A few days ago I posted ten twelve commandments of economics. Here are some more (#19 UPDATED, 12/06/05 @ 10:36 PM):

13. The economy isn’t a zero-sum game; for example:

Bill Gates is immensely wealthy because he took a risk to start a company that has created things that are of value to others. His creations (criticized as they may be) have led to increases in productivity. As a result, many people earn more than they would have otherwise earned; Microsoft has made profits; Microsoft’s share price rose considerably for a long time; Bill Gates became the wealthiest American (someone has to be). That’s win-win.

14. Externalities are everywhere.

Like the butterfly effect, everything we do affects everyone else. But with property rights those externalities (e.g., pollution) are compensated instead of being legislated against or fought over in courts. Relatedly . . .

15 . There is no such thing as a “public good.”

Public goods are thought to exist because certain services benefit “free riders” (persons who enjoy a service without paying for it). It is argued that, because of free riders, services like national defense be provided by government because it would be unprofitable for private firms to offer such services.

But that analysis overlooks the possibility that those who stand to gain the most from the production of a service such as defense may, in fact, value that service so highly that they would be willing to pay a price high enough to bring forth private suppliers, free riders notwithstanding. The free-rider problem isn’t really a problem unless the producer of a “public good” responds to requests for additional services from persons who don’t pay for those services. But private providers would be contractually obliged not to respond to such requests, of course.

Moreover, given the present arrangement of the tax burden, those who have the most to gain from defense and justice (classic examples of “public goods”) already support a lot of free riders and “cheap riders.” Given the value of defense and justice to the orderly operation of the economy, it is likely that affluent Americans and large corporations — if they weren’t already heavily taxed — would willingly form syndicates to provide defense and justice. Most of them, after all, are willing to buy private security services, despite the taxes they already pay.

I conclude that there is no “public good” case for the government provision of services. It may nevertheless be desirable to have a state monopoly on police and justice — but only on police and justice, and only because the alternatives are a private monopoly of force, on the one hand, or a clash of warlords, on the other hand. (See this post, for instance, which also links to related posts.)

You may ask: What about environmental protection? Isn’t it a public good that must be provided by government? No. Read this and this. Which leads me to “market failure.”

16. There is no such thing as “market failure.“

The concept of market failure is closely related to the notion of a public good. When the market “fails” to do or prevent something that someone thinks should be done or prevented, the “failure” is invoked as an excuse for government action.

Except where there is crime (which should be treated as crime), there is no such thing as market failure. Rather, there is only the failure of the market to provide what some people think it should provide.

Those who invoke market failure are asserting that certain social and economic outcomes should be “fixed” (as in a “fixed” boxing match) to correct the “mistakes” and “oversights” of the market. Those who seek certain outcomes then use the political process to compel those outcomes, regardless whether those outcomes are, on the whole, beneficial. The proponents of compulsion succeed (most of the time) because the benefits of government intervention are focused and therefore garner support from organized constituencies (i.e. interest groups and voting blocs), whereas the costs of government intervention are spread among taxpayers and/or buyers of government debt.

There are so many examples of so-called public goods that arise from putative market failures that I won’t essay anything like a comprehensive list. There are, of course, protective services and environmental “protection,” both of which I mentioned in No. 15. Then there is public education, Social Security, Medicare, Medicaid, Affirmative Action, among the myriad federal, State, and local programs that perversely make most people worse off, including their intended beneficiaries. Arnold Kling explains:

[T]he Welfare State makes losers out of people who want to get ahead through hard work, thrift, or education. Those are precisely the activities that produce economic growth and social wealth, and they are hit particularly hard by Welfare State redistribution.

The Welfare State certainly has well-organized constituencies. The winners, such as the AARP and the teachers’ unions, know who they are. The losers — the working poor, children stuck in low-quality school districts — have much less political clout. The Welfare State has friends in both parties, as evidenced by the move to add a prescription drug benefit to Medicare.

As the Baby Boomers age, longevity increases, and new medical technology is developed, the cost of the Welfare State is going to rise. Economists agree that in another generation the share of GDP required by the Welfare State will exceed the share of GDP of total tax revenues today. The outlook for the working poor and other Welfare State losers is decidedly grim.

17. Borders are irrelevant, except for defense.

It is not “bad” or un-American to “send jobs overseas” or to buy goods and services that happen to originate in other countries. In fact, it is good to do such things because it means that available resources can be more fully employed and put to their best uses. Opponents of outsourcing and those who decry trade deficits want less to be produced; that is, they want to shelter the jobs of some Americans at the expense of making many more Americans worse off through higher prices.

For example, when Indian computer geeks operate call centers for lower salaries than the going rate for American computer geeks, it makes both Indians and Americans better off. Few Americans are computer geeks, but many Americans are computer users who benefit when they pay less for geek services (or the products with which geek services are bundled). Those who want to save the jobs of American computer geeks assume that (a) American computer geeks “deserve” their jobs (but Indians don’t) and (b) American computer geeks “deserve” their jobs at the expense of American consumers.

See also this, and this, and this.

18. Government budget deficits aren’t bad for the reason you think they’re bad.

Government spending is mostly bad (see No. 15) because it results in the misallocation of resources (and it’s inherently inflationary). Government spending — whether it is financed by taxes or borrowing — takes resources from productive uses and applies them to mostly unproductive and counterproductive uses. Government budget deficits are bad in that they reflect that misallocation — though they reflect only a portion of it. Getting hysterical about the government’s budget deficit (and the resulting pile of government debt) is like getting hysterical about a hangnail on an arm that has been amputated.

There’s no particular reason the federal government can’t keep on making the pile of debt bigger — it has been doing so continuously since 1839. As long as there are willing lenders out there, the amount the amount of debt the government can accumulate is virtually unlimited, as long as government spending does not grow to the point that its counterproductive effects bring the economy to its knees.

For more, see this, this, this, and this.

19. Monopoly (absent force, fraud, or government franchise) beats regulation, every time.

Regulators live in a dream world. They believe that they can emulate — and even improve on — the outcomes that would be produced by competitive markets. And that’s precisely where regulation fails: Bureaucratic rules cannot be devised to respond to consumers’ preferences and technological opportunities in the same ways that markets respond to those things. The main purpose of regulation (as even most regulators would admit) is to impose preferred outcomes, regardless of the immense (but mostly hidden) cost of regulation.

There should be a place of honor in regulatory hell for those who pursue “monopolists,” even though the only true monopolies are run by governments or exist with the connivance of governments (think of courts and cable franchises, for example). The opponents of “monopoly” really believe that success is bad. Those who agitate for antitrust actions against successful companies — branding them “monopolistic” — are stuck in a zero-sum view of the economic universe (see No. 13), in which “winners” must be balanced by “losers.” Antitrusters forget (if they ever knew) that (1) successful companies become successful by satisfying consumers; (2) consumers wouldn’t buy the damned stuff if they didn’t think it was worth the price; (3) “immense” profits invite competition (direct and indirect), which benefits consumers; and (4) the kind of innovation and risk-taking that (sometimes) leads to wealth for a few also benefits the many by fueling economic growth.

UPDATE: What about those “immense” profits? They don’t just disappear into thin air. Monopoly profits (“rent” in economists’ jargon) have to go somewhere, and so they do: into consumption, investment (which fuels economic growth), and taxes (which should make liberals happy). It’s just a question of who gets the money.

But isn’t output restricted, thus making people generally worse off? That may be what you learned in Econ 101, but that’s based on a static model which assumes that there’s a choice between monopoly and competition. I must expand on some of the points I made in the original portion of this commandment:

• Monopoly (except when it’s gained by force, fraud, or government license) usually is a transitory state of affairs resulting from invention, innovation, and/or entrepreneurial skill.

• Transitory? Why? Because monopoly profits invite competition — if not directly, then from substitutes.

• Transitory monopolies arise as part of economic growth. Therefore, such monopolies exist as a “bonus” alongside competitive markets, not as alternatives to them.

• The prospect of monopoly profits entices more invention, innovation, and entrepreneurship, which fuels more economic growth.

20. Stay tuned to this blog.

For much more, go here and follow the links.

Nobel laureate James M. Buchanan, writing in the inaugural edition of Cato Unbound, observes in passing that

[p]olitical leaders, both legislative and executive, with public support, act as if it is possible to spend without taxing, indeed as if the fisc offers the political equivalent of perpetual motion. This observed fiscal profligacy stems from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, the very logic of collective action, which fosters the personalized illusion of something for nothing, especially amid the natural constituency pressures of representative democracy.

Everything about that paragraph is correct but for the implication that it is not possible to spend without taxing. It is possible for the federal government to spend without taxing; it can simply borrow (or it can print money, which would amount to the same thing). Taxation and borrowing have similar results from the government’s standpoint; that is, both allow the government to commandeer resources and put them to work on things deemed “important” to government officials and their constituencies. But taxation and borrowing do differ in their effects on the public.

1. Through taxation, government confiscates taxpayers’ claims against current output and converts those claims to government programs that (for the most part) either increase the incomes of certain persons (e.g., most welfare recipients and many government employees who otherwise would fare less well in the private sector) or create “psychic income” for the proponents of those programs (even as those programs erode economic performance).

2. Borrowing doesn’t change the effects of government spending, but it does fund government spending in an importantly different way. That is, lenders (unlike taxpayers) voluntarily relinquish their claims on current output, in return for larger claims on future output (i.e., principal plus interest). And those claims on future output can be redeemed by additional borrowing in the future. (As I have argued here, there is no obvious limit on the amount the amount of debt the government can accumulate. I assume, of course, that the government’s appetite for spending would not become voracious enough to bring the economy to its knees.)

3. When the government borrows from foreigners instead of Americans, those foreigners willingly assume the real “burden” of the debt; that is, they relinquish some of their claims on the current output of the U.S. economy. Foreigners can transfer their “burden” to Americans only as Americans are willing to buy government debt from foreigners. To the extent that government spending provides any benefits for Americans, foreigners are doing Americans a big favor by lending money to the government. Why? Because they are subsidizing the output of government services that are, in the main, “enjoyed” by Americans.

MAKE THAT 12 COMMANDMENTS . . . UPDATED 12/03/05

1. Self-interest drives us to do good things for others while striving to do well for ourselves.

2. Profit is good because it drives people to invent, innovate, and invest in new and better products and services.

3. Incentives matter: Just as self-interest and profit drive progress, taxes and welfare stifle it.

4. Only slaves and dupes can be exploited. (Wal-Mart employees are not exploited because they are not forced to work at Wal-Mart; anti-Wal-Mart activists are exploited because they’re dupes of the anti-business Left.)

5. There’s no free lunch, all costs must be covered by prices or taxes.

6. The appearance of a free lunch (e.g., government’s assumption of risk for retirement savings, company-subsidized health insurance) leads individuals to make bad decisions (e.g., not saving enough for old age, overspending on health care).

7. Paternalism is for children; when adults aren’t allowed to make economic decisions for themselves they don’t learn from mistakes and can’t pass that learning on to their children.

8. All costs matter; one cannot make good economic decisions by focusing on one type of cost, such as the cost of energy.

9. There best way to deal with pollution and the “depletion” of natural resources is to assign property rights in resources now held in common. The owners of a resource have a vested interest (a) in caring for it so that it remains profitable, and (b) in raising its price as it becomes harder to obtain, thus encouraging the development of alternatives.

10. Discrimination is inevitable in a free society; to choose is to discriminate. In free and competitive markets — unfettered by Jim Crow, affirmative action, or other intrusions by the state — discrimination is most likely to be based on the value of one’s contributions.

11. Voluntary exchange is a win-win game for workers, consumers, and businesses. When exchange is constrained by regulation, someone loses, namely, the worker (fewer jobs and lower wages) and the consumer (higher prices and less freedom of choice).

12. Absent force or fraud, we earn what we deserve, and we deserve what we earn.

Economic historian Robert Fogel, in an interview with Nick Schultz at Tech Central Station, makes some passing observations about private saving as an alternative to Social Security:

Nick Schulz: In the book [The Escape From Hunger and Premature Death: 1700 to 2100] you see a growing demand for leisure and retirement, and education and health care. Now, in current debates, especially in Washington, that sounds like more Social Security. . . . How do you see that?

Robert Fogel: . . . .

We’re probably going to shift gradually, despite the opposition to it, to private accounts, which exist in some countries, which require everyone who enters the labor force to put aside 30 percent of their income into a fund to cover retirement, health care, and education. In some countries, they permit you to borrow against that fund to buy houses.

And, it’s approaching what American academics have. You cannot teach in American universities without having TIAA-CREF. In American universities, you’re required to put aside between 12-and-a-half and 17 percent (it varies from university to university) into this fund so that when you retire you don’t end up with a tin cup sitting on the administration building saying, “I was a good teacher once, please help me.”

So, that’s a forced retirement system. It has the advantage over Social Security that the government can’t take it away. . . .

Nick Schulz: And you see that as a potential model for Social Security or public pension programs?

Robert Fogel: Right. Now, there is an argument which says it’s not as secure as the guaranteed government program. Well, ultimately, what the government can pay depends on how the economy performs. . . .

Fogel’s last comment is good as far as it goes, but it doesn’t go far enough. Every dime the government takes from a worker and gives to a retiree is a dime that cannot be invested in economic growth. So, it’s true that the “guarantee” of Social Security is only as strong as the economy. But that’s only half the story. It’s true also that Social Security weakens the economy by diverting resources from investment to consumption. The “guarantee” that liberals and leftists like to tout when they defend Social Security is therefore the opposite of a guarantee. Forced participation in Social Security is an insidious form of rot that actually undermines economic security by undermining the economy.