Tuesday, September 16, 2008

Wealth Transfer

A friend shared this with me. The author's main point is very good. He's talking about how to be better stewards of the resources given to the church. This act is the very definition of economizing. Economizing is trying to figure out how best to use scarce resources. It's determining how to get the most bang for the buck. Maybe that means spending less, but getting the same level of utility. Or it could be spending the same, but getting increased utility. Necessity is the mother of invention. The result of being in need is that smart people now have an incentive to think up new ways of accomplishing more with less. Some times those inventions are rehashes of something already invented. Sometimes they're completely novel ideas. Sometimes it involves replacing jobs done by people with automation. Which (eventually) leads to creating new jobs for those people to do.

Now, take all of this activity (what economists call economic activity) and multiply it across the entire population. We call the thing that emerges "the economy". We call it that because it is the sum total of all decisions to economize on scarce resources.

So can you control this thing? Can you engineer it so that people will behave the way you want them to? Can we simply tweak things here or there and increase wealth creation? Good question. Maybe, but probably not. People with free minds, even if they live under a dictatorship, will figure out ways to satisfy the things that they have an incentive to satisfy. Given that, we should be *extremely* cautious about what results we think the government can create. If there's a strong enough incentive to do something, legislation will not prevent it. All that will happen is money will be wasted trying to enforce the unenforceable. If there's a strong enough incentive to avoid doing something, no amount of legislation will make it happen. But, most importantly, if you create legislation that creates a new incentive, you may end up with some surprising results.

An example: anti-gouging legislation. During a crisis, these laws exist to prevent the price of goods from rising. Their purpose seems to be to keep the cost of goods down so that the poor will continue to have access to those goods. But during a crisis the demand for goods goes up and/or the supply of goods goes down. Creating a law that prevents the price from rising does not change the incentive that people have to buy those goods. If the price doesn't go up and signal to the consumer that the demand is higher than the supply, the mass of consumers will not have any information telling them to cut back. The perverse result is that the goods run out because no one is getting the signal to stop consuming. As a result, the poor don't even get to purchase the good at a higher price. The supply is gone. Anti-gouging legislation which intends to keep prices down doesn't do it. It raises prices to infinity.

Which brings me to some of the things that I find frustrating in the above listed article. For example:
We are witnessing what some are calling the greatest transfer of wealth in human history. The McKinsey Global Institute has shown how assets are moving primarily from Europe and America to the oil countries of the Middle East and the manufacturing giants of Asia.

At the end of 2007, these oil producing countries owned about 4.6 trillion dollars of assets. That’s about 1.6 times the whole economy of the UK. The six Arab countries of the Gulf Cooperation Council are receiving 1.5 billion dollars a day. Those are pretty staggering numbers
This paints the picture that we're getting poorer while the Middle East and Asia are getting richer. This is not true. When people engage in voluntary trade, one side does not get poorer while the other side gets richer. Both get richer. Each side brings something to the trading table. When they trade, they are saying by their actions that they value what the other side has more than what they have. If they didn't, they wouldn't trade. So yes we're sending $1.5 billion per day to the Gulf Cooperation Council. But in return, we're getting $1.5 billion in oil. The transfer of dollars to the middle east is offset by a transfer of oil to us. And we value the oil more than the dollars, so we're richer. They value the dollars more than the oil, so they're richer. Neither side gets poorer from this exchange. Both sides see the positive possibilities of the thing they're getting.
And what would you expect to happen when the price of oil goes up? Well, suddenly the value that we're getting for our dollar is less. So what do we do? We buy less. But we do this by engaging in economic activity. Some people start taking the bus. Some people carpool. Some sell their gas guzzling SUV and buy a cheap 4-cylinder. Some, unfortunately, decide to not do any of that and decrease their donations to church.

So, yes this guy's church has less disposable income because the price of fuel is increasing. And it's a wholly appropriate exercise to figure out how to get by with less. That exercise leads to good. But we're not poorer. Moreover, serious problems will result from telling people that we're poorer because we're trading with those foreigners. Bryan Caplan documents two types of biases that result: anti-foreign bias and anti-market bias. This biases lead people to want legislation to control the amount of trading that we do, especially international trading.

Two things:
  1. Limiting our trading actually does make us poorer. Being forced to keep something that I value less than the thing I'd rather buy makes me poorer than if I could buy it.

  2. We should be very very careful when we legislate. Perverse results are not far away.
So while I applaud what this guy wants to do within his church. I wish he could call for it without simultaneously encouraging people to desire legislation to solve this problem. Legislation that will almost certainly not create what it's supposed to create, and will most likely make us poorer.

Update: F.A. Hayek once said, "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." Megan McArdle gives some good examples of this principle. And it makes my point that we should be *very* careful about what we think we can legislate.

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