Everyday Economics: Bioshock Edition

On my recent trek between Virginia and Massachusetts (and back), I listened to an audio version of the book Bioshock: Rapture by John Shirley (If you’re looking for something light to take your mind off of things, this is a good book).  The book details the rise and fall of Rapture, a massive underwater city built by Andrew Ryan (a not so subtle jab at Ayn Rand) to escape the “parasitic” governments of the world and build a society dedicated to freedom and free markets.  While the initial goal of Rapture may have been freedom and free markets, as the novel (and the video game that the novel is based on) details, Rapture becomes a totalitarian police state with an extremely wealthy (and often sadistic) upper class, and extremely poor low class, and no one in between.  Some see Bioshock as a refutation of Randian philosophy, however, I will not address that here as I am no expert in Ayn Rand (for an excellent discussion, see The Value of Art in Bioshock: Ayn Rand, Emotion, and Choice by Jason Rose).  I’ll leave that to people far smarter than I.  Rather, I want to address the economic situation of Rapture and discuss, briefly, how that contributed to the downfall.

A few quick disclaimers before I begin:

1. As far as I know, Bioshock: Rapture is not canonical.  However, it is the only detailed source I can find thus far on the days of Rapture that take place before the video game (which is canon) so I will operate on the assumption that my source material is canonical knowing full well everything I write here could become completely worthless insofar as discussing canonical information (the lessons gleaned from this book are still important, however).
2. Nothing in this essay should be taken as implying the rise or fall of Rapture is purely economic.  There are many other factors involved (social, political, medical, psychological, etc).  I skip or gloss over these not because I think they are unimportant (quite the opposite, really), but because I simply lack the expertise to discuss them with any confidence.
3. I will be avoiding using direct quotes in this version of this essay.  The reason for this is simple: I have the audio book, not the book itself.  I can’t easily do verbatim quotes and attribute them to proper pages for citations.  Therefore, the reader should be aware that I am doing this partly out of memory (although I did scribble some notes) and further the reader should assume that whenever I describe what’s happening in Rapture, that is a reference to the work of Mr. Shirley.  The only original material will be my analysis.  Any inaccuracies, either to details or analysis, belong to me and me alone.

The short version of what follows: Rapture cannot be classified in any meaningful sense as a “free market.” It suffers from several deficiencies that prevent us from labeling Rapture as a free market: lack of property rights, lack of free trade (autarky), lack of labor mobility (autarky in the labor market), rejection of altruism, widespread and institutionalized fraud (this issue is speculative based off of interviews with characters within the book but not substantiated by details), and censorship (indirect at first, but more direct later).  In Andrew Ryan’s Rapture, “free market” and “laissez-faire” were not much more than dishonored buzzwords.  It can best be described, in the words of James Buchanan, as “moral anarchy,” (see Moral Science and Moral Order, especially page 190 and Limits of Liberty, especially Chapter 7).  These factors, coupled with other psychological, social, and other factors, lead to the decline, civil war, and eventual fall of Rapture. 

Regime Uncertianty: NBA Edition

President Trump’s executive order last week banning entry into the nation from several predominantly Muslim countries can best be described as a charlie-foxtrot.  Among those caught in the wave of uncertainty following the order was the National Basketball Association.  From nba.com:

The NBA, its players and its coaches have waded into political waters in the months before and since the November election. But this week politics bled into the NBA when President Donald Trump signed an executive order temporarily limiting immigration from seven Muslim-majority countries.

Milwaukee Bucks rookie Thon Maker and Los Angeles Lakers veteran Luol Deng both are natives of Sudan, one of the countries subject to the temporary ban along with Iran, Iraq, Libya, Somalia, Syria and Yemen.

The Bucks were concerned about Maker’s ability to travel freely with the team back to the United States from its game Friday in Toronto. The NBA released a statement saying it has contacted the State Department for information on how the restriction might affect personnel from the seven countries.

Fortunately, there were no initial negative consequences for the Bucks.  From ESPN:

Bucks coach Jason Kidd, in announcing Saturday that Maker would start, confirmed that Maker had made it to Milwaukee without incident. Maker scored eight points and grabbed two rebounds in eight minutes in Friday night’s 102-86 loss at Toronto, where he had lived for two years prior to being drafted in 2016 by Milwaukee.

However, the fact that Maker was able to re-enter the country from Toronto does not mean there are any losses involved.  Indeed, there were many unseen consequences from the executive order:

1. Coach Kidd had to spend time devising an emergency game plan in case Maker was detained.  This subtracted from his time focusing on a “true” game plan where all his players can be used.  This may have contributed to their 112-108 loss to Boston on Saturday.
2. NBA and team lawyers have been scurrying to get clarification on the new rules, detracting from other duties
3. State Department officials have been scurrying to answer the questions poised by the NBA and team lawyers, detracting from other duties
4. Maker himself (and likely his teammates) were distracted by this non-basketball issue, diverting attention away from practice and game planning (again, possibly contributing to the loss on Saturday).

The list above is hardly exhaustive.  Further, we can imagine this uncertainty, and similar costs, multiplied across the nation for all kinds of industries and employers.  These disruptions, while perhaps at a cost of only a few thousand dollars each (a number I arbitrarily made up.  Could be higher/lower), multiplied across millions of individuals becomes a great sum.

One final NBA-specific point: 90 days (the length of the ban) seems small in the scheme of things.  But, for the NBA, that is half their season.  This ban is no small thing for the Association.

Trump, Regime Uncertainty, and Why Rhetoric Matters

Some defenders of President Trump have tried to justify his trade rhetoric as just that: words.  They argue that Trump will never enact the tariffs, or do so at much lower rates, so firms and individuals will not change their behavior.  However, this is a mistake.  We all make choices in an uncertain world and our actions depend, in part, on our internal calculations of the likelihood of different events (not to mention our own risk tolerances).  With these calculations, we make our actions.  If something comes along to change our perceptions, then we also adjust internally.*

Let’s, for the sake of argument, say that Firm X is considering expanding operations in the US. Let’s say they want their annual profits in the US to be $50 million/year.  They need to spend $100 million to enter into the US and set up.  Through various research, the firm concludes that, given current expectations on 1 November 2016, they have a 95% chance of achieving that goal (or a 5% chance of earning nothing and losing their $100 million investment.  The binary nature of this situation, while perhaps unrealistic, is done so the point doesn’t get lost in the math).

So, the expected value of their operation on 1 November is ([95/100]*50)+([05/100]*-100)=$42.5 million.

Now, let’s say that Trump wins the presidency and the likelihood of tariffs has increased. Given that the firm imports some of their material and may wish to import more in the future depending on conditions, they now conclude the likelihood of earning $50 million per year has fallen to, say, 80%. So, now, the expected value of the move is: ([80/100]*50)+([20/100]*-100)=$20 million! That’s a decline of 52.9%!

The firm is now faced with a decision, just as all firms are, based on their assessments of probability. The expected value of the firm’s move has fallen, which means the firm is less likely to enact the move at all. And all this is based off a change in probability, not just the tariffs themselves.

Another important thing to note is this still holds with small changes in probability, too.  Let’s say, for example, the firm’s initial probability of 95% still holds.  However, after the election the firm determines there is still a remote, but still real, possibility of tariffs and thus their probability estimate falls to 94.9%.  Their expected value drops to $42.35 million, a decline of just 0.04%.  But it is still a decline.  What this means is many marginal investments may be cancelled.  These now nonexistent marginal investments, which would have produced jobs and goods for Americans, are weighing on US economic growth.  All because of words.

With rhetoric flying about, it becomes harder and harder for firms to determine their probabilities.  In this sense, it is no different than arbitrary policy changes that causes other forms of regime uncertainty.  In short, rhetoric matters, even if it doesn’t translate into policy.

*For the sake of clarity, I am not saying people walk around and manually calculate probabilities before each and every action they take, but they often act as though they do.  For example, if a person knows a particular part of town has a higher crime rate than another, he may avoid that part altogether.  However, if that part of town becomes more safe, he may venture in there more often.  These decisions are made based on his perception of probabilities, not his actual probability.

Trade, Tariffs, and Property Rights

In my post earlier today, I wrote about how tariffs affect the value of different resources.  I promised a follow up post on attempting to determine whose value should take precedent, the producer’s or the consumer’s.  This is that post.

Tariffs increase the value of the producer’s property while deceasing the value of the consumer’s property.  All actions have this sort of mirror effect: when I choose to buy my groceries at Giant as opposed to Safeway, the value of Giant’s supplies marginally increased by the $X I spent there and the value of Safeway’s supplies fell.  This is simply the nature of living in a world with scarce resources.  So, how can these conflicts be resolved?  Simply by the assignment of property rights.  By determining how property rights are allocated and assigned, then conflicts can be avoided.

For most of our commercial society (that is, the aspect of our interactions concerning commercial activity), property rights of income are generally assigned to the consumer.  No producer can compel any consumer to purchase his goods/services.  In fact, compelling the purchase of goods and services is illegal.  Further, producers cannot require all other producers in an area to sell at a given price (again, that is also illegal).  This rather simple examination of property rights tells us that, generally speaking, the consumer is sovereign. Property rights of income, we can say, are assigned to the consumer.

Bringing this back to our conversation in the previous post, who has the proper property claim right?  The producer whose goods are lowered in value pre-tariff or the consumer whose value is lowered in value post-tariff?  I think, judging by the above analysis of property rights, the claim rightfully belongs to the consumer.  Therefore, the tariff, insofar as it is currently constructed (a tax on the buyer, not seller) is a violation of those property rights.  The value of the consumer is protected and the producer must find some other way (other than tariff) to seek redress.  He has no legal claim to the consumer’s income stemming from competition.*  I argue that the existing property rights regime requires tariffs be rejected, and the implementation of such is a violation of the property rights regime, thus weakening both property rights and the rule of law.

A larger point I want to make in conclusion: the assignment of property rights, and more importantly their consistent enforcement, will go far in reducing or eliminating conflicts that will arise simply from the fact of scarcity.  Without property rights, economic well-being cannot be enhanced.

*I can even cite legal precedence, see “Illinois Transportation Trade Association v City of Chicago”, where the judge ruled: ““Property” does not include a right to be free from competition. A license to operate a coffee shop doesn’t authorize the licensee to enjoin a tea shop from opening. When property consists of a license to operate in a market in a particular way, it does not carry with it a right to be free from competition in that market.”*

Further Ruminations on Property Rights

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