches to timed ink and keeps charging $30, he has just doubled the cost of the book to students—from $15 for a year’s use to $30?—which will surely decrease the number of students willing to buy it. If he wants to keep all his customers, he will have to cut his price in half, at which point revenue will be the same as before he adopted the new ink (twice as many books at half the price), cost will be higher (since he has to print twice as many books, in addition to paying the inventor to use his new ink), so profit will go down. He could, of course, keep his price at $30 and sell fewer books. But if that increases his profit, he would have done even better selling books without timed ink at $60, since that results in the same cost to the students and lower costs to him.

In this simple example, timed ink reduces profits. In more realistic cases the answer is more complicated. But the editor’s instant response, which simply assumed that the price you could sell a new book for was unaffected by how long it would last, was wrong. Understanding economics is useful—even to economics editors.

When you artificially restrict the after-market options for a commodity, the de facto price of that commodity rises. If I don’t have the option of selling CDs from my collection that I’ve grown tired of, or books from my collection that I’ve already read and am unlikely to revisit, I’ll probably buy fewer CDs and books in the future. So, if the after-market declines, the initial market also declines; artificial restriction of secondhand sales decreases new sales as well, because the restriction has caused the commodity to become, literally, more expensive.

This is a point lost on the recording industry when it calls for royalties on used CDs or radio play, and on author-advocacy groups who complain about used book sales on Amazon. Their concerns are misguided. A healthy market for used items will always spur new-market sales as well — because the very existence of the used market makes new items all the more valuable for consumers.

In the market for event tickets, a restriction on after-market sales hits season ticketholders especially hard. People who can’t make it to every game, or every symphony performance, are less likely to splurge for season tickets — because they can’t do what they want with the tickets they’re not planning to use. If, in addition to a restriction on scalping, ticketholders also weren’t allowed to sell their tickets at face value, or give them away, the de facto cost of season tickets would rise so substantially that the market would likely dry up unless the nominal up-front price was reduced at the same time.

In the final analysis, there’s nothing quite like economic freedom to keep real prices low.

The post You Don’t Count the Cost appeared first on Show-Me Institute.

Broadband Internet has become an indispensable part of life for me — essential to work, recreation, shopping, staying informed, paying bills, playing games, staying in touch with friends — so I can understand wanting to spread the technology to underserved areas. High-speed Internet access is simply useful, in a wide variety of ways. But it’s not a problem that requires a government solution.

The economist David D. Friedman briefly described the concept of "opportunity sets" in his book Price Theory: An Intermediate Text:

Your problem as a consumer is to choose among the various bundles of goods and services you could purchase or produce with your limited resources of time and money. There are two elements to the problem–your preferences and your opportunity set. Your preferences could be represented by a gigantic table showing all possible bundles–collections of goods and services that you could conceivably consume–and showing for every pair of bundles which one you prefer. We assume that your preferences are consistent; if you prefer A to B and B to C, you also prefer A to C. Your opportunity set can be thought of as a list containing every bundle that you have enough money to buy. Your problem as a consumer is to decide which of the bundles in your opportunity set you prefer.

When people decide where they’re going to live, they choose between a variety of opportunity sets, each of which contains some combination of positive and negative factors. A house’s low price may be seen as a positive factor, while its low quality of construction, or risky surrounding neighborhood, may be seen as a negative. A group of friendly neighbors may be mitigated by their unkempt yards or loud music at night. And the pastoral beauty, seclusion and relative safety of rural life might have other drawbacks — distance from the nearest hospital, perhaps, or a limited selection of stores and restaurants. It may also have fewer (or no) options for broadband Internet access.

It’s not clear that any of this is a problem for government to solve. I may have hundreds of great reasons to live in the country, but there are always going to be drawbacks. There’s no reason limited Internet access should be treated as more of a government concern than, say, the lack of good Thai food or multiplex movie theaters. Similarly, the fact that I choose to live in an urban area, with access to a wide range of things to do, doesn’t mean the government should try make my life a little better by tearing down a few buildings to install an artificial lake next to my apartment. Lack of immediate access to nature is one of the drawbacks of my otherwise favorable opportunity set, and it’s simply not government’s job to fix it.

I have a friend in rural Idaho who depends on broadband Internet access for his telecommuting job. None of his options were entirely reliable, so his solution was to pay multiple providers for different kinds of high-speed service — and he can always revert to dial-up in a pinch. It’s more expensive that way, but he’s taken responsibility for his choice of where to live, enjoying the many benefits of rural life and improving his technological opportunity set at his own expense.

The post The Drawbacks of Country Living appeared first on Show-Me Institute.

Claire McCaskill campaigned against congressional earmarks last year when she ran for the Senate.

Talk about counterintuitive politics: Passing up the chance to funnel millions into your state for roads, buildings and other projects — and claim the political bragging rights — is a rare thing on Capitol Hill.

But it turns out she meant it.

Since January, the freshman Democrat from Missouri has received about 200 pleas for money from all over the state and turned down every one of them.

She thinks that using earmarks — whereby members of Congress anonymously tuck appropriations into bills without going through public hearings — is simply not the way to govern: “I honestly believe we can find a way to make serious investments without this secret, behind-closed-door process.”

It can be easy for people who applaud fiscal responsibility to lose sight of principle when it comes to the  pork projects they benefit from personally. When federal coffers are tapped for state or local spending, we don’t see the immediate cost. It’s not our money, we may tell ourselves — not most of it, anyway — so this form of government largesse seems like free cash.

But the money comes from taxpayers all the same, and when every state receives some form of funding from congressional earmarks, we all consistently pay for the frivolous spending of others. The pork windfalls we receive from earmarks are a drop in the bucket compared to what we actually pay.

Economist David D. Friedman provided an ingenious illustration for how congressional earmarks work in his book The Machinery of Freedom:

Special interest politics is a simple game. A hundred people sit in a circle, each with his pocket full of pennies. A politician walks around the outside of the circle, taking a penny from each person. No one minds; who cares about a penny? When he has gotten all the way around the circle, the politician throws fifty cents down in front of one person, who is overjoyed at the unexpected windfall. The process is repeated, ending with a different person. After a hundred rounds everyone is a hundred cents poorer, fifty cents richer, and happy.

We should congratulate McCaskill for sticking to her principles in her fight against congressional earmarks. Some Missourians might feel the pinch as their favored federal pork projects dry up, but this is a cost worth bearing to try to bring systemic reform to the appropriations process. The Springfield News-Leader agrees:

So prepare yourselves, Missourians. If McCaskill won’t participate in the traditional earmark process, that might mean the state takes a short-term financial hit. We think that will be worth it if the end game is real reform that involves Congress learning how to control its own spending.

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