In a market, some trades will end up producing some “waste.” As in all other areas of life, when individuals look back at their decisions in the market, they often find that they have made some mistakes. One important question is – what incentive do they have to try to avoid such mistakes in the future? In a free market, if I make a bad trade (I have buyer’s remorse after the fact), I bear the costs of this “bad” decision. I have given up something else I could have done rather than make the trade; the cost is borne by myself. The “loss” I incur has a function here: it incentivizes me to avoid making such bad trades in the future. I incorporate my losses into my future decision making. The same holds true in production. In a market economy, we don’t know beforehand what the economy will produce. If we did, allowing producers to compete with each other would be pointless. Through the interaction of (a) sellers producing what they believe consumers will want and (b) consumers determining what they value in the market, the state of the economy is continuously reproduced through time. Given the inherent uncertainty of our world, producers will often be mistaken in their evaluation of what consumers’ wants and needs will be. The result of such mistakes is leftover product on which they must take a loss. If the firm does not incorporate such losses into future decision making, it may continue to make losses, eventually reaching an untenable financial situation. In other words, if producers are forced to bear the costs of their own mistaken choices, such losses have a purpose in a market economy. They tell the firm that what it is producing is not of sufficient value to undergo the costs of its production. Thus, “waste” from mistaken production decisions is part of a critical feedback loop in market economies. If producers were protected from bearing the costs of such waste, we would expect more of it to occur. In making this point, I am reminded of a scene from the TV show The Office. Michael Scott, upon being abandoned in downtown Scranton, PA without his wallet, stops by a hotdog stand to bargain for something to eat. The manager of the stand will not allow Scott to buy now, pay later or to offer his watch for a hot dog in lieu of cash. Exasperated, Scott asks “What do you do with the hot dogs you don’t sell at the end of the day?” To which the Manager replies, “We throw them away.” Scott retorts, “why don’t you just throw one of them away right now, in my mouth?” Eventually, Scott leaves the stand empty-handed. A viewer can sympathize with his plea. If some of the hot dogs are going to be thrown away, why not just give one to Scott now? Throwing away hot dogs at the end of the day is wasteful. However, as discussed before, the hot dog maker must bear the cost of any hot dogs he throws away at the end of the day. Therefore, he doesn’t give a hotdog to Scott because he hopes that there are no hotdogs leftover at the end of the day. If there are, it means that he has made an incorrect guess as to how many people in downtown Scranton would want to buy hotdogs that day (at the prices he was willing to sell them at). If he had made a better guess, he could have lowered his costs by preparing only the number of hotdogs that were demanded. The point is that the hotdog maker has an incentive to avoid losses – to avoid wasting hotdogs at the end of the day. Like other producers, he will not always be successful in doing so because he is a fallible human agent making decisions in a world of uncertainty. Nonetheless, the market economy has a built-in enforcement mechanism – losses – that help to minimize the amount of waste that occurs. Another note is that when the hotdog maker does have waste at the end of the day, it is also a waste to society because he competed resources away from other, potentially more efficient, uses. Crucially though, he bears the cost personally as well in the form of costs he could have saved/profits he could have made. Without the punishment inflicted by that loss, there would be no incentive to stop wasting resources, which would continue to hurt society, but not the hotdog maker himself. There will always be some waste in production, as the market is a reflection of the imperfect human decision makers that create it and the uncertainty of the world in which we live. We should keep this in mind when reading reports about the waste generated by capitalism. When waste occurs, we should be on guard for any way that firms are being protected from the losses that wasteful decisions are generating. If losses are socialized, we can expect a lot more of them. Unsocialized losses present opportunities for entrepreneurs who can use resources more efficiently. We should also look out for any rules or regulations – like confusing labeling requirements (mostly at the state-level in the U.S.) – that might unnecessarily increase food waste by sending distorted signals to consumers.   Giorgio Castiglia is the Program Manager for the Project on Competition at the Mercatus Center, and a PhD student in economics at George Mason University. (0 COMMENTS)

A prestigious award that the American Economic Association awards every year is the John Bates Clark Medal. But who was John Bates Clark and what is he known for? I answered those two questions in my bio of Clark that was recently added to the online Concise Encyclopedia of Economics. As I say in the bio: John Bates Clark was one of the leading American economists of the late 19th and early 20thcenturies. He made contributions in the areas of utility theory, marginal productivity theory, capital theory, and competition and antitrust. In his later years, he focused on how to end war. Much of Clark’s early work was collected in The Philosophy of Wealth (1886). In that collection is Clark’s statement of the idea of marginal utility, which he called “effective utility.” He was not the first economist to adopt the concept of “marginal utility.” That distinction goes to the three founders of marginal utility theory, William Stanley Jevons of England, Carl Menger of Austria, and Leon Walras of Switzerland. But, according to George J. Stigler, Clark independently discovered it. Here’s one of my favorite quotes from his work: Give to a man one unit of the article A, and then another and another, till he has ten of them. While each of the articles in the series may do him some good, the amount of the benefit will Steadily diminish, as the number of the articles grows larger, and the tenth one will benefit him least of all. In order to add to his stock of A, the man will never sacrifice more than what is, in his view, a fair offset for the benefit that he will get from the tenth and last unit of it. In order that an article may be wealth at all, each unit of the supply of it must, as we have seen, be of some importance to its owner. The law that we have just cited marks the last unit of the supply as the least important unit. This is one of the universal laws of economics. (Distribution of Wealth, p. 42.) Read the whole thing. Thanks to Tyler Cowen for some helpful suggestions.   (0 COMMENTS)

In a recent post, I cast doubt on claims that China suffered from a Covid pandemic from mid-2020 to mid-2022, which was covered up by the government. I pointed out that something that large is almost impossible to hide. This past week provides an almost perfect illustration of that claim.As of a few weeks ago, I did not know a single person in China that had contracted Covid. And none of the Chinese people I knew were aware of anyone else that had contracted the disease. That changed almost overnight. Since last week’s post, six Chinese people that I know (in Beijing) have now contracted Covid, and they know of many more cases. It’s obvious that China is suffering from a major pandemic. Here’s Bloomberg: Nearly 37 million people in China may have been infected with Covid-19 on a single day this week, according to estimates from the government’s top health authority, making the country’s outbreak by far the world’s largest.  As many as 248 million people, or nearly 18% of the population, likely contracted the virus in the first 20 days of December, according to minutes from an internal meeting of China’s National Health Commission held on Wednesday, confirmed with people involved in the discussions. If accurate, the infection rate would dwarf the previous daily record of about 4 million, set in January 2022.  Beijing’s swift dismantling of Covid Zero restrictions has led to the unfettered spread of the highly contagious omicron variants in a population with low levels of natural immunity. More than half the residents of Sichuan province, in China’s southwest, and the capital Beijing have been infected, according to the agency’s estimates.  Thus the reports out of China closely match my own personal knowledge of the situation.  That’s why it’s so difficult to cover up a pandemic—the story would almost certainly leak out through word of mouth.  If China had experienced a Covid pandemic in 2021, lots of cases of Covid would be known to friends and relatives living outside of China.  That was not the case in 2021. The recent spread of Covid through China appears to be faster than in any other country.  This is likely due to two factors.  First, the Chinese people were “dry tinder”, with almost no herd immunity from previous infections.  Many were vaccinated, but not many had received boosters.  In addition, the vaccines were of inferior quality.  Second, the newest versions of Covid are much more contagious than the original virus that appeared in Wuhan at the end of 2019. In retrospect, China’s zero Covid policy was clearly a major mistake, even if zero weight is given to human rights.  At a minimum, China should have removed its Covid regulations once the vaccines were widely available.  They wasted more than a year for no benefit at all.  Efforts to control the virus in 2020 (prior to the vaccine) were somewhat more defensible, as they saved millions of lives. It’s also worth noting that China did not end its zero Covid policy until after Xi Jinping was reappointed in October, an indication that politics likely played a role in delaying the inevitable. (0 COMMENTS)

Isn’t it obvious how reprehensible is the commercialization of Christmas? I read in a Montréal newspaper that “the development of the mass market stimulated by material desires” and of the “consumer society” around the late 19th or early 20th century led to the “commercialization of the Holiday season” and created an “artificial” Christmas. The commercialization of Christmas was criticized by both the religious authorities and then the bien-pensant socialist intelligentsia. This last expression, nearly blasphemous, is used neither by the journalist nor by the highbrow academic he quotes. We are told that today is even worse: “Everything is excessive, from the decorations to expensive food, through the competition for gifts purchased on credit.” This “alienation through mass consumption” has lately been attacked by environmentalists too. “We are far from voluntary simplicity and negative growth.” To compensate for so much nonsense and out of respect for the poor people in Afghanistan, North Korea, Cuba, Venezuela, etc.) who can only dream of a consumer society and a plush commercial Christmas, let’s reflect on the contempt of statist intellectuals for ordinary people. (We can also compared China, where GDP per capita lies between that of Belarus and that of Thailand, with the history of Hong Kong.) How ordinary people could only hope to improve their conditions by voluntary exchange and free trade, against the exactions of the establishment and the scorn of the crony intelligentsia, is a historical phenomenon well depicted by Deirde McCloskey in her trilogy on the bourgeoisie, to whom are due the Industrial Revolution and the Great Enrichment that followed. In the exordium of the third volume, Bourgeois Equality: How Ideas, Not Capital or Institutions, Enriched the World (University of Chicago Press, 2016), McCloskey summarizes the opposition between the bourgeoisie, which arose in the eighteenth century “out of a new liberty and a new dignity accorded to ordinary people,” and the “clerisy,” a German term representing “the cultivated and reading enthusiasts for Kultur as against the commercial and bettering bourgeoisie.” Artists, intellectuals, journalists, professionals, and bureaucrats made up the clerisy, attacking the bourgeoisie and the commercial society that were launching a unique and monumental phenomenon in the history of mankind: in three centuries, a multiplication by 10 of the average standard of living in the world, which had heretofore stagnated and kept most human beings in dire poverty. A few excerpts from the first pages of Bourgeois Equality: After the failed revolutions in Europe during the hectic year of 1848—compare 1968—a new and virulent detestation of the bourgeoisie infected the artists, intellectuals, journalists, professionals, and bureaucrats—the “clerisy” … The clerisy of Germany, Britain, and especially France came to hate merchants and manufacturers and anyone who did not admire the clerisy’s books and paintings. … In the eighteenth century certain members of the clerisy, such as Voltaire and Tom Paine, courageously advocated our liberties in trade. And in truth our main protection against the ravenous has been just such competition in trade—not Citi Hall or Whitehall, which have their own ravenous habits, backed by violence. … The commercial bourgeoisie—despised by the right and the left, and by many in the middle, too, all thrilled by the Romantic radicalism of books like Mein Kampf or What Is to Be Done—created the Great Enrichment and the modern world. The Enrichment dramatically improved our lives. … Much of the clerisy … mislaid its former commitment to a free and dignified common people. It forgot the main, and the one scientifically proven, social discovery of the nineteenth century … that ordinary men and women do not need to be directed from above, and when honored and left alone become immensely creative. … The modern world was made by a slow-motion revolution in ethical convictions about virtues and vices, in particular by a much higher level than in earlier times of toleration for trade-tested progress—letting people make mutually advantageous deals, and even admiring them for doing so, and especially admiring them when, Steve-Jobs loke, they imagine betterments. … Trade-and-betterment toleration was advocated first by the bourgeoisie itself, then more consequentially by the clerisy, which for a century before 1848, I have noted, admired economic liberty and bourgeois dignity … By then, however, as I also noted, much of the avant-garde of the clerisy worldwide had turned decisively against the bourgeoisie, on the road to twentieth-century fascism and communism. Too all EconLog readers, Merry Commercial Christmas! (0 COMMENTS)

This article caught my eye: In 2014, Oregon voters approved a ballot measure legalizing recreational marijuana after being told it would eliminate problems caused by “uncontrolled manufacture” of the drug. Illegal production of marijuana has instead exploded. There is a simple way to get rid of the problem of illegally grown marijuana. Legalize it. Some states have placed so many restrictions on the legal production of marijuana that it is actually cheaper to grow pot illegally.  That defeats the purpose of legalization.  No state is perfect, but Oklahoma probably has the least bad regulatory regime. You might assume that the problem is high taxes on marijuana.  But that doesn’t seem to be the case.  Cigarette taxes are often even higher than taxes on marijuana, and yet the illegal production of tobacco is much less of a problem.  Unlike with marijuana, banks are allowed to do business with cigarette producers and retailers.  There is broad bipartisan support in Congress for fixing this issue: The House has approved cannabis banking reform more than half a dozen times, including an April 2021 vote in which the SAFE Banking Act attracted the support of 215 Democrats and 106 Republicans. The Senate version has 42 co-sponsors, including nine Republicans. But that doesn’t mean much, as Congress is not an institution that makes decisions based on majority vote:   Senate Majority Leader Chuck Schumer (D–N.Y.) this week blamed Republicans for preventing Congress from approving marijuana banking reform by opposing its inclusion in the omnibus spending bill that was unveiled on Tuesday. That was a pretty audacious excuse, since Schumer himself has a history of blocking the SAFE Banking Act, which would make it easier for state-licensed marijuana businesses to access financial services by removing the threat of civil, criminal, and regulatory penalties for banks that assist the cannabis industry. Sen. Tom Cotton (R–Ark.) displayed a different kind of chutzpah yesterday when he single-handedly stopped the Senate from considering the EQUAL Act, which would eliminate the irrational penal distinction between the smoked and snorted versions of cocaine.  Note that penalties on smoked forms of cocaine are higher than for snorted cocaine, because the former is disproportionately consumed by African-Americans. (1 COMMENTS)

On the one hand, it would seem to be basic decency that a president, even if viewed as merely the chief executive of the federal government, as well as a major candidate for the job, disclose his tax returns, as is done since 1976. After all, he will have much power to influence the amount and uses of the taxes of his voters as well as of those who vote against him. Some humility is warranted. On recent revelations concerning the former president’s taxes, see Richard Rubin, “Donald Trump Reported Little or No Income-Tax Liability for Several Years, Records Show,” Wall Street Journal, December 21, 2022; James Politi and Sujeet Indap, “Donald Trump’s Tax Records Show $53mn in Net Losses over Six-Year Span,” Financial Times, December 21, 2022; and Joint Committee on Taxation, “Report to the House Committee on Ways and Means Chairman Richard Neal”, December 15, 2022. On the other hand, a president or presidential candidate would have credible reasons to object. Take the case of Mr. Trump. We can imagine him declaring during the 2016 electoral campaign: The IRS, just as the government in general, already has too much power, as many ordinary Americans have experienced over the years. I intend to vigorously attack this problem. In this context, I believe it is very dangerous to grant the state apparatus the further power to disclose, or threaten to disclose, the tax return of any American—to “weaponize” tax returns, as so many state powers seem to be weaponized. Pressuring a candidate to the presidency to make his tax returns public would fuel the idea that individual privacy is secondary to state interests. As a consequence, I do not intend to make my tax returns public and I will resist any future attempts to force me to do so. Many problems plague the current tax system. I leave it to my readers to determine if Trump could conceivably have added: As Chief John Marshall once noted, “the power to tax is the power to destroy.” Economic theorists, notably from the Public Choice school, have pointed out and analyzed this danger. My honorable (and scholarly-minded) electors may want to read Geoffrey Brennan and James Buchanan’s The Power to Tax: Analytical Foundations of a Fiscal Constitution (Cambridge University Press, 1980; Liberty Fund, 2000). Of course, Trump never said anything like that. And his “deplorable” supporters could be interested to know that their populist leader and adulated business genius declared $53 million in net losses over the 2015-2020 tax years and no taxable income tax during four of these six years. Notwithstanding all that, state vindictiveness must be avoided. Anybody cognizant with Nobel economist Friedrich Hayek’s theory of law in a free society must be acutely aware that it would be a serious violation of the rule of law, which is based on equal and general laws targeting no particular individual, to adopt any special “law” against Mr. Trump. (0 COMMENTS)

“To continually attack high-income earners when 51% of our taxes are paid by 2% of New Yorkers—this blows my mind when I hear people say, ‘so what if they leave.’ No you leave! I want my high-income earners right here in this city!” So said New York City Mayor Eric Adams last week in a rare moment of clarity. Of course, they aren’t his high-income earners. They just happen to live where he lives. In case there’s any doubt, they belong to themselves, not to anyone else. John Locke’s concept of self-ownership is both powerful and useful. These are the opening three paragraphs of David R. Henderson, “I Want High-Income Earners to Stay,” TaxBytes, IPI.org, December 21, 2022. Final paragraph: Fortunately, there’s a policy that would make the tax system less unfair and would also help retain high-income New Yorkers. Make the tax rate 3 percent on everyone. The rates currently range from 3.078 percent for people with income between 0 and $21,600 to 3.8765 percent for people with income above $90,000. (These tax rates are for married people filing jointly.) Cut that rate to 3 percent and everyone would get a bit of a break. The tax cut would be biggest on the highest-income people. That make sense because, as Adams pointed out, they now pay a disproportionate share of NYC taxes. Their share would still be too high, but the tax cut would be a modest move in the right direction. Read the whole thing, which is short. (0 COMMENTS)

I asked ChatGPT the following question: What are the major effects of rent control on the quantity and quality of housing in the city where the rent control is imposed? Here’s the answer I got back: Rent control is a policy that limits the amount by which landlords can increase the rent for a rental property. The major effects of rent control on the quantity and quality of housing in a city depend on a variety of factors, including the specific details of the rent control policy, the local housing market, and the overall economic conditions of the city. One potential effect of rent control is that it may reduce the quantity of rental housing available, as landlords may be less willing to invest in maintaining or improving their properties if they are unable to charge higher rents to cover the costs. This could lead to a decline in the overall quality of rental housing in the city. Rent control may also discourage new construction of rental housing, as developers may be less likely to build new properties if they are unable to charge market-level rents. Except for the “mays,” this doesn’t seem too bad, right? Unfortunately, I didn’t quote the whole thing. ChatGPT goes on to say: On the other hand, rent control can also have positive effects on the quantity and quality of housing in a city. It can help to stabilize rents and prevent rapid rent increases, which can make housing more affordable for low-income residents and help to reduce the risk of homelessness. Rent control can also incentivize landlords to maintain and improve their properties, as they may be more likely to do so in order to retain their current tenants and avoid vacancies. Overall, the effects of rent control on the quantity and quality of housing in a city can be complex and dependent on a variety of factors. It is important to carefully consider the potential impacts of rent control policies before implementing them. “Rent control can also incentivize landlords to maintain and improve their properties, as they may be more likely to do so in order to retain their current tenants and avoid vacancies.” Seriously? Keeping rents below where they would otherwise be gives landlords an incentive to maintain and improve their properties? The opposite is the truth. And they would have no trouble retaining current tenants and avoiding vacancies. I see a number of my younger economics professor friends worrying on Facebook about how they’ll be able to grade students on written take home tests. Of course, one answer is: Don’t give written take home tests. But if this answer on rent control is any indicator, grading students shouldn’t be much harder than it currently is. For a good piece on rent control, see Walter Block, “Rent Control,” in David R. Henderson, ed. The Concise Encyclopedia of Economics. (0 COMMENTS)

I was very busy this weekend trying to make enough soup so I can afford to hire another cat to shuck corn for me. I should probably explain. A few days ago, my high school freshman introduced me to a  game called Cats and Soup wherein tiny, adorable, animated cats make soup, juice, and stir fry to sell. When the game begins, your woodland clearing is inhabited by one cat who is able to make one kind of soup fairly slowly. As you play, however, that cat’s earnings can be used to hire more cats to act as sous chefs.  Each cat has its own special skills. Some cats chop carrots, others slice cabbage. The frustratingly expensive cat that I am currently saving up for shucks corn. As each new cat joins the team, the cats are able to produce more soup, more varieties of soup, and even broaden out to produce other kinds of food.  Some cats even have skills listed that–so far–have not come into play in the game. But I suspect that Lord Puffington’s ability to squeeze grapes is going to pay off for me before long! And, as the woodland clearing expands, if a grape juice making area opens, Lord Puffington can relocate to that area, leaving his current job as cabbage chopper open to a cat more suited to that task. Each type of food item is priced differently, so as the cats increase their ability to specialize their jobs by adding new cats to the team they are also able to diversify their output by combining their specialized tasks in new ways or by repurposing them. (The carrot chopping cat, for example, not only makes carrot soup, but can help make stir fry, and also make carrot juice!).  The market for the foods produced by the cats is somewhat unclear. We never see the woodland customers. However, a special order board with an ever-changing set of requests suggests that demand is variable and very subjective. And if the cats over-produce and the player is unable to click on the food items quickly enough to claim the gold that each item is worth, the food begins to go stale and is sold for a substantial markdown. So far, so Smithian. But Cats and Soup is also aware of Adam Smith’s cautions about the division of labor as well as his appreciation of its benefits. Smith warns that: The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. This is self-evidently true for soup-making cats as well. Thus, the game allows the cats to purchase and build recreational and rest facilities like shady trees, trampolines, and fishing ponds, where they can refresh themselves from their labors. And as the woodland clearing becomes more productive, the cats can buy hats, clothing, furniture, and accessories with the gold they make. Each new accessory increases their productivity. Happy cats work harder. Our cats, in other words, demonstrate that as societies become wealthier they are able to become more productive. Cats and Soup isn’t quite a full Principles of Economics textbook, but it’s certainly a cute and fuzzy version of some of the key early chapters.  I’ve long been a fan of the ways that economics can delight, entertain, and amuse as well as instruct. Cats and Soup seems like an ideal combination of pretty solid economics and adorable animation. I’d be interested to know what students would make of it, or of an essay prompt asking them to outline the economic principles illustrated by the game.  Meanwhile, I have to go check in on Lord Puffington and his friends. I think they’re about to learn how to fish.    P.S. And when you’re done with the cooking cats, here’s own-admittedly not nearly as cute- division of labor animation. (0 COMMENTS)

How Government Control Can Lead to Censorship in All But Name In the December 11 episode of “CBS Sunday Morning” was a segment on the Smothers Brothers. The show, which was wildly popular and one of my favorites, lasted from 1967 to 1969, when it was abruptly canceled. But nothing in the segment made it clear why it was canceled. You might have got the impression from the way they told the story and from Jane Pauley’s intro, that it was because of the Smothers Brothers’ edgy treatment of the Vietnam war. But that wasn’t it. Here’s what Thomas Hazlett writes in his 2017 book, The Political Spectrum. Licensees [radio or television] tend to comply not only with the explicit rules of the license but also with policy makers’ implicit demands–“regulation by raised eyebrow.” This has allowed officials to sidestep even the weak form of the First Amendment applied to broadcasting–and be happy to do so, as it enhances their clout. When, in 1969, The Smothers Brothers Comedy Hour joked about drug use and criticized U.S. military involvement in Vietnam, it drew criticism. But when the comics singled out for mockery Senator John O. Pastore (D-RI), the powerful head of the Senate Commerce Committees (overseeing the FCC)–he was awarded a “Flying Fickle Finger of Fate” by special guest Dan Rowan–the show never aired. Despite the series’ popularity, CBS abruptly canceled it. No government ruling ended the program. It did not have to. Basically, when you give government officials discretionary power, you can expect that many of them will use it. My guess is that Lee Cowan, the person doing the interview, either doesn’t know the history or wanted to maintain a narrative in which President Nixon, the president at the time, was the villain. (One part of the segment showed Tommy Smothers making fun of Nixon.) Arguably, Pastore had way more power over CBS than Nixon had.   (0 COMMENTS)