Hunter-Gatherer Economics and Sustainability

To many environmentalists, sustainability means leaving the world the way you found it. I think that this may reflect the instincts of a hunter-gatherer.

If you are a hunter-gatherer, how much you can eat is limited by the natural rate of replenishment. If you eat game or plants faster than they are replenished, your tribe will die.

Modern human welfare is not governed by replenishment. We use knowledge to add value to our environment. Cultivation of crops means that we can grow more food than we could obtain by gathering. And we apply ever-increasing ingenuity to this cultivation.

Sustainability of modern life is thus much more complex than sustainability of hunter-gathering. Our modern ancestors have left us the gifts of their ingenuity, so that what they took out of nature has not hurt our welfare. And we are likely to do the same for our descendants.

Tariffs vs. Quotas

Greg Mankiw writes,

rationing under price controls is never perfect. Under rent control, for example, apartments do not automatically go to those who value the apartments the most. The misallocation due to imperfect rationing makes the actual welfare cost of price controls much higher than the standard deadweight loss triangle.

Suppose that the minimum wage is $10. You have one worker who would be happy to work for $8 and another worker who would be happy to work for $10. If the second worker is the one who happens to get the job, you lose $2 of surplus due to what Greg is calling “imperfect rationing.”

I remember being taught the equivalence between tariffs and quotas. But it seems to me that such an equivalence fails by the same reasoning. The quota may be imperfectly rationed, unless rights to sell within the quota are tradable.

Concern with the term “public goods”

Frances Woolley writes,

in the US, as elsewhere, most public expenditure goes towards redistributive transfers, health and education. Table 2 shows
total government expenditures for 18 OECD countries. Most government expenditures go towards health (7 to 19 percent of government spending), education (7 to 15 percent), and ‘social protection’ programs that more directly redistribute income (19 to 45 percent).
The goods most often cited as public goods are unimportant in terms of overall government expenditure for OECD countries: defense accounts for 1 to 6 percent of spending; public order between 2 and 5 percent of spending.

Pointer from Bryan Caplan.

It is an interesting and wide-ranging essay, difficult to excerpt. Here is another:

substantial insights into the economics of non-rival goods can be gained from the analysis of clubs (for providing local goods that are non-rival but excludable), the theory of natural monopoly (for goods such as Microsoft office where there are substantial initial development costs but the additional cost of an extra Word user is (close to) zero), or the economics of information (for the development of new technologies or drugs, where the manufacture of the new drug may cost a dollar or two per user, making it close to non-rival but the drug development may cost millions). While it is interesting and useful to have a theory for the special sub-set of non-rival goods that happen to be non-excludable also, there too few such goods to justify the place such goods hold in the public economics curriculum

One point she is making is that we should not encourage students to think that the theory of public goods explains or describes the actual role of government.

The Economics of Sustainability

George Leef writes,

The sustainability movement isn’t interested in the kind of analysis that scholars bring to controversies. It wants zealots, such as the “eco-reps” now employed on many campuses to push the agenda. Recycling, for instance, is always advanced as an imperative for saving the planet. There are trade-off questions about recycling that have caused many people to conclude that its costs often exceed its benefits, but students are not encouraged to think about them.

It strikes me that introductory economics teachers need to include some thoughts on sustainability. Here are mine:

1. The most reliable indication of sustainability is the ability to make a profit at unsubsidized market prices.

2. When people disagree with the market’s judgment, there is a good chance that they are focusing on a cost they can see and ignoring a cost that they cannot see. For example, someone who argues that “eating local” is sustainable probably sees the cost of transporting food but does not see the cost of allocating land and water to inferior uses. Before modern transportation, refrigeration, and food preservatives, more of us “ate local.” Consequently, we wasted land near cities on farms, and that land now is used to house people or has been returned to wilderness.

3. If in order to get people to recycle you need to use subsidies or regulations, then that is a sign that recycling does not save resources and instead wastes them.

4. Remember that one of the laws of science is that in chemical reactions matter is neither created nor destroyed. There is a sense in which production of goods and services does not “use up” physical resources. Instead, it changes the form of matter from something that is relatively useless to something that is relatively useful.

5. The great industries of the world came about because entrepreneurs were able to take abundant, seemingly useless resources and make them valuable. Before internal combustion engines, oil was just annoying gunk. Before computers, silicon was just the main constituent in sand.

6. In a free-market economy, price signals tell consumers and entrepreneurs what can be wasted and what must be conserved. If property rights are clear and market prices are free to move, then there is no need to fear running out of any valuable resource.

7. Public policy is subject to public choice problems, including the bootleggers and baptists problem. I believe that the consensus now is that using corn to fuel cars is not sustainable. If a free market had experimented with using corn to fuel cars, the experiment would have failed and that would be the end of it. However, because there is now a substantial lobby for the ethanol mandate, government policy to enforce the use of corn to fuel cars remains in place indefinitely.

Properly taught, freshman economics has a lot of useful things to say about sustainability.

Teach Price Gouging Using Uber

I was talking with some young people in Boston about getting around during the severe snow. They commented that Uber’s prices would go up by a factor of 4 or more when things got really tough. But they were not angry. They were grateful that the could get transportation at all. And they understood the role that the higher prices played in helping the situation.

Perhaps one could discuss this phenomenon in class. And then ask why the young people did not complain about “price gouging.” Why is it that if a store were to raise prices on snow shovels during a snowstorm that would be price gouging, but Uber’s approach was not price gouging? Why would someone be inclined to favor a regulation to prevent the store from raising the price of shovels during a snow storm?

I suspect that the intuition is that the store’s supply of shovels is presumed fixed, but Uber’s supply of drivers goes up as prices rise. Since the higher price creates a supply response, people can see it playing a constructive role. But with the store and the snow shovels, all you see are higher profits.

Of course, there are two other benefits to higher prices for snow shovels. First, it discourages people who do not really need shovels from hoarding them (if you already have one shovel, you would not go out and buy a second one at a high price). Second, in the long run it encourages stores to keep extra shovels in stock. Knowing that they can make a good return from having a large inventory of shovels in case of a snow storm, the stores will be willing to hold larger inventories than if their profits are constrained.

A Shortage Explained Using Textbook Economics

Alex Tabarrok writes,

California has plenty of water…just not enough to satisfy every possible use of water that people can imagine when the price is close to zero. As David Zetland points out in an excellent interview with Russ Roberts, people in San Diego county use around 150 gallons of water a day. Meanwhile in Sydney Australia, with a roughly comparable climate and standard of living, people use about half that amount. Trust me, no one in Sydney is going thirsty.

I often complain about textbook economics, but certainly this is an example where it offers important insights. When you see a “shortage,” look for the artificially low price.

The price system fosters order. Repression of the price system leads to disorder.

How to Fix Economic Education

In this essay, I argue that it is badly broken.

Unfortunately, the conventional misrepresentation takes seriously the economics of a camping trip. There are resources to be allocated, including the time that campers have available to pitch a tent, light a fire, cook a meal, and so forth. And there are goods to be allocated, including sleeping bags, food, and water. Thus, from the conventional standpoint, there is nothing wrong with using the camping trip as a metaphor for the economy.

Read the whole thing.

Disability and Employment

Sarah Portlock of the WSJ reports,

In 2013, just over one in six — or 17.6% — of people who were disabled had a job, down slightly from the prior year. The report tracks workforce characteristics of people with a disability, which includes hearing, sight, cognition, mobility or other impairments.

…The Labor Department report comes as new regulations require federal contractors to ask their employees if they have a disability in an effort to reduce joblessness in the community. Companies must employ a minimum of 7% disabled workers, or prove they are taking steps to hire more, or else they could face penalties or lose their government contracts.

In the first paragraph, she links to a report from the Department of Labor.

Government policies shift the supply curve of disabled workers to the left, by offering benefits for not working. The second paragraph describes a policy to shift the demand curve to the right. What would standard economic analysis predict?

Who Says These Are Public Goods?

By paying for public goods like education and health care, governments can improve efficiency as well as welfare.

That is from John Micklethwait and Adrian Wooldridge, writing in The Fourth Revolution. I have just started to read it, based on Tyler Cowen’s recommendation.

If one of my high school students wrote the quoted sentence, it would receive a bad grade. The standard economic definition of public goods is that they are neither excludable nor rivalrous. That means that once the good is produced, it is hard to stop anyone from enjoying it, and one person’s enjoyment does not interfere with someone else’s enjoyment. National defense and pubic public safety are classic examples. Sanitary conditions in a city would qualify.

However, education and health care do not qualify as public goods under the standard definition. If it chooses to, a school or hospital can exclude non-paying customers from obtaining its services. And your use of a teacher’s or a doctor’s time can reduce my ability to use that person’s time.

Another characteristic of public goods is that the social benefits exceed the private benefits. One can make a case that vaccinations have that property. In theory, driver education would have that property also. However, for the most part, the benefit I receive from your education and health care is extremely low, particularly relative to the benefit that you receive from those goods.

In my opinion, casually making the case that government should pay for health care and education by asserting that these are public goods sounds to me like what Tyler would call “mood affiliation,” not sound reasoning. I hope that his endorsement of the book does not turn out to be mood affiliation.