Tuesday 30 July 2013

The fair-trade movement does more harm than good

Or so argue Amrita Narlikar and Dan Kim in a recent article in Foreign Affairs. A short summary of the Narlikar and Kim article reads,
Despite the claims of its champions, the fair-trade movement doesn't help alleviate poverty in developing countries. Even worse, it is just another direct farm subsidy of the kind most conscientious consumers despise. In the long term, the world needs free trade, not fair trade.
This article is the one discussed in the most recent EconTalk.

Narlikar and Kim open their essay by noting,
Although the concept of ethical trade has existed for a long time, the institutionalization of the fair-trade movement did not begin in earnest until the late 1980s. In 1989, the World Fair Trade Organization was founded, and in the years that followed, various fair-trade certification and labeling processes emerged. A product is granted a fair-trade label once its producers have met a list of social, economic, and environmental requirements. The stated purpose of the fair-trade movement is to give economic security to producers in developing countries -- often of unprocessed commodities such as fruits, live animals, and minerals -- by requiring companies and consumers to pay a premium on the market price.

Until now, any questioning of the fair-trade movement has been limited to the micro level. The movement has faced repeated criticisms, for example, for the relatively expensive fees that producers must pay to get a fair-trade label, which make it ineffective for many poor farmers. Another area of concern is just how lucrative the process is for middlemen and retailers. Finally, several studies show that very little of the premium that consumers pay actually reaches needy producers. Consumers might be surprised to learn that only one or two percent of the retail price of an expensive cup of “ethical” coffee goes directly to poor farmers.

The adverse effects of fair trade are even more worrying at the macro level. First, fair trade deflects attention from real, long-term solutions to rural poverty in developing countries; and second, it has the potential to fragment the world agricultural market and depress wages for non-fair-trade farm workers.
An interesting statistic is that in 2010, retail sales of fair-trade-labelled products totalled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers. There has to be a better way of helping poor farmers. Having only 1.2 cents out of every dollar spent on fair-trade products reach the target farmers is a hugely inefficient way of helping these people. If people wish to help these farmers there has to be charities out there that can transfer more than 1.2 cents per dollar to them.

Also a more efficient and straightforward way to help poor farmers is to remove the massive OECD subsidies and tariffs we see on agricultural products. In other words, a move towards free trade is needed.

EconTalk this week

Amrita Narlikar of the University of Cambridge talks with EconTalk host Russ Roberts about fair trade and policy issues related to trade. Narlikar argues--based on a recent article with Dan Kim--that the Fair Trade movement hurts workers outside of the fair trade umbrella and does little for those it is trying to help. She advocates free trade, particularly the elimination of agricultural subsidies in the developed world and the best way to help workers in poor nations. Drawing on a recent article with Jagdish Bhagwati, she criticizes the international response to recent deaths in Bangladesh factories. In the last part of the conversation, she defends the World Trade Organization.

Monday 29 July 2013

Holy credit! 2

In the previous post a little fun was had at the expense of the at the Archbishop of Canterbury, Justin Welby, for his idea that the C of E go up against the payday lenders in the U.K. and put them out of business by out competing them. But there is a positive side to the Archbishop's idea. He wants to out compete the current lenders. And what, you have to ask, is wrong with a bit of competition?

This question is asked by Tim Worstall at the Adam Smith Institute blog and he answers, correctly, nothing.
However, underneath the inherent silliness is something much more welcome, a definite antidote to the increasingly shrill calls from the likes of Stella Creasey that payday lending must be abolished by legislative fiat. For what the Rev Welby is actually saying is that he wants to drive these lenders out of business by competing against them, not by hoodwinking credulous MPs into stealing away someone's livelihood. Welby is insisting that such short term and low value lending can be done at much lower prices than the current companies manage it. This would be to the benefit of the consumer, as competition always is, and this would thus be a good thing. And we around here do have a habit of welcoming goods things, whatever direction they arrive from.
So we have to say, good on you bish!

Sunday 28 July 2013

Holy credit!

It is being reported in the U.K. that the Archbishop of Canterbury, Justin Welby, wants to make the Church of England’s property available for Credit Unions so they can wipe out those dastardly payday loan sharks; evil, nasty people that they are. Jan Boucek writes at the Adam Smith Institute blog that this is a brilliant idea with wide-ranging opportunities for both entrepreneurial clerics and banks.

Boucek explains that
Just consider the convenience for consumers of banking and praying at the same time. After the queue for communion, you simply shuffle over to the bank teller next to the altar to pick up your loan or maybe deposit whatever spare change you have after passing the collection box.

Meanwhile, over in the confessional, the priest can follow up an absolution prayer with a financial product pitch – “Have you considered insurance for seven years of drought?”

Recruitment of young folk into the priesthood has become a real problem for the Church but Credit Unions on site offer an added attraction in the area of branch security. Wearing body armour under cassocks, learning a martial art or designing bank vaults disguised as crypts will broaden the profession’s appeal.

Of course, established banks won’t be sitting still against this new competition on the High Street. Many branches surely have space available for any number of religious sects to set up shop.

What depositor with a bag full of cash could resist first lighting a candle in the hopes his deposits won’t attract the attentions of the taxman? Impatient couples could stop off at the on-site wedding chapel before opening a joint bank account.
Imam calling for midday prayers while you’re stuck in the queue behind the old lady counting out thousands of pennies? No problem – step aside to our prayer rug area and we’ll hold your place in the line.

And what customer wouldn't appreciate an evangelical choir lifting the spirits before meeting the bank manager about those persistent overdrafts?
Its good to see that entrepreneurship is not dead in the Anglican Church after all. What new financial instruments will the Catholic Church offer to compete with the Anglican innovation? And what of the Scottish Presbyterians? How will they react? A free haggis with each new loan?

Can Islam and free markets co-exist?

This question is asked by Benedikt Koehler at the IEA blog. Koehler argues that they can co-exit, in fact he says that the pro-business approach of Mohammed and his successors helped turn early Islamic societies into the most dynamic economies of their time. Koehler goes on to write,
Islam and entrepreneurship

Mohammed was an orphan who had to pay his way in life. Whilst Buddha and Jesus were conspicuously indifferent to acquiring wealth, Mohammed encouraged his adherents to engage in business and deemed acquisition of wealth meritorious. He was born in Mecca, a city located in a barren valley whose population had as its sole useful natural endowment a black rock that attracted pilgrims from all over Arabia because it was believed that Abraham had built an altar on that cube, the kaba. The coming and going of pilgrims offered opportunities to trade and do business. This communal business had been operational for many generations when Mohammed was born in 570.

Mohammed was born into a family of leading Meccan traders. He was around ten years old when his uncle took him on his first caravan journey and married an entrepreneur when he was 25. When Mohammed found his calling as Allah’s Apostle, he emigrated to Medina to set up a community on Islamic lines. One of Mohammed’s first actions in Medina was to set up a market. Raising the standard of living through trade, after all, was what he was familiar with. Indeed the Koran exhorted Believers that gold should be put to productive use.

Mohammed died in 632 and the boundaries of the Islamic empire expanded within decades to encompass the entire Middle East and most of North Africa. A large trade zone emerged governed by Islam’s ruler, the caliph. Long distance trade became easier once borders fell away. By the end of the seventh century, the caliphs introduced a gold standard that powered investment activity. The caliph’s mints used bullion from Arab gold mines, church treasuries in former Byzantine lands, and Pharaonic gravesites in Egypt.

Islam and the rule of law

Market economies cannot thrive without a supportive legal framework and respect for private property. Mohammed’s first successor, the caliph Abu Bakr, made clear in his acceptance speech that his authority was that of a deputy to Mohammed (caliph means deputy) and he did not assert the right to construct laws arbitrarily. He would forfeit his right to govern were he ever to deviate from what the teachings of the Prophet. Abu Bakr thus set a precedent – a ruler is bound by laws too. Medieval Arab lore abounds with anecdotes about Abu Bakr’s and his successor Umar’s integrity. Both were extremely conscientious in avoiding conflicts of interest and pre-empting accusations of nepotism. Umar personally punished his sons in public to show they had to comply with the same laws as every other citizen. Indeed, Umar asked each senior government official to disclose his personal assets before taking up a senior appointment and to explain any sudden increase in wealth. Umar fired corrupt officials on more than one occasion, including the army’s commander-in-chief Khalid al Walid.

Early Islamic judges were known not to countenance even the appearance of accommodating the government. Exemplary anecdotes of judicial independence from the executive were passed from generation to generation reading the classic collection of tales in Arabian Nights. In one such story, the famous jurist Abu Hanifa declined an invitation to work for an administration where he might compromise his standard of integrity, because, as he made it known to the caliph, ‘how can I enter the water without getting wet?’. The Arabian Nights gather many other instructive anecdotes explaining a nuanced understanding of the interdependence between low taxes, entrepreneurial freedom and political liberty. The Arabian Nights’ narrator Shahrazad told her royal husband (and all her readers) how good governments are run: ‘Religion depends on the king, the king on his troops, his troops on money, money on prosperity, and prosperity on justice.’ The Arabian Nights feature many other examples of good and bad governments, showing that early Islamic societies had a very articulate educated class voicing opinions on public affairs. Islam’s fundamental pro-business stance was not controversial. Mohammed was remembered to have given sound investment advice: ‘There is nothing wrong in wealth when a person is God fearing, but health is better than wealth for the God fearing, and cheerfulness is a blessing.’

The rise and fall of the Islamic empire

The early Islamic empire grew very quickly and Arab Muslims were a minority that was vastly outnumbered by Christian and Jewish subjects. The early caliphs had no option but to rely on non-Muslims to staff their administration, collect taxes and negotiate treaties. The integration of a vast region, and the scope for professional advancement of a vast talent pool, engendered dynamic economies and spawned rapid urban growth. Baghdad in the tenth century was the world’s largest city.

Some Islamic scholars and lawyers pined for a return to the simplicity of Islam’s early days and had reservations about the luxurious lifestyle of the Muslim upper classes. But they could not point to a single Koranic injunction to compel Muslims to stop pursuing business opportunities and enjoying the rewards of successful investments.

Tenth century Baghdad afforded a much higher standard of living than European cities. Medieval Islamic societies were the most advanced economies of their time and their prosperity seemed assured. Manufacturing and agricultural innovations from Islamic societies found their way to Europe, including manufacturing paper and growing oranges.

Islam’s golden age ended after crusaders attacked from the West and Mongols from the East. There were economic reasons for decline, too. Once new trade routes were found trade no longer depended on traversing land routes across the Middle East. The drive to build new markets overseas sidelined the Arab world.

But the long-term effect of these external shocks was not as pernicious as the enfeeblement of entrepreneurial energy wrought by a combination of self-inflicted factors. Islamic societies lost the ambition to lead the world in scholarship and science and the loss of integrity of ruling classes was even more damaging. Entrepreneurs had no incentive to build a business once more money could be made from seeking favours from whoever happened to be in power. Rent-seeking became more remunerative than investment. Civil institutions and personal initiative withered.
The reasons for the economic decline of the Islamic world is one of the big questions in economic history. Timur Kuran discusses the issue at length in his book "The Long Divergence: How Islamic Law Held Back the Middle East". When looking for reasons for underdevelopment lets start with what Kuran does not see as causes; he doesn't argue is that colonialism or geography are the causes of underdevelopment or that there is some incompatibility between Islam and capitalism. Roughly what Kuran does argue is that problems started around the tenth century when Islamic legal institutions, which had up until this time benefitted the Middle Eastern economy, began to act as a drag on development by slowing or blocking the emergence of central features of the modern economy. Such slowed or blocked features included private capital accumulation, corporations, large-scale production, and impersonal exchange. Such handicaps gave the West - which did develop these features - the chance to jump ahead in economic terms, an advantage it still has today.

Friday 26 July 2013

Property rights may mean something after all.

Thanks to Homepaddock I have been alerted to this news item noting that the Court of Appeal has upheld a High Court ruling that the Anglican Church is entitled to demolish the Christ Church Cathedral. This is, as Homepaddock notes, a victory for property rights.

As I have argued before it is up to the owners of a building what happens to the building. The owners have the property rights over the building, which include the right to bring it down, if they so wish, and the Great Christchurch Buildings Trust - the group wanting to stop the cathedral from being demolished - gets no say in the matter. The news item points out that the Court of Appeal has dismissed all the arguments made by the Trust.

Oliver Wendell Holmes Jr. made it clear as to what ownership means,
But what are the rights of ownership? They are substantially the same as those incident to possession. Within the limits prescribed by policy, the owner is allowed to exercise his natural powers over the subject-matter uninterfered with, and is more or less protected in excluding other people from such interference. The owner is allowed to exclude all, and is accountable to no one. (The Common Law, p193, (1963 edn.))
The Anglican Church has these rights and their rightful exercising of them means that the cathedral can be demolished, if they so determine it should be, and that decision is to be "uninterfered with". The Great Christchurch Buildings Trust, or any other such group,  must be excluded "from such interference", the Trust has no right to try and usurp control over the cathedral away from its rightful owners.

Condliffe 2013

Here is the video of the 2013 Condliffe Lecture given recently at the Univeristy of Canterbury by Professor Edward Glaeser under the title "What if... Our cities vanished?"

Thursday 25 July 2013

Kling on non-profits

Arnold Kling writes,
James Piereson writes,
For much of U.S. history, nonprofits have operated as a check on government by providing private avenues to serve the public interest. Unfortunately, American charities—and more broadly, the entire nonprofit sector—have become a creature of big government…

The publication Giving USA, which tracks charitable spending, reports that the government now supplies one-third of all funds raised by not-for-profit organizations.

… According to a recent report by the Chronicle of Philanthropy, government funding of such charities grew by 77% between 2000 and 2010, while private support for such groups grew by just 47%.
I keep emphasizing that the main difference between non-profit and for-profit is that non-profits are accountable to donors and for-profits are accountable to customers.
While I agree that non-profits are not accountable to their "consumers" I don't agree that they are accountable to their donors. If they were for-profit status would work. In fact the use of non-profit status is largely because they are not accountable to donors, the non-profit status is a way of signalling to donors that they will not (or are less likely to) be ripped off.

Imagine that you are a possible donor to a firm the outputs of which you can't easily verify. If the firm is for profit then the profit maximising thing to do is take the donor's money and do nothing at all. Remember the donor can't verify what you have done with their money. The donor's money is then pure profit, you have no costs since you haven't actually done anything. You just tell the donor you have done lots of things. The revenue from the donor is then profit. If you are non-profit then you can't capture profit in this way since there are no profits to be distributed by definition. This gives a lesser incentive to rip a donor off since any rent seeking must be done via other higher costs methods

Wednesday 24 July 2013

Now this is just stupid 2

A reading of Henry Hansmann's 1996 book "The Ownership of Enterprise" may be worthwhile for Geoff Bertram. When discussing the Spanish cooperative Mondragon Hansmann writes,
The wage structure has been among the most contentious issues at Mondragon. Initially, the systemwide top pay index-the maximum permissible ratio of highest to lowest rate of pay-was three to one. Over the years, this ratio has been increased to attract and hold talented executives.
Hansmann notes that the ratio had been increased to 4.5 to 1 and then to 6 to 1 in a effort to keep good managers.

A firm with a very constrained  pay scale will not be able to keep its "best and brightest". I used this basic argument in a paper to help explain why you don't see player-owned teams in professional sport,
Another (more usual) example of a human-capital based "firm", but one where labour-owned firms are seldom, if ever, found, due to the heterogeneity of the human-capital involved, is that of the professional sports team. Here we have a situation where human capital, talent at playing a particular sport, is the basis for the “firm” but ownership by the human capital, the players, is extremely rare since a worker-owned team would be at a disadvantage relative to a player-as-employee based team.

Heterogeneity among playing talent and thus earning potential acts as a disincentive to the formation of a worker cooperative, which involves (rough) equality in payment, since those players with the greatest earning potential, the largest outside options, will transfer away from the cooperative to maximise their income stream. Differential payment schemes can occur, especially within partnerships, but they require that the individual employee productivities are sufficiently easy to measure so that a relatively objective method of productivity related pay is possible. Given the team production nature of team sports productivities are difficult, if not impossible, to estimate and thus payment by productivity is not feasible, which argues in favour of equality in payments. Thus a worker-owned team would have few, if any, star players, a handicap in the winner-takes-all world of professional sports.

Tuesday 23 July 2013

EconTalk this week

Michael Lind of the New American Foundation talks with EconTalk host Russ Roberts about two recent articles by Lind at Salon.com. In the first article, Lind argues that libertarians are wrong about how to organize a society because they embrace a philosophy that has never been tried. In the second article, Lind argues that the ideas taught in economics principles classes lead to bad public policy. Roberts challenges Lind and along the way they manage to find some areas of agreement.

Now this is just stupid (updated)

Kiwiblog writes,
Simon Collins reports:
The Government should stop giving contracts – and knighthoods – to companies that pay their bosses more than three times their lowest-paid workers, an economist has suggested.

Dr Geoff Bertram, a retired Victoria University economist who inspired a Labour Party plan to force down electricity prices, made the proposal at a conference on inequality in Wellington yesterday.
Seriously I find it hard to believe an economist could come out this such an idea, after all as Steven Landsburg pointed out back in 1993,
Most of economics can be summarized in four words: "People respond to incentives." The rest is commentary.
Has Bertram really thought about the incentives in his idea? If he had he would know that they are all bad. These ideas have been tried and failed. Many worker cooperatives have payment schemes which limit the ratio of the highest paid person to the lowest, e.g. 3 to 1, 6 to 1 etc, in an effort to create a more equal division of the firm's residual. Ricketts (1999: 20) outlines the general problem with this as '[...] to minimise antagonism a rough equality in the division of the residual will be necessary and this may conflict with outside opportunities. Those with high transfer earnings reflecting high productivity elsewhere will desert the co-operative. It is for these reasons that control of the firm by its labour force is usually found in circumstances which permit a high degree of common interest'. Jossa (2009: 709-10) explains the basic issue in terms of the management of capitalistic versus co-operative firms: '[g]iven the tendency of cooperatives to distribute their income equitably among all the members, it is difficult to deny that few cooperatives are in a position to pay the high salaries that able managers can expect to earn in capitalistic firms. Whenever a group of people resolve to work as a team-we may add-the member who outperforms the others in initiative and organizational skills will inevitably take the lead. The crux of the matter is that such a person has no incentive to establish a cooperative and share power and earnings with others. He or she will prefer to found a capitalistic firm, where he or she will hold all authority and, if sole owner, appropriate the whole of the surplus [references deleted]'.

In other words having a payment scheme which imposes a tight limit on the payments to the most able within the firm gives an large incentive for these people to leave. And these are the very people the firm needs to succeed.

Update: Eric Crampton also seems to see some problems with the Bertram suggestion while Matt Nolan thinks Bertram's being "reasonably disingenuous".

Friday 19 July 2013

Big Mac index

A new interactive Big Mac index is available from the Economist magazine here.
THE Big Mac index was invented by The Economist in 1986 as a lighthearted guide to whether currencies are at their “correct” level. It is based on the theory of purchasing-power parity (PPP), the notion that in the long run exchange rates should move towards the rate that would equalise the prices of an identical basket of goods and services (in this case, a burger) in any two countries. For example, the average price of a Big Mac in America in July 2013 was $4.56; in China it was only $2.61 at market exchange rates. So the "raw" Big Mac index says that the yuan was undervalued by 43% at that time.

Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible. Yet the Big Mac index has become a global standard, included in several economic textbooks and the subject of at least 20 academic studies. For those who take their fast food more seriously, we have also calculated a gourmet version of the index.

This adjusted index addresses the criticism that you would expect average burger prices to be cheaper in poor countries than in rich ones because labour costs are lower. PPP signals where exchange rates should be heading in the long run, as a country like China gets richer, but it says little about today's equilibrium rate. The relationship between prices and GDP per person may be a better guide to the current fair value of a currency. The adjusted index uses the “line of best fit” between Big Mac prices and GDP per person for 48 countries (plus the euro area). The difference between the price predicted by the red line for each country, given its income per person, and its actual price gives a supersized measure of currency under- and over-valuation.
By this measure the New Zealand dollar is undervalued by 5.7%.

Wednesday 17 July 2013

EconTalk this week

Michael Clemens of the Center for Global Development talks with EconTalk host Russ Roberts about the effects of aid and migration on world poverty. Clemens argues that the effects of aid are positive but small. But emigration has the potential to have a transformative effect on migrants from poor countries who emigrate to richer ones. The discussion concludes with the impact of migrants on the host country.

Education and labour markets

Bill Kaye-Blake writes In praise of liberal arts:
One of the issues we examined was ‘mismatch’. With the NZ data, there wasn’t much we could do. There just isn’t enough information on what happens to students after they leave tertiary education. I know that the pay-off to a liberal arts education for me was a long time coming — it isn’t enough to follow people for two years or five years. To cite our conclusion:
Finally, mismatches between employment and field of study and/or qualification level are often cited as a possible driver of low returns. There is little evidence that observed mismatches are in fact mismatches at all. However, if persistent mismatching is going on due to policy or market failures, this could be having a significant impact on returns. Whether that is the case or not is an open question.
Mismatch actually refers to two separate things. One is qualification mismatch — people getting Bachelor’s degrees when employers really want trade qualifications. The second is subject-matter mismatch — university students studying French literature when employers want computer science grads.
But if there is a mismatch in either sense, isn't the real question, What are prices not adjusting? If there is an excess demand (supply) for a particular qualification/skill why are wages not increasing (decreasing)? Thus is the problem got more to do with labour markets, and their regulation, than it has to do with education as such?

Firms learning without markets

Being able to judge market signals and learn from what they are telling you is important for any firm operating within a market system. But what if your firm worked outside of a market system, Would it still have the skills to respond to market information? The answer appears to be no. A new NBER paper from Thomas Triebs and Justin Tumlinson argues that firms operating outside the market system — the former East Germany in this study — do not have the ability to judge market signals. Triebs and Tumlinson look at firms in East and West German, after unification had taken place, and they find that East German firms did not anticipate, or respond to, market information as well as their West German counterparts. This suggest that firms operating under the Communist system lost, or never had, the ability to function within a market setting.

See "Learning Capitalism the Hard Way—Evidence from Germany’s Reunification" by Thomas P. Triebs and Justin Tumlinson, NBER Working Paper No. 19209, July 2013:
Communism in East Germany sought to dampen the effect of market forces on firm productivity for nearly 40 years. How did East German firms respond to the free market after being thrust into it in 1990? We use a formal learning model and German business survey data to analyze the lasting impact of this far-reaching treatment on the way firms in former East Germany predicted their own productivity relative to firms in former West Germany during the two decades since Reunification. We find in confirmation of our formal model’s predictions, that Eastern firms forecast productivity less accurately, particularly in dynamic and uncertain markets, but that the gap gradually closed over 12 to 13 years. Second, by analyzing the direction of firm level errors in conjunction with contemporaneous market signals we find that, in the years immediately following Reunification, Eastern firms estimate the market’s role as generally less potent than Western firm do, an observation consistent with overweighting experiences from the communist era; however, over roughly 14 years both converge to the same (incorrect) overestimate of the market’s role on their productivity.
A less extreme example of the same issue is adjustment by New Zealand firms to the 1980s reforms. A point noted by Eric on twitter:

Thursday 11 July 2013

Privatisation in New Zealand

This is a video of a presentation given by Sinclair Davidson a few weeks back at the New Zealand Initiative on privatisation and public choice.

Wednesday 10 July 2013

MRUniversity on Edward Gibbon Wakefield

A name known to all in Canterbury since in 1848 Wakefield, with John Robert Godley, set up the Canterbury Association to plan a Church of England colony in New Zealand.

Alex Tabarrok on "How the Dismal Science Got Its Name"

Alex Tabarrok at Marginal Revolution University explains how the dismal science got its name.

Fans of Thomas Carlyle and John Ruskin will not happy to learn this story, but the dismal science no longer looks so dismal.

Tuesday 9 July 2013

5 reasons price gouging should be legal

"Price gouging" is meant to describe something bad, something we don't want to see happen, especially in emergencies. But Peter McCaffrey argues that we should like price gouging and gives 5 reasons why:
So-called price gouging is a critical economic tool to ensure that supplies last and so can meet ongoing demand. Making it illegal is ridiculous, and here’s why:
  1. Without price increases, many people buy extra supplies “just in case”, regardless of what they have tucked away at home already. If too many people do this, supplies run out and people who need them much more urgently miss out. With price increases, people who don’t really need supplies will leave them on the shelf, not out of the goodness of their heart, but out of concern for their wallet.
  2. Price increases encourage conservation of resources people already have. Those who can most easily adjust their consumption will do so, leaving resources free for those who can’t. People might, for example, use their cars more sparingly to avoid having to fill up while prices are inflated.
  3. The ability to raise prices encourages businesses to stock excess reserves. Space in stores and warehouses is limited and products (even water) go off over time. If they’re not allowed to raise prices on those items, they’ll use that limited space for other products that have higher profit margins the rest of the time.
  4. Allowing price gouging actually encourages citizens to be more prepared for disasters. Do you have enough food and water and other essentials stored at home for you and your family if disaster strikes your town? Or do you just assume you’ll be able to go to the store and buy what you need when something goes wrong? Knowing that prices might double, triple, or more during a disaster is a pretty big incentive to go and stock up now instead of waiting — even for that person who lives right next door to the store!
  5. Finally, rising prices attract more resources from outside of the disaster area, where prices are lower. Nearby businesses, small or large, can easily profit by shipping essential supplies in and selling them at a premium. Without the ability to charge that premium, they would actually end up losing money through shipping costs, overtime wages, and inherent risks of operating is a disaster area. Without the profit motive, many don’t take the risk.
McCaffrey suggest that we should use a different term for what is now called price gouging:
“Price gouging” is a derogatory term meant to belittle. A more accurate description would be “sustainable pricing” — pricing that ensures supplies are sustainable to meet the demand of future customers.
So, "price gouging" is dead, long live "sustainable pricing".

Economic freedom and labour market conditions

An interesting new paper on Economic Freedom and Labor Market Conditions: Evidence from the States by Lauren R. Heller and E. Frank Stephenson. The abstract reads:
Using 1981–2009 data for the 50 states, this article examines the relationship between economic freedom and the unemployment rate, the labor force participation rate, and the employment-population ratio. After controlling for a variety of state-level characteristics, the results from most specifications indicate that economic freedom is associated with lower unemployment and with higher labor force participation and employment-population ratios.
The conclusion to the paper states,
Our findings have clear implications for policymakers. Adopting policies that increase economic freedom by one point in the EFNA index would reduce the unemployment rate by as much as 1.3 percentage points. Likewise a one point increase in economic freedom would increase the labor force participation rate by up to 1.9 percentage points and the employment-population ratio by as much as 2.3 percentage points. Moreover, the estimation results for the EFNA sub-components offer policymakers some guidance about the most beneficial ways to improve state EFNA ratings. The effect of area 1 (size of government) is generally larger than the effect for areas 2 or 3. Hence, our results suggest that reducing the size of government would have the largest effect on labor market outcomes.
So economic freedom does decrease unemployment and increase the labour force participation rate but reducing the size of government is the big winner for reducing unemployment.

EconTalk for two weeks

Michael Munger of Duke University talks with EconTalk host Russ Roberts about the role of formal rules and informal rules in sports. Many sports restrain violence and retaliation through formal rules while in others, protective equipment is used to reduce injury. In all sports, codes of conduct emerge to deal with violence and unobserved violations of formal rules. Munger explores the interaction of these forces across different sports and how they relate to insights of Coase and Hayek.

Morris Fiorina, the Wendt Family Professor of Political Science and Hoover Institution Senior Fellow at Stanford University, talks with EconTalk host Russ Roberts about the state of the American electorate and recent election results. Fiorina argues that while the Republican and Democratic parties are more extreme than they were in the past, there has been only modest change in the character of the American electorate. Fiorina discusses these differences in light of recent election results which show an inability of either party to sustain control of the Presidency or the Congress.

The dark side of social capital

We hear much about the wonders of social capital - the dense network of associations facilitating cooperation within a community - of which there are many. It typically leads to positive political and economic outcomes, but is there a "dark side" to social capital? A new NBER working paper suggests there can be.

Bowling for Fascism: Social Capital and the Rise of the Nazi Party in Weimar Germany, 1919-33 by Shanker Satyanath, Nico Voigtlaender and Hans-Joachim Voth

A growing literature emphasizes the potentially "dark side" of social capital. This paper examines the role of social capital in the downfall of democracy in interwar Germany by analyzing Nazi party entry rates in a cross-section of towns and cities. Before the Nazi Party's triumphs at the ballot box, it built an extensive organizational structure, becoming a mass movement with nearly a million members by early 1933. We show that dense networks of civic associations such as bowling clubs, animal breeder associations, or choirs facilitated the rise of the Nazi Party. The effects are large: Towns with one standard deviation higher association density saw at least one-third faster growth in the strength of the Nazi Party. IV results based on 19th century measures of social capital reinforce our conclusions. In addition, all types of associations - veteran associations and non-military clubs, "bridging" and "bonding" associations - positively predict NS party entry. These results suggest that social capital in Weimar Germany aided the rise of the Nazi movement that ultimately destroyed Germany's first democracy.