The Broader Effects of Trade and Tech

Quite a few people consciously favor “free markets, but not free migration.”  When questioned, many explain that unlike free markets in goods, free markets in labor have “broad social effects.”  At this point, I have to suppress my urge to exclaim, “Are you out of your minds?”  They’re right, of course, that free migration has broad social effects.  They’re crazy, however, to imagine that free markets in goods lack these effects.  Indeed, at least within the observed range, ordinary market forces have changed society far more than immigration.

Start with international trade.  If the U.S. were a closed economy, manufacturing would still have shrunk, but it would remain a major source of employment.  The Rust Belt would be doing far better – and less eager for a populist political savior.  Opioid and alcohol use among the working class would likely be considerably lower.  Families would be more stable.  College attendance and the college premium would have risen more modestly.  More speculatively, church attendance would be higher, and nerd culture less dominant.

The broader effects of international trade are however dwarfed by the broader effects of all the technological progress that market forces unleash.  I remember life before the Internet.  When I was a teenager, I was almost completely intellectually isolated.  Overcoming boredom was a constant challenge.  There were no cyberbullies; we had real bullies instead.  When I wanted to publicly speak my mind, I wrote letters to the newspaper.  I had zero friends outside the U.S.  My parents and I were routinely out of contact for hours at a time.  I still feel young, but I remember a world that most EconLog readers would find primitive.

Nor is the Internet an isolated example.  The automobile has broad social effects.  So did household appliances.  So did modern contraception.  Obviously.

The pro-market, anti-migration thinkers could demur, “Yes, we all know that.  Our real complaint is that the broader effects of immigration are generally bad, while the broader effects of international trade and technological progress are generally good.”  But if that’s the real complaint, I say we’re entitled to a careful accounting of these broader social effects.  Who has even bothered to compile lists of these broader effects, much less try to measure them?

If no one is doing the math, why would anyone think that broad social changes are benign?  By the power of hindsight bias!  Once a major social change happens, people just get used to it, with little doubt about whether the change was in fact a net positive.

Immigration is, of course, the main exception.  We can’t imagine going back to a world without the Internet, automobiles, or contraception.  It doesn’t ultimately matter whether their broad social effects are good or bad; we just have to live them them, because turning back the clock would require draconian tyranny.  We can, however, imagine going back to a world with near-zero immigration, so fretting about the broader effects of immigration has great appeal.  Wouldn’t that require draconian tyranny, too?  Well, since the victims aren’t fellow citizens, no.

My personal view is that the broad social effects of international trade, technological progress, and immigration are all, on balance, positive.  For immigration, I’ve done my homework; for trade and tech, however, I’m only guessing.  What’s clear, however, is that broader social effects are ubiquitous.  Selectively invoking “broader effects” may be rhetorically effective, but it does not make you wise.

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Historically Hollow: The Cries of Populism

History textbooks are full of populist complaints about business: the evils of Standard Oil, the horrors of New York tenements, the human body parts in Chicago meatpacking plants.  To be honest, I haven’t taken these complaints seriously since high school.  In the absence of abundant evidence to the contrary, I say the backstory behind these populist complaints is just neurotic activists searching for dark linings in the silver clouds of business progress.  When business offers new energy, new housing, new food, the wise are grateful to see the world improve, not outraged to see a world that falls short of perfection.

Still, I periodically wonder if my nonchalance is unjustified.  Populists rub me the wrong way, but how do I know they didn’t have a point?  After all, I have near-zero first-hand knowledge of what life was like in the heyday of Standard Oil, New York tenements, or Chicago meat-packing.  What would I have thought if I was there?

If we’re talking about the year 1900, I’m afraid we’ll never really know.  Yet what I’ve seen with my own eyes during the last fifteen years has done much to cement my out-of-sample confidence.

During this time, I’ve seen the tech industry dramatically improve human life all over the world.

Amazon is simply the best store that ever existed, by far, with incredible selection and unearthly convenience.  The price: cheap.

Facebook, Twitter, and other social media let us socialize with our friends, comfortably meet new people, and explore even the most obscure interests.  The price: free.

Uber and Lyft provide high-quality, convenient transportation.  The price: really cheap.

Skype is a sci-fi quality video phone.  The price: free.

Youtube gives us endless entertainment.  The price: free.

Google gives us the totality of human knowledge!  The price: free.

That’s what I’ve seen.  What I’ve heard, however, is totally different.  The populists of our Golden Age are loud and furious.  They’re crying about “monopolies” that deliver firehoses worth of free stuff.  They’re bemoaning the “death of competition” in industries (like taxicabs) that governments forcibly monopolized for as long as any living person can remember.  They’re insisting that “only the 1% benefit” in an age when half of the high-profile new businesses literally give their services away for free.   And they’re lashing out at businesses for “taking our data” – even though five years ago hardly anyone realized that they had data.

My point: If your overall reaction to business progress over the last fifteen years is even mildly negative, no sensible person will try to please you, because you are impossible to please.  Yet our new anti-tech populists have managed to make themselves a center of pseudo-intellectual attention.

Angry lamentation about the effects of new tech on privacy has flabbergasted me the most.  For practical purposes, we have more privacy than ever before in human history.  You can now buy embarrassing products in secret.  You can read or view virtually anything you like in secret.  You can interact with over a billion people in secret.

Then what privacy have we lost?  The privacy to not be part of a Big Data Set.  The privacy to not have firms try to sell us stuff based on our previous purchases.  In short, we have lost the kinds of privacy that no prudent person loses sleep over.

The prudent will however be annoyed that – thanks to populist pressure – we now have to click “I agree” fifty times a day to access our favorite websites.  Implicit consent was working admirably, but now we all have to suffer to please people who are impossible to please.  Yes, tech firms made a business decision to ramp up privacy protections; but this business decision is tainted by a barrage of thinly-veiled threats of government persecution.  In a functional world, we would have a few start-ups catering to privacy fanatics – and the rest of us could enjoy the bounty of the tech industry without this absurd digital red tape.

How, though, do I logically leap from the unreliability of populists on tech to the unreliability of populists on business in general?  After all, anyone can make a mistake.  My reply: Being negative about the tech industry isn’t just a small, isolated mistake.  Populists are applying massive intellectual energy to major issues and ending up painfully wrong.  This is strong evidence that their whole way of thinking is deeply corrupt.  They don’t deserve our trust or attention – not today, not yesterday, and not tomorrow.

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Monetize Your Anger

Critics of the economics profession often accuse us of “knowing the price of everything and the value of nothing.”  But economists also often antagonize a far larger group – ordinary people who barely realize our profession even exists.  How?  By asking about Willingness To Pay (WTP).  How much extra would you have to earn to add 20 minutes to your daily commute?  How large of a fare discount would be required to get you and your husband to sit separately on an airplane?  Part of the complaint is that questions about WTP are dehumanizing.  The main complaint, though, is that monetizing emotions creates conflict.  Social ties are so important that it’s best not to price human feelings.

Perhaps.  But I can’t help but notice a wide range of cases where thinking in terms of WTP smooths social relations and defuses conflict.  Consider: In a typical day, events occur that make you angry – and angry people are unpleasant company.  When angry, many of us “take it out” on whoever’s around.  Even if you don’t, you’re probably no fun to be around when you’re angry.

What does this have to do with WTP?  Simple: Most of the daily indignities that make us angry are worth next to nothing in dollar terms.  Someone cuts in front of you in line at the supermarket.  Well, what’s your WTP to wait for an extra two minutes?  The milk goes bad.  Well, how much does a gallon of milk cost?  You don’t feel like changing the oil on your car.  Well, what does Jiffy Lube charge?  Commercials aggravate you.  Well, how much does the premium version cost?  I can’t tell you how many times I’ve seen wealthy individuals rage over $2 problems.

If you respond, “There’s a disconnect between how we feel and WTP,” I completely agree.  My point: If you value social harmony, you should try to bring your anger into line with your WTP.  Especially over the long-run, this is a choice.  When problems arise, you can train yourself to monetize them.  Strive to replace thick description of an outrage (“This jerk in a Mercedes cut me off right before the light turned red, so I was stuck at the Route 50 intersection until the light changed again – and you know how long that takes!”) with a thin price tag (“I lost $1 of time”).  This won’t instantly calm you, but with practice you will gain perspective.

Why monetize your anger?  In slogan form: Because $2 problems just aren’t worth getting angry about. Say it, believe it, and eventually you will (kind of) feel it.  It may seem Vulcan, but it will make you a better human being.

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£s for Brexit

With my perfect betting record hanging in the balance, I follow Brexit news to the point of obsession.  Out of the many hundreds of stories I’ve read, though, I have yet to hear anyone point to the simplest path to Brexit: Let Britain buy its way out! In Theresa May’s failed deal, the UK was supposed to pay the EU about £38 billion for the “divorce.”  Yet there is nothing magical about this price tag.  It could just as easily be £40 billion, or £140 billion.  Why, then, can’t the UK just tell the EU, “The backstop is a deal-breaker.  How much money will it take to make this issue go away”?

If this were any normal business deal, this straightforward path would be on the tip of every Brexiteer’s tongue.  It’s the logic of any familiar real estate transaction:

“We won’t buy unless you fix the roof.”

“OK, that will cost me $25,000, so let’s add that to the price.  Ready to sign now?”

As far as I can tell, however, there isn’t a single prominent British or European politician who even mentions the possibility of letting the UK pay more to get more, much less advocates it.  Instead, we see British politicians demanding better terms for free, and Europeans saying that the current deal is Take-It-Or-Leave-It.

But politics isn’t like business, you say?  I know!  I’ve been saying so for decades!  The very fact that elementary monetary bargaining on Brexit is so unthinkable is yet another symptom of the psychological chasm between the relatively rational, instrumental world of business and the irrational, expressive world of government.

Brexit now hogs the global stage, but politics is packed with look-alike impasses.  Why can’t Israelis just pay Palestinians for the land settlers have taken?  Why can’t the EU just pay Russian to withdraw from Ukraine?  Why can’t the U.S. just pay Maduro to resign – and Russia to welcome the regime change?  Indeed, why can’t Bay Area developers just pay local governments to approve a hundred more skyscrapers?  In each case, the answer is a multilateral mix of foolish pride and wishful thinking.

Since I think that Brexit is a bad idea, why am I telling its advocates how to proceed?  Because I know Brexiteers won’t listen – and even if they did, the EU wouldn’t budge.  While I can understand the failures of politics, I have near-zero ability to solve them.  Not coincidentally, this is precisely what my view predicts.

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Martial Negligence in Game of Thrones and Beyond

I’ve previously argued that George R.R. Martin’s Song of Ice and Fire is implicitly a great pacifist work.   While rewatching season 2 with my younger son, I re-discovered a scene worthy of a pacifist ovation.  While Talisa, the crucial pacifist character, appears only in the show, the following exchange sheds great light on the role of martial negligence in Martin’s fictional universe.  For context, Robb Stark is the King in the North, Talisa is a battlefield medic, and they’re surrounded by the bodies of maimed and dead soldiers.

Talisa: That boy lost his foot on your orders.

Robb: They killed my father.

Talisa: That boy did?

Robb: The family he fights for.

Talisa: Do you think he’s friends with King Joffrey? He’s a fisherman’s son that grew up near Lannisport. He probably never held a spear before they shoved one in his hands a few months ago.

Robb: I have no hatred for the lad.

Talisa: That should help his foot grow back.

Robb: You’d have us surrender, end all this bloodshed. I understand. The country would be at peace and life would be just under the righteous hand of good King Joffrey.

Talisa: You’re going to kill Joffrey?

Robb: If the gods give me strength.

Talisa: And then what?

Robb: I don’t know. We’ll go back to Winterfell. I have no desire to sit on the Iron Throne.

Talisa: So who will?

Robb: I don’t know.

Talisa: You’re fighting to overthrow a king, and yet you have no plan for what comes after?

Robb: First we have to win the war.

Notice: Rather than argue that war can never be justified, Talisa shows that Robb is unleashing the horrors of war casually.  He has no master plan to bring great good from great evil.  Instead, he has a master plan to do great evil, motivated by vague wishes to do great good.  Proverbially, however, if you fail to plan, you plan to fail.

Is this scene an unfair caricature of the practice of moralized warfare?  Hardly.  U.S. leaders of both parties barely thought about what would happen after the fall of Saddam Hussein in Iraq or Muammar Qaddafi in Libya.  Roosevelt’s view of Stalin was mind-bogglingly naive.  Wilson, a former Princeton professor, wrote his sophomoric 14 Points, then dumped most of them in a failed effort to build a sophomoric “League of Nations.”  This is what a morally serious case for just war sounds like, but don’t expect to hear anything like it for as long as you live.

Why do even well-intentioned leaders so carefully plan for war, and so negligently plan for peace?  Simple: Despite their self-righteousness, they’re drunk with power.  Well-intentioned?  Don’t make me laugh.  Yes, with great power comes great responsibility… which politicians routinely fail to exercise in reality and Westeros alike.

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In Sync: How Business Responds to Gratis Government

Whenever people criticize government provision of a product, clever analysts often demur that private suppliers who compete with government have exactly the same problems.  Part of Helland and Tabarrok‘s case for the Baumol effect in education, for example, is that prices have risen at the same rate in both the public and private sectors:

Prices are much lower at public than at private institutions. The vertical scale is a ratio scale, so equal slopes mean equal rates of growth. Thus, although prices are lower at public institutions, the rate of growth in prices has been similar at private and public institutions. Between 1980 and 2015, real prices more than doubled.

OK, let’s step back.  Picture a typical government service.  The price: gratis.  The quality: mediocre.  Private competition, however, remains legal.  Should we expect the private part of the market to look just as it would under laissez-faire?

No way.  Unless the government rations the free mediocre product, consumers have virtually no reason to ever pay for products of mediocre or lower quality out of their own pockets.   At minimum, then, government’s gratis products kill private production of all products of equal or lower quality – a textbook case of predatory pricing.

That’s not all.  Gratis production also effectively kills private provision of products of moderately higher-than-mediocre quality.  After all, if you can get a C+ product for free, who wants to pay full price for a B- alternative?  With gratis public provision, private providers must convince consumers that the marginal quality improvement is worth the total price of the product.  A tall order.

What does this mean?  Well, if public schools add more low-value services, private schools must keep pace in order to compete.  If public schools add more sports, more specialized teachers, or more courses, private schools that fail to keep up will lose their customers.  The first rule of private competition against gratis government is: Always keep your product quality well above the government’s.  This remains true even if the government adds services that consumers value well below cost.  If you can get them for free from the government, why pay extra for a private school that refuses to offer them?

The lesson: When government supplies free (or highly subsidized) products, we should expect private suppliers to supply gold-plated versions of the standard government-issue.  As a result, their prices and costs will be closely synced.

There are admittedly some exceptions: If government is spending money for no gain at all, private competitors needn’t bother.  If government supplies numerous expensive low-value services, private competitors might decide to just outshine the government on other dimensions.  Most realistically, if government refuses to provide some cheap, highly-valued options (such as religious education), then private competitors can win customers by filling the gap.

Yet overall, when there is a dominant public sector with a private fringe, we should expect the Helland-Tabarrok pattern – without or without a Baumol effect.  Given the pathologies of the public sector, it’s nice to have a private option, but don’t get too excited.  The private options will generally be extravagant, because gratis government strangles budget-friendly alternatives.  Tragically, this in turn sustains the illusion that in the absence of government, only the rich would be able to afford whatever the government now provides.

P.S. Another reason to expect public and private education to closely resemble each other is that both are almost always non-profit.  Morally, yes, there is a major difference between public and private non-profits.  Economically, however, they’re very much alike, because both give managers flimsy incentives to raise value or cut costs.

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