Tuesday, November 29, 2005

Can You Answer This Preliminary Exam Question

In the 60s when Professor Steven Cheung was taking his oral exam on price theory, his teacher asked the following question:

Under perfect competition, the best firms in the market can do is to cover their costs of production. The question is why these firms do not quit producing?

Professor Steven N S Cheung

I have just returned from the professor's 70th birthday party and a conference to honor his academic achievements.

A lot of people have offered their views of the Professor's contribution to economics. In my opinion, professor Qian Yingyi of UC Berkeley probably has delivered the best presentation on the topic.

If my memory serves me right, his message is this:

Professor Qian considers "The Theory of Price Control" (1974 Journal of Law and Economics) to be the most important paper the Professor has ever written. In the traditional discussion of price control, people tend to subsume the discussion under a larger debate on whether the state or the market is a better mechanism for resources allocation.

The Professor goes beyond that according to Qian. The professor first asks the question, what will happen if price control is introduced. His answer is rent-dissipation. But the professor does not stop there. He then asks what people will do to minimize rent-dissipation. Because people will act to minimize rent-dissipation, the Professor then concludes that whatever rent is dissipated has to be a constrained minimum.

Tuesday, November 22, 2005

I Don't Call Him Steve

A volume of Steven N.S. Cheung's collected essays is out. Including index, there are some 803 pages in this volume. All of the Professor's major pieces are included, including some that have never seen the light of day before. Among all of these unpublished papers, one is especially important. It is called "Why there is a lack of Freedom under Communism." Using the property rights framework, the Professor explains why freedom is incompatible with communism.

This Saturday, there will be an academic conference to honor the Professor's academic achievements. Almost all well known US trained Chinese economists will be there, including Zhou Qiren of Beida and Qian Yingyi of UC Berkeley. It is going to be exciting!

Right around the time when Hayek passed away in the 1990s, Jim Buchanan wrote a piece in momemoration of the old man entitled "I Don't Call Him Fritz". Jimmy explains what the title means in the article. His reason is that Hayek is far too important an intellectual giant for him to simply address him by his first name. I feel the very same way whenever I talk to the Professor, I never call him "Steve".

Sunday, November 20, 2005

Disneyland with Chinese Characteristics

According to a story in South China Morning Post, even with discount on ticket prices, daily attendance remains low at 12,972 on a recent weekend, and at 11,399 on a recent weekday. Needless to say this is far below the government's projection of average daily allowance 15,342.

Note that the above figures are recorded after the price reduction plan for locals is introduced, that means the actual figures before the plan may be even less and further below the government's projections.

Why I should care? Because I am forced to own a piece of the theme park as a taxpayer. And I am stuck with it because the theme park is not listed. Readers like you should care as well as long as you pay taxes and are co-owners of the theme park.

More, according to another story, there is so far no independent directors on the board overseeing the operations of the Micky land.

The Micky Land is then just like any other state-owned enterprise (SOE)in China(HK's Micky Land is 57% owned by the government). Those SOEs are supposedly owned by all the people, but these shareholders have no say whatsoever on their operations.

Saturday, November 19, 2005

UN is Perpetuating the Life of Dictators!

Call me a cynic, but has anyone ever thought seriously about what business UN is in? Aid, right?
According to Lord Peter Bauer, aid is nothing more than government to government transfer. Now UN acts as a bureaucracy between the government that is giving the money and the one that is receiving the aid. As the money does not come out of UN's own pocket, what incentive is there for bureaucrats to ensure it is put to good use?

That is why one should not be surprised when the money is being used to prop up dictators, yes you hear me right, dictators!

According to a story in NYT (18th November), the Zambabwean government has accepted UN's offer to build 2,500 houses to alleviate its housing shortage. Now why is there a housing shortage in the first place?

It turns out that the government of President Robert Mugabe has initiated a demolition campaign with the stated objective of clearing illegal structures from urban areas. The real objective of the campaign is, according to Zimbabwean civic groups, "an effort to disperse the urban poor who present possibly the greatest threat to Mr. Mugabe's 25-year rule."

In other words, by offering to build new houses for Zimbabwe, presumably away from the city, the UN is in fact helping to perpetuate the rule of Robert Mugabe the dictator.

Tuesday, November 15, 2005

They Called Him IQ Tang For a Reason

Hong Kong's Financial Secretary Henry Tang has long been ridiculed by the media for his apparent lack of intellectual firepower. The media has a nickname for him, IQ Tang.

Here is the latest example of why he deserves to be ribbed.

According to a story in today's South China Morning Post, "just days after two government allies in the Legislative Council called for salaries tax to be cut to 2002-03 levels, Mr. Tang said he would not hand out tax relief just to buy people "short-term" joy".

My reading of his message is this:

1) People in HK are stupid, they do not know what policies are in their best interests. So they may want a tax cut even if it runs against their long term interest.

2) The government is in a better position in making policies that will bring "long-term" joy to the HK people.

Needless to say neither of these claims hold water.

After denying people the right to indulge themselves in "short-term joy", he expressed in the next breath his confidence in winning people's support for a new sales tax, because -- now get this -- he believed that "the people of Hong Kong are rational and cleaver."

If people are rational and cleaver enough to welcome a sales tax, then why would they be so stupid as to indulge in the short-term joys of a tax cut? His intellect boggles the mind.

I think I have finally figured it out why our Financial Secretary has IQ for a nickname, have you?

Monday, November 14, 2005

And You Think Only The Legislators Are Stupid

This is a story from the 15 November edition of the NYT,

"On Nov. 1, Colorado voters approved a ballot proposition that would allow the state to keep a projected $3.7 billion in tax revenue over the next five years rather than return it to taxpayers.

In California last Tuesday, voters resoundingly defeated Proposition 76, supported by Governor Arnold Schwarzenegger. The measure would have limited state spending and given the governor broad new powers to cut spending when state revenue lagged.

And in Washington, an initiative put on the ballot by antitax groups failed last week by a six-point margin, letting stand a 9.5-cents-a-gallon gasoline tax passed by the Legislature."

Now you probably understand why we have stupid legislators who know nothing other than spending your hard earned tax dollars as fast as your next door neighbor's Lamborghini. Because voters WILLINGLY elect legislators to steal from their pockets!

So what is going on here? Well, one explanation may be that voters have mistaken beliefs on economic issues. Actually, Austrian economist Ludwig Von Mises is one of the pioneers in figuring this all out, read this piece by the economics professor Bryan Caplan at George Mason University.

Friday, November 11, 2005

Pitfalls of Hong Kong's Fight For Democracy

Pro-democracy legislators in Hong Kong, led by the Democratic Party, are not happy with the government's latest proposal on political reform. The reason for rejecting the government's proposal is the apparent missing of a time table for universal suffrage.

Now let's see what kind of policies these folks want to achieve once democracy is attained and they are on the drivers' seat. They would like to introduce antitrust law, more welfare benefits, more expenditure on health care, more affordable housing, minimum wage, maximum working hours...

In other words, they want more not less government. And so far as economic policies are concerned, they are a bunch of socialists. As I mentioned before, a very strong reason why the democrats are not happy with the current government is simply that they are not the ones calling the shots, not that they think the current government is too expansive.

Thus one should not be surprised by the fact that the democrats are not concerned at all with how we should go about restraining the government's power once democracy becomes a reality.

If the democrats are to have their ways, we will have tyranny of the majority on our hands. As we know too well, tyranny by any name is tyranny.

Afterall, Hayek wrote back in 1944 that

"There is no justification for the belief that,
so long as power is conferred by democratic
procedure, it cannot be arbitrary...
[I]t is not the source but the limitation
of power which prevents it from
being arbitraty. Democratic control may
prevent power from becoming arbitrary, but
it does not do so by its mere existence." (italics in original)

Hu Yaobang 1915-1989

"We have got to build up authority, not personal authority but a collective one. Democracy should be our highest authority"

Hu Yaobang, former Secretary-General of the CCP said in 1986. The quote is from the latest issue of Yazhou Zhoukan. Question is what he meant by democracy. Did he mean democracy with Chinese characteristics, did he mean constitutional democracy....

Thursday, November 10, 2005

Why Can't We Have More Intelligent Legislators (Part 2)

In a story of today's South China Morning Post, it reported that:

"Three note-issuing banks were urged yesterday to take their social responsibilities seriously after it was revealed they had cut the number of manned branches by 27 per cent over the past four years."

These banks were urged by our "honorable" but ignorant + stupid legislators to take up social responsibilities by opening branches manned by real persons. In this internet age, where most of the bank customers use the internet and the telephone instead of going to a bank personally, a branch manned by real persons means one and only one thing: higher costs. So it is only understandable why in a competitive banking sector like Hong Kong's, banks consolidate their branch networks in order to minmize costs.

Costs saved from the closing of uneconomical bank branches, by the way, will be passed on to the customers through more up-to-date, more secure, more advanced internet banking facilities in competitve banking environment. And what's wrong with that?

Forced to do so, assuming all banks have to set up these uneconomical new branches in order to fulfil their "social responsibilities" and other factors affecting the banking industry have not changed, what will happen is that banks will need to charge higher fees for services provided to stay afloat.

When this happens, I am sure these "honorable" legislators will again cry foul, saying the banks are ripping off their customers.

In other words, our ignorant legislators believe that services can be offered for free. My question is: if our "honorable" legislators are out to take care of the "social interests", why don't they open a bank themselves that offers everything for free?

Wednesday, November 09, 2005

IMF, Knowledge Problem and Government Failure

In its latest Article IV Mission, IMF cautions against tax reduction in Hong Kong. IMF fears such a move may cause Hong Kong to rely too much on volatile revenue sources, read the story here.

I don't know how many times since its inception after WWII IMF accomplishes its mission of helping countries to steer clear of crisis. Judging by the advice that they prescribe, the success rate cannot be high.

The reason is simple, and not the usual moral hazard story. The usual moral hazard story says that the presence of IMF encourages countries to behave in an imprudent manner realizing that the IMF will come in later with a bailout package. That is an incentive argument.

Another argument relies on the distribution of knowledge. How could IMF, a bureaucratic agency, marshal the neccessary knowledge required to set things straight in a screwed up country it is trying to help?

In addition, almost all the time, the reason why a country needs a helping hand from the IMF is government failure. Asking help from the IMF is like asking a bigger government to replace the smaller one which had created the problem in the first place!

Tuesday, November 08, 2005

Micky Fails to Perform Magic

Hong Kong Disneyland will slash HK $ 50 off ticket prices for locals according to a story in South China Morning Post (8 November), read the story here (subscription required). The company denies that the move is an act to boost attendance.

Indeed, ever since the opening of the amusement park in mid-September, daily attendance at the park has seldom reached its maximum capacity at 30,000 according to various news reports. And visitors from China have not turned up in large numbers as expected.

It is of course perfectly OK if HK Disneyland is a private concern. Afterall, in the business world, failure is far more common than success.

But HK Disneyland is NOT a private concern but a STATE-OWNED enterprise (HK government owns 57% of the concern), and that is why there is a problem. For it is not the shareholders who will shoulder the loss of the company, but taxpayers like you and me!

Unlike the market place where investors/shareholders buy into a company after rational calculations of all the risks and benefits involved, no one, absolutely no one at the government has asked me whether I want a piece of the HK Disneyland. Instead, stupid government officials who know squad about business risks make that decision for us taxpayers. Sad!

Saturday, November 05, 2005

Hayek in Favor of Competition Law?

In Democratic Party's submissions to the government on why Hong Kong needs a competition law, Hayek's work is being cited (more specifically The Road to Serfdom) as in favor of having a competition law. Read the whole thing here (in Chinese only).

Have they really read the book? Do they really understand what Hayek was saying in that book even if they did ? Hayek must be rolling over in his grave now.

Why can't we have more intelligent and intellectually honest legislators?

Conference In Honor of Peter Bauer

On May 6-8, 2004, the James Madison Program in American Ideals and Institutions at Princeton University held a conference in honor of Peter Bauer.

Conference participants included Jim Buchanan, I. Kirzner, A. Sen, M. Friedman and Tom Sowell (the latter two participated through a pre-recorded video). Papers presented by the conference participants (including the transcript of the Friedman and Sowell exchange) are now on line in the latest issue of the Cato Journal, read the whole thing here.

HT to Chris Coyne up at Austrian Economists for the pointer.

Wednesday, November 02, 2005

Government Failure, Big Time!

In a 2 November New York Times story, it reported that the Malawi is the latest African country where people are suffering from hunger, read the whole story here.

Malawi is not the only one. Indeed many countries in Africa, ranging from Niger to Zimbabwe, share the same fate as Malawi of late. The question is why?

It turns out that there is one and only one reason that explains the plight of African people in those countries. The governments in those countries, instead of helping their people to get rich through protecting private property rights, are instead stealing from them.

So by practicing socialism, Zambia reduced its economy to penury. Zimbabwe's economy collapsed after the government seized its richest farms, which were owned by whites. And as far as Niger is concerned, regulatory burden strangled its economy. As an example of the regulatory burden in Niger, Nicholas Kristof of the NYT has written back in October that " local regulations stipulate that companies must give all employees six weeks and two days of paid vacation a year. Not surprisingly, there are almost no employers in Niger." Read the whole thing here. (Subscription required)

Tuesday, November 01, 2005

This is Why Hong Kong is Going Down

The Government announced on October 31 a proposal to extend the concessionary duty rate on ultra low sulphur diesel (ULSD) for another year. The extension of the $1.11 per litre duty concession will cost the Government about $1.1 billion in 2006.

The lower duty is supposed to soften the blow of high oil prices on the transport industry. And this is not for the first time that the government has done this. On six other occasions - December 2000, June 2001, March 2002, March 2003, March 2004 and December 2004 - the Government, with the Legislative Council's agreement, extended the concession, as a measure to give "temporary" relief to the transport industry.

The question that needs to be answered is this: Higher oil prices affect just about every sector of the economy. Why is transport the only sector singled out to get the concessionary rate? Why are middle-class car drivers left out?

When a government rigs the rule of the game to give handouts to some group (the transport sector in this case) but not to others, inevitably the rule of law is damaged. Without the rule of law, what is left to build prosperity?