01 Aug 2009

How Can Destroying Products Be Good for Consumers?

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I’m still at Mises U, so that’s why the posting has been so sparse. On the bright side, I had a pretty good “Mises Circle” talk that I will link to when it goes up on the LRC podcast. There also may be some new karaoke YouTubes floating around to incriminate me in the near future.

In the meantime, let me share one interesting tidbit for the econ geeks amongst you readers. In the lecture concerning Mises vs. Rothbard on consumer sovereignty, I realized something that made the whole issue seem obviously “Point, match, Murray.”

Specifically, Mises had conceded that in principle, even on the free market a monopolist (facing an inelastic demand curve at the point of the original equilibrium) would find it profitable to restrict output. This would be a violation of the general rule that entrepreneurs act as mandataries of the consumers. Here would be a case where the market economy perversely led a capitalist to act contrary to the wishes of consumers, because he deliberately destroys units of a good–and that can’t possibly be the right outcome as far as the consumers are concerned.

Rothbard has a bunch of responses, but here’s something I had never thought of before. (Maybe it’s in Rothbard and I just missed it; I haven’t gone back to check.) We normally think of implausible cases where a private agricultural company manages to corner the world market on tobacco or coffee, and then burns some of the harvest in a given year in order to raise the price. (It has to be a private concern doing it, otherwise the issue has no bearing on the free market possibly hurting consumers.)

The discussion makes it sound as if it’s a rare, almost hypothetical scenario, but actually it happens all the time! For example, in high school I worked in the dairy department at a large grocery store. We would always keep a sharp eye out for expired product in the cooler or on the shelves.

Now let’s say there are a few quarts of skim milk that are getting close to the expiration date. We can try putting them in the very front of the case–and that’s why you should always look a few units deep into the cooler before buying anything perishable from the grocery store–but sometimes you end up with expired units. So you have to throw them out. (Or maybe we gave them to a soup kitchen or something; I can’t remember. I think we just threw them out.)

This was a conscious decision on our manager’s part. It would have been possible to put on a sale to move every last unit of product off the shelves before the expiration date. But in the grand scheme, it made more sense to keep the price at the normal level, knowing there would be a chance of losing some product every other week due to expiration.

Of course, the manager would try to order inventory to minimize this wastage, but on the other hand she wouldn’t want to run out of nonfat strawberry yogurt every other week, either. So it was a tradeoff when ordering more inventory; the more cases she ordered, the more units we would likely throw out, but the fewer she ordered, the more potential sales we would miss out on if demand were unexpectedly high. (And also customers would get mad if we were consistently out of stock on various items.)

So is this a violation of consumer sovereignty, the fact that we consciously adopted a strategy that would yield, on average, a lot of food being tossed out, month after month? Not at all. If someone insisted that always adjust spot prices to unload every last unit, it would change the manager’s ordering behavior and (I think) would clearly make the customers worse off. After all, rival grocery stores were always free to adopt such a policy. I can’t think of any obvious externalities or other stumbling blocks, so it seems there is a prima facie case that the systematic destruction of food by our grocery store was economically efficient.

The argument generalizes once you see it in the above light. For example, movie theaters routinely “withhold supply” off the market, in order to charge a higher price. Airlines do the same thing. Wouldn’t it be awful, in fact, if airline and movie prices always adjusted to make sure every last seat were always filled?

29 Jul 2009

There’s No "I" in IER

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Lately we’ve had some pretty good stuff come out at the Institute for Energy Research (IER), if I do say so myself. And such horn-tooting isn’t as bad as it first seems, since the below were truly team efforts.

* In this press release we pointed out the irony of Joe Biden’s recent recommendations to Ukraine. (Hint: he wants them to cut government subsidies and to increase domestic natural gas production in order to bolster their national security.)

* In this blog post we underscored the significance of Secretary of State Clinton’s visit to India, where she was told that India was not going to sacrifice its economy to fighting climate change.

* Continuing the theme, in this press release the IER team collected a bunch of quotes showing that US officials seem to not be listening to Chinese and Indian officials, when they say in quite plain English (?) that they aren’t going to adopt caps on their carbon dioxide emissions. This is rather awkward, since the only sliver of a rationale left for the Waxman-Markey bill (which passed the House narrowly and still has to get through the Senate) is that US leadership will provoke other major countries to follow suit.

* Finally, here is a blog post giving the low down on the CFTC’s recent announcement that, “after further review,” it turns out speculators caused the oil price spike in 2008 after all. I guess science advances one election at a time.

28 Jul 2009

"Why won’t he write?"

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Excuse the paucity of posts; on Saturday I went to Dick Clark (the younger)’s wedding to Justina White and then I went straight from there to Mises University. For those who know him, let me mention that Dick’s wedding was great; we had the best karaoke ever for the afterparty. I know that might sound lame but really, it was a small group in a dive bar in Decatur AL, but there were several musicians in the group and it was freakin’ sweet.

In the meantime, here is my critique of a PIMCO guy talking about how awesome Bernanke is, and why paying interest on reserves will contain the inflation genie. An excerpt:

Recall that Bernanke’s extreme money pumping — necessary to avoid the “mistakes of the Great Depression” — began in September 2008. That means almost two-and-a-half years will have passed, before these wonderful remedies work their magic.

Am I the only one who wants a refund? Back when Bernanke and Henry Paulson were bailing out AIG et al. with hundreds of billions of dollars, they told us it was necessary to avert a global economic catastrophe. Did everyone realize that the lesser of two evils involved two-and-a-half years (at least) of stagnation and interest rates at 0 percent?

27 Jul 2009

The Wenzel Wager: A Call for Disinterested Analysis

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In light of our recent wrestling match, I decided to look up the terms of the wager I had made with Robert Wenzel (see here and here). Back in January we agreed that the winner (someone who gets 2/3 or 3/3 out of the following) would get a dinner of up to $350 from the loser in the winner’s city of residence. The 3 conditions were:

* Murphy says CPI (not the “core” number) will rise by at least 8% during 2009; Wenzel says it won’t.

* Murphy says unemployment will be higher at end of 2009 than at start; Wenzel says no.

* Murphy says real GDP growth will be flat or negative for 2009; Wenzel says it will be positive.

I’m feeling great about the unemployment call, I’m optimistic about the CPI call, and I’m not at all confident about the real GDP call, especially because suppressed inflation numbers would artificially boost the official real GDP figures (which we have no choice but to use for our bet).

But here’s the problem: If you follow the links, and especially if you read other Wenzel posts from January, you’ll see that the reason he made the case for optimism (which prompted me to disagree and then our bet) was that M2 was growing at double-digit rates. Nowhere in our bet did we say “assuming Bernanke keeps up the money printing.”

So what do the judicious readers of Free Advice (both of you*) think? Do I give Wenzel the opportunity to cancel the wager since the basis for his views has now collapsed?

* I mean that only two readers are judicious; I have way more than two readers.

26 Jul 2009

Another Analogy for My Solution to the Mind-Body Problem

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Last week, I dazzled you all with my computer analogy that I thought neatly solved the philosophical mind-body problem as well as the theological problem of God’s sovereignty and free will. In the comments, KSralla argued that my approach wasn’t consistent with the Christian conception of God:

Unless God violates his own rules (becoming a lawbreaker), then he must (according to his nature) allow the physical universe to expand and evolve according to these rules, and has in effect banned himself from pervading his physical creation at t=X. That might be an acceptable model if it were consistent with the image of the Judeo-Christian God portrayed in scripture. It is not.

Several Christians have recoiled from my “solution” in this fashion in the past, and so I want to spend today’s post trying to defuse the hostility. (Note that to make sense of today’s post, you should first read last week’s, though you don’t need to read any of the comments to get up to speed.)

First, let me spend a minute explaining that by definition, God can’t break the laws of physics, any more than He can make 2+2=5. What are the “laws of physics”? As Richard Feynman explained in an essay called “The Character of Physical Law,” they are simply the rules that describe the behavior of the objects of our natural investigations. Now because we are fallible, if we ever discover a violation of one of these “rules”–and we’re sure it’s a legit violation, not due to experimental error–then we must conclude, “The rules aren’t what we thought they were yesterday.” Einstein overturned Newtonian physics, but the universe itself didn’t change because of his work.

Now the average Christian, I think, believes that scientists have come up with the “normal” laws of physics and of biology. Further, the average Christian believes that when Jesus walked on water, or raised Lazarus from the dead, that these miracles were violations of those rules. Maybe they were, and maybe they weren’t (I think not–it would make God’s design that much more impressive), but either way, it is nonsensical to say that the atoms in Lazarus’ body broke the laws of physics that day in the tomb. Whatever behavior his atoms did display, must have been consistent with a generalized body of laws that would be the new and improved “laws of physics.”

(In case this sounds too tautologous, note that unless the rules are fairly economical, the study of physics is pointless. The reason it’s so helpful for us to learn “the laws of physics” is that it gives us predictive power; we really do gain insight into how nature operates. But we could imagine a world in which the laws were so broad that onlookers with our degree of mental powers would discern no obvious patterns, and the world would be a chaotic muddle. So part of God’s design is that all of the wonders of the universe have their physical instantiations–apparently!–composed of a small group of elementary building blocks, which obey a fairly sparse set of rules.)

So we see that KSralla’s objection doesn’t make any sense. The standard Deistic image of God–against which KSralla is reacting–doesn’t really work if you think that God created not only space but also time. It’s wrong to think that God created Adam and Eve and everything else, then sat back and waited for His wound-up clock to spin out His design. From God’s point of view, it is all simultaneous; He creates Adam and Eve just as He descends to Earth with a flaming sword in His mouth. (Note that this is also how I deal with Mises’ praxelogical critique of the Western idea of God. Mises asked, why wouldn’t an omnipotent and omniscient being remove all of its felt uneasiness in one action? He does.)

In my view, it’s wrong to picture God as only jumping in once in a while to help out nature to fulfill His plans. “Whoa, those whiny Israelites will be in bondage forever if I don’t do something. I’ll temporarily make bushes impervious to fire and talk to Moses. Then I’ll hang out back in heaven for a while until they need Me to swoop in again and change the charge on electrons in the Nile to turn the water into blood.”

No, that’s not how I picture it at all. Every instant of the history of the universe is intimately infused with God’s presence and action; He is always “intervening.” But in order to allow us to make sense of things, 99.999999% of the time it seems as if nature obeys its “lifeless” rules, and then once in a great while an apparent “miracle” takes place. There couldn’t be apparent violations of the ordinary rules all the time, lest those “rules” would never be perceived in the first place. (Just to clarify, I am not saying that what we call the laws of physics were actually violated during the plagues and so forth. I think those were just unexpected and rare outcomes of the standard rules, given the earlier conditions of the physical universe.)

OK so on to the new analogy, to help make this point: Let’s say I have a stack of blank index cards. With my pencil I start doodling shapes on the cards. Also, I don’t do the first card, and then the second. Rather, I do part of the doodles on, say, the 87th card in the stack, then I do part of the doodles on the 13th card, and so forth.

Finally, when I’m all done doodling, I call my buddy over. I tell him, “I am going to show you a new world in which your body is that of a frog. Your objective is to get from one side of the street to the other, without getting hit by any of the traffic.”

I start flipping through the stack of cards, on which I have drawn the scenes from a game of Frogger. But because I perfectly anticipated what my buddy would will with his mind, I have drawn the scenes such that the frog moves in exactly the way my buddy wants it to. After a few minutes, the novelty wears off and my buddy is dead certain that he is controlling his frog body with his mental desires.

Now, if I stop the demonstration and ask my buddy, “Describe how the cars move?” he will be able to do it. Some cars move really fast, others move slow. But at no time does a car that’s on the top right of the xth index card suddenly teleport to the lower left of the (x+1)th index card.

I hope it is clear that in order for my buddy to be able to play the game at all, I had to build in some patterns for the objects in the alternate world to obey. Did these rules constrain me? Not really; I was free to do whatever I wanted with the pencil and the blank cards. But part of what I wanted was for my friend to be able to test his frogging skills, and he couldn’t have done that if the cars appeared in and out of existence at apparently random spots on the cards. Moreover, it’s clear that the “time” in the frogger world has nothing to do with me; I didn’t even create the cards in order.

This is what I think the actual, physical universe must be like. It’s true, the replacement of a deterministic, Newtonian universe with quantum uncertainty makes the analogy less compelling. But in any event I think it disposes of the claim that my approach somehow limits God’s sovereignty, or limits His creative work to the first week of Genesis.

24 Jul 2009


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* Jason Clemens and I have a piece in Human Events on California’s predicament. (The comments are more entertaining than our dry analysis.)

* Marlo Lewis challenges the claim that the “science is settled” regarding global warming. Does anyone know if RealClimate has addressed Watts’ claims about thermometers being put next to exhaust fans, etc.? If his work is right (as Lewis summarizes in the linked post), it’s pretty serious.

* Scott Sumner continues to unwittingly support my new book’s thesis. After quoting Bernanke’s recent WSJ op ed, in which Big Ben listed all the ways he had expertly steered the economy through this storm, Scott asks:

Isn’t this basically what Herbert Hoover’s Fed did? Didn’t they also cut rates to near zero levels? Didn’t they also massively expand the Fed’s balance sheet, causing rapid growth in the monetary base? Didn’t Hoover also bail out the banking system with taxpayer money through his Reconstruction Finance Corporation? So does that mean the Fed was also “accommodative” in the early 1930s? And if so, what’s the difference between ‘accommodative’ and ‘expansionary.’

Am I being too hard on Bernanke? After all, the Fed has done a lot. But so did Hoover’s Fed, the question is whether the Fed is doing anything effective. The only difference I can see is that the base rose even more under Bernanke than under Hoover, but that was fully neutralized by the policy of bribing banks to hoard excess reserves.

Yes Scott, that is what happened under Hoover. The government has implemented the exact policies that it implemented the last time it caused a decade-long depression. And since Bernanke was appointed before it was apparent that we were in for Depression 2.0, and since he was an academic expert on what has caused the Great Depression…that’s why I got suspicious.

* In the post calling for celebrity quotes, someone posted the following video. Hilarious. (Make sure you watch the finale.)

23 Jul 2009

Murphy Interviewed by Karen Kwiatkowski

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Here is the audio [.mp3]. (Note that that’s not me singing in the beginning.)

23 Jul 2009

Looking for Silly Celebrity Quotes

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I am working on a project where I need to collect a bunch of economically ignorant quotes from famous people. So for example, I know Bono has pontificated about Third World debt, Leonardo DeCaprio has jumped on the global warming bandwagon, etc. In the comments I’d like any links you could provide to examples.