A common fantasy of adolescence is imagining a world without money in which you can get whatever you want without needing those pesky green pieces of paper bearing pictures of George Washington. The fantasy quickly turns into annoyance that some people have lots of those Washington portraits. What makes those people so special? Why should they get to acquire all that cool stuff when you can’t? Enter Cory Doctorow’s novel Down and Out in the Magic Kingdom, a veritable Fantasyland for the indignant adolescent. In this world, money has magically morphed into Whuffie. “Whuffie recaptured the true essence of money: in the old days, if you were broke but respected, you wouldn’t starve; contrariwise if you were rich and hated, no sum could buy you security and peace. By measuring the thing that money really represented—your personal capital with your friends and neighbors—you more accurately gauged your success.” To our embittered adolescent, that seems so much better. Up against the wall, green pieces of paper! Whuffie is here! Whuffie seems like a really amazing new form of money. You get more Whuffie by doing nice things for people. You lose Whuffie by being mean. So if you want to spend your days writing poetry or making puppets, you can still acquire Whuffie and be rich! Finally the right people are the rich ones. Alas, go one step further and the Whuffie experiment starts unravelling. If Whuffie is created when people are grateful for something I have done, why does it matter if I have any Whuffie myself? I can be grateful even if I never do anything to make others grateful. Indeed, why would I give up Whuffie (reputation) when I give you Whuffie (reputation)? If I spend Whuffie as fast as I acquire it, doesn’t that mean I have the same reputation as the person who never acquires any reputational capital?            Doctorow compounds this problem by changing the terms of the economy. In this world, scarcity is, well, scarce; it is a world where “even a zeroed-out Whuffie loser could eat, sleep, travel and access the net without hassle.” You don’t need Whuffie for all those things. Why do you need Whuffie: “While I couldn’t get a table in a restaurant, I was free to queue up at any of the makers around town and get myself whatever I wanted to eat and drink, whenever I wanted it.” You have no Whuffie but you want a steak and lobster dinner with some top shelf bourbon to wash it down? No problem; you just can’t eat it in a restaurant. The longer you look at it, the odder Whuffie gets. Doctorow is not unaware of this problem. In an essay written over a decade after the novel came out, Doctorow begins, “I need to confess something: ‘Whuffie’ would make a terrible currency.” He is certainly right about that. But, then he adds: “Whuffie has all the problems of money, and then a bunch more that are unique to it.” He explains that the problem with Whuffie and real money is that the people who end up at the top are “sociopathic jerks who know how to flatter, cajole, or terrorize their way to the top.” That, however, is not the problem here. The problem is not that Whuffie is bad money; the problem is that Whuffie is not money at all. Doctorow is confusing “money” with “wealth.” They are not at all the same thing, and the difference is vitally important for seeing why the monetary system in Doctorow’s novel isn’t dystopian; it is nonsensical. Money is a particular asset, and even among assets, it is not a particularly desirable one. You actually don’t want all that many green pieces of paper; you would much rather have assets that increase in value over time. However, money is enormously valuable as a thing used to purchase other things. We use money because barter is hard to arrange. Money smooths out the ability to trade what I have (including my time) for things I want. Moreover, we only need money because things I want are scarce; in a world in which I can get whatever I want whenever I want it, the need for money vanishes. Doctorow seems to know this, which is why his economy has to have some things that are still scarce; you can travel all over the world, have a place to stay, and eat whenever you want, but just don’t try to go into a restaurant. Why do people provide those free things though? Presumably people provide food to others because they get Whuffie even from those zeroed-out Whuffie losers. So, why do the owners of restaurants and select other goods only get Whuffie if the customers have some to spare? What about considering Whuffie as a replacement for wealth? This works better and indeed is probably what Doctorow was imagining when he wrote the novel. In the real economy, people with lots of wealth can acquire the things they want because they can convert their wealth into money and use the money to purchase the things they want. This is not the only way to acquire things in the real economy though. If you have a high reputation, if people like you and think you are an amazing person, then people are willing to do favors for you, give you things you want but not expect any payment in return. In Doctorow’s novel, Whuffie is just quantifying that reputational capital. But, that sort of reputational capital is not something that can function as a medium of exchange. Whuffie isn’t money. This confusion between “money” with “wealth” has real-world consequences. The ultimate source of money in the modern age is the government. Because of the potential to abuse the printing press, governments all over the world have delegated the power of creating money to an independent central bank. This has not stopped people from arguing that the government should fund a wide array of projects simply by creating more money. In making this argument, people are making the same error as Doctorow made in his novel. Creating more wealth is desirable. Creating more money? The money itself is not creating wealth; in the absence of more things being produced, the increase in the amount of money will simply result in higher prices. The fact that Doctorow’s novel is confusing money with wealth is illustrated by the fact that no one is concerned that increasing reputations are going to cause inflation. Sadly, this confusion does not just happen in novels. James Hartley is Professor and Chair of Economics at Mount Holyoke College, where he teaches Macroeconomic Theory, Money and Banking, and Principles of Economics among other economics courses.  (0 COMMENTS)

Of all the scenarios that keep astrophysicist Sandra Faber up at night, it’s not the Earth’s increasing volcanism, the loss of photosynthesis, or even the impact of a massive asteroid. Rather, it’s the collapse she’s certain will result from the unbridled growth of the world’s economies. Join Faber and EconTalk host Russ Roberts as they explore what the most inexorable law of physics has to do with economics and whether the world’s growing economies pose a problem or provide the solution for the finiteness of planet Earth. (0 COMMENTS)

Of all the scenarios that keep astrophysicist Sandra Faber up at night, it’s not the Earth’s increasing volcanism, the loss of photosynthesis, or even the impact of a massive asteroid. Rather, it’s the collapse she’s certain will result from the unbridled growth of the world’s economies. Join Faber and EconTalk host Russ Roberts as they […] The post Sandra Faber on the Future of the Earth appeared first on Econlib.

Ilya Somin, a law professor at George Mason University’s Antonin Scalia Law School, advocates that we make November 7 (today) the Victims of Communism Day. I agree. I can’t think of much to add to what he said and I can’t say it better. Here are two of his key paragraphs: The Soviet Union did not have the highest death toll of any communist regime. That dubious distinction belongs to the People’s Republic of China. North Korea has probably surpassed the USSR in the sheer extent of totalitarian control over everyday life. Pol Pot’s Cambodia may have surpassed it in terms of the degree of sadistic cruelty and torture practiced by the regime, though this is admittedly very difficult to measure. But all of these tyrannies – and more – were at least in large part part variations on the Soviet original. And: The Black Book of Communism estimates the total number of victims of communist regimes at 80 to 100 million dead, greater than that caused by all other twentieth century tyrannies combined. We appropriately have a Holocaust Memorial Day. It is equally appropriate to commemorate the victims of the twentieth century’s other great totalitarian tyranny. The picture above is of bones of tortured prisoners, Kolyma Gulag, in the USSR.   (0 COMMENTS)

During the Great Recession, I used to argue that when it comes to monetary policy, there is no “wait and see”. Within minutes of a Fed announcement, the financial markets give us almost all the information on the likely impact of a new policy that we will ever have.  The actual future course of the economy depends not just on the new policy, but also on many other extraneous factors. The same is true of the world of sports, where the betting line for a game is a rough estimate of the market prediction as to the outcome. The prediction is relatively efficient, although the actual outcome of the game is highly random and often differs one way or another from the predicted outcome. This recent story caught my eye: The Packers were 1-point favorites on Tuesday. Then on Wednesday, Aaron Rodgers was ruled out for Sunday’s game at Kansas City due to a reported positive test for COVID-19. And we got a clear idea how much the Packers quarterback matters to the point spread. When BetMGM opened the line after the news, the Chiefs were 7.5-point favorites. Not many players ever can cause an 8.5-point difference in the spread. . . . Rodgers is one of the league’s best players. We saw it yet again last week when he helped a shorthanded Packers team to a win over the then-undefeated Arizona Cardinals. It’s arguable he means even more than 8.5 points to the spread. We’ll find out on Sunday what Rodgers’ absence means for the 2021 Packers. I’m not sure it’s “arguable” that he means more than 8.5 points to the spread, at least for this game.  Perhaps the reporter means that it’s arguable that the change in the spread underestimates how much he actually means to the Packers.  In any case, we probably won’t find the answer to that question on Sunday–as football outcomes depend on all sorts of unpredictable factors.  We might know a bit more after Sunday, but not because we’ll know more about Rodgers, rather we’ll learn a bit more about his replacement. (0 COMMENTS)

My letter to the Carmel Pine Cone was the lead letter in the November 5-11 edition. It’s about a local issue involving a teacher who thought it was important to teach her students using the text of Martin Luther King’s famous “Letter from Birmingham Jail.” I learned about the MLK letter relatively late in my life, at about age 31, when my wife told me she used it in her English composition class at Santa Clara University. The editor added a punctuation error that was partly my fault because I should have use an exclamation mark rather than a period. He replaced my period with a question mark. Here’s my letter as it should have read: Thank you for reporting on the Pacific Grove Unified School District cracking down on a teacher who had the temerity to quote Dr. Martin Luther King Jr. She was quoting from his “Letter from Birmingham Jail,” which I recommend to all of your readers. Because King himself used the n-word, this teacher must have thought that it was alright for her to use it. How dare she accurately quote an historical document! We residents of Pacific Grove and of other adjacent areas had a spirited discussion of the issue on Nextdoor on Saturday, October 23. While the person who started the discussion seemed to see it as obvious that one should not quote the whole of King’s relevant sentence, many of us disagreed. There’s a huge difference between using the word to put someone down and quoting someone who used the word to explain his hurt and anger at the word’s use. One of the main things educators can teach us is to make crucial distinctions. It’s too bad that the Pacific Grove Unified School District, which is in the business of education, does not seem able to master what seems to be a simple distinction. The editor had the guts to write an editorial on the same page as my letter in which he quoted from the relevant passage of the King letter. A friend on Facebook pointed me to a very nice lesson on line about the distinction between mentioning a word and using a word. (0 COMMENTS)

. Josh Hawley is a man of system. In a guest essay in the October 29 New York Times titled “The Only Way to Solve Our Supply Chain Crisis Is to Rethink Trade,” US Senator Josh Hawley (R-Missouri) challenges what he sees as a dangerous reliance on imports from other countries. He claims that Washington politicians from both parties have “helped build a global economic system that prioritized the free flow of capital over the wages of American workers, and the free flow of goods over the resiliency of our nation’s supply chains.” He proposes that the Departments of Commerce and Defense be given the power to determine which goods and inputs are “critical for our national security and essential for the protection of our industrial base.” Once these goods and inputs are designated, Hawley would have the US government require that at least 50 percent of the value of the goods be made in the United States. He would have this requirement enforced by allowing domestic producers to petition the US International Trade Commission to take enforcement actions against violators. Hawley claims that local-content requirements “will bring jobs back to America, help to revitalize the nation’s depleted manufacturing sector, and foster the domestic production so essential to our economic independence.” Some of what he claims is true. His proposal, if implemented, would bring some jobs to America—and would cause America to lose other jobs. It would revitalize parts of our manufacturing sector—and would hurt other parts of manufacturing. It would foster domestic production of some goods but, ironically, this could actually make us less independent. These are the opening paragraphs of David R. Henderson, “Hawley’s Folly,” Defining Ideas, November 4, 2021. Note the quote from Adam Smith, The Theory of Moral Sentiments. Read the whole thing. (0 COMMENTS)

Insensitive speech is productive if by “productive” we mean conducive to individual liberty, economic prosperity, and human flourishing. I take “insensitive” in Merriam-Webster’s definition of “lacking feeling or tact.” There are at least three arguments in defense of insensitive speech. First, insensitivity is largely in the eye of the listener. This is demonstrated by the wide variation of what was considered insensitive in different societies and historical periods, and by what is now considered insensitive among different groups of people in the same society, especially in advanced societies. Some insensitivity is thus an unavoidable consequence of free speech. And free speech is an essential condition for the search of truth and thus for the intellectual and material progress of mankind. (See John Stuart Mill, On Liberty, 1859.) A corollary argument is that exposure to insensitive speech can lead people to question their prior beliefs and biases. Depending on the beliefs questioned, this can be judged good or bad, but it is certain that the capacity to question one’s biases is a necessary condition for distinguishing what may need to be changed and what should be conserved in society. Comedy was long a favorite way to challenge popular beliefs, perhaps starting with Aristophanes’s “Lysistrata,” which imagined a women’s sex strike to stop wars. Responding to the leader of the chorus of old men, the chorus of women is pretty insensitive (Catherine Lecomte Lapp, The Essential Classics: An Anthology of Greco-Roman Literature [Les Belles Lettres, 2005]): Now just you dare to measure strength with me, old grey-beard, and I warrant you you’ll never eat garlic or black beans any more. Nowadays, stand-up comedian Dave Chapelle “shows how hollow—and marginal—the arguments of the woke left are” (“Dave Chapelle for Gender Realism,” The Economist, October 16, 2021): Even many of his critics concede that the lead-in to Mr Chappelle’s long transgender riff is pretty funny. Because of his past jibes at the community, Mr Chappelle claims, in mock fear, a conspiratorial well-wisher warned him, “they after you”. “One ‘they’ or many ‘theys’?” he hissed back. But whatever the critics thought of his craft, they adjudged his act “transphobic” and to be condemned. As evidence, many cited his defence of J.K. Rowling’s insistence on the biological reality that trans identity and sex are different. (No wonder, he deadpans, that women are annoyed that Caitlyn Jenner won “woman of the year her first year as a woman, never even had a period…”) “The phobic jokes keep coming,” sighed the Guardian. … Group politics, zero-sum and exclusionary, is dehumanising; his profane, moral comedy is a corrective. In the production of ordinary market goods, innovation depends on the capacity to question traditional ways. Entrepreneurs are insensitive to most people except for their potential customers. Another argument: the proper exposure to insensitive speech helps distinguish between children and adults. A child must be protected from the conscience of certain realities. As Marcel Pagnol wrote at the end of his 1958 biographical novel Le château de ma mère, Such is life for mankind. A few instances of joy, soon erased by unforgettable sorrows. No need to tell children about that. (My translation) Telle est la vie des hommes. Quelques joies, très vite effacées par d’inoubliables chagrins. Il n’est pas nécessaire de le dire aux enfants. An adult, on the other hand, must have gradually learned to face life squarely if he is to enjoy it and have any success in what he wants to do. He must be able to hear and see things he does not like or approve of. We can think of a demand curve for sensitivity from the sensitive or oversensitive and an offer of sensitivity by what we may call the “sensitivity industry,” made of both private parties and governments. Supply and demand establish an equilibrium price, which represents what demanders must sacrifice in terms of other goods, services, and opportunities (opportunities they would have in a society of “insensitive” people), and what the professional sellers of sensitivity gain from promoting it. Politically, it is possible that sensitivity feeds on itself, just as a one-time supply problem becomes ongoing inflation when the central bank accommodates it with more money. The more sensitive and childish people are, the more they want to be protected by the state, through restrictions on free speech for example. The state responds by happily providing more protection because politicians and bureaucrats benefit from it. The more protected the subjects are, the more childish and sensitive they become and the more protection they demand. We may borrow Alexis de Tocqueville’s immortal words: [The sovereign power] hinders, it represses, it enervates, it extinguishes, it stupifies, and finally it reduces each nation to being nothing more than a flock of timid and industrious animals, of which the government is the shepherd. One caveat: However politically useful insensitive speech can be, it may, together with hairy sensitivity demands, poison personal interactions. We could hope that traditional rules of etiquette would dampen this danger. But along with other moral constraints, etiquette (as it had developed in Western countries) has been declining, with the result that personal interactions have become less predictable and often harsher. (0 COMMENTS)

I’ve long been critical of local government.  Yes, local officials are “closer to the people.”  And yes, moving to a new town is a lot cheaper than moving to a new state or a new country.  Yet local governments are still far inferior to for-profit businesses. Recently, however, I’ve realized that I’ve been too generous.  The two main things that local governments do are: 1. Provide K-12 education. 2. Regulate construction.   And on reflection, local governments do both of these things terribly.  Consider: 1. Voucher systems are clearly more efficient, yet virtually every locality continues to directly supply K-12 education.  Nor is this a product of rising state and federal involvement.  America’s local governments have been funding systems, not students, for centuries. 2. Local governments’ construction regulations are usually quite strict, especially in the most desirable locations.  The resulting draconian system of height limits, zoning, minimum lot sizes, minimum parking requirements, and beyond roughly double the cost of housing and greatly retard national economic growth.  While state and federal governments also regulate construction, local regulations are clearly vastly more important.  That’s why we call them Not In My Backyard policies.   Some economists try to rationalize the status quo, but to no avail. 1. While voucher systems’ effect on test scores is debatable, the effect on customer satisfaction is not.  How so?  Because if you let parents take their money elsewhere, plenty will.  Hence, they are not currently satisfied customers.  You can deny that customer satisfaction is a good benchmark, but that’s the standard we use for almost every other business.  Why should education be any different? 2. While you can argue that housing regulations curtail negative externalities, the leading examples are parking and traffic.  The optimal response to both is not construction regs, but peakload pricing.  In any case, the damage of housing regulation vastly outweighs the harm of any negative externalities that it plausibly prevents.  And what about all the positive externalities of construction?  More homes means more playmates for my kids.   The other route is to concede the inefficiencies, but insist that local government still “works.”  After all, local governments are supposed to maximize the interests of their own citizens.  And that’s what they do, right? At least for housing regulation, this is superficially plausible.  “Existing property owners benefit if you restrict supply to keep housing prices high” sounds right.  Yet on reflection, this slogan is far less clear than it sounds.  Most obviously, if housing prices in your region are high, and all of the other localities strictly regulate housing, deregulation allows your locality to sell out to developers and earn massive profits.   Local deregulation is like violating your OPEC quota: In the absence of strident retaliation, it’s practically a license to print money.   How, though, can local government be so dysfunctional? First, as I’ve argued before, non-profit competition is weaker than for-profit competition, even if the number of competitors is vast.  Why?  Because no one is trying very hard to win.  As I’ve explained before: Tiebout implicitly assumes that non-profit competition works the same way as for-profit competition.  It doesn’t.  If a business owner figures out how to produce the same good at a lower cost, he pockets all of the savings.  If the CEO of a publicly-held corporation figures out how to produce the same good at a lower cost, he pockets a lot of the savings.  But if the mayor of a city figures out how to deliver the same government services for lower taxes, he pockets none of the savings.  That’s how non-profits “work.” With non-profit incentives, neither the number of local governments nor the ease of exit lead to anything resembling perfectly competitive results.  The “competitors” simply have little incentive to do a good job, so they all tend to perform poorly. Second, voters are deeply irrational, even at the local level.  Most people childishly refuse to grant that allowing more construction will reliably make housing more affordable. Yes, you can point to my Myth of the Rational Voter and object, “How can voters be so irrational even though the expected cost of voter irrationality is especially high at the local level?”  Reply: Even at the local level, the probability of voter decisiveness is so low that the expected cost of voter irrationality is approximately zero.  If you have more than a hundred voters, “Your vote doesn’t count” is basically correct. To reiterate, I am not arguing that local governments have two little blind spots.  I am arguing that local governments have two main jobs – and they’re awful at both. (0 COMMENTS)

A recent WSJ article discussed two reasons why, unlike in 2013, there was no “taper tantrum” in the markets when the Fed began hinting that they planned to taper their purchase of Treasury bonds: The benign explanation is that the Fed has done a better job of preparing investors for a shift in its policies than it did in 2013 and that the market largely agrees with its approach. . . . The problematic explanation is that the Fed is going to have to shift its policies more abruptly or aggressively than expected and the market is in for a rude awakening later. I don’t find either of those explanations to be entirely persuasive (although the first is partly correct.)  Indeed I don’t even like the term ‘taper tantrum’, as it suggests that the financial markets behave with the maturity of a baby that had his bottle taken away.  These are not “tantrums”; they are rational market responses to new information about Federal Reserve policy. Unfortunately, many pundits are arrogant, assuming that they know more than the markets.  When they cannot explain market reactions to news, they claim investor irrationality. In fact, financial market prices embed far more wisdom than even the most brilliant Nobel Prize winning economist could hope to have.  Markets are far smarter than people. There is a much simpler explanation for the why markets reacted differently this time around.  The 2013 decision to taper was a policy mistake that slowed the recovery, as even the Federal Reserve’s leadership now recognizes. Markets understood this immediately. Indeed growing awareness that this was a mistake is one factor that led to the recent adoption of flexible average inflation targeting. In contrast, the current decision to taper will help the economy.  NGDP growth is back on trend, and right now the bigger risk is overshooting, not excessively tight monetary policy.  Markets know this and this explains why there has been no “tantrum” this time around. So the WSJ is correct when it points to the fact that this time around, “the market largely agrees with [the Fed’s] approach”. Many people believe the Fed “pumps money into the stock market”.  That’s nonsense; money doesn’t go into markets.  Easy money helps the stock market when it helps the economy.  A good economy is good for corporate profits.  When easy money doesn’t help the economy (as in 1966-81), it also doesn’t help the stock market (in real terms).  David Glasner once did a study showing that TIPS spreads became positively correlated with the stock market during the Great Recession, which is roughly the point at which higher inflation expectations would have been beneficial to the economy. (0 COMMENTS)