An army of immigration skeptics warn that mass immigration paves the road to socialism and tyranny.  When they express these fears, they almost always find a receptive audience.  Even thinkers inclined to favor immigration often get cold feet when they visualize the new arrivals’ broader political effects. Yet if you search for actual research on what economists call “the political externalities of immigration,” you won’t find much.  George Borjas himself writes: “Unfortunately, remarkably little is known about the political and cultural impact of immigration on the receiving countries, and about how institutions in these receiving countries would adjust to the influx.”  Indeed, to the best of my knowledge there isn’t a single book published on this general topic. Until now.  Early next year, Cambridge University Press releases Alex Nowrasteh and Ben Powell’s Wretched Refuse? The Political Economy of Immigration and Institutions.  Immigration skeptics will no doubt protest that both authors are well-known for their pro-immigration stances. Yet the fair question to ask skeptics is: Shouldn’t you have published your book on this topic years ago?    They, after all, are the ones predicting doom.  The fact that Nowrasteh and Powell are beating them to the punch is deeply revealing at the meta level: Even the more scholarly critics of immigration rely heavily on ominous speculation.  In social science, pessimists normally present concrete evidence of social ills, and critics try to rebut them.  For immigration, the critics often have to create the pessimists’ case for them, then rebut it – because the pessimists don’t go beyond vague Cassandra cries. I’ll discuss Wretched Refuse? in depth when it releases.  For now, I’ll just say that I’ve read the book, and it’s excellent.  Pre-order now!   (0 COMMENTS)

Author and journalist Virginia Postrel talks about her book The Fabric of Civilization and How Textiles Made the World with EconTalk host Russ Roberts. Postrel tells the fascinating story behind the clothes we wear and everything that goes into producing them throughout history. The history of textiles, Postrel argues, is a good way of understanding […] The post Virginia Postrel on Textiles and the Fabric of Civilization appeared first on Econlib.

Consider a wide definition of a conspiracy as a secret plan between two parties or more to do something, legal or illegal, that hurts somebody else’s interest for the purpose of furthering their own mutual interests, conspiracies. This definition is close to the dictionary’s (“A secret plan by a group to do something unlawful or harmful”), although it focuses less on secrecy. For instance, a firm is a general conspiracy to wage competition against other firms’ interests and manages small conspiracies, only some of which are secret. Government actors are the masters of conspiracies. The problem is to distinguish good from bad conspiracies, and plausible from implausible conspiracies (or “conspiracy theories,” as specific conspiracy claims are often called). A bit of economics is especially useful to make the latter distinction. To be engaged in by an individual, a conspiracy must promise a good likelihood of higher benefits than costs for the individual himself. If this is not true for the minimum number of conspirators required, the conspiracy will not happen. Focusing on the costs, the difference between a plausible and an implausible conspiracy is often determined by whether it is legal or illegal since an illegal conspiracy that is uncovered brings severe punishments, that is, higher costs. There are conspiracies in any spontaneous order, in any system of individual relations without a central and effective coercive authority. Subgroups of individuals always engage in more or less secret plans to further their own interests. In the case of illegal conspiracies, the higher the expected punishments (cost of punishment times the probability it will be metered), the less frequently they will happen. Some spontaneous order also exists in any conspiracy. Conspirators don’t necessarily act in a way that is consistent with the conspiracy. In a firm, individuals sacrifice more or less the company’s interest to further their own interests. In an army, the foot soldiers at the end of the chain of command don’t do exactly what the faraway general intended them to do (see Gordon Tullock, Bureaucracy, in The Selected Works of Gordon Tullock, edited by Charles K. Rowley, Liberty Fund, 2005). There is also some spontaneous in illegal conspiracies. Spontaneous rules developed within groups of pirates to help further their objectives (see the work of Peter Leeson). But in some circumstances, the self-interested behavior of individual conspirators leads them to act against the conspiracy. A conspirator will rat on his co-conspirators if he thinks that the conspiracy is on the verge of being uncovered and that he can thereby reduce his own punishment. And he is even more motivated to spill the beans as he knows that his co-conspirators are equally motivated. If a co-conspirator is going to denounce me, I better denounce him first. The famous Prisoner Dilemma models such interactions. The more numerous the conspirators need to be and the longer and more complex their plan, the less likely each one will participate, because he knows he can be betrayed by any of the others. The less likely it is that such a conspiracy will materialize. Conspiracy hoaxes are implausible conspiracies precisely because they ignore these individual incentives. Given the decentralization and complexity of the American election system, a large election fraud—one that has some chance of changing the election result—would need much complicity, including from government actors. The government conspirators’ individual benefits in terms of future power, perks, and money can be large, but their costs, if the conspiracy is uncovered, will also be large. In a country with severe penalties for interfering with voting or tampering with ballot boxes, with a host of independent investigating authorities and judges, with a free press and a pack of Pulitzer-chasing journalists, the cost will likely be too high for any individual to engage in a vast electoral fraud. A conspiracy to “steal” the recent presidential election is not completely impossible, but it is highly implausible. It is not more incentive-compatible than, say, Pizzagate (an imagined conspiracy of Democratic pedophiles in a DC pizzeria) or than the claim, pushed by Alex Jones, that the Sandy Hook murders did not really happen. If that is not true, the difference between the United States and banana republics would be blurred. These explanations by incentives overlap Ockham’s razor: in explaining election results, choose the theory that is the simplest—although determining what is simpler is not always simple. If the foregoing is true, we would expect that most if not all election conspiracies would be run by foreigners under the umbrella of their own governments. In such cases, the individual cost of being unmasked is relatively low and may well be lower than the benefits conferred by the government. That the rulers of Russia would mount a conspiracy to influence the result of an American election, especially to favor a narcissist and potential puppet, is certainly incentive-compatible, although it is not in itself proof of the conspiracy. There is a demand for conspiracy theories, as co-blogger Scott Sumner recently argued and, in response, there is a supply of them, a supply that has dramatically increased with the reduction in its production cost. In this post, I looked at the supply side. An extreme example of conspiracy theory is the one peddled by the president of an organization called Judicial Watch: “elite units of the National Guard” “fed” the ballots of several states into a quantum computer (nothing less!) and were also able, with a GPS technology and the ballots’ “ink made of corn,” to follow them; the conclusion is that Trump won reelection with “over 80%” of the legal vote (see beforeitsnews.com). In that particular conspiracy theory, everything is nonsense, from the beginning to the end. The criminal actions of the guardsmen and their superiors and accomplice are not incentive-compatible. Time is scarce: don’t waste yours with that sort of conspiracy theory. (0 COMMENTS)

What kind of person do you aspire to be? How do you know how to become that person? This is the realm of aspiration, as philosopher Agnes Callard describes it. In this episode, EconTalk host Russ Roberts welcomes Callard to discuss her book, Aspiration: The Agency of Becoming.   Callard defines aspiration as the rational process of value acquisition. Not the same as having a goal, aspiration is not the satisfaction of a value or desire you already have. Rather, Callard says aspiration explains “how you got from there to here.” How and when did you start to value having children? To embrace a particular political ideology? These are more the realm of aspiration. Let’s hear your take on aspiration. What kind of person do you aspire to be? Use the prompts below to continue the conversation.     1- What’s the difference between the Platonic and Aristotelian conceptions of aspiration, and which one appeals to you more? Why? What is the relationship of college, teachers, and structure to aspiration?   2- What is the role of rationality in aspiration, according to Callard? What does she mean when she says, “I propose that the large transformations in people’s lives are rational though their rationality is not best captured through the framework of decision-making.” What’s the difference between reasoning from value and reasoning toward value?   3- Roberts and Callard spend a good bit of time discussing the process of self-creation. How does the notion of “two selves” apply to aspiration? (Hint- part of the conversation is a reconsideration of this episode with L.A. Paul, who argues that you can never know the person you will be and the preferences you will hold in advance of a transformative life change.)   4- How much of a role does free will or agency have in aspiration? How does aspiration change over an individual’s lifetime, and what does Callard mean when she says, “Aspiration requires help.” Who has been your greatest mentor in the process of aspiration?   5- Are the structures and constraits of tradition now less felt by aspirants today, as Roberts suggests?  If so, what would be the consequence(s)? Can habituation, as discussed by Dan Klein, overcome this challenge? If so, how?   (0 COMMENTS)

In 1804, the English government raised the duties on sugar 20 per cent. It might have been expected, that their average product to the public exchequer would have been advanced in the same ratio; i. e. from 2,778,000l. the former amount, to 3,330,000l.: instead of which the increased duties produced but 2,537,000l.; exhibiting an absolute deficit. Speech of Henry Brougham, Esq., M. P., March 13, 1817. This is from Jean-Baptiste Say, A Treatise on Political Economy, translated from the 4th edition, Book III, Chapter VIII. (0 COMMENTS)

A man is not rich because he pays largely; but he is able to pay largely because he is rich. It would not be a little ridiculous, if a man should think to enrich himself by spending largely, because he sees a rich neighbor doing so. It must be clear, that the rich man spends, because he is rich; but never can enrich himself by the act of spending.” This is from Jean-Baptiste Say, A Treatise on Political Economy, translated from the 4th edition, Book III, Chapter VIII. In the above quote, Say is pointing out the absurdity of the claim that Great Britain is rich because its taxes are high. (Britain’s taxes were high at the time to pay for the war against Napoleon.) So while Say is simply making an analogy between the rich country and the rich man, I found myself, while reading this passage, thinking of a really good book by Thomas J. Stanley and William D. Danko titled The Millionaire Next Door: The Surprising Secrets of America’s Wealthy. In it, they show, with ample data, something that is obvious as soon as you think about it: most millionaires got that way, not by spending, but by saving, almost never being extravagant.   (0 COMMENTS)

Recent trends in Covid-19 fatalities in Western countries are quite unusual, with a wide range of outcomes. We know that these highly divergent results can be explained with a model where long run outcomes are highly sensitive to whether the replication rate “R0” is above or below 1.0 (after social distancing.) I will argue that a country’s complexity plays an important role in determining that replication rate. Obviously the term ‘complexity’ will require some unpacking, but first let’s look at the number of Covid deaths thus far in November: EU: 34,276 deaths (76.56 per million) USA: 14,637 deaths (44.12 per million) Canada: 658 deaths (17.38 per million) Australia: Zero deaths (0 per million) New Zealand: Zero deaths (0 per million) I will argue that in the list above, countries with higher recent death rates are places with higher levels of complexity. And I’ll also argue that a slight difference in complexity can make a huge different in long run outcomes. And finally, I’ll argue that these results can be affected to some degree by policy choices, but mostly for countries near the “tipping point” (i.e. places like Canada and Australia.) Before going further, let me address the concern that these results only show recent rends, and thus for instance the US has been hit harder than Europe if you look at the entire pandemic, not just November. Or that Australia and New Zealand had some deaths before November. That’s all true, but I’m interested in current trends because I feel they better illustrate the direction to which countries tend to migrate in the long run. There are many possible reasons why Australia and New Zealand might have done better than other Western nations. For instance, Australia does not have particularly cold weather. But you could say the same about Texas, which had over 200 deaths yesterday. Or perhaps Australia was just lucky; the virus missed this remote continent. But the Melbourne area was hit by a huge surge in cases a few months ago, with hundreds of new cases every single day during July and August. Perhaps they avoided “superspreaders”, but how likely does that seem when total cases are in the tens of thousands? There’s the “law of large numbers” to consider. How was Australia able to get things under complete control in a short period of time, and why weren’t other Western nations able to replicate that success? Consider a model where Covid is easiest to control in an isolated village of 100 people, where everyone knows each other. As societies become more “complex”, Covid becomes progressively more difficult to control. But what exactly does the term  ‘complexity’ mean in this context? I’m open to suggestions, but I’d start with density. Next I’d add the total population of a country. Then I’d add the ease of movement between population centers. Highly populated and dense countries with lots of movement between regions are highly complex. Then I’d add cultural heterogeneity. That factor may be negatively correlated with civic cohesion, or willingness to cooperate for the public good. You might want to add administrative complexity; are the governmental lines of authority clearly demarcated? Here’s another way to make the distinction. Travel in New Zealand is both much more convenient and much less interesting than travel in Italy. Italy is complex, while New Zealand is “simple” (no pejorative intended.) I’ve lived in both the UK and Australia, and Britain seemed like a much more complicated and confusing country. Less “legible” if that term has any meaning when applied to countries. I suspect that the UK’s greater density plays a big part in that difference. And notice that while hard hit Belgium is a small country, it’s also quite densely populated and culturally diverse, with a confusing governmental structure. Although Australia has a population roughly comparable to Texas, and also has some metro areas that are only a bit smaller than Dallas and Houston, it differs in one important respect. The Australian population centers are more isolated than in Texas. In a sense, Australia is sort of like five New Zealands cobbled together—with population centers that are pretty isolated from one another by vast distances. People don’t typically just get in the car and drive from Adelaide to Perth. So when commenters tell me what Australia did differently, such as interstate travel bans, I want you to also reflect on the extent to which these policy differences are partly endogenous, reflecting geography and culture. You might argue that Canada is kind of similar to Australia, both being continental size English-speaking countries with modest populations. But Canada is more diverse, with a French area that was hit far harder than the rest of Canada, including more than 60% of Canada’s Covid deaths. Right now, the four Maritime Provinces have a grand total of 43 active Covid cases, while Quebec has 13,463. Canada may also have more links to the US, despite recent travel bans. In this model, even a slight difference in complexity can have big long run consequences if it puts two countries on the opposite side of R0 = 1.0. Canada had the misfortune of having a bit too much complexity to control Covid (or perhaps a bit less effective government policies). Over time, the two countries diverged more and more, with Australia going to zero deaths and Canada to a position somewhere between Australia and the much more complex US/EU regions. The big policy question going forward is whether in a future global pandemic there is a set of policies that if pursued early and aggressively could get us to the Australian equilibrium. I don’t believe that any one policy could do that for the US or the EU, but I wouldn’t rule out a set of policies in combination. These would include a much earlier travel ban from the country where the virus originates. And a much more aggressive test-trace-isolate regime for the few cases that sneak though the travel ban. It’s much easier to control an epidemic if you don’t first allow it to get out of control, but (and this is important) Melbourne showed that it’s possible to eliminate a pandemic even after it’s out of control. That’s very good news. My suggestions might lead to an overreaction to less serious threats, such as the earlier SARS virus from 2003. But in a sense what I think doesn’t really matter. The reality is that future SARS-type outbreaks will be accompanied by some pretty draconian travel bans, at least until scientists can figure out the exact risk associated with the new virus. That’s the new world we live in, for better or worse. And for the few cases that do sneak through, expect countries to try very hard to replicate what Melbourne did. PS.  I hope it goes without saying that I am not recommending that countries become less complex.  Complexity also confers huge advantages.  It helps explain why industries like Hollywood and Silicon Valley locate in the US rather than New Zealand. PPS.  When examining the following graph, pay attention to the log scale:   (0 COMMENTS)

How do you make a case against capitalism while appearing to defend consumers’ rights and values? You make a movie called The Social Dilemma. The movie is cleverly done. It purports to oppose manipulation by Big Tech of social media users, calling out advertisers who manipulate people for profit. At the same time, the movie engages in its own manipulation. How does it do so? To quote Elizabeth Barrett Browning, “let me count the ways.” These are the opening two paragraphs of David R. Henderson, “No Fair Trial for Big Tech,” Defining Ideas, November 12, 2020. A highlight: In the whole movie, only one person expresses skepticism about the idea that manipulation by social media is sui generis. He expresses this view at a panel in which he challenges the aforementioned Tristan Harris. This skeptic points out that newspapers and print media also played on people’s addictions and ability to be influenced. He notes that when television came along, it did so as well, but in different ways. This, according to the skeptic, is just the next thing. Here’s what’s most interesting about this skeptic. Only because I’m an economist do I know who he is. “That’s Kevin Murphy,” I said to my wife, who was watching the movie with me. Who’s Kevin Murphy? You wouldn’t know from watching the movie. You had to pay close attention even to know it was Kevin Murphy. I had to pause and rewind and only then did I notice that he had a name card in front of him. Probably not one viewer in fifty notices that, and probably not one viewer in a thousand knows who he is. So let me tell you. Kevin M. Murphy is a star economist at the University of Chicago. He won the John Bates Clark Medal in 1997, given in those days only once every two years to the most outstanding American economist under age forty. He’s the only business school professor ever to win a MacArthur genius award. But the movie tells you none of that. And one more highlight: Rosenstein complains that social media corporations go unregulated “as if somehow magically each corporation acting in its selfish interest is going to produce the best result.” One gets the idea that he’s never read Adam Smith, who indeed did argue in The Wealth of Nations that “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest.” Rosenstein also says mining the earth and pulling oil out of the ground are bad for humans. He claims as evidence of a warped, for-profit system that trees and whales are worth more dead than alive. And then he jumps the shark, or maybe I should say the whale, by saying “we’re the tree; we’re the whale.” How exactly social media companies kill us and how exactly they gain from dead consumers he leaves as an exercise for the viewer. Read the whole thing.   (1 COMMENTS)

This Yahoo headline caught my eye: Rand Paul’s Shockingly Bad Advice To Recovered COVID-19 Patients Fires Up Twitter The story contained these competing claims: The senator urged all those who have recovered from the coronavirus to throw out their masks and go out and enjoy public spaces because they are now “immune” to it. This is not true; there have been confirmed cases of reinfection both in the U.S. and abroad. “We have 11 million people in our country who have already had COVID. We should tell them to celebrate. We should tell them to throw away their masks, go to restaurants, and live again, because these people are now immune,” he told Fox News host Martha MacCallum. The Centers for Disease Control and Prevention has said that reinfection is possible and that all people should wear masks in public spaces, regardless of whether they have had COVID-19 or not. It is certainly true that reinfection is possible, but that has almost no bearing on whether Rand Paul is correct when he tells those who have had the disease to throw away their masks.  The question is whether the risk of re-infection is high enough to make mask wearing appropriate, not whether it’s zero.  I don’t know the answer to that question, but this article suggests the risk of reinfection (before there is a vaccine) is very low: Following the news this week of what appears to have been the first confirmed case of a Covid-19 reinfection, other researchers have been coming forward with their own reports. One in Belgium, another in the Netherlands. And now, one in Nevada. That doesn’t sound like very many for a world with many tens of millions of recovered Covid victims. You might think that I’m just quibbling over a minor point, but I have in mind something more serious.  There’s a danger that people use measures appropriate for a very serious crisis even after the threat becomes far lower. Consider this analogy.  The 9/11 terrorist attack was a severe shock to the US, with nearly 3000 killed.  After this event, we quickly took measures to prevent a repeat.  But then we went much further, taking extremely costly steps to prevent far smaller terrorist attacks, where the costs almost certainly outweighed the benefits.  My fear is that we’ll come out of this with mask wearing becoming somehow normalized, even for medical threats an order of magnitude lower than Covid-19.  For “just the flu”. People who early on claimed that this is “just the flu” were rightly criticized.  But what is the actual risk for those who have already had the virus once?  I don’t know, but I’m not able to find evidence that the risk is significant enough to require mask wearing. There are other arguments for having everyone wear masks in crowded stores until we have a vaccine.  It provides “social solidarity”, as customers might feel more comfortable if other shoppers have masks.  They would not be aware that the person not wearing a mask had already recovered.  But if that’s your actual objection to Rand Paul’s statement, then say so! I’m a big fan of mask wearing and have no ax to grind on this issue.  So if I’m wrong about reinfections, if those who have recovered are still highly likely to get the disease again, then let me know that I’m wrong about the facts and I’ll change my view. (3 COMMENTS)

In a previous post, I attempted to demonstrate how transaction costs—the costs of defining and enforcing property rights—modify and enrich the standard (and important!) Econ 101 analysis. In this post, I want to show how transaction cost analysis benefits from incorporating the most important Austrian contribution to economic science: economic calculation. What follows provides a practical example of how Austrian and transaction cost analysis can complement one another, as many scholars have argued they ought.   Measurement Costs and the Organization of Markets Transaction costs arise when exchanging parties take steps to mitigate the threat of opportunistic behavior. As Barzel notes, a buyer has an interest in inspecting a good’s “attributes”—its size, quality, freshness, color, or similarity to other units—in order to verify that what is given up in exchange is perceived as less valuable than what is gained. (Resources that consumers perceive as having different attributes are different goods in the Mengerian approach). However, “measurement” of a good’s attributes is costly. The “problem” with measurement is that its costliness, unlike the money price, does not accrue to the exchange partner’s benefit. Relative to a perfect, Nirvana world where measurement is unneeded, measurement costs are pure waste! This suggests that buyers and sellers could affect exchanges at a higher net price if they could agree to a low-cost means of rendering measurement activity superfluous. Sellers would gain by receiving a higher money price; buyers would gain if the increase in the money price is less than the reduction in measurement costs. How then can exchange partners reduce measurement costs and enjoy these gains? One possibility is for sellers to do something which makes it in the buyers’ best interests to refrain from expending resources on measurement. Perhaps counterintuitively, one way to achieve this goal is to raise a buyer’s cost of measuring, so that less of it is undertaken. Barzel offers a few illuminating examples. DeBeers, once the owner of a large majority of the world’s diamonds, interacts with its distributors only on a somewhat curious, “take-it-or-leave-us” basis. After having assessed a potential diamond dealer’s request, DeBeers will present the distributor with a package of diamonds that roughly matches the description. Next, the buyer is asked to make a choice: Make the purchase or forgo dealing with DeBeers ever again. Instead of seeing nefarious market power inherent in the “take-it-or-leave-us” offer, Barzel argues that this practice reduces the sorting and negotiation costs that buyers would otherwise incur. To convince buyers to consent to such seemingly slanted terms, sellers invest in brand name capital which they forfeit should they behave opportunistically toward buyers. The discipline of continuous dealings therefore constraints potential opportunism. Similar arguments can make sense of the way that perishable food items, such as tomatoes, are packaged and sold. Barzel extends this analysis by noting that, in some markets, sellers will tend to be the least cost “measurers,” while buyers will tend to be so in other contexts. Under large-scale production of durable goods, for example, buyers will tend to be the least-cost inspectors, since each unit tends to be examined only once—by the buyer when he attempts to use it. In such contexts, sellers usually offer warranties, which reduce the costs associated with each buyer being forced to measure separate units at the point of sale. This lowers the overall costs stemming from measurement and allows the seller to receive a higher money price. Calculation and the Organization of Markets During the Socialist Calculation Debate, first Ludwig von Mises and then F.A. Hayek convincingly demonstrated that a consumer-satisfying allocation of resources is impossible under pure socialism, a system where the state owns all factors of production. Without the exchange of productive factors, there are no market prices for them, and without market prices, there is no way to perform profit and loss calculations. Lacking measures of profit and loss, there is no non-arbitrary means of assessing whether a production process has created or destroyed value. According to this argument, an institutional environment characterized by private property rights is necessary and sufficient for capital goods to be continuously re-allocated to their highest valued uses. Since the original contributions of Mises and Hayek, the calculation argument has been extended (including by Mises himself), most notably to argue that interventionism’s fundamental flaw is that it causes “false” prices to inform economic calculation. More recently, Piano and Rouanet have extended the calculation argument into the organization of markets themselves. Without re-hashing their argument, they show that “primary calculation” occurs within a given set of institutional rules, but that “secondary calculation” governs the decision of what institutional arrangement to adopt. For example, the fundamental Coasean question about whether to use a market or a firm is regulated by secondary calculation. Along the same lines, in free markets, the decision about whether to implement a measurement cost reducing arrangement is also subject to economic calculation. Certainly, the opportunity to participate in exchanges where the distribution of goods’ attributes is narrower is a benefit to buyers who can spend less time and fewer resources inspecting. Just because something is a benefit, however, does not mean the benefit exceeds associated costs. You may consider an anti-theft device to be a beneficial ad-on when purchasing a car. But if you live in a low-theft region and rarely drive your car into other areas, you may view the benefit of the ad-on to be less than the cost. Private versus Public The most important implication of integrating economic calculation with a theory of market organization is that transaction cost arguments do not apply with equal weight to both private and public institutional arrangements. To illustrate this point, I draw on an example that Barzel offers in his 1985 paper, “Transaction Costs: Are They Just Costs?” In discussing institutions which serve to reduce the variance of goods’ attributes and therefore to reduce measurement costs, Barzel writes: “Occupational licensing may serve a similar purpose. Consumers will view licensed professionals as more uniform when some minimum qualifying criteria are imposed. They would spend less on search and would be willing to spend more on the service itself,” (p. 15). Barzel is contending that licensing necessarily reduces the quality variance among sellers. Buyers, knowing this, expend fewer resources sorting between labor sellers, and therefore pay higher prices for the laborer’s service. Of course, virtually all economists believe that licensing leads to a higher money price, but Barzel here argues that it is lower than the full price, inclusive of measurement costs, that would be incurred without licensing. In Barzel’s approach, the higher price is a boon to consumers because they are simply paying a premium to avoid sorting. Elsewhere in the paper, Barzel makes similar remarks about government interventions which would force grocery stores to remove expired milk from the shelve. Similarly, for Barzel, the American Medical Association’s regulation of doctors reduces physician variance and thus may confer net benefits on consumers. However, we might wonder if there is there truly symmetry between private institutional arrangements that reduce measurement costs and public institutional arrangements purported to do the same. Barzel moves seamlessly from examples of sellers voluntarily suppressing expiration dates to government occupational licensing. A key difference between the two cases, though, is that private institutions designed to lower measurement costs are subject to profit-and-loss discipline, while publicly imposed constraints are not. The reduction of measurement costs is itself a goal that demands someone expend resources to achieve it. When resources are devoted to this task, we must ask whether the resources used to achieve this goal might have been used to satisfy other, more intensely desired ends. For example, suppose that the measurement costs associated with buying tomatoes are minimized when they are sold in a specialized plastic carton. Further, suppose the benefits that exchange partners receive from this reduction in measurement costs are trivial, but that the plastic used to make the cartons is intensely demanded in some other use. The profit-and-loss system assures that the plastic is bid away from its measurement cost reducing role to satisfy some other end. This logic is also applicable to the labor market example that Barzel supplies. In an unhampered labor market, there would likely be a larger range of quality among labor sellers than in a market restricted by licensing. Yet, an entrepreneur who perceives gains from reducing measurement costs could introduce a new institutional configuration in the form of (say) an association which certifies the quality of its members’ work. Another solution is individual certification by a third-party. In both cases, measurement costs are reduced, as buyers can come to rely on the brand name of the association or the third-party certifier. However, such arrangements will only arise if consumers value the reduced variance in seller quality sufficiently to pay the higher price that comes with “association” or “certified” labor. Additionally, the reduction of measurement costs is clearly not the singular objective of exchange parties. Yes, some sellers may find it profitable to suppress information about expiration dates, while relying on reputation to assuage suspicions of their opportunism. Other sellers, of course, find that the benefits consumers derive from knowing this information outweigh the gains associated with reducing measurement costs. Which consideration ultimately prevails in any given context can only be determined in the presence of profit and loss feedback. It follows that a persistent private institutional arrangement that reduces measurement costs can be taken as evidence that it confers net benefits. If it did not, firms employing this technique would earn losses and be forced to implement an alternative arrangement. The same cannot be said of public policies that reduce measurement costs. They may confer net losses on market participants yet persist because the public agency operates in the absence of disciplining losses. For examples of persistent public institutions, which nonetheless failed to achieve even their stated ends, see here. Ultimately, the notion that occupational licensing works to benefit consumers by shrinking labor market variance is a subset of the idea that the state’s primary role is to reduce a society’s transaction costs. Certainly, more exchanges will occur should the state depress transaction costs. This is because transaction costs are a “brake” on the number of mutually beneficial exchanges which can occur. To point this out, however, is only to note that transaction costs are like all costs in this regard. Costs are barriers to action. If the state subsidized steel production, we would doubtless consume more steel, yet no economist reasons from this fact alone to conclude that steel subsidies are therefore justified. By the same token, transaction cost reducing innovations ought themselves to be left to the realm of economic calculation—if our goal is the most efficient use of society’s scarce resources.   Caleb Fuller is an assistant professor of economics at Grove City College and a faculty affiliate at the Program on Economics and Privacy. (0 COMMENTS)