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Okay, Enough Vacation...
I'm done with vacation, I can't take it anymore.
Over the past few days I kept catching myself every couple hours thinking about pricing and trade issues. "No," I'd tell myself, "you're taking a few days off." Then I'd go back to reading or practicing the piano or anything else.
My formal piano lessons have ended for the time being, because my instructor decided to pursue other interests. (Really. That's not a euphemism.) I do have a referral to someone else, but I've decided to go it alone for the next month or so and learn some Christmas tunes on my own time. My first effort is to learn a simple version of () Carol of the Bells, which "didn't look too hard" but nonetheless has given me quite a challenge. I can sorta-kinda-mostly play it now, and plan to have it solid in the next week or so. I do enjoy the tune, and particularly Metallica's rendition.
I got the film from my Halloween vacation developed. I'll be posting pictures and narrative from that in the Zany stuff section sometime over the next few weeks, but I don't consider it a priority unless I get lots of mail from people dying to see my costume. I'll also recycle my narrative about Halloween 2002 from the e-mail list I wrote to before I started blogging, so you'll get two years of bizarre Halloween antics at once! (In 2002 I dressed as a pirate, and in 2003 I dressed as a giant pizza, which will begin to make sense (heh) if you read my story in the zany stuff section — which proves that I'm insane, if you had merely suspected it before.)
Thanksgiving day was pleasant. I don't have any family in the Oregon area, but for the second year in a row one of my co-workers has invited me to dinner with his family… which I'm thankful for. (Geddit!?)
I should have mentioned in my last post that I was feeling fine and nothing was wrong and I'm not depressed due to the holiday. I had just been overworking myself and needed a break. I think three days is about all the break I'm capable of absorbing, so now it's back to normal for me.
A side advantage is that it gave my brain plenty of time to juggle around the issues related to pricing in the background. (The fact that it's kept bubbling to the surface has been nice because it reminds me that I'm still working on it.) I often find that it's mentally easier to tackle a complex subject if I get into it deeply, collect questions and suppositions and musings, and then cool off for a few days. When I then return to the subject, it takes much less mental effort to conclude.
I plan to use the weekend to write up something about pricing and price discrimination. If I finish it during the weekend, great — otherwise it will have to bend to my work schedule.
Have a lovely Thanksgiving, everyone. Enjoy your turkey. Give in to the dark side of the meat.
I haven't been in much of a writing mood since the weekend. I suspect writing the prescription drug essay, and also adapting it for a speech at Toastmasters, fulfilled my creative needs for a while.
I'll probably feel like blogging again in a couple days. There's no point trying to force myself to write if I'm not in the mood, so I'm going to catch up on some reading instead. (I'm reading Financial Reckoning Day, which so far hasn't provoked any strong reaction from me. If it does, maybe I'll do a book review.)
P.S. people sending e-mail, it's good to let me know exactly which article of mine you're writing about. Sometimes it's hard to tell, and I'd rather not guess. :) I made a note about this on the contact page too.
Carnival of the Capitalists #7 is Online
I'm having a substantive e-mail discussion about my CotC submission. I will be adding new material to it over the next few days, covering the question of what happens to the prices paid by wealthier people under a system of price discrimination. (Short answer for the impatient: I don't think they'll rise, and think they'd probably fall.) Thanks, Don!
Jobs Returning From Overseas
Via Instapundit comes news that Dell is moving some corporate customer service jobs back to the U.S. in response to complaints about the quality of service.
Clearly wages are but one of many factors to be considered when deciding who to hire and in what location.
Undercover Capitalist Update
I've been going undercover for about a month now, attending a weekly environmentalist circle-jerk anti-globalization discussion group. The discussion this week confirmed some of my suspicions about the environmentalism movement.
Session 4 was "Food in the Global Marketplace," which included topics like the trend of larger corporate farms putting small family farms out of business, genetic engineering scaremongering, and urges to purchase locally instead of feeding the global trade behemoth.
Session 6, "Social Equity," discussed the plight of the poor in Haiti, the inequality of income distribution, and the movement of manufacturing overseas to take advantage of cheap labor in sweatshop conditions.
The environmentalist and socialist movements have made an alliance against their shared enemy, capitalism. Hence the popular pejorative "watermelon" — describing someone who is green on the outside, but pink on the inside.
In the readings and in the discussions, the environmentalist component is stronger than the socialist one, but both are palpable. Session 4 was environmentalist, session 6 was socialist, and both were a lot of fun for an undercover procapitalist radical like myself.
Jean-Bertrand Aristide, the Haitian president, blames capitalism for the fact that his people are poor and blames cheap imported food for the fact that his people are starving. Two-thirds of Haiti's active work force are employed in subsistence agriculture yet the country is a food importer. By contrast, only 2% of U.S. employment is in agriculture yet we are the world's preeminent food exporter.
If small farms are so good, why do they produce so little? I advised the group that the best way for Haiti to feed its people would be to emulate the United States. (I stopped right there, not elaborating, because that would have blown my cover.) The implication, of course, is that the modern agricultural technologies and techniques so hated by the environmentalists are in fact the most productive. The tension within environmentalism between concern for the poor and concern for nature is well-known. It is their basic contradiction.
In the 1980s, when Haiti opened its markets to U.S. food imports, the need for subsistence farming would have dramatically fallen and that enormous portion of the Haitian labor pool would have become available for other uses. It was an opportunity for economic development. Aristide reports that this economic development did not occur. Does it follow that trade — the creator of that opportunity — deserves the blame? Or might there be other factors involved that are responsible for the failure of development?
The examples typically given to argue that trade fails are places afflicted with corruption. Of course trade fails there — even direct aid fails under those circumstances! While I believe it is very easy to show a causal connection between corruption and poor economic performance, the anti-globalizers do nothing but show a correlation between trade and poverty and think their case is sufficiently argued. To begin with they've chosen a very bad sample, because the vastly greater trade between and economic performance of (say) Japan and the United States is a data point they do not attempt to explain. The ultimate problem is that they do not argue causality. They do not seem to be theoretically-minded at all.
One of these days I'll ask the simple question, "Why does nature have intrinsic value?" I expect they'll have nothing intelligent to say.
Reimportation Essay Posted
I've posted my essay on drug reimportation that actually isn't so much about reimportation, because under my proposal reimportation ceases to be an important issue.
Lawsuits and even convictions concerning alleged restriction of supply in the California energy crisis do nothing to alter the economic facts involved.
In a shortage there are insufficient units on the market to meet the demand at the given price. A person capable of supplying extra units would be able to sell them without causing the price to fall until they had sold enough units to end the shortage. Only at that point would prices begin to fall.
Given the extreme profitability of extra units of electricity at the height of the crisis, it would have been incredibly stupid for electric producers to withhold units during an actual shortage. Therefore, they did not, whatever the courts concluded notwithstanding.
(It also should go without saying that expensive contracts signed near the end of the crisis had no bearing whatsoever on its cause, unless you believe in time travel.)
The two primary reasons for the energy crisis were (1) retail electricity rates were not allowed to rise, by government fiat and (2) environmentalists prevented construction of sufficient power plants, again through government fiat.
Evil in Palestine
I'd call this a Shocking! Outrageous! post, but those usually have some element of humor or farce. This has none.
I don't care to describe such evil on my own blog, but Conrad does it well.
It's disgusting stuff like that that convinces me beyond any shadow of doubt that the blame for the trouble in the middle east does not rest on the foreign policy of the United States. Why have their nations failed by every objective standard of comparison, despite being able to import advancements from the West? They've done it to themselves, through their own poisonously evil ideas and traditions, which they certainly didn't learn from us. We dont have those problems.
All sympathy I ever had for the Palestinians (in the abstract, as a group) has long since drained away. Israel has its own problems, but it's a beacon of moral righteousness when the two lay in contrast, and that's why I give Irsael my moral support in its struggle.
Gold Makes $400/oz!
For the first time since 1996, gold broke above $400/oz today.
Gold To Da Mooooooon!!!
In India, Private Schools Succeeding, Government Schools Failing
Dr. Reisman posted a link on the Mises blog to a New York Times article about the success of private schools in India:
To all the people who argue that a completely private education system would fail because parents are too irresponsible to care for their own children, I say, "Look."
There's also this:
Public schools, losing out to the competition, adjusting their curriculum to retain customers? It's incredible what a little competition can do! Ask yourself this: Would this change, clearly desired by the parents, have occurred under a system where the public schools were better-financed and therefore better able to prevent the encroachment of private schools? No? Then don't tell me the way to improve our own school system is to pour more government money into it. That would only make it less responsive than it already is.
We need to end the system of public education, not reform it. I want parents to face the responsibility of making informed choices about their children's education. I can think of no other area where the customers have such a vested interest in monitoring the long-term quality of what they're buying. Competition would be fierce and everyone would benefit. The willful ignorance of the opponents of private education on this point is appalling.
Eliminating public education would also end the shamefully immoral practice of taxing people who have no children, to pay for the education of others, and also of taxing people who send their children to private school, so they must pay twice.
I consider the argument that even the childless should pay for education because they benefit from it indirectly to be wholly without merit, and I dismiss it contemptuously, because the great benefit of capitalism is precisely that people are net beneficiaries of the system. To call for taxing away the net benefit is to advocate the destruction of the value of the system and must be repelled in the strongest terms possible. (I have not "paid for" the medical technology that allows so many people to live longer and more productive lives, but I benefit from it indirectly all the time. The indirect benefits of economic competition are, in fact, one of the primary reasons to support it, as I elaborated in my globalization essay. The only consistent way to pay for all indirect benefits is to establish socialism.)
Carnival of the Capitalists #6 is Online
Carnival of the Capitalists #6 has been posted at Prof. Bainbridge. Yes, I'm mentioning this because I have an article in there this week. I'll be in there next week, too, if I spend some more time on this drug reimportation essay…
On that note, it appears that Howard Dean supports reimportation, which is a policy conclusion I support, but the reasons he gives for that position are a little different (that's putting it nicely…) from my own. But I'm going to make you wait for a few more days before I explain. Har har haaarrrrr…!
Upcoming Essay on Drug Reimportation
I've been regularly watching the program Forbes on Fox for the past few months, after it came to my attention as an accidental search result on my DVR. I started watching because they discussed the oil markets, and I kept watching largely because frequent guest Victoria Murphy (a reporter at Forbes Magazine) is gorgeous. :)
Steve Forbes is also an occasional guest, and was on the Nov. 15th program. One of the topics was prescription drug reimportation. In response to the question, "Why are drugs so cheap in Canada?," this is what he said:
This subject has been rattling around in my brain for a few weeks now, but that statement was the trigger that motivated me to start studying the economics behind the issue. I plan to write an essay about it, hopefully to be published by Thursday. These things tend to consume me, so blogging will probably be light until then.
Oh Those Melodious Notes
I can play Minuet in G on the piano, now! I'm so excited. :)
When I started trying to play it, it sounded incomprehensible. Even though I was hitting mostly the right notes, the rhythm was way off and I didn't know where I was going. Almost by accident I got two measures only slightly mangled and then I suddenly realized, "Hey, this is familiar — wait, I know this piece, I know how it's supposed to sound!"
Then I spent a half-hour playing it over and over, and now I can play it without needing to pause to wipe the blood off my ears. Yippie! (Arrrr!!)
I knew these hands had to be good for something besides caressing women typing, I mean typing. And clicking on the mouse.
Opportunity Cost and Stock Option Expensing
The position I laid out in my essay on stock option expensing (which itself was a response to two other articles) is that the exercise of stock options represents a cost to the owners of a company, through share dilution, but is not in any way an expense to the company itself.
The paper by Hall and Murphy (quoted approvingly by Arnold Kling) states that "when a company grants an option to an employee, it bears an economic [opportunity] cost equal to what an outside investor would pay for the option." This is precisely where my disagreement starts.
The concept of opportunity cost is a useful and simple one: Due to scarcity, every action you take precludes the possibility of taking certain other actions. If you purchase a gallon of milk, that same money cannot also purchase apples. If you decide to sleep, you cannot also use that time for studying. If you go into business for yourself, you forgo the wage income you would have earned by working for someone else. The purpose of the concept of opportunity cost is to remind us of the pervasive influence of scarcity and therefore the need to weigh our alternatives consciously in an effort to maximize the value we obtain from our choices.
The problem with the concept of opportunity cost is its name. It uses the word "cost" in an idiosyncratic way, unlike how it is used in other areas of economics and accounting, which makes it prone to confusion. I believe this confusion is at the root of the controversy over stock option expensing.
Let's say you drive to your bank with $1000, planning to open a CD account earning 2% interest. On your way there, you hear a radio advertisement from a competing bank offering 3% interest. You quickly consider this alternative and conclude that a year's investment at your bank would net you $20, but at the competing bank it would net you $30.
A proper application of opportunity cost to this situation is the conclusion that you could earn $10 more by investing at the competing bank. The $10 is the opportunity cost — the difference in outcomes between two mutually exclusive alternatives.
A troubling, but still technically correct, restatement would be that you lose $10, compared to the alternative, by investing at your bank.
If you drop the context — that's the error — the statement becomes you lose $10 by investing at your bank.
This last statement is emphatically not true. You actually do gain $20 at the end of the year, just like the accountant says, and the accountant is a decent, honest, hard-working individual with the numbers to back it up. Just because you might have had more is no reason to deny the fact that you have still gained.
An opportunity cost is not a real cost in the sense of a quantity of time, money, or other resources that must be expended. The concept of opportunity cost is simply and only a reminder to consider your alternatives carefully and to choose the best one. Giving it a monetary value (such as $10) may help in calculation, but mentally associating that value with the notion of a "cost" creates a mental environment conducive to context-dropping.
The concept of opportunity cost does apply to a company considering the alternative of (1) selling stock options on the open market or (2) awarding them to employees. The company should consider the difference in outcomes among each alternative. But when it chooses one over the other, only the actual costs of the alternative it actually chooses are relevant from then on. The fact that the company might have had more by selling the options is no reason to deny the fact that awarding the options to employees does not incur an actual cost on the company.
With this in mind, my essay might be more persuasive.
I've just discovered an article on Catallarchy from September that deals with this same issue, arguing that there's no opportunity cost because the company could issue additional options out of thin air and sell those. I disagree, but only lightly, because the issue of scarcity still exists with regard to any specific batch of shares.
If the vehicle was originally the property of Ford, but is then given to the CEO's wife, this does affect the financial condition of the company — its inventories have been reduced, which is an actual cost, and should affect its balance sheet. (I decline to take a position on exactly how, because if I did I'm sure I'd start getting e-mail from accountants asking me why I'm such an idiot and where I studied accounting, and I could only tell them that I haven't, ever.)
The vehicle gift is an actual cost, not an opportunity cost. The difference between this case and stock options is that the vehicle gift affects the assets of the company itself, while stock options affect only the company's owners.
Don then goes on to discuss why it's stock repurchase that should be expensed, not options or grants. Go read it, you might learn something. I did.
Separation of Church and State in Iraq
Nic writes to ask if we need to establish a separation of church and state in Iraq as part of our long-term strategy in the region.
A robust church-state separation, such as we have in the United States, is probably not practical in Iraq. In a democracy such as we intend to create, if the people oppose such a strong church-state separation they would (at best) change their constitution or (at worst) ignore their constitution. In either case, what emerges could be very bad.
Given our basic intent of creating a stable democracy in Iraq, we only need to establish enough church-state separation to prevent either the Shia or Sunni from imposing their respective variants of Islam upon the other. The government should also guarantee freedom of religious choice and should have no religious test for office.
I don't know what level of church-state separation is appropriate for Iraq. I hope it could be much more than the minimum I just described, but feel fairly confident that a total separation would break down quickly. I hope this decision would be made by the Iraqis themselves as they draft their constitution — they're in the position best able to understand how much church-state separation will be accepted by the people. I also hope that a few decades from now, when things have stabilized and they're ready for it, that they revisit this issue and strengthen the separation.
Saudi Arabia Bombing To Our Advantage?
Conrad quotes a Reuters news story that portrays the recent al Qaeda bombing in Saudi Arabia as working against the terrorist organization's interests by turning ordinary Muslims against them. (It's also already being blamed on Israel — who didn't see that coming?)
SDB provides, as usual, a very broad view of the implications of this bombing. He starts off by talking about Netscape (<grin>) but eventually ends up with this:
He wrote that article in response to Bush's speech at the National Endowment for Democracy. It's a very good speech, with too many important parts to selectively quote, so read the whole thing yourself.
Microsoft Shareholder Proposal
There's an interesting shareholder proposal in Microsoft's '03 proxy statement:
The shareholder meeting is on the 11th, so there's still time to vote your shares if you haven't already.
I decided to vote in favor of this proposal, but not because of the argument given in the proposal's supporting statement, which I thought was very bad:
The problem here is that nobody is being compelled to do anything. People own Microsoft stock voluntarily, and Microsoft's policy and history of charitable giving are public knowledge. Jefferson's argument is one against the actions of government, not against the actions of people or groups of people (such as a corporation). Government and business are fundamentally distinct — government uses force, and business may not.
Jefferson's argument is a convincing cudgel against public education (which brazenly glorifies environmentalism, and can't quite shake away the creationists, among other nonsense) but it absolutely does not apply to Microsoft. Microsoft is not a government, it can't compel anyone.
I voted in favor of the proposal because I want Microsoft to focus on earning money, not on giving it away (except as a dividend, which I hope they increase.) The recommendation that Microsoft pay out a dividend instead of making charitable contributions is eminently sensible, and I would be happy to send that money to my favorite charity.
Bastiat on Free Trade
From Frédéric Bastiat's (1801-1850) A Petition:
This is a wonderful, burning satire, and should be required reading for all people who are opposed to free trade because it hurts domestic producers. The conclusion:
I support unilateral free trade. There are many people who unfortunately insist on "fair" or "balanced" trade, requiring both trading partners to coordinate in opening their markets. (i.e., "We'll lower our tariffs if you lower your subsidies.") Allegedly this protects the freer nation from being exploited by the more protected one, but this view has it entirely backwards. In a condition of unilateral free trade, the freer country gains the dual benefits of cheaper imports (no tariffs) and avoids paying subsidies. When imports are made cheaper by the other nation's subsidies, the result is that much more fortunate for the freer nation — it makes the cost of those imports that much less. When the other nation's subsidies strengthen one of its industries, the cost weighs on all its others. (They make it more difficult for one domestic industry, but easier for all others.)
President Bush has made the double error of supporting both tariffs (steel) and subsidies (agriculture). But I sympathize with his circumstances — for political reasons he can't be seen taking advice from a Frenchman.
GMTA — The Usurer broadcasts his own message in support of unilateral free trade.
And given the opportunity to expand, I should note that in my parenthetical above I neglected to mention that subsidies don't just shuffle around the strengths of industries — they're actually a net loss to the country implementing them, both because they create malinvestment and because the benefit flows overseas.
Okay class, put away your notes and clear your desks of everything but a #2 pencil and an eraser. Today's quiz will identify the ideological source of many of your economic ideas. Each question has 4 possibilities, multiple-choice, one each from the Austrian, Chicago, Keynesian-Neoclassical, and Socialist schools of thought.
This is a surprisingly high-quality, academically-oriented test for something found on the web. :) Unfortunately there are certain key words in many of the responses of a political nature that "give away" their economic nature. I think it would have been more fun to leave those out...
I'm somewhat unhappy with question 3, which doesn't capture my position well.
The scoring system is designed to tell you how close you are to the Austrian School position. The only non-Austrian answer I gave was on question 22, and that was simply because the "Austrian" answer implied a scheme of competing governments, which is one of my (admittedly few) strong disagreements with mainstream libertarian philosophy. The same objection made me hesitate on question 10, but wasn't enough to push me over the edge in that case.
If you have the patience to go through the whole thing — it takes about an hour — I'd be interested in hearing your results. Even if you don't answer the questions, simply reading the alternatives provides good perspective on the differences between schools of economic thought! Check it out.
God of the Machines
I just saw the new Matrix movie. I watched the credits. They named the big spiky thing Deus ex Machina. Ye gods.
Updated Insider Trading Essay
I've posted an update at the end of my essay defending insider trading in response to a reader's question.
It appears that I have readers in Finland. Isn't the internet great? :)
Right now I have three topics to write about, pending time to write about them. I've been unusually busy every night this week, primarily because I just came back from vacation and I have a lot of things to catch up on, so the most likely outcome will be a pile of blog articles over the weekend instead of regular ones during the week. Sorry, but I blog in my spare time, and there's precious little of that at the moment.
After I left college I thought my days of "cramming" would be over … but today I crammed for my piano lessons, if you can believe it. Now I'm off to finish my anti-globalization readings for tomorrow's discussion group. Preparation is the key to demolishing hippie socialist nonsense. :)
Quote (paraphrase?) of the week: "We didn't design in that failure mechanism."
Dimensions and Economics
In the distant past (three weeks ago) I mentioned what I consider to be an important paper in the QJAE. I've since discovered that it's available online for free. The author is William Barnett II, the title is "Dimensions and Economics: Some Problems".
My lack of paying attention :) prevented me from noticing that another paper I particularly enjoyed (urm, to the extent one can "enjoy" economics) was written by the same author. He's on my reading list, now.
Poor Being Dropped From Oregon Health Plan
While I was on vacation in Iowa, Conrad (who lives in Hong Kong) unknowingly took up the slack in reporting Oregon news. As if I ever reported much Oregon news...
He found an AP article about large numbers of poor people in Oregon being dropped from the Oregon Health Plan (emphasis added):
<gasp> <choke> <sputter> I cannot think of a witty rejoinder.
Oh, wait, yes I can — does this mean they'll be lowering my taxes?
This isn't a directly related point, so don't draw any conclusions from its proximity to the above, but it's important to understand that the function of insurance is to trade the low risk of a huge cost into the certain risk of a small cost.
Insurance is a tradeoff; having it isn't automatically best. Some people who drive older cars (like myself) rationally choose not to carry collision coverage on their vehicles. A person who owns a concrete house might decide they need very little insurance for it, or they might be willing to carry none and simply bear the risk. A single person with no children might decide to have no life insurance. A very healthy person might rationally choose not to have prescription drug coverage, or might decide to have no health insurance at all.
One of the many problems with socialized health care schemes is that they compel all people to have a certain minimum level of coverage. Of course, this is the opposite perspective from that of "they provide a minimum level of benefits to all people." The problem here is that some people might desire to have less coverage, and to use the money they would have spent on insurance for other, more important things. This is the same pattern I discussed at length when I talked about Social Security.
Socialism in health care, in retirement savings, and other areas overrides the decision of the individual in pursuing their goals. In economic language, it forces them to spend on things with a lower marginal utility. In this way, it's a net loss to the economic system and to the wealth of the individuals within it.
Back from Vacation
Arrrr! I'm back from vacation.
Bad weather tends to follow me around wherever I go. The sun had a very active week, firing off two of the most powerful solar flares ever recorded. They came from sunspot <ahem> 486. I couldn't view the aurora because it was cloudy all the time — sigh! I returned to Oregon on Saturday night, and Sunday morning it was snowing here. But nooo, it didn't snow in Iowa while I was there...
Fire and Ice. Feels like 1998 all over again. :)
At work I had a smaller e-mail backlog than I anticipated — only about 500 messages. After deleting the spam and the automated notification messages, there were only about 300 I cared about. It still took 2.5 hours to get through it all, and there are quite a few things I need to follow up on during normal business hours.
I have a lot of stuff to write about.