Against the Price Transparency Act

My latest article on Mises Canada takes on the Price Transparency Act, a piece of legislation that would allow the Competition Bureau to investigate alleged “price gouging” of Canadians. Here’s a bit of it:

The price transparency act aims to seek out firms that sell profitably in Canadian markets and shame them into charging lower prices for their outputs. I’ve seen complaints that, since the legislation doesn’t grant the Competition Bureau the power to set prices, the investigations will create costs for the government and for compliant firms without having any real impact on prices. Actually, that would be the best possible outcome. The legislation would be far more disastrous if it succeeded in its goal of putting downward pressure on prices. To do so would remove the incentive for entrepreneurs to efficiently employ their knowledge and insight in allocating resources. While bailouts famously socialize losses while privatizing gains, antitrust actions to reduce “gouging” effectively socialize gains while privatizing losses. We all know how privatized gains and socialized losses led investors to take excessive risks in the lead up to the financial crisis. If the antitrust authority steps in to force profitable firms to reduce prices, effectively socializing gains, then entrepreneurs will be excessively averse to risk taking. Entrepreneurs will not seek out opportunities for high profit if they anticipate that government officials will order them to reduce their prices if they succeed.

High profits are what motivate entrepreneurs to zealously pursue opportunities. Whether they achieve those profits or not, in pursuing them they bring their best knowledge and insight to bear on the problem of allocating scarce resources. High profits motivate entrepreneurs the same way a carrot can motivate a donkey. Mainstream economists are too worried about losing the occasional carrot to realize that taking away the carrot would seriously impair the donkey’s motivation to walk. Taking away the carrot would save a carrot, but it would forfeit something far more valuable. Similarly, while pushing down prices that far exceed marginal costs could reduce the deadweight loss in a particular time, place, and industry, doing so would hamper the entire entrepreneurial process.

Go read the whole thing.

Finance and the Austrian School with George Bragues

This episode of Economics Detective Radio features George Bragues, professor of business at the University of Guelph-Humber, discussing his work developing a distinctly Austrian theory of finance. While there have been forays into finance by Austrians such as Mark Skousen and Peter Boettke, Austrians have not yet fully developed a complete and distinctly Austrian theory of finance.

George names five pillars of modern finance theory: (1) The capital asset pricing model (CAPM), (2) the Black-Scholes option pricing model, (3) the efficient markets hypothesis (EMH), (4) behavioural finance, and (5) the Modigliani-Miller theorem.

CAPM is a model that derives the value of assets based on the risk-free rate and market risk, that is, risk that cannot be diversified away. The Austrian response to this model is that there is no such thing as a risk-free asset, as risk is inherent to human action. An Austrian alternative to CAPM would incorporate the Austrian theory of a natural interest rate derived from time preference. Continue reading Finance and the Austrian School with George Bragues

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Is a Small Amount of Money More Valuable to a Low Income Person than to a High Income Person?

I answered this question over at Quora. Just about all the other answers were wrong, so I thought I’d set things straight.

No. Value is not a quantity. It cannot be compared across individuals, so we cannot say that $50 is more valuable to person A than to person B.

To understand value, you must understand action. To act is to select one thing and set aside another. Thus, an ability to evaluate one thing over another is a necessary prerequisite to action, one that all mentally functioning humans possess. Valuation is always a comparison between two alternatives. It is a comparison made in the mind of an acting human.

Because the high income person and the low income person are different individuals, their valuations cannot be compared. We could say something like, “the low income person values an hour of his time less than $50, while the high income person values an hour of his time more than $50.” But this does not mean the low income person values $50 more than the high income person does in any absolute sense, because an hour of time is not the same to different individuals.

Some people have said that the answer is yes because marginal utility decreases with quantity. This is a misinterpretation. It is true that people tend to value additional units of a stock of interchangeable consumer goods less with each additional unit. This is because a person will use the first unit of the good to satisfy his highest unmet need, the second unit to satisfy his second highest unmet need, the third unit to satisfy his third highest unmet need, and so on. Thus, marginal utility does decrease with quantity. But it only meaningfully decreases with respect to other goods! If I have five dumplings, I might value an additional dumpling more than a battery, but if I have six or more dumplings I might value the battery more than an additional dumpling.

While I value things less with each additional unit, we can’t take this to mean my valuation of my total wealth must decrease as I grow wealthier. Total wealth comprises everything, leaving nothing to compare it against, so valuation is meaningless.

Continue reading Is a Small Amount of Money More Valuable to a Low Income Person than to a High Income Person?

Teaching Economics: Age of Empires and Central Planning

When I was young, I played a lot of Age of Empires. For those who are unfamiliar with the series, they are games where the player must direct a tiny civilization’s development. He begins with one building and only a few villagers. By right clicking on a villager, then left clicking on a tree, stone mine, gold mine, or animal, the player can direct the villager to gather wood, stone, gold, or meat. He can also direct villagers to make buildings. And with buildings, he can recruit more villagers or soldiers.

By directing every action of every person in his civilization, the player can eventually turn his tiny village into a sprawling city, clashing militarily with other players’ civilizations.

I think a game economy like that one could be a good teaching tool for young people. In the early stages of the game, centrally managing a few villagers works well. But as the civilization grows, the player’s attention becomes more stretched. It is common, in the game economy, for the player to discover a group of villagers clustered around a (now exhausted) mine or forest. The growing economy becomes ever more difficult to manage, and it becomes more difficult to coordinate the growing numbers of workers and soldiers. Continue reading Teaching Economics: Age of Empires and Central Planning

Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

This episode of Economics Detective Radio features Pierre Desrochers discussing the life and work of Jane Jacobs. Jacobs, born Jane Butzner, was a thinker and activist who wrote about cities. She spent her early career as a business journalist. When she started writing about urban renewal, she recognized the policy for the disaster it was. Jacobs became a voice for the general dissatisfaction with a policy that would bulldoze whole neighbourhoods, relocating the inhabitants into new buildings preferred by urban planning reformers and political elites.

The editors of Fortune Magazine invited Jacobs to write a piece about downtowns. Her piece, “Downtown is for People” became the magazine’s most-discussed article. She developed the ideas in that article into her first and most famous book, The Death and Life of Great American Cities. The book launched her as a minor celebrity.

In New York City, she successfully opposed initiatives to “renew” Greenwich Village. She also opposed a plan that would have cut a highway through SoHo, Chinatown, and Little Italy. Eventually she found herself opposing the Vietnam War, and, fearing that one of her sons would be drafted, moved to Toronto. Continue reading Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

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On the Political Economy of Native Tribes

My latest Mises Canada post is all about Native tribes:

Ludwig von Mises wrote that, “[d]emocratic control is budgetary control. The government has but one source of revenue—taxes. … But if the government has other sources of income it can free itself from this control.”[1] This principle is particularly important for understanding the internal politics of Canadian Native tribes, whose governments are the recipients of large transfers from the Canadian federal government.

A recent scandal involving the Squamish Nation, a Vancouver-area tribe with a population of about 4,000, is a case in point. Two political officials of the band spent $1.5 million from an emergency fund for their personal ends. According to the investigation that eventually exposed them, “it was clear they handed out funds to develop political support from members.” [2] The scandal derives from the fact that funds earmarked for one purpose, emergencies, were used for a different purpose. But the interesting economic story would nonetheless hold if the funds had been used only for their intended purposes.

According to its most recent financial statements,[3] the Squamish Nation earned $11.3 million from Aboriginal Affairs and Northern Development Canada, i.e. the Canadian Federal Government, and only $8.4 million from taxation in 2014. As Mises suggests in the quote above, a government with alternative sources of income besides taxation can use this income to free itself from democratic control. Robbing Peter to pay Paul is a favourite activity of all governments, but when the robbery occurs through taxation, it is at least limited by Paul’s awareness that he is being robbed.

Go read the rest at Mises Canada.

Economics is a Philosophy of Tolerance

My latest Mises Canada article deals with the economist’s response to snobbery:

The world is full of snobs. There are music snobs who complain that most people prefer Lady Gaga to Stravinsky, film snobs who complain that most people prefer action movies to art films, and food snobs who complain that most people prefer pizza to fine sashimi. Whatever one’s area of interest, it is tempting to pass judgement on others’ preferences.

In learning economics, and in absorbing its lessons, one learns to be less of a snob. Economic analysis always begins by taking people’s preferences as given. The economist sees someone choosing pizza over sashimi and sees only a person acting towards the highest attainment of his ends. The economist trains himself to leave his personal biases and any inclination towards snobbery behind so that he can keep his analysis value free.

Even common terms like “responsible” and “irresponsible” are value-laden. Activities we recognize as responsible, such as saving for retirement, avoiding risks to life and limb, and living a healthy lifestyle are consistent with a specific set of preferences. Someone who values future experience highly against present experience (i.e. someone with a low rate of time preference) will favour all of these behaviours. Activities we recognize as irresponsible, such as profligate spending, risk-taking, and indulging in junk food, alcohol, or illicit drugs are consistent with a different set of preferences. Valuing present experience highly over future experience (i.e. having a high rate of time preference) makes all these activities more appealing. Economics permits us to understand these different preferences but it never permits us to judge one set of preferences to be superior to another.

Read the whole article at Mises Canada.

TruthCoin, Prediction Markets, and Anarchy with Zack Hess

This episode of Economics Detective Radio features Zack Hess. Zack is working on a project called “TruthCoin,” a decentralized prediction market based on the technology behind bitcoin.

Prediction markets are a highly effective way to bring together dispersed information and insight into prices that reflect the likelihood of any future event. However, recent attempts to create centralized prediction markets have been thwarted by governments under antiquarian anti-gambling laws.

Enter TruthCoin. TruthCoin is a prediction market (currently in beta) that will not depend on any central server or organization. This online market will be dispersed among all the participants and thus more difficult to shut down.

Furthermore, TruthCoin will not depend on a central arbiter. The main difficulty faced by the creators of TruthCoin is in creating incentives for human arbiters to judge the outcomes of bets correctly. The solution is for judges to be set against one another, for each judge to get a higher payoff when other judges are wrong. Then any attempted collusion between arbiters falls apart. Continue reading TruthCoin, Prediction Markets, and Anarchy with Zack Hess

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About Those Monotonic Transformations…

Well, this is awkward. You told us that utility was strictly ordinal, that utility functions were unique up to a monotonic transformation. But whenever there’s a problem that requires them to be cardinal in some sense, you just revert right back to cardinality, don’t you? Remember how interpersonal comparisons of utility were supposed to be impossible? You made them anyways. You were never committed to the idea of ordinal utility. You just told us that to make us think we were safe. You lied to us.

In my newest post on Mises Canada, I critique expected utility theory on the grounds that it depends on cardinal utilities. Go read it and report back.

Vampires, Zombies, and the Dismal Science with Glen Whitman

In this episode, Glen Whitman discusses Economics of the Undead: Vampires, Zombies, and the Dismal Science, a book he co-edited with James Dow. Glen is an economics professor at California State University and, unlike most academic economists, he moonlights as a TV writer. He first wrote for the TV show Fringe and now writes for the soccer spy drama, Matador.

The book’s website provides the following description:

“Whether preparing us for economic recovery after the zombie apocalypse, analyzing vampire investment strategies, or illuminating the market forces that affect vampire-human romances, Economics of the Undead: Zombies, Vampires, and the Dismal Science gives both seasoned economists and layman readers something to sink their teeth into.

Undead creatures have terrified villagers and popular audiences for centuries, but when analyzed closely, their behaviors and stories—however farfetched—mirror our own in surprising ways. The essays collected in this book are as humorous as they are thoughtful, as culturally relevant as they are economically sound, and provide an accessible link between a popular culture phenomenon and the key concepts necessary to building one’s understanding of economic systems large and small. It is the first book to combine economics with our society’s fascination with the undead, and is an invaluable resource for those looking to learn economic fundamentals in a fun and innovative way.”

Continue reading Vampires, Zombies, and the Dismal Science with Glen Whitman

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Garrett M. Petersen's blog about markets, institutions, and ideas.