Free Our Markets

by Howard Baetjer Jr

  Early in the 1870s, three economists working independently, Carl Menger of Austria, Leon Walras of France, and William Stanley Jevons of Britain all established the subjective theory of value, and showed that valuation occurs “at the margin.” That is, the value we put on one more unit of a good (the marginal unit) depends on how much of that good we already possess. The major change in economic understanding these three economists initiated is called “the marginal revolution.”

  The claim that “both buyer and seller gain” from a voluntary exchange should perhaps be clarified: At least they expect to gain at the moment of decision. Of course we all make mistakes. In the example in which you and your friend buy and eat a pizza, you might feel uncomfortably stuffed after eating your half, and wish you had bought something smaller. Nevertheless, you bought the pizza because you expected to be better off as a result.

  The question asked by Jesus, “For what is a man profited, if he shall gain the whole world, and lose his own soul?” is from Matthew 16:26.

  The original Iridium company was called Iridium LLC. Its assets were bought out of bankruptcy in December, 2000, by a new company called Iridium Satellite LLC, which was immediately awarded a two-year, $72 million contract with the Department of Defense for unlimited use of the low-Earth orbit network. Note that that $72 million is approximately 1.15 percent of the low-end estimate of $5 billion spent building the system. The Department of Defense is still the company’s main customer. More information is available at http://www.iridium.com/About/IndustryLeadership/fastfacts.aspxaand http://www.defense.gov/releases/release.aspx?releaseid=2769.

  Michael Rothschild’s insightful and readable Bionomics, Economy as Ecosystem, originally published in 1990, is available in a reissued edition from Owl Books (1995). Russell Roberts’s The Price of Everything is available from Princeton University Press (2009).

  Scarcity in economics means the insufficiency of the amount of some good to satisfy all possible wants for it. It means there is not enough of it to do everything we might like to do with it. Scarcity does not rule out unemployment: human talent and other resources are scarce even when unemployed, in that there are many ways we would like to use them. Unemployment is a consequence of discoordination in the economy; it does not mean that we all have everything we would like to have.

  To those who have studied economics, the first kind of discovery discussed in this chapter will be familiar as the standard textbook version of the economic problem: How do we use our limited resources to satisfy unlimited wants? F.A. Hayek is persuasive that this is not a good way to conceive of the economic problem, however, because it assumes that “we” know what resources are available and what people want. Hayek, in his indispensable “The Use of Knowledge in Society” (Paragraph H.3, available at http://www.econlib.org/library/Essays/hykKnw1.html) writes:

  The economic problem of society is thus not merely a problem of how to allocate “given” resources—if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

  The quotations from Joseph Schumpeter are from page 83 of his Capitalism, Socialism and Democracy, published by Harper & Brothers Publishers, New York, 1950.

  I thank my friend and colleague Antony Davies for crystallizing for me this idea and for its wording: “We want entrepreneurs to take risks because, when the risks pay off, we all benefit from the new products and lower costs. But we don’t want entrepreneurs to waste society’s resources on foolish risks.” I thank Russell Roberts for this way of putting the same idea at various times on EconTalk (http://www.econtalk.org/): “The lure of profit encourages entrepreneurs to take risks, while the fear of loss discourages them from taking imprudent risks.”

  Franz Oppenheimer’s distinction of the economic means and the political means is in The State: Its History and Development viewed Sociologically, first published in German in 1908. The authorized translation by John M. Gitterman (New York: B.W. Huebsch, 1922), is available from the Online Library of Liberty at http://oll.libertyfund.org/title/1662.

  Antony Davies points out that oil companies’ profits are not out of line with those of other industries. In 2007, for example, “oil companies’ return on assets were less than Pizza Hut’s.” He has a useful short presentation on this point at http://www.antolin-davies.com/conventionalwisdom/oil.pdf.

  Notes to Chapter 3 “Free Market Incentives Foster Service to Others”

  Walter Williams’s statement comes from the ABC news special “Greed,” with John Stossel, available from ABC News and at various place on YouTube.

  The Anchorage Daily News story, “Tongass forest river damaged by logging declared restored,” available at http://www.adn.com/2011/ 08/25/2031770/tongass-national-forest-river.html, briefly describes some of the environmentally destructive logging practices and recent restoration of the watershed. The quotation from John Baden and various figures from this section are from Baden’s Destroying the Environment: Government Mismanagement of Our Natural Resources, National Center for Policy Analysis, Policy Report No. 124 (October, 1986) pp. 12-13.

  The Forest Service’s website about the Tongass used to contain a FAQ page which was the source of much of the data in this section. It was located on the web at http://www.fs.fed.us/r10/tongass/forest_facts/faqs/forestmgmt.shtml. That page has been taken down. Any reader wishing to see it may email the author for a copy.

  Information on another interesting restoration project in the Tongass can be found here: http://alaskaconservation.org/conservation-issues/tongass-rainforest/updates-field/sitka-conservationists-pursue-unconventional-path/.

  My original source of information on the Rainey Wildlife Sanctuary is also John Baden’s Destroying the Environment: Government Mismanagement of Our Natural Resources; the quotations are from page 34. For a fascinating story of Audubon Society’s handling of the political incorrectness of allowing oil and gas production inside a bird sanctuary, see “PC Oil Drilling in a Wildlife Refuge,” a September 7, 1995, article in the Wall Street Journal (available at http://www.perc.org/articles/article167.php). A January 23, 2010, article entitled “Audubon Society considers allowing oil and gas drilling at sanctuary in Vermilion Parish” (available at http://www.nola.com/business/index.ssf/2010/01/audubon_society_considers_allo.html) discusses the Audubon Society’s renewed interest in leasing oil and gas production rights.

  The short quotations from James Buchanan come from his “Public Choice: Politics Without Romance,” Policy, Vol. 19, No. 3, The Centre for Independent Studies (Spring, 2003), p. 3, available at http://www.cis.org.au/publications/policy-magazine/article/2379-feature-public-choice-politics-without-romance. This essay is a good introduction to public choice economics from its leading exponent. Another helpful essay on public choice is William F. Shughart II’s “Public Choice,” in The Concise Encyclopedia of Economics, 2008, Library of Economics and Liberty, available at http://www.econlib.org/library/Enc/PublicChoice.html.

  Ludwig von Mises’ noble statement “If honour cannot be eaten, eating can at least be foregone for honour” is from his book Socialism, Part II, Chapter 5, paragraph 15. In my version, published by Liberty Classics in 1981, the quotation is found on page 100. A full-text, searchable edition is available online from the online Library of Economics and Liberty at http://www.econlib.org/library/Mises/msS.html.

  Thomas Sowell’s immensely instructive A Conflict of Visions (Basic Books, 2007, first published in 1987) provides an illuminating discussion of the vision of mankind as inescapably self-interested, and the opposing vision of mankind as to a large degree perfectible.

  Part II: Regulation by Market Forces Outperforms Government Regulation

  Notes to Chapter 4 “Ownership Matters”

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nbsp; The story of the elephants in Kenya and Zimbabwe began for me when I read “Herd Mentality: Banning Ivory Sales is No Way to Save the Elephant,” by Randy T. Simmons and Urs P. Kreuter, in the Heritage Foundation’s Policy Review, Vol. 50 (Fall, 1989), pp. 46-49. This article is my source for much of the information in the first part of this chapter, including information on poaching and smuggling in Kenya. The article is not available online. Additional information about wildlife management in Kenya and Zimbabwe and the problem of overpopulation in some regions in recent years comes from personal communications with Urs Kreuter.

  Information about CAMPFIRE and quotations from Brian Child come primarily from Child’s article, “Building The CAMPFIRE Paradigm, Helping Villagers Protect African Wildlife,” PERC Reports: Volume 22, No.2 (Summer, 2004). This can be accessed at http://www.perc.org/articles/article138.php. The Property and Environment Research Center (PERC), located in Bozeman, Montana, is a world leader in “free-market environmentalism.”

  Urs Kreuter’s statement that “In some areas villagers began to actively inform on illegal poaching in their areas (unheard of in the preceding colonial area),” the quotation about overpopulation on the Botswana-Zimbabwe border, and the statement that elephant populations “have led to the eradication of most trees in game reserves such as Amboseli” are from a personal communication.

  Information on Community-Based Natural Resource Management in Namibia is from Karol Boudreaux, both from a personal communication and from her “Community-Based Natural Resource Management in Namibia: A Case Study,” Mercatus Policy Series, Feb. 20, 2007. This article is available online at http://mercatus.org/publication/community-based-natural-resource-management-namibia-case-study. The phrase, “CAMPFIRE continues to limp along,” is Karol’s.

  For an up-to-date (2011) account of conservation through private ownership in Africa, see “An African Success: In Namibia, The People and Wildlife Coexist,” by Fred Pearce, available from PERC, the Property and Environment Research Center, at http://perc.org/articles/african-success-namibia-people-and-wildlife-coexist. Their website, www.perc.org, is a wonderful resource for those interested in the crucial role that private property rights play in effective stewardship of natural resources.

  For a 1996 update on the failure of the ivory ban in Kenya (and early discussion of instituting community ownership rights there), see “Why the Ivory Ban is Failing,” by Urs Kreuter and Linda Platts, at http://www.perc.org/articles/article171.php.

  Information on African wildlife thriving on ranches in Texas comes from Terry L. Anderson’s, “In Praise of ‘Enviropreneurs’,” in the Wall Street Journal, February 13, 2012, available at http://online.wsj.com/article/SB10001424052970204369404577209062592063958.html.

  For a CBS News 60 Minutes report on the conservation of African animals on Texas hunting ranches, see http://www.cbsnews.com/8301-18560_162-57366738/hunting-animals-to-save-them/.

  The United States Postal Service states in its 2011 Report on Form 10-K (p. 15) that its “[n]et losses were $5,067 million, $8,505 million, and $3,794 million for the years ended 2011, 2010, and 2009, respectively.” The report is available at http://about.usps.com/who-we-are/financials/10k-reports/fy2011.pdf.

  The Express Statutes grant a legal monopoly on first class mail to the U.S. Postal Service. No other companies are allowed to offer such service; those that have tried have been shut down. The example that follows is reported by James Bovard in Cato Institute Policy Analysis No. 47: “The Last Dinosaur: The U.S. Postal Service” (available at http://www.scribd.com/doc/57683405/Last-Dinosaur-the-U-S-Postal-Service-Cato-Policy-Analysis-Some-Hard-Facts-About-the-Incompetence-of-the-USPO):

  In 1978, the P.H. Brennan Hand Delivery Service offered same-day delivery of mail in Rochester, New York, for 10¢ apiece; the Postal Service could not guarantee overnight delivery even for 15¢. The Brennan Service operated during snowstorms (when the Postal Service did not even try to deliver), never lost a letter, and never had a complaint. When U.S.P.S. attorneys closed in on the Brennans, Rochester lawyers provided them with a free legal defense. But the Postal Service persuaded a judge to issue a “cease and desist” order on account of the “threat to postal revenues.”

  About “the dole” in Britain, I was surprised to learn from fellow students that many of them collected unemployment compensation during summer and Christmas vacations. When I questioned this, a student explained that of course they should receive unemployment compensation during vacations, because their taxpayer-funded college grants covered only time actually spent in school.

  CSF Baltimore supported 230 children at 47 different schools in and around Baltimore for the school year 2012-2013. Median tuition at these schools in that school year was $6,400.

  Notes to Chapter 5 “Government Regulation Gets Captured by Special Interests”

  The figure for the total price of beauty school tuition, fees, books and supplies was given on the webpage of the Maryland Beauty Academy, July 29, 2012,ahttp://www.stateuniversity.com/universities/MD/Maryland_Beauty_Academy.html.

  The classic article on regulatory capture is George Stigler’s “The Theory of Economic Regulation,” published in The Bell Journal of Economics and Management Science, Vol. 2, No. 1 (Spring, 1971).

  Descriptions of the Institute for Justice cases on occupational licensing come from the Institute’s website. They are available as follows (as of July 29, 2012):

  Clemens v. Maryland State Board of Veterinary Medical Examiners, et. al.: http://www.ij.org/victory-for-maryland-entrepreneur-in-animal-massage-dispute-2;

  Brown v. Hovatter: http://www.ij.org/brown-v-hovatter-2;

  Susan Roberts v. Jerry Farrell: http://www.ij.org/susan-roberts-v-jerry-farrell;

  Clayton v. Steinagel: http://www.ij.org/utah-hairbraiding-2.

  Sidney Carroll and Robert Gaston’s article on the effects of licensing electricians is “Occupational Restrictions and the Quality of Service Received: Some Evidence,” in the Southern Economic Journal, Vol. 47, No. 4 (April, 1981) pp. 959-976.

  The quotation from the Institute for Justice on the number of occupations requiring a license is from Chip Mellor’s “IJ’s Campaign to Restore the Constitution & Protect Economic Liberty” available at: http://www.ij.org/index.php?option=com_content&task=view&id=2668&Itemid=194.

  Of general interest on the subject of occupational licensing is License to Work, A National Study of Burdens from Occupational Licensing, published by the Institute for Justice in 2012. They provide a link to the study itself and to an interesting, five-minute video on its findings at http://www.ij.org/licensetowork.

  For information on airline regulation and deregulation I am indebted to my friend Jerry Ellig, a regulation expert who, with Robert Crandall, has summarized the academic literature on airline deregulation in “Economic Deregulation and Customer Choice: Lessons for the Electric Industry,” Center for Market Processes, 1997. This is available from the Mercatus Center at http://mercatus.org/publication/economic-deregulation-and-customer-choice-lessons-electric-industry.

  Ellig wrote me in an email that, interestingly, his “impression from reading the literature” is that even though the Civil Aeronautics Board excluded competition, the “[a]irlines did not end up earning monopoly profits because they dissipated the profits in spending on meals, piano bars in airplanes, and scheduling excess flights (intending to appeal to passengers’ desire for convenience, which also meant flights were less full).” Those interested in studying the subject “will find the whole story told very well in Prophets of Regulation,” by Thomas K. McCraw (Harvard University Press, 1986) “in the chapter on Alfred Kahn.”

  The seminal works, recommended by Ellig, on the effects of deregulation are: Steven A. Morrison and Clifford Winston, “The Remaining Role for Government Policy in the Deregulated Airline Industry,” in Sam Peltzman and Clifford Winston (eds.), Deregulation of Network Industries: What’s Next? (AEI-Brookings Joint Center for Regulatory Studies, 2000); Morrison and Winston, The Evolution of
the Airline Industry (Brookings, 1995); and James C. Miller III and George Douglas, Economic Regulation of Domestic Air Transport: Theory and Policy (Brookings, 1974).

  Information on Mexican trucking is taken from Dan Griswold’s “Attempt to Limit Mexican Trucking in U.S. Masks Union Agenda,” Los Angeles Daily Journal, December 20, 2007, available at http://www.freetrade.org/node/818, and his “House Bans ‘Driving While Mexican’,” Cato@Liberty, March 4, 2009, available at http://www.cato.org/publications/commentary/attempt-limit-mexican-trucking-us-masks-union-agenda.

  Economists broadly agree that minimum wage laws have negative economic consequences overall, for reasons we discussed in Chapter 1. Like all price controls, they hinder the operation of the Price Coordination Principle. Whether or not minimum wage laws benefit or harm low-income workers on balance in the short run depends on what is called the elasticity of demand for labor. The reader can pursue this with any good microeconomics text. For our present purposes, the key point is another on which almost all economists agree: minimum wages set above market levels will cause at least some unemployment.

  The quotation from Adam Smith is from The Wealth of Nations Book I, Chapter X (Part II), paragraph 67, available from the Library of Economics and Liberty at http://www.econlib.org/library/Smith/smWN4.html#B.I, Ch.10, Of Wages and Profit in the Different Employments of Labour and Stock.

  For more on how the unionized coal interests influenced the 1977 Amendments to the Clean Air Act, see Bruce Yandle’s classic article, “Bootleggers and Baptists: The Education of a Regulatory Economist,” in Regulation, Vol. 7(3) (1983); and Bruce Ackerman and William Hassler’s, Clean Coal/Dirty Air: or How the Clean Air Act Became a Multibillion-Dollar Bail-Out for High-Sulfur Coal Producers (Yale University Press, 1981).

  The passage from George Stigler is as recounted to Russell Roberts by Bruce Yandle in the EconTalk podcast of January 15, 2007, (http://www.econtalk.org/archives/2007/01/bruce_yandle_on.html). Roberts quotes Yandle in his weblog Café Hayek, at http://cafehayek.com/2006/12/who_benefits_fr.html.