Monday, December 31, 2012

Why I am pro gun and always will be

I recently read the David McCullough book 1776. I enjoyed it and I wholeheartedly recommend it. As you probably guessed the book tells the story of the continental army's campaigns and battles during 1776, from the siege of Boston up through Washington's midnight crossing of the Delaware.

I don't really remember how the revolutionary war was taught when I was in high school but reading this book was definitely a learning experience. Like most Americans I think that George Washington was a great patriot and outstanding general. He beat the most powerful army of the time after all. But Mr. McCullough also shows his blunders and mistakes. He makes Washington human, full of worries about his own ability and the ability of his soldiers and officers. Even some of Washington's closest friends and confidants doubted his ability to lead the Americans to victory at times.

And they did this for good reason. The continental army was made up of young boys, old men, and every age in between. They were for the most part untrained and highly undisciplined. Many deserted, some back to their homes others to the British. They were short on supplies and many were left shoeless in the cold northeastern winters. While I was reading the book all I kept thinking was "How did this ragtag bunch of guys ever win this war?". It seemed impossible.

But the revolutionary war could have been a lot more difficult than it was. King George and Parliament could have outlawed guns. After all, there was no continental army before the continental congress decided to create one in defiance of their king. The colonies had no standing army to call on to fight the British for them. They had to form one, an army made up of everyday people fighting for the freedom that they felt was being denied to them. These men took their rifles, muskets, and pistols from their houses to the battlefield. How would they have fought the British if they had not been allowed to own guns?

Some people will say that this is a ridiculous example. We don't have to worry about rebellion and revolution and fighting our government in this country. It is OK for us to give up some of our individual rights to own weapons and just allow the police and army to protect us. They will never turn on us, we will never need to protect ourselves from them.

Maybe that is true now. But will it always be that way? Will we always be able to rely on our government to protect us, even from themselves? Will there never be any minorities, like the Japanese Americans in the 1940's, who have to worry about their government throwing them in prison camps? That was only 70 years ago. Or what about African Americans during the Jim Crow era, who often relied on personal firearms to protect themselves from racists when the police were looking the other way. I doubt that they would have felt comfortable being told that they were not allowed to own a gun.

I find it hard to believe that we have reached such a level of peace in the last 50 years that I no longer have to worry about protecting myself and can instead rely on the police to do it for me. And not only that, but I also no longer have to worry about my government turning against me, even though every government I can think of has at some point turned on its citizens or at the very least a minority of them.

The point is that yes, maybe today we don't need semi-automatic rifles, machine guns, grenades, or even tanks in the hands of private citizens. Maybe. But even if that is true that is just today. What about 100 years from now, or 200 years? Will our posterity also be alleviated of this threat? History tells us no. But once we give up guns, once we let the government take them away a little at a time, I promise that they will not give these rights back when they become oppressive. If we lose the right to carry these kind of weapons now we lose it forever. And when the day comes that we do need these weapons they will not be around except in the hands of the very people we are trying to defend ourselves against.

In closing I have two quotes from the great patriot and American, John Adams.

 "Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There never was a democracy yet that did not commit suicide. It is in vain to say that democracy is less vain, less proud, less selfish, less ambitious, or less avaricious than aristocracy or monarchy. It is not true, in fact, and nowhere appears in history. Those passions are the same in all men, under all forms of simple government, and when unchecked, produce the same effects of fraud, violence, and cruelty."
- John Adams

"Posterity! You will never know how much it cost the present Generation to preserve your Freedom! I hope you will make good use of it. If you do not, I shall repent in Heaven, that I ever took half the Pains to preserve it."
- John Adams

Wednesday, December 26, 2012

On the topic of firearms

I am working on a post explaining my personal position on gun control. In the meantime I would like to share some quotes on the topic. These quotes have a common theme and are in line with my personal feelings. Enjoy.

"The constitutions of most of our States assert, that all power is inherent in the people; that they may exercise it by themselves, ... or they may act by representatives, freely and equally chosen; that it is their right and duty to be at all times armed; that they are entitled to freedom of person, freedom of religion, freedom of property, and freedom of the press."
- Thomas Jefferson

"To disarm the people is the most effectual way to enslave them."
- George Mason  

"Besides the advantage of being armed, which the Americans possess over the people of almost every other nation, the existence of subordinate Governments, to which the people are attached, and by which the militia officers are appointed, forms a barrier against the enterprises of ambition, more insurmountable than any which a simple Government of any form can admit of. Notwithstanding the military establishments in the several kingdoms of Europe, which are carried as far as the public resources will bear, the Governments are afraid to trust the people with arms."

 - James Madison

"The Constitution shall never be construed to prevent the people of the United States who are peaceable citizens from keeping their own arms."
- Samuel Adams

"The most foolish mistake we could possibly make would be to allow the subject races to possess arms. History shows that all conquerors who have allowed their subject races to carry arms have prepared their own downfall by so doing."
- Adolph Hitler

"No Free man shall ever be debarred the use of arms."
- Thomas Jefferson

"The militia is the natural defense of a free country against sudden foreign invasions, domestic insurrections, and domestic usurpation of power by rulers. The right of the citizens to keep and bear arms has justly been considered, as the palladium of the liberties of the republic; since it offers a strong moral check against the usurpation and arbitrary power of rulers; and will generally ... enable the people to resist and triumph over them."
- Joseph Story (Supreme Court Justice)

"Before a standing army can rule, the people must be disarmed; as they are in almost every kingdom of Europe. The supreme power in America cannot enforce unjust laws by the sword; because the whole body of the people are armed, and constitute a force superior to any bands of regular troops that can be, on any pretense, raised in the United States"

- Noah Webster

"Are we at last brought to such humiliating and debasing degradation, that we cannot be trusted with arms for our defense? Where is the difference between having our arms in possession and under our direction, and having them under the management of Congress? If our defense be the real object of having those arms, in whose hands can they be trusted with more propriety, or equal safety to us, as in our own hands?"
- Patrick Henry

"Guard with jealous attention the public liberty. Suspect everyone who approaches that jewel. Unfortunately, nothing will preserve it but downright force. Whenever you give up that force, you are inevitably ruined"
- Patrick Henry

"And what country can preserve its liberties, if its rulers are not warned from time to time that this people preserve the spirit of resistance? Let them take arms....The tree of liberty must be refreshed from time to time, with the blood of patriots and tyrants"

- Thomas Jefferson

Friday, December 21, 2012

Are monopolies back? Part 3

Part 3: What is the role of a business?
In their article, Mr. Lynn and Mr. Longman lament the "consolidation" of America's businesses and blame said consolidation as a cause of the current jobless recovery. In my previous posts I provided some evidence and reasoning that shows that "monopolies" are not as bad for consumers as people think. But what about for workers?

It could be reasonably argued that more consolidation means less employers which means less competition for workers. This is one of the arguments put forth by Messieurs Lynn and Longman. But have we really reached that extreme point? I think it is quite a stretch to say that there are not enough potential employers for most occupations. Off the top of my head football players, basketball players, baseball players and other athletes might have a few complaints (Note that the NFL, MLB, and the NBA have some antitrust exemptions granted to them by Congress. There is that government monopoly thing again...). But computer programmers? Lawyers? Investment Bankers? Cooks? Dentists? Teachers? Mechanics? Analysts? Do any of these occupations really suffer from a lack of employers? I personally do not think so.

Regardless of how one feels about the current amount of employers, a more fundamental question is whether it is the responsibility of firms to create jobs. I do not think that it is. The purpose of a business is to make the owners money. They do that by creating a product or service that people value. Jobs usually accompany the production of a new job or service, but that is not and should not be the reason someone starts a business. If jobs are truly our goal as a society, then we should give our construction workers spoons instead of bulldozers. Similar substitutions could be made in other professions.

When economists talk about the labor/leisure decision, labor is a bad. Leisure is everything people do that does not involve working. Working i.e. labor is what people do so that they can consume. People only work to consume. You might be thinking "hey wait, I like my job". And maybe you do. But I doubt you would continue to do every aspect of your job if you had a billion dollars. The parts of your job that you like you could certainly continue to do as a hobby and it would fall under leisure. But the paperwork, the emails, the nagging boss, the deadlines, etc., that could all go away. I think that even the people that love their work would give up the annoying parts if they could.

In my opinion the ultimate goal of society should be to have machines making all of our consumer goods. Machines can work 24 hrs a day with no breaks or vacations. Goods would be cheaper and much more prevalent. People could focus their time and energy on more service oriented jobs or on inventing new products to help people live better lives. Time, energy, and human capital are scarce resources. There is no need to waste them on doing things that machines can do.

We do not need nor should we desire a world where people do monotonous factory work for 40 hours a week. Yet our politicians and media tell us that the loss of factory jobs is a terrible thing. I understand that the factory jobs of yesterday paid more than the jobs of today, but much of that wage premium was a union fantasy and the result of a temporary period of American dominance in a post WWII world.

As a society we should be happy to see China, India, Indonesia, and other developing countries increase their standard of living and join the modern world. Instead we yearn for the days of old when Americans were doing the same boring, tedious, factory work now being done in those countries.

Progress will always create winners and losers, with the winners far outnumbering the losers. Hopefully we will reach the point where we desire the return of the auto assembly line worker as much as we desire the return of the blacksmith.

Wednesday, December 12, 2012

Are monopolies back? Part 2

Part 2: How likely are monopolies? 
In my last post I showed that Standard Oil and Alcoa were not quite the terrifying monopolies that they have been made out to be. But how can this be? Standard Oil controlled 88% of the refined oil market by 1890 and Alcoa controlled 91% of the primary aluminum market by the 1930's. Those sure sound like market dominating numbers.

The real problem with trying to define a monopoly is coming up with the definition of the potential monopoly's market. How a market is defined will directly impact the number of available substitutes. The number and quality of substitute goods are both very important when determining how much competition a firm faces.

Let's think about Standard Oil. Was Standard Oil really only competing with other oil refining companies? One of Standard Oil's most important products was kerosene for lamps. If you think of Standard Oil as being in the light producing business instead of the oil refining business, you can begin to see that Standard Oil had a large number of competitors. In addition to other oil refining companies, Standard Oil had to compete with candle makers, trees, and the sun to name a few. All 3 of those goods are substitutes, but they are hardly the only ones. Whale oil can light lamps. People can alter their behavior by sleeping more and working less when it is dark. While none of these may be perfect substitutes for kerosene, if the price of kerosene increases people on the margin will switch to some combination of these goods or something else that I have failed to mention.

But perhaps most importantly, new goods that are even better substitutes can be invented. In 1879 Thomas Edison patented an incandescent light bulb that used a carbon filament. By 1914 88.5 million lamps were being used in the U.S. Three years earlier, in 1911, Standard Oil's market share had fallen to 60%.

If Standard Oil had kept the price of their refined oil and thus kerosene artificially high, they would not only have had to worry about other oil refining companies undercutting them. They also would have had to worry about people switching to wood, candles, whale oil, or even forgoing artificial light altogether. To make matters worse, they constantly had to worry about someone inventing something even better than what they were selling! This unseen competition always exists for every company in every industry. The higher Standard Oil's prices, the stronger the incentive for entrepreneurs to come up with something new, better, and of greater value.

This same analysis just as easily applies to Alcoa. Only government sanctioned monopolies are truly shielded from the threat of competition. The thought of natural monopolies arising on their own with no state assistance, either direct or indirect, is very hard to believe.

The next time you hear about a company monopolizing a market, think hard about what their market really is. Chances are it is much larger than you first thought. When the company is correctly viewed as a competitor in this larger market I bet that they are not as dominant as they first seemed.

Monday, December 10, 2012

Are monopolies back? Part 1

This is the first of a 3 part series on monopolies. I am dividing the post into 3 parts just to keep it the posts shorter and more blog friendly.
In a recent NY Times article by the always enlightening Paul Krugman, Mr. Krugman makes the case that a return of the Gilded Are robber barons is partially to blame for the slow recovery in America. To be fair, Mr. Krugman does not do his own research but instead cites an article from The Washington Monthly written by two fellows of the New America Foundation. In this article, the authors Mr. Lynn and Mr. Longman use historical and present day anecdotal evidence to argue that increased corporate consolidation is holding back the emergence of new small businesses, which they claim are the primary drivers of job growth.

But is the U.S. really going back to the days of Rockefeller, Carnegie, and Morgan? And even if we are, is that really so terrible?

Part 1: Debunking the robber baron myth

First, just to set the historical record straight, a little data on the two classic historical "monopolies" Mr. Lynn and Mr. Longman refer to in their article, Standard Oil and Alcoa.

Standard oil was incorporated in 1870 in Ohio by John D. Rockefeller, his brother, and a few other investors. By 1890 they controlled 88% of the refined oil flows in the U.S. That sure sounds monopolistic huh? But what actually happened to the price of refined oil? In the graph below (source) you can see that the price went from $0.26 in 1870 to about $.06 cents in 1898. That hardly seems like the pricing trend of a monopolist. (Click graph to expand)

The ideas of knowledge specialization, trade secrets, and increasing returns to scale, criticized by Mr. Lynn and Mr. Longman in their article as "corporatism", are the reasons Standard Oil was able to lower the price of refined oil so dramatically. Since when is creating a product that people want for less money harmful to consumers or the public in general? Yet many people today still believe that John D. Rockefeller was an unscrupulous businessman driven by greed and the love of money, his only goal in life being to screw over the oil consuming public.

In reality Mr. Rockefeller was exceptionally hard working and thrifty. His donations to medical research were instrumental in the eradication of yellow fever and hookworm. He founded the University of Chicago and Rockefeller University and as a devout Northern Baptist supported many church based institutions. Though I am certain he had his faults, he was hardly the snake that many people know him as.

If you want to learn more about Standard Oil I suggest this unbiased article by Lawrence Reed in the The Freeman.

Like Standard Oil, Alcoa has become synonymous with the evil monopoly. In 1938 the Justice Department under FDR sued Alcoa, demanding that the company be broken up. Four years later the case was tossed out and two years after that, in 1944, the U.S. Supreme Court referred the case back to the U.S. Court of Appeals for the Second Circuit. Ultimately the case was referred back to District Court which rule against divestiture in 1950, though they did place Alcoa under watch for 5 years.

What was Alcoa's crime? Well in the words of judge Learned Hand, the Second Circuit Court of Appeals judge who presided over the case, they were just too good. From his case opinion:

“It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every new-comer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel.”

So Alcoa just reacted before everyone else, had more experience, better logistics, and better workers. That was their crime. Meanwhile, what was happening to the price of aluminum ingot during Alcoa's reign of terror? As you can see in the graph below, not much (source).

Alcoa became the only legal supplier of aluminum ingot in 1903 and remained the only one while there patents were in force. The price was $0.33/pound that year, down from $0.60/pound in 1895. As seen in the graph, there was a large spike due to the increased demand of WW1 but other than that the price stays relatively constant between $0.15 and $0.30 cents through 1970. The Alcoa "monopoly" was ended in 1955.

So even if Alcoa was a monopoly, it does not appear that they charged consumers classic monopoly prices.

It seems as if both scholars and journalists spend an immense amount of time worrying about natural monopolies even though history shows they never really exist (this is in contrast to government sanctioned monopolies which do exist and are the ones that we should be worried about). In my next post I will discuss why natural monopolies are not as common as we think they are and why they are unlikely to become so regardless of any antitrust laws on the books.

Wednesday, December 5, 2012

Entry exams are not going to improve teacher quality

The American Federation of Teachers, an affiliate of the AFL-CIO (shocker), has proposed an entry 'bar' exam for teachers. Despite what the AFT says, this exam will not improve teacher quality.

Many public choice economists associate certifications, licenses, and other attempts at excluding people from various professions with rent seeking. Often the people who are already in the profession, and thus voting on the new licensing standards, are grandfathered out of the new requirements. This implies that the requirements are more about limiting their future competition than increasing their expertise. In many cases it also leads to the profession charging a premium for their services since they are now "licensed" or "certified", despite the fact that as a group they are no more knowledgeable than they were before and no more qualified than the uncertified practitioners.

Certifications rarely lead to improvements in product quality despite the new higher prices. Has the bar exam eliminated bad lawyers? Has the AMA eliminated bad doctors? Does the fact that your plumber or electrician is certified make them good? What about your hairdresser or manicurist? I am sure that everyone reading this has had nothing but wonderful experiences with all of the occupations I just named. And lets not forget that teachers are already certified by their respective states.

When it comes to certifications/licenses I am reminded of a scene in the movie Tommy Boy. In the movie Tommy Callahan, played by Chris Farley, is attempting to sell brake pads to an automotive supply store owner, Ted Nelson: Video Here

 Tommy: ...Let's think about this for a sec, Ted, why would somebody put a guarantee on a box? Hmmm, very interesting. 
Ted Nelson: Go on, I'm listening. 
Tommy: Here's the way I see it, Ted. Guy puts a fancy guarantee on a box 'cause he wants you to fell all warm and toasty inside. 
Ted Nelson: Yeah, makes a man feel good. 
Tommy: 'Course it does. Why shouldn't it? Ya figure you put that little box under your pillow at night, the Guarantee Fairy might come by and leave a quarter, am I right, Ted? 
Ted Nelson: What's your point? 
Tommy: The point is, how do you know the fairy isn't a crazy glue sniffer? "Buildin' model airplanes!" says the little fairy, well, we're not buying it. He sneaks into your house once, that's all it takes. The next thing you know, there's money missing off your dresser and your daughter's knocked up, I've seen it a hundred times. 
Ted Nelson: But why do they put a guarantee on the box? 
Tommy: Because they know all they sold ya was a guaranteed piece of shit. That's all it is, isn't it? Hey, if you want me to take a dump in a box and mark it guaranteed, I will. I've got spare time.

I view certifications/licenses the same way Tommy views guarantees. Professions put a certification on themselves to make consumers feel all warm and toasty inside, but they know that all they did was certify a piece of shit.

Free markets and competition are the only mechanisms that can eliminate poor performers. Licenses and 'bar' exams will not do the trick. Competition gets rid of bad lawyers, bad doctors, bad plumbers etc. But teachers want to shield themselves from this competition. They would rather hide behind exams and training requirements and act like they are doing something.

This is too bad, especially for the youth of America. Increased competition is the only hope for improving K - 12 education in this country.