The Trouble With Statistics

In the comments section of this EconLog post, one commentator, pasjer, attempts to defend Castro’s legacy in particular and communism in general.  He (she?) writes:

I like Castro’s egalitarian planned economy; good health and education systems, existential safety, increased equality. Reasonably good GDP growth last 25 years. That economy, like in USSR and China saved lives. (Don’t rush to argue without checking life expectancy and child mortality data before.)

…

Life expectancy in China (1978), Soviet Union (1989) and Cuba (these days) was/is 3-8 years longer than world average; child mortality in these countries was/is 2-10 times lower than world average; all three countries, particularly China, started with planned economy poorer than world average.

That those three countries were barely above the World Average (and even then, they beat out mainly war-torn or plagued countries and lagged well behind their developed-world counterparts), is a poor argument for communism.  But it is also a mistake to focus just on life expectancy without looking at the quality of that life.

A simple historical example:

According to the book Time on the Cross, the life expectancy of a US slave in 1850 was about 36 years, slightly lower than the US average (40 years), but higher than many European countries (Italy – 35, Austria – 31) and about the same as others (Holland – 36, France – 36).  And while no estimates exist from the African continent at the time, it is possible these lifespans were even longer than in Africa.  Could one claim, then, that slavery was good for the black man?  Many often did, for this and similar reasons.  These statistics were how slavery was justified on moral (and Christian!) grounds.  But the life and care of the slave was not out of good will or in any genuine attempt to improve his life.  The care was done for the same reason a craftsman takes care of his tools: they serve a purpose and are expensive to replace.  But they have no freedom, no care beyond what is necessary to achieve goals.  They are not living for themselves, but for others.  It’s a very poor quality of life.

When we look at statistics, we must be careful.  Statistics can mislead just as easily as they can enlighten.  Given the extreme lengths Soviet, Cuban, Chinese, etc citizens went to escape their countries with “good health and education systems, existential safety, increased equality…,”I have to conclude the quality of life, of health care and education and equality, left much to be desired. Just like the slave trying to escape his master despite the master providing him with housing, clothing, food, and care.

Further Ruminations on Property Rights

This post is continuing a line of thought I explored the other day.

What Economics Teaches Us About Humanity

F.A. Hayek once said:

Nobody can be a great economist who is only an economist – and I am even temped to add that the economist who is only an economist is likely to become a nuisance if not a positive danger.

I argue this is very true (personally, I like the interaction between law and economics), but the opposite is true as well: economics can teach a lot of other disciplines, too.  The economic way of thinking, properly understood and applied, can provide many great insights.  Further, I am not talking about applying some of our more extreme assumptions and models, but rather just one particular assumption: people are, generally speaking, rational (that is: they move toward a specific goal).

The assumption of rationality can lead to some very interesting (and sometimes uncomfortable) questions.  For example, we often see people taking extreme risks to leave socialist/communist countries: crossing shark-invested oceans, climbing barbed-wire walls, risking execution or torture, cramming themselves into hot shipping crates or under bushes of hay, etc.  If we assume rationality, it leads us to the question: “What are conditions like in those countries where these risks are acceptable?”

The assumption of rationality also helps us reject some of the more silly arguments that can lead to bad policy.  For example, a common argument from the Right is that immigration must be restricted because immigrants vote Democrat and therefore they want to recreate the socialist Hellholes from whence they came.  The assumption of rationality leads us to question that claim: if they wanted to recreate socialism, why did they leave their socialist world to begin with?  It’d be irrational.  Could not a better explanation of immigrant voting patterns be simply the Democrats don’t treat them with outright hostility (but rather mask their hostility behind pleasant-sounding schemes like minimum wage)?

My professor Walter Williams likes to say never to assume someone is an idiot unless they prove themselves so.  The assumption of rationality helps prevent us from making this mistake.

It Matters Where Goods Go, Not Money

Commenting on this piece by Steve Horwitz (reblogged at Cafe Hayek), a commentator writes:

In actuality, the money isn’t really being kept local [by big businesses compared to local businesses].

To the extent this is true, by question is “so what?”  Money is not what matters.  What matters is goods and services that can be exchanged for money.  If a store sells the necessary food I need, what’s it matter if the money stays in Fairfax or goes to France?  If a store sells me clothing, what’s it matter if the money stays in Virginia or goes to Vanuatu?  What matters is my wealth has been increased.

If more goods and services are flowing into a community, even if dollars are flowing “out,” that is a good thing.

Further Thoughts on Predatory Pricing and International Trade

The other day, I wrote on predatory pricing (“dumping”) in the international trade market.  At Cafe Hayek, Don Boudreaux has additional comments.  Don writes:

There are many reasons to ignore allegations that private firms use so-called “predatory pricing” today as a means of monopolizing markets tomorrow – not the least of which is that there is no credible historical evidence of any such scheme ever actually being used to achieve genuine monopoly power for an alleged practitioner.  (By “genuine monopoly power” I mean the power of a firm to make consumers worse off than consumers were before the alleged predatory-pricing scheme resulted in the alleged monopoly power.)

Why is it genuine monopoly power is so unobtainable by a predatory pricer (for the sake of discussion, I am going to use the term “predatory pricing” both for domestic would-be monopolists and international “dumpers”)?  Here we must turn to our economic theory of monopolists.  A monopolist is a single seller who enjoys market power due to barriers of entry preventing other entrants into the market.  These barriers may be technological, geographical, or legal.  Since there are already participants the market (otherwise, the predatory pricer wouldn’t need to cut prices), we can determine the current barriers to entry are not so substantial as to prevent entry into the market.  This indicates that, even if the predatory pricer were to successfully drive out all current competition, future competition could come into the market as soon as prices rise to their monopoly level (this is especially true at the international level.  The world is a huge marketplace).

Another thing to consider is what happens to the competing firms.  These firms face two options when dealing with a predatory pricer: 1) compete on price or 2) shut down.  If they opt for #2 and shut down, their resources do not disappear.  They can either be sold to other competitors, new entrants into the market, or simply mothballed until the predatory pricer raises prices again and the firm can enter back into the market.

The above discussion should give us pause whenever we see some politician or special interest group complaining about “unfair price competition.”  It may very well be that the price is an accurate reflection of the firm’s costs and not a signal of some sinister pricing plot.

Ruminations on Property Rights

Property rights are an extremely important institution in economics.  As discussed in yesterday’s Quote of the Day, property right regimes are one of the ways society attempts to answer the economic question. What follows below the fold are some of my thoughts, ramblings, and discussions on the matter.

Quote of the Day

Today’s Quote of the Day is from page 77 from the 1973 reissue of Richard Schlatter’s 1951 book Property Rights: The History of an Idea (link unavailable):

It is a commonplace of intellectual history that each age must find new arguments to justify and defend its interests even though the interests themselves remain the same.

Indeed so.  You won’t read anything particularly groundbreaking in this blog, or many other economic books and blogs.  You’ll see economic analysis applied to new problems (or old problems), but the conversations are very much the same the ancient Greeks had.  Since Day 1, humans have faced the economic problem and have developed with varying institutions to deal with the problem, but century after century, age after age, the institutions have been attacked and defended.

The words I say here are not much different from the men who have come before me, men like Milton Friedman, Adam Smith, David Ricardo, Harold Demsetz, Armen Alchian, Walter Williams, Frederic Bastiat, or John Locke.  That is because, in many ways, we are still having the same conversations as they did.  And I imagine these conversations will persist long after I am dead.

Quote of the Day

Today’s Quotation of the Day comes from Armen Alchian and Harold Demsetz 1973 article in the Journal of Economic History, The Property Right Paradigm (Original emphasis):

Economics textbooks invariably describe the important economic choices that all societies must make by the following three questions: What goods are to be produced?  How are these goods to be produced?  Who is to get what is produced?  This way of stating social choice problems is misleading.  Economic organizations necessarily do resolve these issues in one fashion or another, but even the most centralized societies do not and cannot specify the answer to these questions in advance and in detail.  It is more useful and nearer to the truth to view a social system as relying on techniques, rules, or customs to resolve conflicts that arise in the use of scarce resources rather than imagining that societies specify the particular uses to which resources will be put.

Since the same resources cannot simultaneously be used to satisfy competing demands, conflicts of interest will be resolved one way or the other.  The arrangements for doing this run the full gamut of human experience and include war, strikes, elections, religious authority, legal arbitration, exchange, and gambling.  Each society employs a mix of such devices, and the difference between social organizations consists largely in the emphasis they give to particular methods for resolving the social problems associated with resource scarcity.

These two paragraphs, which begin their relatively short but interesting article on property rights, are an important discussion of the economic problem: when faced with scarcity, how are resources allocated?  The three questions they discuss as leading off economic textbooks are ways of addressing the economic question, but can be misleading to the young economist or layman since they imply that the answers are conscientiously chosen can be known.  However, as Hayek teaches us, that sort of information is highly decentralized and extraordinarily context-dependent.  So, the real question is what techniques are used to allocate these resources.

Some techniques are better than others in differing contexts, and in a near-future post (inspired, in part, by this article) I will be expanding on one particular technique, the allocation of property rights.

Illegal Immigration Follows The Laws of Supply and Demand. Who Knew?

Writing at CATO, David Bier has an excellent article on illegal immigration.  The whole thing is worth a read, but there are two particular points I want to focus on:

Border patrols and deportations were increased to stop the flow of unauthorized immigrants, but they had little effect. “I’ve no doubt whatever that the man finally deported is back here,” the Assistant Secretary of Labor told the Times. “Easily 50 per cent of them return.” In July 1929, Congress gave in and provided “amnesty” or citizenship to the undocumented immigrants. Then, the Great Depression dried up demand for workers, temporarily resolving the issue.  When the economy finally picked up again following World War II, illegal immigration returned.

…

Illegal immigration finally nosedived after the housing bubble burst, and the illegal population shrunk from 2007 to 2014.

[Emphasis Added]

Lest I be accused of cherry-picking, the trend of immigration tapering off during recessions and increasing during booms holds throughout history (obviously, the more severe the recession, the more pronounced the decline in immigration).

This pattern is exactly what one would expect: when the economy is growing, labor demand is growing, and the wage rate (the cost of labor) is increasing, more supply (immigration) is attracted to the market.  When the economy is shrinking, labor demand is shrinking, and thus the wage rate is falling, supply is repulsed from the market.  Just a simple analysis of the labor market.

Harold Demsetz, Emergent Order, Property Rights, and Poverty

In his 1967 AER article Toward a Theory of Property Rights, Harold Demsetz discusses (among other things) the emergence of property rights among the Naskapi, a tribal group located on the Labrador Peninsula.  The whole paper is worth a read, but it is on this section, located on pages 350-353 in the AER, I want to focus this blog post.

The thesis of the referenced section of Demsetz’s article is:

It is my thesis in this part of the paper that the emergence of new property rights takes place in response to the desires of the interacting persons for adjustment to new benefit-cost possibilities. [Emphasis added].

He demonstrates this discussing the change in property rights regime the Naskapi experienced before fur-trading (communal hunting) vs during fur-trading (privatized hunting and barriered hunting grounds).  What’s interesting about this example is the change in the property rights were not imposed on the Naskapi by their European trading partners, nor the governments of the Naskapi.  Rather, the property rights regime emerged on its own in reaction to the new set of incentives facing the Naskapi: whereas before hunting was done for food and not for trade, the cost of enforcing any private property rights in the forest were prohibitively high.  Following the introduction of the fur trade, the cost of enforcement now fell relative to the benefits received from hunting and this new property rights scheme emerged.

While Demsetz is writing exclusively about property rights and externalities, his article also provides us with interesting insights into the emergence of other institutions beyond property rights.  The benefit-cost analysis performed by the Naskapi that ultimately lead for them to alter their property right institutions likely also shapes the development of other institutions: market and market enforcement mechanisms, social taboos, societal hierarchies, languages, laws, religion, and other institutions.  This provides us with a framework to explain why some institutions work well in some places but not others and why attempts to impose institutions from the top-down tend to end in disaster.

Furthermore, Demsetz’s insight could provide us with a useful framework for considering foreign aid and poverty alleviation (both domestically and in the US).  When aid is targeted (for example, providing all mosquito nets to villages in Africa or food stamps that can only be used for milk purchases), it tends to be an inefficient method of solving the problem the imposer is trying to fix.  The relative cost or preference of, say, milk may be low for the person receiving their stamps vs, say, a satellite dish.  They’ll sell their aid and use the funds to buy whatever they wanted anyway.  This will not change unless their relative price or preference situation changes.

This also suggests to us a problem with tying aid or other issues to institutional changes.  For example, if the US were to provide aid to North Korea on the condition they alter their property rights regime, it may lead to resistance or waste (or corruption: a nominal change in institutions without any real change).  Rather, it would be better to increase trade with the nation and increase the benefit to them to adopt new property rights and institutions.  This will lead to far less resistance in the nation.  Another interesting implication of this is embargos and sanctions will have the opposite effect from those intended: not trading with a nation because of human rights violations or because they’re communist is likely to entrench the regime, not weaken it.

One final point to make that Demsetz emphasizes as well is these institutional changes are not quick.  They take time to happen.  The Naskapi property rights change appears to have taken about a generation or two to fully materialize.  This is because institutions are, rightfully so, difficult to change even by the participants themselves.  Institutions exist by reason and tradition, and short-term fluctuations aren’t likely to change them.  The fact that these institutions take so long to change is a factor of the fact the variable that is the impetus of change needs to show that it is not a temporary fluctuation but rather a new norm (think of it like this: if your water bill rose one month due to an abnormal drought, you wouldn’t be running out to rip up your lawn and put in a rock garden, would you?  However, if the drought lasted many years (or you live in Arizona or California where such conditions are normal), you just might).*

A Theory Toward Property Rights is a very interesting paper, both for considering property rights but also exploring how we think about emergent order.

*I hasten to add that this is not meant to imply the changes in institutions are a conscience effort.  They slowly emerge through common law, through interaction, through individual decision-making.  Just as each person learns to walk, from a tipsy toddler to a confident adult, without any conscience efforts to change one’s gait, same with the institutions.