The Strike to End All Strikes

The teachers’ strike in British Columbia, Canada, is over… almost. On Thursday, 40,000 public school teachers in the province will vote on whether to accept the proposed contract. Neither side got everything it wants, and the main headline is that teachers will receive a 7.25% salary raise over 6 years. The province also pledged to add $100-million to an education fund to benefit BC teachers over the next five years.

Education minister Peter Fassbender is seemingly satisfied at a job well done: “We have guaranteed that every student’s educational journey in this school year will be kept whole.”

Right. Not counting the five weeks of shuttered classrooms lost so far this year. That’s over a quarter of the fall term, for those that are counting.

Premier Christy Clark was also pleased with the deal:

We’ve found a way to give teachers a fair raise, improve classroom composition – to really make it work for teachers, but at the same time that we’re making sure it still works for taxpayers. So we’re not going to have to raise taxes, we aren’t going to go into deficit and we’re not going to increase our debt.

No new taxes, but no new debt from this multi-million dollar deal. The money has to come from somewhere. For all of these points Ms. Clark raises to be true, the province must be cutting spending from elsewhere. She doesn’t say where that is, but I have a feeling the offsetting cuts figments of her imagination. My money is on a this settlement attributing to a deficit, or higher taxes, at some point in the future.

While encouraging teachers to accept the deal, BC Teachers’ Federation president Jim Ikers chimed “Be proud… There are meaningful achievements in this deal for teachers and students.”

And therein lies the rub. Everyone should be pleased with this outcome, because a painful strike is the only way it was going to happen. With a near monopoly on schooling in the province (nearly 90% of students are educated in the public system), there is no competitive check to let any of the belligerents settle their dispute elsewhere.

Parents are obviously upset because they don’t have any choice in the matter. Moving to a nice neighborhood with a good school is about all they can do to have a say in their child’s education. Contrast this with, say, buying clothes where you can go where you want and direct your money at the store that best suits you. Parents in BC pay their taxes, and lose all control of how that money is allocated.

It’s fun to poke fun at entitled teachers, but think about it from their point of view. You are in an industry with only one company to work for. Your pay is pre-determined according to a scale that you have no control over, by people you will never meet. Your colleagues cannot be let go if they do not perform. You enter the job wide-eyed and bushy tailed, only to find that for all the efforts you do, there is not much you can do to peaceably argue for better working conditions. No bantering over your salary raise for the coming year during the annual performance review. No back-and-forth with the boss over your working hours. If you are dissatisfied, it’s nearly impossible to quit your job and look for another in the same field (and licensing requirements across provinces make teachers trained for one system unemployable in others). There is only one recourse left to this group if they want a better work life – strike!

You can almost sympathize with the opprobrium felt by the teachers.

This strike will not be the strike to end all strikes, because the conditions for why the strike was necessary are not fixed. There is no competition in schooling as long as it remains in the public’s hands. Parents will continue feeling trapped and looking to the government to maintain services with minimal amounts of disruption, since they can’t vote with their feet and send their kids elsewhere. Teachers will continue protesting and threatening for better conditions the next time their contract expires because it’s the only way they can argue for a better working life.

If you want to understand why public school teachers’ strikes are so disruptive, think about the one main fact that separates that industry from others. It’s not hard to please customers (parents). It’s not demanding employees (teachers). It’s that the lack of competition means that a strike is the only way the two sides can settle disputes.

(Cross posted at Mises Canada.)

Thornton: ‘US-Russia political tensions will speed up demise of dollar’

Mark Thornton interviewed on PressTV:

“The political tensions between the United States and Russia has increased or speeded up the process of which nations are doing business between countries instead of dollars and doing it with their local currencies,” Mark Thornton, Senior Fellow at Mises Institute, told Press TV on Wednesday.

“As a result, that puts pressure back on the United States because the United States wants everybody to use dollars in international transactions as well as a reserve currency in their central banks,” the professor at Auburn University added.

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Do Incentives Really Matter?

7214510228_fa7685186d_bThe phrase “incentives matter” is ubiquitous in economics, from undergraduate teaching to economic policy debates. The mantra is especially popular in the growing literature targeted at the general public, which I’ve criticized before for its undue focus on incentives (see here and here). My point is that while it’s good to see economic ideas reaching a larger audience, it doesn’t help much if the ideas aren’t sound to begin with. Such is often the case with the concept of incentives.

To answer the question posed in the title, yes, incentives matter, in the sense that individuals have motivations, and it’s important to think about what those motivations are if we want to know how people act in the real world. For example, in the words of Steven Kerr, ignoring incentives often leads to “the folly of rewarding A, while hoping for B,” which produces managerial chaos.

Nevertheless, emphasizing incentives too much glosses over several problems: economic laws can make incentives irrelevant; incentives are in any case too narrow a concept to be the defining characteristic of economics; focus on incentives sometimes leads to a paternalistic view of economic policy.

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Mises on Secession

In light of the upcoming Scottish independence referendum, some quotes by Mises are appropriate. Too bad the Scots’ idea of independence is Salmond and the EU, not Wallace and Bruce.

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No people and no part of a people shall be held against its will in a political association that it does not want. (Nation, State, and Economy, p. 34)

It makes no difference where the frontiers of a country are drawn. Nobody has a special material interest in enlarging the territory of the state in which he lives; nobody suffers loss if a part of this area is separated from the state. It is also immaterial whether all parts of the states territory are in direct geographical connection, or whether they are separated by a piece of land belonging to another state. It is of no economic importance whether the country has a frontage on the ocean or not. In such a world the people of every village or district could decide by plebiscite to which state they wanted to belong. (Omnipotent Government, p. 92).

The right of self-determination in regard to the question of membership in a state thus means: whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with. This is the only feasible and effective way of preventing revolutions and civil and international wars. (Liberalism, p. 109).

More great quotes, plus an explanation by Hans Hoppe of “democracy” as understood by Mises, here.

 

The NCAA Racket

ncaa2Mises Daily Tuesday by Andrew Syrios:

The NCAA, a quasi-governmental regulatory cartel, prohibits colleges from paying athletes. So colleges employ a variety of schemes to offer unofficial “pay.” Meanwhile, the NCAA ensures there is no functioning job market for athletes at that level, and no competition to which students might go seeking higher pay.

‘Power and Market’ Is Now in Persian

Thanks to translator Matin Pedram, Rothbard’s Power and Market is now available in a Persian translation.

Front:

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Back:

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The Mises Institute Hosts Auburn Econ Graduate Students

As has been done for several years, the Mises Institute hosted our annual Auburn University Economics Graduate Student Reception on Friday at our campus next to Auburn University. It was organized by Jonathan Newman (Summer Fellow 2014, Mises U Alum, and Economics Doctoral Student at Auburn).

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Before Adam Smith There Was Chydenius

Stockholm, Old CityMises Daily Monday by Gary Galles:

The work of economist Anders Chydenius, which predates Smith’s The Wealth of Nations, provided a radically free-market voice for Scandinavia in the 18th century as Chydenius battled against mercantilists and those who thought government well-suited to plan economies with laws and edicts.

The Regret of War

Enlist_in_the_Navy_LCCN2002699395.tifWe all have regrets. But if you find yourself consistently ruing your past decisions, maybe it’s best to rethink your rashness.

Writing in the Financial Times this weekend, Richard McGregor gives some perspective on Americans’ change of heart for wars.

In the wake of a triumph in WWII, in 1950 65% of polled Americans supported sending troops to Korea. Two short years later only 37% felt the same way. We know what a boondoggle it turned out to be, but few would remember that nearly two-thirds of Americans supported the Vietnam War early on. As it neared the end, almost no one could stomach it any longer.

And speaking of boondoggles, don’t forget that when American went into Iraq in 2003 more than 70% of the population thought it was a good idea. By 2010 only around half that many thought so. The incursion into Afghanistan in the wake of 9/11 was the most “popular” war in America’s recent history – it was almost unanimous! 93% of polled Americans supported it. Today, public opinion is split 50/50.

We all make mistakes, but should heed Albert Einstein’s advice that the definition of insanity is doing the same thing over and over, expecting a different result.

Why is this troubling right now? With troubles brewing afresh in Syria and Iraq, 61% of Americans think there is a threat to the national interest, and only 13% disagree. Let’s hope cooler heads prevail.

(Cross posted at Mises Canada.)

Peter Thiel on Monopoly and Competition

220px-Peter_Thiel_TechCrunch50Entrepreneur and venture capitalist Peter Thiel has an interesting Wall Street Journal piece on innovation, firm growth, and market structure, misleadingly titled “Competition Is for Losers.” Thiel’s essay is ostensibly about the defense of “monopoly” — the large market shares achieved by successful firms — over “competition,” by which he means perfect competition, the neoclassical economist’s fantasy world in which tiny, identical firms exist in a kind of stasis, not doing anything and not earning any economic profits.

Actually, without meaning to, Thiel gives us a thorough and persuasive critique of mainstream monopoly theory and its bizarre, counterintuitive, and misleading concepts of “monopoly” and “competition.” The business behaviors Thiel praises — innovating, creating economic value, out-competing rivals, and increasing sales and profits — are thoroughly competitive, in the Austrian (and common-sense) notion of of competition. If Thiel had followed the Austrians in defining competition as the absence of legal restraints on entry and exit, he could framed his essay as an explanation of how innovation and entrepreneurship benefit society, rather than making it look like a critique of competition per se. A better title: “Perfect Competition Theory Is for Losers.”

Sweden Politically Deadlocked

Sweden_from_ciaUpdated: The poll stations in the Swedish general election closed a mere two three hours ago. With about 60% 90% of voting districts already counted, it looks like the voter turnout has increased – and that voters have caused quite a mess in the parliament. No likely constellation of parties will reach a majority of seats in parliament.

The parliament’s 349 MPs will be distributed proportionally to represent a total of eight parties. The center-right “alliance” four-party government under PM Reinfeldt (marked by * below) has undoubtedly lost the election with a total of 39% to a 44% minority constellation of Three leftist parties. And in the middle is the nationalist/racist party Sweden Democrats as the election’s winner and third largest party in the parliament. The radical feminist party “F!” (Feminist Initiative), it seems, will not make it past the 4% of the popular vote that is necessary to be represented.

To form government requires more pro votes than con votes; most decisions during the four-year period to next election require simple majority.

The results with about 90% counted (with difference to prior election result within parentheses) is as follows:

5.7 % (+0.1) Vänsterpartiet (radical left, formerly the communist party)

31.1 % (+0.4) Social democrats (progressives)

6.8 % (-0.5) Green party (environmentalists)

5.4 % (-1.7) People’s party (social liberal)*

6.2 % (-0.4) Center party (social liberal)*

23.2 % (-6.9) Moderates (conservative party)*

4.6 % (-1.0) Christian democrats*

13.0 % (+7.4) Sweden democrats

3.1 % (+2.7) Feminist initiative

0.8 % Other

Noah Smith: Keynes Misunderstood, Maligned by Austrian Critics

WhiteandKeynesIn a September 11 Bloomberg article, economist Noah Smith claims that Keynes wasn’t a “ ‘socialist’ “or even a “’progressive’.” He did not favor “a command economy.”

Yes he “ was in favor of some amount of wealth redistribution and government intervention into the economy.” But “Keynesian policies are fundamentally . . . about economic stability, . . . about smoothing out the fluctuations in the economy, reducing risk for everyone concerned.”

“Stabilization theory says that you can smooth out the wrinkles of the business cycle without messing with the deep structure of how the economy works. The expectation is that if the government does just that — just that one small, minor intervention — then recessions won’t be a big problem….” To accomplish this, among other things, the government will raise interest rates when the economy is too hot and lower them when it is too cool.

So who is misrepresenting Keynes? His critics or Smith?  In the first place, Keynes himself did not recommend raising interest rates to cool off an economy. He wrote that “ The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last.” [General Theory p. 322]. He even recommended eventually bringing interest rates down to zero and keeping them there [General Theory, pges 220-21 and 336].

Nor are Keynesian attempts to stabilize the economy through interest rates a “small, minor intervention.” They represent a price control of one of the economy’s biggest prices, the cost of credit. Today they are also accompanied by many other managed prices—most notably in world currency markets, but also in large domestic markets such as healthcare.

A market economy depends above all on free prices. All the Keynesian price controls, manipulations, and nudges just lead to boom, bust, and economic destruction, the opposite of stabilization.

Smith states that Friedrich Hayek, Keynes’s most prominent critic in the 1930’s and 1940’s, began the misrepresentation of Keynesianism. But Hayek argued that “ the more we try to secure full security by interfering with the market system, the greater the insecurity becomes,” and Hayek was right. Wilhelm Ropke put it even more succinctly: “ The more stabilization, the less stability.”

Smith also describes Greg Mankiw, a leading contemporary Keynesian and author of one of the most widely used economic textbooks, as one of “the most prominent conservative economists writing in the popular media today.” Well, Mankiw is a Republican and did serve George W. Bush as chairman of his Council of Economic Advisors. But George W. Bush is the president who enlarged government and deficits and who coined one of the most memorable oxymorons of all time when he said “ I’ve abandoned free market principles to save the free market system.”

Is Smith at least correct that Keynes was not in favor of a “ command economy?” Here is how Keynes described his own views on this subject:

“[I favor] … a somewhat comprehensive socialization of investment” [ General Theory, p. 378].

“ State planning,…intelligence and deliberation at the center must supersede the admired disorder of the 19th century “ [ BBC broadcast, March 14, 1932].

Keynes did oppose Marxism. He regarded Soviet Communists as deranged “Methodists” [Essays in Persuasion, pg. 299, 310], but said about the Soviet five year plans: “  Let us not belittle these magnificent experiments or refuse to learn from them” [BBC Broadcast, March 14, 1932].

Keynes’s Austrian critics are not distorting him. It is the people who zealously guard his shrine, including the New York Times, Public Radio, and Wikipedia, who are doing so.

Newsflash: Central Banks Elevate Asset Prices

220px-BankIntZahlungsausgleichThe Bank of International Settlements has issued a warning that central bank monetary policy has elevated asset prices and reduced market volatility to abnormally low levels.

In its quarterly review, the BIS said financial market volatility spiked higher in August on the back of geopolitical concerns and worries over economic growth, but quickly returned to “exceptional lows” across most asset classes.

“By fostering risk-taking and the search for yield, accommodative monetary policies thus continued to contribute to an environment of elevated asset price valuations and exceptionally subdued volatility,” the BIS said.

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From the BIS website:

The mission of the Bank for International Settlements (BIS) is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks.

In broad outline, the BIS pursues its mission by:

* promoting discussion and facilitating collaboration among central banks;
* supporting dialogue with other authorities that are responsible for promoting financial stability;
* conducting research on policy issues confronting central banks and financial supervisory authorities;
* acting as a prime counterparty for central banks in their financial transactions; and
* serving as an agent or trustee in connection with international financial operations.

The head office is in Basel, Switzerland and there are two representative offices: in the Hong Kong Special Administrative Region of the People’s Republic of China and in Mexico City.

Dr. David Howden: Let Banks Fail! (Central and Otherwise)

 

Jeff Deist and David Howden discuss the history of banking in America before 1913, the supposed justifications for the Federal Reserve Act, and why American economists all seem to be thrall to—and on the payroll of—the Fed. David also lays out the realities behind transitioning to a future without the Fed. Next, they discuss his book about the Icelandic banking crisis, and how that country’s deposit insurance scheme created enormous moral hazards. David explains how Iceland, however, mostly had the good sense to allow its bad banks to fail and its foreign creditors to take a well-deserved haircut. The lessons to be learned, he tells us, are both cautionary and optimistic, at least for a homogeneous nation of 325,000 people.

The Basic Economics of Bank Robberies

FBI statistics reveal that over the eight years concluding with 2011, the number of bank robberies in the U.S.  fell dramatically, declining from 7,500 in 2004 to 5,000 in 2011. During the same period the total cash haul from bank robberies dropped even more precipitously from $78 million to $37 million. The sharply downward trend appears to be continuing. In 2012, 3,870 banks were robbed, down from 9,400 in 1991. One causal factor in the decline is the increase in the costs of robbing a bank including better bank security, bullet proof barriers at teller stations, exterior cameras, and more severe criminal penalties. Meanwhile, the benefits of bank robbery have  decreased–thanks in some measure to inflation. According to the FBI a bank robbery averaged a take of $4,000 in 2009, which may not have been sufficient to yield the thieves a positive return on their enterprise. You see, at today’s prices, the robbers would need to expend $4,442 for the guns, bullets, and masks used in a typical bank robbery.

The Endangered Species Act and the Double Coincidence of Wants

9063391401_65324bf5e5_k-e4401aa96f3946385507ca36fddb5e5956ec2ca0-s4-c85This year’s silly Copenhagen Zoo controversy reminded us that, when it comes to animal care, people have difficulty thinking clearly. NPR’s Planet Money ran an interesting piece this morning about animal barter among zoos. The US Endangered Species Act and  global treaties such as the Convention on International Trade of Endangered Species of Wild Fauna and Flora make it a crime to buy and sell zoo animals like other commodities. This makes it difficult for zoos not only to obtain new animals, but also to get rid of existing, unwanted ones. (Hence the fate of poor Marius the giraffe.)

To get around these rules, zoos have adopted a complex and cumbersome barter system. Zoos are, under the law, allowed to make animal-for-animal swaps. But, as economists such as Carl Menger explained more than a century ago, barter is hampered by the double coincidence of wants: to trade with you, it’s not enough that I want what you have; you also have to want what I have. Money eliminates the double coincidence of wants by introducing a third commodity that serves as a generally accepted medium of exchange. Unfortunately for the zoos, money is off the table. And hence: 

The New England Aquarium in Boston was recently in the market for some lookdown fish, and they knew of an aquarium in North Carolina that was willing to trade some.

The folks in North Carolina wanted jellyfish and snipe fish. The New England aquarium had plenty of jellyfish — but no snipe fish.

Steve Bailey, the curator of fish at the New England Aquarium, wound up making a deal to get snipe fish from an aquarium in Japan, in exchange for lumpfish. Then he sent the snipe fish and some jellyfish to North Carolina. In exchange, he finally got his lookdown fish.

Allowing zoos to buy and sell animals using money, rather than complex and inefficient barter arrangements — why, that’s inhumane!

Is Scotland Big Enough To Go it Alone?

scot2Mises Daily Friday by Peter St. Onge:

Some opponents of Scottish secession (and most other secession movements) claim that places like Scotland and Quebec are “too small” to be independent countries. A look at small countries vs. large countries, however, suggests that small countries often perform better economically.

 

How to Make Goods More Expensive: Target Truckers

6877Mises Daily Friday by Salmann A. Khan::

Government management of the trucking industry has brought raising prices for both consumers and producers who depend on trucking.

The New Sweden and the Old

SWE-Map_Combo2007Coloured.svgAs Sweden is heading for the polls to elect rulers for the next four-year term on  Sunday, it looks like there will be a bunch of winners: the racist party, the feminist party, the green party, and the communist party. The other parties, which are more Sweden-style mainstream, seem to lose, which will leave the parliament in a sort of deadlock with two “blocs” with only minority influence – dependent on at least one of the former parties (likely two – maybe even three).

The Economist has an article discussing the new Sweden, which is nothing like the progressive utopia, and how voters might turn their backs on this improvement. Writes the Economist:

Twenty years ago public spending took an eye-watering 68% of GDP; today the figure is heading to 50%. Although the tax burden remains high by international standards, top rates have been cut, as have corporate taxes. Taxes on gifts, inheritance, wealth and most property have been scrapped. Few Swedes need now to flee into tax exile.

Perhaps we’ll see another wave of Swedish [tax] refugees in the not too distant future. The question is, where will they go?

H/T Jesper.

Mises Alumni News: David Rapp

Dr. David Rapp (Mises U, 2013) writes:

I received my Ph.D. from Saarland University in Saarbruecken, Germany in May 2014 (grade: summa cum laude) and right now I am a visiting professor at Grove City College, Grove City, PA at Dr. Herbener’s invitation. I will be staying at Grove City College for the fall semester, conducting research and teaching the course “Investment Theory and Business Valuation.”