Monthly Archives: January 2016

Market Failure: Revenge of the Commons?

If you missed last week’s article be sure to read it here, however, a synopsis of the article’s thesis is that “market failure” is impossible. Markets are closed systems and as such anything internal to the system affects the entire system. A market can no more “fail” than a pot of water exposed to a flame will fail to boil. Apropos the pot of water example: if a pot of water does not boil after 5-seconds of exposure to a lighter we do not say “ah-ha, physics has failed, here is proof that flames cannot boil water!” No, we realize that if sufficient heat is applied, it will boil (thermodynamics) but that the process takes time (kinetics). Failure of something to occur instantly or even within our own lifetime does not equate to “failure”. Markets regulate themselves; perhaps not as fast as some would like, but it occurs nevertheless. As the saying goes: you can have it fast, cheap, or good: pick any two. With state regulation of the market you only get one: fast, at the expense of it being both expensive (inefficient) and poor (ineffective). Natural market regulation is both good (effective) and cheap (efficient), but tends to be slow, which many find frustrating. This gradual process thus provides a framework of excuses for state intervention to speed things up. These people fail to see the thermodynamic forest for the kinetically slow-growing trees.

At first glance it might appear the pot example is not illustrative of a closed market system. The pot is exposed to the surrounding air, which can transfer the heat away. So we must clearly demarcate the borders of the system under discussion; let us say the pot and flame are in an insulated box. Everything outside is irrelevant to what occurs in the box.

So, we define the market as that system containing everything that is (apparently) part of the market. However, the counterargument here would be that things outside of the market system, unlike the pot and flame, do effect what is in the system. That is, the “commons” outside of the market (into which things may be dumped or extracted) apparently play a role. To the extent such commons are artificial in nature (“public” spaces) and thus through state coercion the market’s efforts to allocate and economize those resources via private property are frustrated, we cannot say then that any abuse of such spaces is a market failure. The state itself is setting up the very situation that opens them up to abuse. The state is not part of the market. The market is peaceful voluntary trade where both parties “win”; the state is violent involuntary trade where one side wins and one side loses.

However, there are natural common areas (the oceans and the sky) that are not amenable to conventional private property demarcations (e.g. fences) – although technology is slowly changing that reality. These would appear to be areas outside of the closed market (private) systems and thus immune to feedback from the market even though the market may benefit from them. For markets separated by a commons but connected through other means, the feedback occurs at the border with the commons and this information is transmitted via the other connection just as though they directly bordered each other.

But, let us consider the more difficult example of two isolated markets, not in communication, separated by a commons. We will consider the ocean (although the sky works equally well). Imagine that you live on the coast and fish for a living. Far across the ocean another settlement pollutes the water. Eventually that pollution reaches your shore and affects your fishing productivity. You have no idea where it is coming from (non-point source pollution), all you know is that it is a new cost you did not have before. Since you do not know the source you only have once choice: to clean up/remove the pollution at the bordering point to where you customarily fish.

Is the fact that you have to devote resources to cleaning this up a market failure? No. Why not? Well imagine that if instead of it being some far away people polluting the water it was some natural event (volcano, mudslide, etc.). Your actions would be no different (cleaning the water) yet you would not say the market has failed just because Nature foisted additional hurdles at you. If the effect is the same, the cause is irrelevant if you have no way of knowing or influencing the cause.

Now lets say you do find out who is polluting and ask them to stop but they refuse. You do not trade with them so feedback cannot occur that way. You now have two choices that prompt me to pose this question: Is it morally justified to attack and kill them until they submit to your will if continuing to remove the pollution yourself may also solve the problem? One option involves the ending of human life; the other option is a mere inconvenience. Which would you choose? If you answer yes to the former then I suggest you reflect on how the state has warped your sense of reality such that it is considered morally acceptable to initiate violent actions against others in order to resolve non-violent conflict. Now consider that all state actions rest on a bedrock of threatening violence against those that will not bend to its will, no matter how trivial the concern. History does not judge kindly those who initiate aggression to force others to do their bidding

Market Failure is not an option, it’s not even possible

Proponents of state intervention in markets (managed markets) unfailingly assert the legitimacy of their stance by pointing to “market failure.” Yes, yes, they admit, markets are great at delivering goods and services to people, but, sometimes they inexplicably fail and this consequently requires men with guns (the state) to “fix” them. To put it simply, market failure is a myth. There is a failure however, not of the market, but of their own ability to comprehend the complexities of a natural system whose chaos is brought to order through feedback.

Appeals for regulation by some central authority are predicated on the ideal of “fairness” in ensuring that all who use some resource pay for such use. In other words, if one perceives even the possibility of “free riding” with regard to some economic good then this is all the excuse needed to bring in men with guns to ensure all pay their “fair share.” Free riding is the quintessential example of market failure. Now, as they say, time to bust that myth.

Now rather than choose an example that would be quite easily dismantled as embodying free rider potential (roads, courts, police, fire protection, etc.) I shall choose what is perceived as the most difficult of all: the environment. For this example we shall use the ever-popular environmental whipping boy, carbon dioxide. The output of CO2, it is said, does not factor in the costs of the damage wrought by this “pollutant.” That is, the externality is not internalized in the cost of the product. In fact the truth is exactly the opposite. To see this let’s consider an economy of two actors, Y & Z. Y produces product y and Z produces z and they trade with each other. Now let’s imagine Y can increase his output if he dumps his waste onto Z’s property. Y can now produce more of y, but Z must now devote time and resources to cleaning up the mess (or perhaps it makes him tired or ill) and thus the output of z declines. Y can now only obtain that smaller fraction of z output when trading. Obtaining less for the same cost is equivalent to a greater cost for the same amount. In other words the apparently externalized cost that Y foisted on Z must necessarily be internalized back to Y by virtue of how his actions affect other actors in the economy. No regulation is needed; it is inherent to the system that for every action there is an equal and complementary reaction.

So now extending this metaphorical example to the real world let us assume for the sake of argument that all the doomsayer prophesies of the climate alarmists are true. Is it not obvious that all these bad consequences would negatively impact economic productivity? So all things being equal, if one sells a barrel of oil for $50 that $50 will now only buy the equivalent of say $40 worth of goods (that is, $40 of goods will cost $50, a de facto market “tax” that precisely mirrors the level of damage as reflected in the decreased output). If the damage predicted by the alarmists is real, then it can’t not have this negative effect. In other words, if everything becomes more expensive because there is less of it, then necessarily less will be consumed, including energy derived from CO2. If the damage is real, this natural negative feedback loop will self-correct the problem as profit seeking people strive to innovate their way to greater production. If the damage is not real, then no correction was necessary.

Ironically, carbon taxes, long touted as a “market” approach to solving this issue would do nothing whatsoever. Energy consumption is relatively inelastic and thus higher prices (taxes) for energy would force prices down in other sectors to compensate. Indeed carbon taxes are already touted as revenue neutral (through lower taxes elsewhere or rebates). The only thing that one might superficially assume could work would be a flat consumption tax on all goods. But even if you could impose a 50% sales tax on the entire economy it would ultimately have no effect on consumption at all. If the money is simply removed from the economy, then deflation takes over and all prices drop. That is, output has not declined, only the money supply. The same amount of goods still trade but with fewer dollars. But, if instead the government spends the money, other than productive losses due to government waste, the supply and demand for goods, including energy still won’t change. With natural market feedback the external cost is internalized as reduced supply; with an artificial system (taxes) supply is unaffected, only the identities of those doing the demanding changes.

The market system needs no overseer or committee to function. It is not “targeted”, the entire economy would be affected as if with a fever until the profit motive drives the innovators and entrepreneurs to shed the burden of the internalized costs of decreased output. To say that markets suffer failure is the intellectual equivalent of denouncing a fever as a failure of the immune system.

Market Justice

The standoff between ranchers and the federal government at a U.S. Fish and Wildlife Service building in Harney County, Oregon can be distilled down to one core issue: property rights. The Hammond’s land abuts Federal lands and due to their past less than neighborly management practices (setting containment fires that got out of hand) their neighbors (the Feds) believed they had the right to throw their neighbor (the Hammonds) in a cage for one year. Which they did. Then they decided to give it a different name (terrorism) and throw them in a cage for another 4 years. That’s when the Hammonds objected and said enough is enough. Just imagine if your next-door neighbor could lock you up in a cage at their whim for any perceived transgression. That would surely be quite frustrating and dare I say terrorizing? To know that any minor misstep could result in your freedom and liberties being ripped away from you is indeed terror inducing. Welcome to the world of the American Indian.

The federal government has been terrorizing the American Indian for the past 200 years. They’ve had a lot of practice. They’ve become quite adept at it. The modern western rancher is simply the latest recipient of this unilateral wielding of overwhelming violent force.  So to the ranchers I say this: your ownership and the related benefits of your land and abutting federal lands is the result of prior violence by the Federal government on behalf of your ancestors or predecessors. The Feds stole it from the Indians and made it available at a fraction of its value to millions of homesteaders. That is not homesteading, that is theft and redistribution.

While it is true that the Federal government has wrought numerous distortions into the fabric of society and the economy and some have benefited while others have been harmed, these past transgressions are so complex, intertwined and convoluted as to make it impossible to untie such a Gordian knot and make amends. But, presently the Federal government owns approximately 28% of the land in the United States – the vast majority of having belonged to one Indian tribe or another.  There is no chain of a multitude of prior owners; there is a direct link of ownership of Indians->Federal Government. In virtually all cases the transfer was illegitimately obtained through acts of violence. If the current presidential administration is so concerned with righting past wrongs and the redistribution of wealth then it should immediately hand over all property rights in federally owned lands to those tribes (still in existence) with the strongest past territorial claim.

Such a transfer would instantly transform many of the impoverished Indian reservations, who rely on a constant influx of Federal money to maintain their citizenry, into powerhouses of wealth. A $1 billion lotto jackpot pales in comparison to a $1 trillion jackpot! In other words the land would be taken from “public” use to “private” use. The new private owners could do with the land as they see fit relative to all economically demanded uses coming from the market. That is, those uses that people most want to see would have the most money behind them and enable the highest bid to prevail. People vote for what they want with their dollars and those with the most votes wins. Some tribes might maintain their land as a natural preserve. Some might sell portions to farmers, ranchers or those wishing to develop them commercially. Some might buy the land and build high rises, new factories, or wind farms. Others (like the Sierra Club) might buy land and create their own “private” nature reserve, where they, and not the federal government, is in control of its (seeing as how the Feds often allow mining or logging in “protected” regions).

In short, in one fell swoop a big chunk of the past wrongs against the American Indian could be rectified (nothing of course could ever undo all the damage) while simultaneously releasing nearly 1/3 of the land mass of this country into the most efficient system the world has ever known for optimizing the use of scarce and rivalrous resources: the market.

Under the Hood

One of the apparently more innovative techniques automakers have applied to saving fuel is a concept borrowed from the electric or hybrid vehicle: automatic start/stop. The concept is fairly simple, turn off the engine when the car is stopped (i.e. at a stop sign or traffic light) and instantly turn the engine back on when the driver initiates their intent to commence motion (releasing foot from the break or depressing the clutch). Depending on the traffic patterns one encounters, fuel savings can be as low as a mere 0.5% all the way up to 10%. Truly this would seem to be getting something for nothing!

But as with any government mandated arbitrary standard there are unintended costs and consequences.  For example, prior efficiency decrees have compelled automakers to make their cars lighter – but lowering mass makes a car less crash worthy. To compensate as much as possible it became necessary to beef up the A, B, and C pillars (the front, middle and rear attachment points of the lower portion of the car to the roof) so passengers aren’t squashed in a rollover. That is, these pillars are now much wider and thus much more readily obscure objects behind them at a distance. Don’t believe me? Hold out your thumb at arms length and place it in front of a car 50 feet away; now unfurl all 5 fingers and block it with your hand. Completely disappeared now hasn’t it? Those of us who drove cars from the ‘80s or earlier are well aware of this slow change. Unfortunately anyone younger just assumes it’s totally normal to have a 6-8 inch A pillar blocking one’s view of oncoming traffic as they try to merge. Such actively growing blind spots have ironically led to more accidents, injuries, associated health care costs, repair costs, higher insurance rates and in some cases even death. But hey, what is human life worth when weighed against the “environment”?

In other words, there are costs associated with everything. If it were up to the individual to decide for him or herself how much more safety risk they are willing take relative to increased fuel economy that would be one thing. However it is quite a different story when the choice is taken away and there is only one option allowed for all. That is what government is: the removal of choice. Bureaucrats decide on the “best” route and make all other options illegal. The same removal of choice is now happening with these automatic start/stop systems. Starting with model year 2016 they are becoming more and more prevalent. Why is this? Because of government fuel economy standards like CAFE (or it’s European equivalent) mandate FLEET wide averages. Therefore the ability by the automaker to extract even a few small percent increase in fuel efficiency multiplied by a fleet of thousands or millions of vehicles helps them meet those standards and avoid possibly millions of dollars in fines. The problem, however, is that the cost of meeting those standards is shifted to the consumer. Such systems require larger, beefier starters and batteries – which cost more. Due to more frequent use these components will wear out sooner – which costs more. Ironically the greater the fuel savings, the more the engine will be damaged. Engines are most vulnerable at start up due to lack of oil. The longer it sits off the more the oil drains back down. Obviously an engine that has to be replaced or rebuilt on a more frequent basis is going to be a significant cost to the owner.

In other words, there is no free lunch. Even something seen (fuel savings) has an unseen cost (wear and tear and repairs). Fortunately, for now, we are permitted the ability to override and turn these systems off (although it must be done manually with every cold engine start). But there is no doubt that in order to eke out another 0.1% of CAFÉ fuel savings, automakers will soon remove the option to disable this feature. Then again perhaps it doesn’t really matter as soon enough the government will outlaw human drivers and we’ll all be passengers in self-driving cars within 30 years – cars that some are already discussing whether or not the automated “brain” behind it should sacrifice its passengers if it determines more deaths would result by protecting its occupants. Unintended costs indeed.