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Saturday, September 24, 2005

The Exploitation of Walter E Williams Forging the finest print

Have you ever taken a good look at Capitalism Magazine? Ever notice their laissez faire attitude toward their except policy? No? Well, they allow you to take as much as 250 words from an article, as long as you provide a link to the original article. Noticing that loophole, I decided to exploit that policy as much as possible when writing my weekly big post. This means, of course, I sought out Walter E. Williams’s ten part lecture note series, "Economics for the Citizen," so I could piece together something longer than 2500 words really quickly. I ended up borrowing just below the maximum allowable total. Doctor Williams’s text will be italicized. Now, throw in a good quote for added validation:

"As a man is said to have a right to his property, he may be equally said to have a property in his rights. Where an excess of power prevails, property of no sort is duly respected. No man is safe in his opinions, his person, his faculties, or his possessions."
-- James Madison, National Gazette essay, March 27, 1792

Link 1

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…
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 where 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!"

It isn’t the best, Williams, but barring the free market, there are few other realistic ways of solving the problem.

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…

The importance of knowing whether a statement is non-normative 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… (I) tell students that my economic theory course will deal with positive, non-normative economic theory.

I understand you, Williams, but at times, I’ve seen this argument used for defending some shady moral relativists. In other words, I like the sword, but am cautious of how the sword can be misused.

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.

Consumption is simply the reduction of the want-satisfying capacity of something.

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?

…I must have seen myself as being better off taking your offer than my next best alternative.

Exactly why I disapprove of price floors, Williams. I want to determine what my labor is worth!

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's really individual Americans trading with individual Japanese through intermediaries.

I think we approve of globalization for the same reasons, Williams.

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.

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.

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 an 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 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.

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 there from. 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.

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 all of these people? Rest assuredly 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.

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 mind 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.

Well, I must say I budgeted my time really well here. Imagine if I’d tried to write all of this! Glad I’m being more frugal with the limited resource we call time! Thanks for writing for me, Dr. Williams!

Published by Typewriter King | 3:32 PM
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