Prior to and since the death of Harold Demsetz, there have been a series of wonderful posts here on Econlib that have highlighted the importance of his work, in particular his article, “Toward a Theory of Property Rights” (1967). What makes it such a great article is not only that it was a seminal contribution to the economics of property rights, but that reading its central point, namely that the role of property rights is to guide the internalization of externalities, contains various applications and implicit assumptions that provide fruit for future research. For example, as David Henderson has pointed out in a previous post, Demsetz highlighted the military draft as an additional example of a negative externality, one that could be internalized and priced through the implementation of a volunteer army, one that establishes the exchange of private property over labor services. Demsetz also hints at serfdom as an example of a negative externality, and the transition from serf labor to free labor also represents an internalization of a negative externality guided by the evolution of private property in labor. As Demsetz has explained elsewhere in a Liberty Fund interview with Mark Grady, the powerful insight of this article is representative of an “old trick” that defines his research, namely, to explain and explicate given (or implicit) assumptions in the research of other scholars. My purpose here is to explicate what I regard as another implicit assumption in Demsetz’s article, which further exemplifies the fruitfulness of his work, namely the institutional preconditions for the emergence of property rights. Before turning to my main point, I will briefly summarize Demsetz’s argument and then explain how his article can also be extended to develop a constitutional theory of property rights. The core of Demsetz’s argument is that the logic of choice can extended to explain the emergence of property rights. That is, individuals will devise private property rights arrangements in response to changes in the transaction costs of internalizing an externality. As Demsetz puts it (1967, p. 350), “property rights develop to internalize externalities when the gains of internalization become larger than the cost of internalization.” His example of the emergence of property rights due to the rise of the fur trade throughout the 18th century among the Montagnes who inhabited regions around Quebec illustrates this previous point. Prior to the rise of the fur trade, hunting only took place primarily for the purposes of food, the significance of which, in terms of externalities, was small enough that it did not pay for anyone to take account of them. With the rise of the fur trade, the lack of private property over beavers led to overhunting in the sense that no individual finds it in their self-interest to take full account of the costs imposed on subsequent hunters, resulting in a negative externality. The advent of the fur trade led to an increase in the relative price of furs as well as hunting activity, both of which incentivized the emergence of property rights to internalize the externality of hunting. This resulted from the expected gains of internalization exceeding the expected transaction costs of devising and enforcing property rights arrangements over beaver pelts. The theoretical argument and historical illustration provides a straightforward and powerful lesson of how property rights replace potential competition for resources in the form of violent conflict for peaceful competition for resources in the form of productive specialization and voluntary exchange. I say the word “potential” for a very specific reason, since the example in this paper provides yet another puzzle, one that I’m paraphrasing from Professor Richard Wagner’s fantastic book, Mind, Society, and Human Action (2010): why are not the Native Americans in this historical example not incentivized to fight when furs become more valuable? Or, to put it another way, what are the institutional arrangements precluding the Native Americans from fighting between each other, or for that matter, between the Native Americans and Europeans who would later colonize the area for such resources? My point is meant in no way to undermine the theoretical validity of Demsetz’s argument. After all, there is only so much an author can do in one paper. Rather, my point is to render explicit an implicit assumption in his own argument. What I’m suggesting here is that the outcome illustrated in Demsetz’s example is predicated on an implicit assumption, namely there exists a set of institutional preconditions that internalize another negative externality, namely the costs of violent conflict itself (such costs being the foregone opportunity to engage in productive specialization and exchange). Understood this way, the emergence of property rights in Demsetz’s example is contingent on a set of rules that internalize the cost of using violence, or put another way, minimize the returns to using violence, as a means to define and allocate property rights. What all this implies is that Demsetz’s story can be incorporated into framework of constitutional political economy, developed by James Buchanan and Gordon Tullock (1962) (as well as F.A. Hayek (1960)), one that redirects attention to a rule-level of analysis, which govern the emergence of property rights as by-product of interaction within a set of rules. As Hayek best states this point in The Constitution of Liberty (1960, p. 151): “from the delimitation of a private sphere by rules, a right like that of property will emerge.” My co-author, Vincent Geloso, and I address this point in a paper published in the most recent issue of Public Choice, entitled “Trade or raid: Acadian settlers and native Americans before 1755.” Our case study parallels that of Demsetz by observing the interaction between French colonists outside Quebec (the Acadians) and a Native American tribe (the Mi’kmaq) between the seventeenth and eighteenth centuries in the areas around the Bay of Fundy in the modern provinces of Nova Scotia and New Brunswick. One way to understand the contribution of this paper is that it extends Demsetz’s central insight by observing the rules governing collective decision-making between the Acadians and Mi’kmaq. Living under a relative state of anarchy (compared to Quebec itself), the Acadians and Mi’kmaq, respectively, developed institutions (the council of sagamores for the former, and the parish assembly for the latter) for coordinating collective action. These institutions relied heavily on high levels of consensus in their decision-making and they possessed no coercive abilities. As a result, the emergence of concentrated interest groups proved more difficult. For such interest groups to form in each society in order to capture the gains from violence, the ability to shift the costs of fighting onto the rest of the population would have been required. Thus, both the Acadians and the Mi’kmaq were able to minimize the relative returns to using violence by adopting rules of collective decision-making that favored consensus-building, the by-product of which was to incentivize the emergence of property rights, facilitating productive specialization and exchange between these respective groups. To summarize, the threat of violence can be a productive activity if it is restricted as a means to define and enforce property rights, or it can unproductive if violence is used as a means to engage in wealth transfers in the form of public predation or private predation. From this perspective, the fundamental basis for securing and defining property rights, and hence economic development, is the minimization of the returns to violence in the first place. The question then becomes one of how the relative payoffs become established regarding the utilization of trade or violence to allocate resources. All of this points to, as I’ve suggested, a constitutional level of analysis governing the formation of property rights.   Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs  at the Mercatus Center at George Mason University References Buchanan, James M. and Gordon Tullock. 1962. The Calculus of Consent: Logical Foundations of Constitutional Democracy. Ann Arbor: University of Michigan Press. Reprinted in The    Collected Works of James M. Buchanan, Vol. 3, The Calculus of Consent: Logical Foundations of Constitutional Democracy. Indianapolis: Liberty Fund, 1999. Candela, Rosolino A., and Vincent J. Geloso. 2021. “Trade or Raid: Acadian settlers and Native Americans before 1755.” Public Choice 188 (3-4): 549–575. Demsetz, Harold. 1967. “Toward a Theory of Property Rights.” The American Economic Review 57(2): 347-359.   (1 COMMENTS)

Doug Irwin has an excellent new paper describing how the Korean economy took off in the late 1960s: In the early 1960s, South Korea was close to being considered a failed state. It suffered from political turmoil and economic stagnation. One of the poorest countries in the world, it had a lower per capita income than North Korea, and its standard of living was not much higher in 1959 than it had been in 1945. Domestic savings were virtually nonexistent, and foreign assistance was required to finance most domestic investment. Exports were less than 1 percent of GDP, and it could afford imports of about 10 percent of GDP only because of US foreign aid. Today, South Korea is an economic success story and an export powerhouse. The key transition period is widely agreed to have been the mid-1960s, when it began a sustained period of rapid economic growth. Although the many factors behind the country’s transformation are still debated, the decision to promote exports is generally accepted to have been a key part of its success. In 1959, South Korean exports were just 0.7 percent of GDP. A decade later exports were about 10 percent of GDP, and by the early 1970s they reached 20 percent of GDP. The key policy initiative was a move toward less restrictions on trade: The United States opposed the military government’s initial policy stance and withheld aid to force it to devalue the won and liberalize the foreign exchange regime. With US encouragement, the previous, short-lived administration of Chang Myŏn had introduced these liberalizing reforms to stimulate exports and reduce the rent-seeking that came with government allocation of foreign exchange. Although these changes were deeply unpopular in Korea and resisted by government officials, the United States wanted a return to those policies and had enormous leverage because it financed most of the country’s desperately needed imports. In 1964, the Park government, in a weakened position because of domestic crop failures, relented and appointed an economic reform team that was strongly committed to export promotion as a national priority. Expanding exports was seen as a way of earning foreign exchange to pay for imports and ending the country’s excessive dependence on the United States. The financial sector was also liberalized: In September 1965, Korea lifted interest rate controls that had depressed savings and financial development. The cap on deposit rates was lifted from 15 percent to 30 percent and that on loan rates was raised from 16 percent to 26 percent, though the rate on export credit remained 6.5 percent. The result was a dramatic increase in private savings, which were channeled through the banking system and produced an astonishing increase in investment that further propelled exports. Gross domestic investment rose from 15 percent of GDP before the reform to more than 25 percent of GDP after, reaching nearly 30 percent by 1969. There are no economic miracles.  Rather there are countries held far below their potential due to bad government policies.  South Korea in the early 1960s was one example, while China under Mao was another.  In the Korean case, economic success resulted from following the recommendation of US policymakers.  In the German case, economic success came after domestic policymakers ignored the advice of US policymakers and freed up domestic prices (in 1948). The common thread is that almost all economic “miracles” involve some form of economic liberalization.  What looks like a “miracle” is the rapid growth after the removal of growth constraints. HT:  David Levey (0 COMMENTS)

One of the less charming features of the woke movement is its vocal age prejudice.  In conversation, believers have repeatedly appealed to my age and their youth to gain argumentative advantage. I’m tempted, admittedly, to respond in kind.  In reality, the young have less insight on political and social issues than their elders.  The young themselves agree: Who has the greatest insight on political and social issues? — Bryan Caplan (@bryan_caplan) September 7, 2021 In your personal experience, at what age do people attain MAXIMUM insight on social, political, and economic issues? — Bryan Caplan (@bryan_caplan) February 26, 2020 But per Dale Carnegie, I recognize the futility of insulting people into agreeing with me, however true and relevant the insults may be.  What I’d rather challenge, in this case, is the premise that the woke movement has even developed a novel, young worldview. Yes, its intellectual decorations are novel.  Ten years ago, I never heard anyone talk about “microaggressions” or “privilege.”  The substance, however, is almost exactly what teachers, textbooks, and the media told me back in the 1980s. Namely: The sole reason non-whites and females are less conventionally successful is because white males have been treating them so unfairly for centuries.  The Beckerian view that market forces strongly check discrimination was never taught – or even mentioned – in school when I was growing up.  For income, the party line was clear: All observed white/non-white and male/female earnings gaps are unjustified by productivity.  For other forms of success, the party line equivocated between, “White males haven’t disproportionately contributed to science, technology, and culture” and “This disproportionate contribution solely reflects white male unfairness.”  And of course, teachers, textbooks, and the media aggressively overlooked Asian and Jewish success even in the face of blatant prejudice.* This is no hyperbole, and I grew up in moderate Reagan country. If this worldview has been riding high since the 80s or even earlier, what’s changed?  Zeal.  When I was a kid, these dogmas received constant lip service, but few took them seriously in daily life.  It was like going to a liberal Lutheran church: Yes, the Bible is the word of God during the Sunday service, but the rest of the week we’re not going to worry about what the Good Book says or whether our words and deeds are consistent with the text. Nowadays, about 5% of the population have become part-time fundamentalist preachers of the dogmas of my youth.  And they punch above weight because our latter-day clergy are urging people to live up to the ideology our society has treated as Gospel for as long as we can remember. Yes, you could say that the modern woke movement’s focus on “systemic” injustice as opposed to garden-variety injustice is a major intellectual advance.  Indeed, I’ve heard it said.  My response: At least the version of this doctrine taught in the 80s was falsifiable.  Hardly anyone ever tried falsifying it, but it was falsifiable in principle.  The modern version, in contrast, is a mere fanatical tautology.  When anything can be “systemic” or “structural” oppression, nothing is. Bottom line: Woke is a revival movement.  Like almost all fundamentalist religious crusades, it presumes the truth of long-standing dogmas, then invigorates them with youthful enthusiasm.  If the revivalists took their ad hominem arguments against older minds seriously, they would face severe cognitive dissonance, because it is the older generation that handed them their Gospel. * The main detail that’s changed over time: In the 1980s, teachers, textbooks, and (to a lesser extent) the media still talked about America’s long-standing mistreatment of Catholics and Jews – and almost never mentioned gays.  Now Catholics and perhaps even Jews are supposed to be perpetrators of injustice rather than its victims. HT: Nathaniel Bechhofer, but blame him for nothing I’ve said. (0 COMMENTS)

Russ Roberts: Now, you mention property rights. Both Alchian and Demsetz emphasized the importance of property rights, the applications of property rights. And, we’ll talk a little bit about Demsetz’s contribution in particular. But I want to start with an example from your book, which is the power of private property and a lesson that you use about Robert Barro, past EconTalk guest and a first-rate economist. David Henderson: Yeah. Bob Barro was at University of Chicago at the time. One of his favorite colleagues to talk to was Bob Lucas. Bob Lucas–I don’t know if he was literally a chain smoker, but he smoked a lot. And, Barro hated cigarette smoke. So, Barro had a sign on his door, ‘No smoking except for Bob Lucas.’ And, the idea was, the trade-off with other people wasn’t worth it. Like: You want to come and talk to me, don’t smoke. With Bob Lucas, I’m gaining so much from you, Bob, that I am willing to suffer with that cigarette smoke. Russ Roberts: And, it’s a beautiful example of the subtlety of property rights. And, also by the way of free association, the idea that you can let people into your house if you choose– David Henderson: Yes– Russ Roberts: and you can keep them out if you choose. That’s, in a way, the essence of private property. And here, because he–in theory, I mean, he literally didn’t own his office–but he had, there was a norm established about who could come into his office. This is from “David Henderson on the Essential UCLA School of Economics,” Econtalk, September 20, 2021. Russ interviews me on David R. Henderson and Steve Globerman, The Essential UCLA School of Economics, published by the Fraser Institute. You can get the book here. You’ll like the price. You can download it here. You’ll also like that price. (0 COMMENTS)

Last month, Canada’s Prime Minister, Justin Trudeau, called a snap election 2 years before it would normally have been held. His goal was to attain a majority for the Liberal Party so that he wouldn’t have to keep making deals with the smaller parties, typically the New Democratic Party (it’s like the left wing of the Democratic Party in the United States) or the Bloc Quebecois, a party with seats only in French-speaking Quebec. He failed. He had started with 157 seats (he needed at least 170 for a majority of the 338 seats in the House of Commons) and, if the current numbers hold up even after the absentee ballots are counted, will end up with . . . 157 seats. So when Trudeau said in his victory speech early this morning “You are sending us back to work with a clear mandate to get Canada through this pandemic,” he’s making it up. It’s not a clear mandate. Of course, in another sense Trudeau succeeded: he will remain as Prime Minister. Something else that would interest those of my American friends who think that the party with the most votes should win is that if that were the case in Canada, we would now be talking about incoming Prime Minister Erin O’Toole. As of early this morning, the Conservative Party received 34.1 percent of the vote and the Liberal Party received 31.8 percent. That’s a 2.3 percentage point gap. It’s larger than the 1.2 percentage point gap in the 2019 federal election, when the Conservatives received 34.3 percent and the Liberals received 33.1 percent. I’m, by the way, a dual citizen of Canada and the United States. You might think I would be disappointed that O’Toole lost. I’m not. He caved on a number of issues that the Conservative Party had held near and dear and on which I agreed with them. But also, he was worse on international travel. Here’s a snippet from a news report in April 2021: Flights from all hot-spot countries must be stopped, he [O’Toole] said — maybe all international flights, “(until) we can rectify and secure our border.” Also, although I can’t find the link, O’Toole called just last week for restricting travel into Canada. Trudeau, on the other hand, opened up travel for returning Canadians in early July. Before that, they were required to quarantine for 14 days even if they had been vaccinated and even if they tested negative for Covid. Then he opened it up for Americans on August 9, who hadn’t been allowed in at all. Trudeau, in short, although bad on freedom to travel, was substantially better than O’Toole.     (0 COMMENTS)

Guest post from EconLog reader Paul Fredenberg, reprinted with his permission. Enj0y – and possibly profit! Professor Caplan, I read your post about your homeschooling experience. Sounds like you’ve raised some awesome kids. Congratulations to you and your wife (and your twins too)! I am in utter amazement of your curriculum. I am a father of 10 (yes, I have your “Selfish Reasons” book on my shelf!), ages 4 to 22, and my wife and I have largely homeschooled our kids. My wife took it a step further when she declared one night years ago that we would move to a farm and raise our kids in a different kind of setting. Our oldest kids so far have opted for homeschool until about age 16 and then a transition to public high school (at smaller, rural schools outside of Ann Arbor, MI). Although we consider ourselves reasonably well-educated (I have an MBA from Wharton), my wife and I don’t have the ability to run our homeschool the way you have. Our parental approach has been much more hands-off on the academics, but certainly very hands on regarding character, hard-work, project management, virtue, etc. We milk cows, bale hay, split wood, and all the other good farm stuff. Our oldest 2 boys got perfect scores on the ACT and took as many AP classes as our country schools offered. They chose public schools to participate in the extra-curriculars and graduated at or near the top of their classes. But their transcripts were not perfect. There were a few “B’s” sprinkled in there. When they applied to college I suggested they play the farm angle to their advantage. They wrote essays about burying stillborn calves, milking at 5am in the dead of winter, and baling hay in the 93-degree heat of summer. The first got into MIT and is in his second year studying nuclear physics. The second was accepted Early Action at Harvard – he is currently serving a church mission in Italy and will start fall 2022. Our third is a senior (35 ACT) and wants to go to BYU, largely because he thinks the other schools are a waste of money (“Dad, I’m ROI-focused”), and because he is keen on the prettier girls and better pickleball courts out west. My question for you: did we unwittingly discover a secret “backdoor” into these elite schools? The odds of a non-athlete kid from an upper-middle class, LDS/conservative, white, non-legacy family getting into Harvard early seem astonishing low. And he didn’t have perfect grades either. But I maintain there are probably like 3 kids in the world who both milk a cow every day and scored perfect on the ACT. The admissions folks must have noticed – they must have liked the “story.” I wonder if the advice to anxious parents willing to do nearly anything for their kids to get a sniff of the Ivies – i.e. buy expensive homes in the very best school districts, pay a fortune in property taxes and/or private tuition, and spend years of their livelihood shuffling to whatever next activity might be a marginal help to future admissions possibilities – is actually much more attainable: buy a farm in a rural school district and put the kids to work. (0 COMMENTS)

While watching TV last night, I turned briefly to the Emmys and saw a lot of people in close quarters indoors joyously singing a song. Good for them. One of the biggest losses from the government’s lockdowns is the socialization that is so much a part of our being human. “Man is a social animal,” said Aristotle, and man, are we ever seeing how true that is! Here’s what I wonder. I wonder how many of those few dozen people I saw shame others who don’t wear masks or, even worse, advocate mask mandates. There’s an old line: “Practice what you preach.” But that’s not apposite here. What I want them to do is preach what they practice. They practice not wearing masks. Then they should preach against mask usage for the vaccinated and against government mask mandates. Maybe some of them already do. Good. All of them should. Note: the pic above is of a group at the Emmys last night. UPDATE: Check out the San Francisco mayor’s justification for going maskless at another singing event. She gets to decide what is an important event that justifies going maskless. As well she should be able to. But so should we. (0 COMMENTS)

Pierre Lemieux has a post explaining the fallacy of assuming that inflation is caused by changes in relative prices. An increase in the price of used cars cannot generate or “drive” inflation for a simple reason: it works the other way around. Inflation, which is defined as a continuous and sustained increase in the general price level, causes all individual prices (including wages, interest rates, etc.) to rise more or less proportionately, over and above the change in relative prices caused by changes in demand or supply on specific markets. To the extent that used car prices were partially caused by both inflation and a relative price change, they could not be a cause of inflation. Pierre is correct.  Nonetheless, some people might have a nagging doubt about this issue.  Consider the following thought experiment.  Someone with a crystal ball tells me that the relative price of oil will double in the next three months.  How does that change my forecast for the rise in the CPI?  I don’t know about you, but I’d raise my forecast of next year’s CPI.  So why can’t we say that a rising relative price of oil is inflationary? Let’s first think about why people often link relative price changes with inflation.  One possibility is that some prices are “sticky”, or slow to adjust, while other prices are quite flexible.  Thus an inflationary monetary policy might cause the price of commodities such as food and energy to rise immediately, while other prices respond with a delay.  To the average person, it looks like rising commodity prices are causing an inflation that is actually caused by an expansionary monetary policy. Another possibility is that relative price changes are associated with a change in aggregate supply.  Here we can also assume that monetary policy targets something like NGDP (although a “flexible inflation target” that “looks through” supply shocks would also work.) If a disruption in the supply of oil causes real GDP to fall, then it will lead to a one-time increase in the price level under NGDP targeting.  Strictly speaking, it’s not correct to say that rising oil prices “cause” the inflation (that would be reasoning from a price change), rather the rise in the price level is caused by a combination of falling RGDP and a monetary policy that targets NGDP (or core inflation.)  In this particular case, inflation is caused by the thing that causes the relative price of oil to rise. To summarize, the false belief that rising relative prices cause inflation is due to the correct view that: 1.  Most large and sudden relative price changes are caused by supply shocks. 2.  Central banks tend to target something like NGDP or core inflation rates. 3.  When both #1 and #2 are true, most large and sudden relative price changes will be associated with a one-time movement in the overall CPI in the same direction. Here it’s important to understand that negative supply shocks only cause even a temporary rise in prices by depressing real GDP.  Because real GDP growth in the 1970s was quite respectable (more than 3%/year), we can conclude that relative price changes for products like food and energy played almost no role in the overall inflation rate during the 1970s.  If NGDP growth had been 5% during 1971-81 instead of 11%, then inflation would have been 2% instead of 8%.  It was easy money that caused the inflation. At the same time, the inflation rate during the 1971-81 period was not constant, and the Fed’s response to supply shocks led to inflation rates that were higher during periods of depressed oil production than during periods of high oil output.  So it looked to the average person (and perhaps even many economists) as if oil were driving the high inflation of the 1970s. (0 COMMENTS)

My friend Jason Ford wrote this little play, inspired by The Case Against Education.  Enjoy! Three Mercedes By Jason Ford (The Admissions Office at Foxmoor College in the Philadelphia Suburbs. Bart Amblin, the Head of Admissions, is seated at his desk.)   BART (on phone) Send in the next candidate please.   (Enter Melissa Morely, fashionably dressed)   BART Melissa, thank you for coming! I view this interview process as both a chance for us to learn about you and also for you to find out if Foxmoor is right for you. We offer a world-class academic environment, respect for the student’s voice, and a commitment to teaching every student ethical leadership so they can go help the world with all the challenges we face. Why are you interested in enrolling at Foxmoor College?   MELISSA Thanks for inviting me! Well, it’s like this. My dad Joey Morley was a top Mercedes salesman. You’ve heard the ads, right? (Singing) “Morley Mercedes”   MELISSA AND BART “For only the best.”   MELISSA You got it! It’s a great dealership. We’ve been in business 30 years. So I graduated from high school last year and was gonna work at the dealership, which I’d been doing all through high school. If you count appearing in the ads, I’ve been working there since I was a baby. But then dad collapsed and died on the showroom floor a few months ago.   BART That’s horrible.   MELISSA Thanks. (Composes herself). Anyhow, he didn’t leave a will and me and my four brothers and sisters couldn’t figure out who was going to get the dealership, so we’re just going to sell down the inventory and then sell the dealership altogether and split the profits. So, I’m gonna be without a job, right? And any dealership where you get a decent commission—the high-end stuff—they want a college degree. Got me to researching. Turns out college is a great investment. I did my research and found the ROI on your college—   BART ROI?   MELISSA Return on investment. Anyway, the ROI on Foxmoor College —figuring tuition and future increased earnings—is the best in the Philadelphia area. So I thought we could make a deal.   BART College isn’t about the money you earn.   MELISSA It’s the selling point for me. Looking at your price– I want to offer you three new Mercedes in exchange for four years of  tuition. That’s a great deal—do the math, it’s almost wholesale. Take a look. (Hands brochure) I circled the ones we’ve got available.   BART We don’t do trades. We’ve got–   MELISSA It’s perfectly legal. We traded one car to a contractor in exchange for adding some rooms to our house. But the key to trades is you have to report it as income to the IRS. My dad always said, “Sell, but don’t lie.“ Do you want to test drive this model? I can have it here in under an hour.   BART We’ve got a financial services office to deal with…   MELISSA I saw that your chief executive Dr. Ferris…   BART Our college president.   MELISSA Yeah. Sorry. Anyway, he’s 52 and recently divorced. Wouldn’t he want a Mercedes? I can forward you a link to send to him.   BART I’m sure he isn’t interested. Let’s get back to the point of this interview.   MELISSA You might be surprised. Could you call him?   BART We can deal with finances later. Let’s talk about your academic interests.   MELISSA I don’t have the cash on hand. But you know what…this presents a unique marketing opportunity. We could do a live broadcast. Hey, when I point to you, I’m going to hold up the phone and you say, “Help Mercedes Missy go to college.”   BART Can we please take this seriously?   MELISSA Oh come on! it’ll be fun.   BART We’ve got limited time here.   MELISSA I’ll be quick.  (Turns on phone) Hey, everyone, it’s Mercedes Missy with big, big news! Mercedes Missy is going to college! We’re broadcasting live from the admissions office of Foxmoor College. Mr. Amblin, tell us about Foxmoor. (Turns the phone on Bart.)   BART Um…Foxmoor College is one of the most highly rated small Liberals Arts Colleges in the country with some of the world’s leading professors and a commitment to diversity and…   (Turns the phone back to herself)   MELISSA And that means it’s awesome! The perfect place for your favorite car girl to get smart! Now because it’s a special day, we’ve got a special sale! For the first three buyers who qualify, we’re giving ten percent off all new models. Ordinary is fine for ordinary people, but I know some of you out there want only the best! Are you that special one of a kind we built the C Class Coupe for? Ron from Jenkintown, thank you! Eliza from Mount Airy, you got yourself a deal! Oh look at that! Sid all the way from Reading, you made it under the wire! I’m so sorry, Carolyn from Narberth, you missed by the tiniest second. But don’t worry! Be sure to stop by Joey Morley’s Mercedes for more great deals! (Hangs up phone) Got the money now. Let’s sign the forms. Thank you for your patience.   BART Did you really just sell three cars? Wow. We can’t sign any form. You haven’t applied yet.   MELISSA I don’t need to apply. No credit checks necessary–I’m paying cash.   BART That’s great. But we’re a selective college. We only admit one out of every six applicants.   MELISSA No offense, but you should sell some franchises. You’re leaving money on the table.   BART This isn’t a college for everybody.   MELISSA Okay, I’ll make you a deal. I was looking over the options you offer. How about I pay full price, but you don’t have to worry about the dorm option?  And you throw in a free parking space. This offer is only good for today. (Hands him a pen)   BART It’s not about the money. We have to see if you’re a good fit here.   MELISSA Based on what?   BART We take a holistic approach. Strengths, interests, life experience. We’re trying to bring together a diverse pool of students who will insure a rich intellectual life on campus and build a community that encourages people to do good for the world.   MELISSA All right. What do you want to know about me?   BART What was your high school grade point average?   MELISSA I ain’t stupid. (hands over papers) I pulled a 3.8 at Upper Merion Area High School and SAT scores that are competitive for who you got here now. I did my market research.   BART That’s good. So what are your academic interests?   MELISSA Well, the economics major is the best ROI, so that’s a no-brainer.   BART Is there a subject you want to study out of general interest?   MELISSA Look, I could sit here and tell you I’m gonna get really interested in philosophy or something. But that’s lying, not selling. I just sat through one of your philosophy classes.   BART Did you get permission before doing that?   MELISSA There were lots of empty seats. Besides, if you wanted to buy a car from us, we’d let you take it on a test drive. So what’s wrong with…   BART Next time, ask. I’m sorry you didn’t find it interesting. But keep an open mind. You may find you like the classics once you delve in. We look for people who are academically motivated.   MELISSA And maybe you get some people like that. We got this twenty-year old trust fund kid who waits outside the door the first day the latest S-Class Coupe is available. So we say “We’ve been saving the rubellite red metallic for you!” And he’s always driving out of there with the papers signed by like 7:15 a.m. We’d love it if all our customers were like that. But we gotta make deals with anyone. Two or three students were talking with the professor about Socrates and most of the rest of the class were on their smart phones. So you already have lots of people like me. What’s one more?   BART Smart phones. It’s pathetic.   MELISSA But you admitted them. Why don’t you judge me against them?   BART We’re looking for those people who want to discuss Socrates. Maybe it’s not that many, but I celebrate the ones we get.   MELISSA One of the students fell asleep and that’s real distracting, you know? At least I’ll stay awake so I won’t bother the students who want to talk about Socrates. So you get my money, the Socrates fans can talk about Socrates, and everyone wins.   BART Maybe this school is not for you.   MELISSA Keep an open mind.   BART Fine, I’ll ask the standard questions. Outside of academics, what skills can you bring to Foxmoor that will help us as a community?   MELISSA So besides paying all this cash, I gotta work for you?   BART You’re not just the consumer here. Foxmoor is a community where people learn from and help each other so they can then go help the world.   MELISSA Hmmm.  Okay, here’s one thing I can do.  I’ve organized a lot of displays when we’ve had sales drives. Balloons in the corner, sheet cake with pictures of the cars, that sort of thing. One time, we had all the staff dress like it was the prom. So if you need someone to organize a formal dance…   BART That’s not what I mean. Let’s discuss some specific examples. Do you play a musical instrument?   MELISSA No. But if you need to hire musicians, you’d be amazed at how cheap you can find them. We had a Christmas sale and we brought in the bluegrass band, the Big Sandy River Boys to “a country style Christmas sales event.” Here’s their card. (Bart doesn’t take it.) Now you think bluegrass wouldn’t work in Philly, right? But we had a great sales week and they were working for…   BART Yes, right. Were you on any sports teams?   MELISSA I was at school until 3, at the dealership until 7, and then home for dinner and homework. Sorry if I didn’t have a chance for piano lessons and soccer. But my dad really needed the help there. His health hadn’t been good for years. Never admitted it. So that’s how I spent my time. How does that fit in with that holistic thing you were talking about?   BART Fair point. Sometimes I wonder if we define these things too narrowly. I spent a lot of time when I was a kid visiting my grandmother in the nursing home, but was told that wasn’t the sort of thing you put on a college application.   MELISSA Don’t you hate when people get all superior when you’re the one helping the family? I love my sister, but she’s never helped out at the dealership and is always giving me crap that I wear too much makeup—which you have to do to get sales. And then she thinks she’s so superior because she’s reading books all the time. But I’m putting her food on the table.   BART That would tick me off too. The last standard question is as follows: Foxmoor College is an institution committed to diversity. How would your planned college experience help us achieve this goal of becoming a more diverse and inclusive community?   MELISSA You know, I shouldn’t put down my sister. That dealership thing is the only thing we argue about. Otherwise, real sweet, real smart, reads a book a week—and I mean, hard books—for fun. She could apply here for next fall. Believe me, you admit us both, you got diversity. You won’t believe we’re from the same family! And she might even care about Socrates. Especially if I say that I don’t.   BART That’s not what I mean. Many people of our community who come from a place of privilege are taking a good hard look about how they treat people of color both consciously and unconsciously. Do you have any thoughts about that?   MELISSA It’s not something we talked about at the dealership.   BART I wouldn’t have expected you would have, but..   MELISSA If we don’t treat a customer right, that’s money out of our pocket. When the Philadelphia Eagles break training camp, we always get like a dozen players to come over and buy a Mercedes. Black players, white players, one guy from Samoa….   BART So you treat people of color nicely only to get money out of them?   MELISSA Okay, so you don’t want to let in people who are prejudiced, right? I know where you’re coming from. Had this one guy apply at the dealership and he seemed real good until he said something bad about Arabs. They buy cars too, you know? So forget hiring him. Anyone can stand up in school assembly and say we gotta fight racism and prejudice and stuff. Me, I learned to treat everyone good every day so that we could keep the dealership going.   BART Interesting perspective. So got any questions for me?   MELISSA Am I getting in?   BART I’ll be honest; you’re an unusual candidate. But maybe it would be good to have someone like you.   MELISSA Please let me know soon. Classes start in a week.   BART You have to apply by January 15th, unless you wanted to go early decision. In any case, you’d be applying for a space for next September.   MELISSA I can’t afford to wait a year. Try to get into the car sales business with only a high school diploma and you’re looking at selling used Chevys at Big Ed’s Car-o-rama if you’re lucky. And the commissions suck. If we want to make a deal, it’s got to be for this year.   BART We’ve already selected the class for this year.   MELISSA I told you I don’t need a dorm room. I show up, you take my money, who’s going to care? Except your finance department who will thank you for making it easier to pay your bills.   BART We spent a great deal of time putting together the best possible class. We strive for a variety of interests, talents, backgrounds.   MELISSA Am I going to mess up that perfect balance you have? Don’t try to tell me this is precision engineering.   BART Look, I said you’d be a strong candidate. But you have to go through the process like anyone else.   MELISSA How about we do a one-semester trial? If you don’t like me after one semester, I’ll leave, no questions asked. But in the meantime, I’ll be great for you. What harm can it do to try?   BART It would undermine the integrity of the admissions process. Do you have any questions for me?   MELISSA One thing. You’ve talked about your students helping the world. So how do they do that here? Got any charities you do?   BART Is that a serious question? (She nods) The Tygard housing project borders the campus and we do initiatives over there.   MELISSA (Opens her smart phone to look at picture of the area) Oh yeah, your college looks like a mansion next to a dump.   BART Please don’t call it a dump. We know there’s a disparity and we try to help. If you’re interested in working on that initiative, I’ll make a note of it. Our students tutor their kids, act as mentors.   MELISSA That’s awesome. How’s it going?   BART Okay.   MELISSA Just okay?   BART We get a lot of first-year students coming in who are enthusiastic about helping the world. They sign up to volunteer to help tutor and do it for a while. It’s rare to find a sophomore who still does it.   MELISSA I bet that’s like our sales drives. We announce a new one, get the staff fired up, and everyone’s super into it on the first day. But keep it up a few weeks and people lose the energy, they forget to wear their buttons…   BART That’s human nature. But people miss the point of a college education if they never volunteer.   MELISSA Morely Mercedes is real involved in charity. We donate a few cars every year to the Leukemia and Lymphoma Society. They raffled them off at their annual gala. I was the company representative at the gala last year. (Shows Smart Phone) Here’s a picture of me there. You know what we could do? Throw a big scholarship fundraiser gala on campus for the kids at Tygard. Invite everyone at Tygard, call the newspapers…I know how to do this.   BART That’s a really interesting idea. If you get in next year, I urge you to try.   MELISSA “If”? I can’t afford “if”. You need to tell me now if you’ll take me. If not, I’ll go to the college in the area with the second highest ROI. If they don’t take me, I’ll go the third highest, and so on, until someone takes me. Why not you guys? Don’t you really want that gala to happen?   BART It might be good. But I really shouldn’t change procedures.   MELISSA Can I talk to your manager?   BART Well, I’m the manager here.   MELISSA Okay. Then thank you for your time. (They shake hands)   BART Thank you. It’s been good..and interesting..talking to you.   MELISSA (Starts to exit) You know what? You can have my idea for free. You really should throw that gala.   BART It’s a good  idea. Although I don’t know if we could convince the students and administration to go along with something like that. You’d need to convince a lot of people.   MELISSA You heard me sell three Mercedes. (exit)   (Bart pauses for a moment and then opens door.)   BART Melissa! (Picks up phone) Juan, is there a young woman walking past your office? That’s her. Could you please tell her to come back here?   (Curtain)     (0 COMMENTS)

It is always surprising how even the financial press is confused about inflation. I am not speaking of complex conflicting theories on the causes of inflation but of the very basic distinction between inflation and changes in relative prices. For example, The Economist just wrote: America’s annual inflation rate stood at 5.3% in August, down slightly from the 13-year highs of the previous two months. There was some evidence that inflationary pressures may be levelling off, such as an easing of prices for used cars, which have driven some of this year’s inflation. [my emphasis] An increase in the price of used cars cannot generate or “drive” inflation for a simple reason: it works the other way around. Inflation, which is defined as a continuous and sustained increase in the general price level, causes all individual prices (including wages, interest rates, etc.) to rise more or less proportionately, over and above the change in relative prices caused by changes in demand or supply on specific markets. To the extent that used car prices were partially caused by both inflation and a relative price change, they could not be a cause of inflation. Suppose that a decrease in the supply of new cars causes an increase in their prices. This in turn boosts the demand for used cars, a substitute, and causes an increase in their prices of, say, 27%. The consumers who continue to buy cars at the higher prices must spend less on other goods and services, whose relative prices would decrease. Assuming no independently generated inflation (no increase in the general price level), that would be the end of the story: fewer cars and more of other goods or services are produced. Prices of cars have increased relative to the prices of other goods; only a change in relative prices has occurred. If there is inflation, though, the increase of used car prices will be augmented by the general rate of inflation in the economy, say, 5%. To illustrate, take the Bureau of Labor Statistics (BLS) data for August. The BLS report on the Consumer Price Index (CPI) reveals a 5.3% increase in the index compared to August of last year. In other words, the BLS estimates that the general level of consumer prices in the economy grew by 5.3%. It also calculates that the prices of used cars and trucks (the available statistical category) increased by 31.9%. If the 5.3% represents a good estimate of inflation (in the price level), this means that the relative price of used cars and trucks increased by (roughly) 26.6% (= 31.9% – 5.3%), that is, relative to other goods in the economy. (I say “roughly” because an exact calculation would require excluding the increased price of used cars and trucks from the total increase of the CPI, not a large correction as used cars and trucks account for only 3.5% of the goods and services in the CPI.) The remaining 5.3% in the increase of used car and truck prices is what is due to inflation. It is nonsensical to say that the 26.6% “has driven some of this year’s inflation” of 5.3%, because the latter gets added to the former. Look at it in another way. If T=R+L, it is nonsensical to say that R contributed to, or “exerts pressure” on, L. If the Total price change of used cars and trucks (32%, rounded) is equal to the Relative price change (27%) plus the change in the general price Level (5%), it is nonsensical to say that the relative price change (R)  contributed to the change in the general level of prices (L). The Economist is not the only media to be confused. For another example, see the Wall Street Journal’s related story, “Inflation Eased in August, Though Prices Stayed High,” September 14, 2021. God knows what the New York Times, the Washington Post, or Fox News must have said! Steve Ambler, an economics professor at the University of Québec in Montréal, adds a point that may partly explain the confusion of non-economists (and perhaps some economists): There’s a significant empirical correlation between the rate of inflation and relative price variability. … In an inflationary environment there’s likely going to be a few price increases that commentators will be able to point to that are in the right hand tail of the distribution. Then they conclude that those extreme price increases are “driving” inflation. (0 COMMENTS)