Why Inefficiency Persists?

Arnold Kling at the EconLog wrote that, "Or consider health care. If the goal is to help people who cannot "afford" health care, then national health care is horrendously inefficient compared with a voucher system that targets the poor."

Read the whole post here.

The real puzzle is: If national health care is indeed that "inefficient" as Arnold claimed. Why is it so prevalent across the world, and why it is so difficult to get rid of?

I don't have a definite answer, but here are some possible ones:

1) National health care, though seemingly inefficient, actually is pretty good compared with the alternatives. This is the good old Chicago, "What is, is efficient" type argument;

2) The costs of reforming the national health care are high. Therefore, whatever benefits one can get from an alternative system are overwhelmed by the high reform costs. Indeed, this is only a variant of the "What is, is efficient" argument;

3) People are stupid, they do not know the national health care system is inefficient.

Inefficiency means unexploited gains from trade. Whenever inefficiency persists, like national health care, what that implies is somehow economic agents fail to realize gains from trade. And that troubles me to say the least.

Adam Smith on Dispersed Knowledge

I was having a discussion with one of my teachers Yeung Wai-hong, a card carrying member of the Hayek Fan-club, on the empricial content of Hayek's 1945 paper"The Use of Knowledge in Society" the other day.

For those of us who have read the piece, probably all will agree that this is the first work that provides a defence of the free market based upon the importance and existence of dispersed knowledge.

We are wrong!

Adam Smith had talked about this in his monumental work "The Wealth of Nations."

Here is the quote:

"What is the species of domestic industry which his

capital can employ, and of which the produce is likely to

be of the greatest value, every individual, it is evident, can

in his local situation, judge much better

than any statesman or lawgiver can do for him."

By the way, I get this quote from Jerry Muller's The Mind and the Market, an excellent work. The quote is on p.67.

Democracy Comes Second

"Whatever the reason for the observed positive cross-country correlation between income and democracy, it should not be confused with causality. Being democratic does not seem important in securing economic success...

This does not mean that democracy is unimportant. But the sequence of reforms is critical for successful economic development, with economic reforms coming first. When an open andwell functioning market system is in place, democracy has a much better chance to lead to lasting prosperity.

An important reason for this is that, in order to create a successful market system, the statemust respect basic individual rights: the rule of law, private property, and the enforcement ofjustice. These fundamental rights are part and parcel of democratic government. But when itcomes to economic development, these fundamental rights are more important than otherpurely political aspects of democracy, such as universal suffrage and genuine political competition.."

This is from G. Tabellini, one of the leading experts in the field of political economy, read it here. (The title of the piece is Democracy Comes Second written for Project Syndicate)

Just as Professor Steven Cheung said long ago, Tabellini's point is that democracy may be alright for a country that has achieved a certain level of economic development but not before that. In other words, democracy should come after economic development.

Can Lobbyists Perform Good Deeds?

Apparently, Washigton Post's Jeffrey H. Birnbaum thinks so, read his story here.

He cites a lot of instances where lobbyists spend time and effort for free trying to steer government expenditures on socials goals that these lobbyists consider worthwhile.

Should we cheer for these lobbyists effort, just like what Jeffrey did in the piece?

The concept of opportunity costs tells me things are not as sanguine as Jeffrey protrays them to be.

Suppose the government's expenditure is fixed a certain level, say 10 bucks, then before the lobbyists effort 5 bucks are spent on education while the rest are spent on medical uses. Now the lobbyists come in and ask for more funding in education. As a result, 8 bucks are now spent on education and the rest are spent on medical uses.

Now you can of course cheer, just like Jeffrey did in the piece, for the success of the lobbyists in helping to increase the funding for education. But the problem is we also have to consider the other side of the picture. With more funding for education, given a fixed level of government spending, that also means less resources are devoted to medical uses. Can anyone be so sure that the marginal benefits that result from additional 2 bucks spent in education are higher than than the loss in beneifts (or marginal costs) that result because 2 bucks less are now spent on medical uses?

I am not so sure for one, what about you?

Government Failure, A Real World Example

When I was in graduate school teaching a course on socialism, I liked to tell my students that if they wanted to understand better how a state-owned enteprise worked, went to over to the library and you would see how it operated. At one time, I even organized a field trip for my studnets to check out our library actually worked. That was fun.

In the Christmas edition of the New York Times, there is another story that is illustrative of just how inefficient government enterprises operate.

In the aftermath of Harricanes Katrina and Rita, a lot of clean-up work has to be done. For those juridictions that rely on private contractors, the clean-up effort has progressed much further than those that get help from the Army Corps.

The story cites several reasons for the difference in performance, and they are all interesting ones:

"One is the complexity of the contract the Corps of Engineers has with Ashbritt, a Pompano Beach, Fla., company that is overseeing the debris collection in Mississippi and parts of Louisiana. Its 192 pages include sections on the type of office paper the company uses and a ban on releasing information to the news media without the written permission of the Army Corps.(Ashbritt officials declined to comment for this article.)

Simply getting an agreement from the Army Corps on the exact wording for the legal release document that residents must sign to authorize contractors to clear their homes took several weeks, officials said.

Then the Army Corps and its federal partners repeatedly gave new demands, such as satellite-based measurements on the location of each house, before large-scale clearing could start, county officials said."

Bottom Line: Do you think the government officials will behave differently if they are spending their own money?

Why Politicians Can't Do Math?

A week ago most of the businesses in Wanchai and Causeway, an area close to the venue where the WTO Ministerial Conference was held, were adversely affected because of the conference. Politicians in Hong Kong have come up with a "way" to help these businesses. Read the details here.

Bottom line: the government will adopt a host of measures to encourage more people to visit and spend money in those two places. The government hopes that businesses in Wanchai and Causewaybay will be appropriately compensated by doing so.

Will the policies be effective in boosting businesses in those two places? Certainly. But this misses the point.

Suppose, if not for the WTO, shops located in the Wanchai and Causeway would have sales that amounted to HK$ 1 million. Now with the WTO, consumers made their purchases elsewhere. In other words, total spending in Hong Kong did not decrease because of the WTO. The only difference the hosting of the WTO made was that the geographical distribuiton of sales shifted from one place to another. The losses in sales for businesses in the Wanchai and Causewaybay area was completely offset by sales increase of the same amount elsewhere.

Now with the policies proposed by the government, the opposite will happen. Businesses in Wanchai and Causewaybay area will benefit at the expense of businesses elswhere. In other words, the proposed government policies are pure tranfers, they will not bring along any net benefits to the Hong Kong society. Such transfer policies, like any other transfer policies, will also need to consume some resources for their implmentation. So on net, the benefits from those policies are likely to be negative from the society viewpoint!

Now who said politicians are out there to look after the society's interest eh?

Hong Kong's Shame

Today's edition of South China Morning Post (19 December) has a story on Hong Kongers' sympathy and support to the Korean farmers.

It writes, "Korean protestors may have put Wan Chai under siege on Saturday night, but yesterday many Hong Kong people told of how they had won their hearts during their controversial week-long visit.
They turned out in their hundreds to catch a glimpse of their last day in town, many offering food, drinks and scarves against the cold weather." Read the full story here.

Koreans farmers are asking for protectionist policies. Do the cheerleaders from Hong Kong really mean to endorse their cause?

Undercover Economist

Tim Harford, who writes the Dear Economist column for Financial Times, has a new book out called "The Undercover Economist." Here is the latest review of his book in New York Times.

The Triumph of Free Trade!

After the setback in Seattle and Cancun, the WTO's plan to phase out trade barriers and subisidies in agricultural trade has achieved a breakthrough tonight (Hong Kong time). Read the WTO's Draft Ministerial Declaration here and a WSJ report here.

Long before WTO MC 6, free trade guru Jagdish Bhagwati has argued that it is too soon to call the Doha round a failure. He is right. Read his article here.

May be the fact that breakthrough in negotiations over worldwide trade liberalization happens in Hong Kong but not in Doha or Seattle should not come as a surprise...Nothing can convince the skeptics of free trade better than for them to see first hand what miracle free trade can bring.

When they are in Hong Kong and see for themselves how free trade has transformed Hong Kong from an island barely noticeable on the map to become one of the most advanced economies in the world, how can they possibly deny the existence of great benefits from free trade any more?

Media Bias

As I am typing this post, WTO MC 6 is still going on here in Hong Kong, you can get the most up to date information here.

One thing I notice since the conference started a few days ago is that most media reports, especially the local ones, tend to focus on the Korean farmers. I doubt how much the local reporters truly understand the issues involved. However, by having their focus mainly on the Korean farmers, the reporters and their reports are inadvertently making a case for the Korean farmers. As a consequence, on TV and in news stories, we see a lot of Hong Kong people who are sympathetic to these Korean farmers.

What about the tens of thousands of poor Korean consumers who have to pay high prices for the agricultural products they consume everyday because of high tariffs and other non-tariff barriers that help to protect the Korean farmers? What about the tens of thousands or even millions of poor developing countries farmers who are actually far more efficient in producing agricultural products than their Korean counterparts, but thanks to the barriers of trade imposed by Korea, their products are pretty much barred from entering the Korean market.

Aren't these people hurt by the very policies that the Korean farmers are trying to protect?

Who speaks for these Korean consumers and farmers from the developing countries? Who speaks for the free market? Who speaks for free trade? It is indeed sad to see a place like Hong Kong, a beneficiary of open trade, to fail to produce even one paper, one paper that has the decency and the wisdom to promote the cause of free trade.

That is sad indeed and this is much more disturbing to me than if Hong Kong can only have democracy in 3067!

"By Far the Best Economic System in Human History"

WSJ reported that China, after finishing a national census on its economic activities, has discovered that "its service sector, including businesses like restaurants, banks and shops, is a far more sizable part of the economy than previously understood."

Quoting a local paper, the South China Morning which broke the news a day before, the story said that as China plans to annouce revised GDP figures next week, " the planned revision could show services as a portion of GDP were underreported last year by as much as $300 billion, or nearly 20% of last year's total economic output." Read the story here.

Only a few weeks ago, Professor Steven N.S. Cheung in a conference in his honor, said:
"China has the Best Economic System I know in Human History." Yes, No, comments are open though.

By the way, and to his credit, Professor Cheung has mentioned in his Chinese writings a few years back that China's GDP is seriously underestimated. And he suggested back then that the amount of waste a country produces is a better barometer of an economy's vitality than GDP figures.

And finally, this is one of the latest academic papers on China's GDP figures.

Common Agricultural Policy in a Nutshell

In the eyes of Sir Charles Crawford, the British ambassador to Warsaw, EU's common agricultural policy is "the most stupid, immoral state-subsidized policy in human history, give or take communism...It's a program which uses inefficient transfers of taxpayers' money to bloat French landowners and so pump up food prices in Europe, thereby creating poverty in Africa, which we then fail to solve through inefficient but expensive aid programs."

The above is from a story in WSJ, read it here.

Tick, Tick, Tick...

Folks...you know Hong Kong is quick transformig itself into a paternalistic state when the government has made an annoucement on its website telling you folks how not to overeat during Christmas! Read the government press release here and it's title is funny as well, it is called "Safety Tips for Enjoying Christmas Buffet."

Also, dear readers, as I type there is a conference going here in Hong Kong on why Hong Kong needs a competition law.....

Hong Kong's days as a last bastion of free market are numbered, I can just hear the clock clicking follks.....Tick, tick, tick, tick....

How the West Grew Rich?

Monetary theorist Meir Kohn at Dartmouth has a new interest. He has written a new economic history book entitled," The Origins of Western Economic Success:Commerce, Finance, and Government in Pre-Industrial Europe."

It is not published yet. Don't sweat, you can read the whole book manuscript here.

Also, don't miss his excellent paper "Value and Exchange" which you can also find on his website. You can also read it at Cato Journal here.

The Economics of the C rate

The Hong Kong Monetary Authority has just launched a new lending benchmark rate, called the C-rate, in a bid to boost market transparency and help consumers understand how their loans are priced. That is from a story in South China Morning Post, read it here.

You may think it must be the case that Hong Kong's banking industry is so uncompetitive that banking firms have no incentives to fulfill customers' needs. Hence, to "protect the consumers' interests", HKMA has to stepped in to take care of customers' interests.

But this is simply not true...the story above quoted Joseph Yam, chief executive of HKMA as saying that "[s]even years of deregulating interest rate charges by banks had produced a competitive market."

In a competitive market, if customers find that the lending rate charged by a bank is unreasonable high and the basis upon which the rate is determined opaque, then the customers can always punish the bank in question by moving their businesses elsewhere. In other words, competition will ensure that customers' interest be taken care of. Why the HKMA needs to launch a new benmark rate then?

Several possible answers:

1) HKMA wants to transform itself from a currency board into a full blown central bank;
2) Guys at HKMA are stupid;
3) HKMA wants to justify its value of existence.

Any one of these answers is bad for the Hong Kong people. Now who says public officials are out there looking after the "public interests"?

Ben Bernanke & Milton Friedman

In a conference honoring Milton Friedman's 90th Birthday held in 2002. Ben Bernanke, already one of the Fed's seven governors, told Milton Friedman, "Regarding the Great Depression, you are right, we did it. We are very sorry. But thanks to you, we won't do it again."

That is from an excellent piece done by Grep Ip in Wall Street Journal on the developments of Ben's views on monetary policy, read it here.

Here is another related piece by Ben praising Milton Friedman's work on monetary policy.

Sam Peltzman on Aaron Director

"This shifting of weight from monopoly to efficiency explanations as the primary motive for a business practice has, I think, been permanent among economists and policy makers. This broader change in the framework of our analysis owes much to Aaron Director. It may be his most important intellectual legacy."

That's Sam Peltzman on Aaron Director in the latest issue of Journal of Law and Economics.

Also in the same issue, there is another piece on Aaron by Stephen Stigler, the son of George Stigler.

Buchanan on Constitutional Amendments

James Buchanan proposes the following 3 constitutional amendments for the US:

1) Balanced Budget Amendment;
2) Nondiscriminatory Politics Amendment;
3) Natural Liberty Amendment.

Read the whole thing here.

In the essay, there is a quote of Hayek's which is worth repeating here:

"In the 1978 video-taped interview, F.A. Hayek stated to me that a constitutional amendment should read:

"Congress shall make no law authorizing government

to take any discriminatory measures of coercion".

He went on to add that, with such an amendment, all of the other rights would be unnecessary." (my emphasis)

Hmm..Just wonder how many of our "fighters for democracy" here in Hong Kong get what Hayek and Jim Buchanan are trying to say here.

Serious Flaw In Hong Kong's Struggle for Democray

Don't get me wrong, I am all in support of democracy. The problem with HK's democratic movement is that the leaders of the movement are single-mindedly concerned with universal suffrage but nothing else. This is dangerous.

No one, absolutely no one, among the democratic movement's leaders have mentioned anything about how once democracy is installed, how the government's hand should be tied. You say, wait a minute, it is already such a tough job for us to ask for universal suffrage, can't the discussion regarding how the government's power should be restrained wait until after we have universal suffrage. That is indeed a bogus argument.

Look, be realistic, the so called democrats in HK are bascially a bunch of socialists in disguise, or at least in terms of their beliefs in economic matters. They believe in more welfare spending, more government spending on health care, minimum wage, competition law, maximum work hours, fair trade....Do you really expect these folks willingly have their hands tied once they have their hands on the government money? NO, no, NO, no, NO! They Will Not! Period!

And that is the reason why I think that the direction HK's debate on democracy is heading is wrong-headed. Let's first talk about how government's power can be and will be restrained before universal suffrage is introduced.

Think about this. In the status quo, we have economic liberties but no limited political liberties. With the direction democracy movement is heading, on the day universal suffrage is introduced, I expect that our economic liberties will be severly curtailed because those democrats believe not just in big but huge, giant, super government. In other words, we will have wider political liberties but less economic liberties compared with what we have right now.

Which state I prefer, I will definitely choose the former rather than the latter.

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.

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".

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.

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.

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?

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.

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....

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?

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!

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!

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.

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)

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?

You Can Have the Cake and Eat it Too!

Hong Kong government has recently concluded its consultation exercise on its plan to partially privatize the airport, read the consultation paper and written submissions here.

Reading the submissions is great fun, check this out...

"In going forward with any plan to privatize AA (blogger note:AA stands for Airport Authority) , it is essential that the major aim of developing and maintaining Hong Kong International Airport (HKIA) as an international aviation centre be upheld. The process has to provide genuine benefits to the people of Hong Kong at large."

If I do not tell you the identity of the organization that sent in the submission which contains the quote above, you would probably guess it is sent by some government departments that would like to support the government's case for privatizing the airport. Afterall, who else except the government concerns about protecting "the genuine benefits of the people of HK at large?

If you venture such a guess, you are....WRONG. It is Cathay Pacific, a listed private company here in Hong Kong! Read the whole thing here. The company, by the way, does not support the government's privatization plan.

Now the question is why would a for-profit company suddenly be interested in the welfare of the "people of Hong Kong at large"? And why does the company oppose privatization?

My guess is....hmmm... Cathay Pacific fears that once the airport is privatized, fees will gp up. In other words, the airport is currently under-pricing its services, so taxpayers are in fact subsidizing Cathay Pacific.

Cathay Pacific is in effect saying that hand-out from the government is a way to "provide genuine benefits to the people of Hong Kong at large". Is this Orwellian Newspeak or what? Or is it a living proof that you can have the cake and eat it too?

Lord Peter Bauer

"Aid is a process by which the poor in rich countries subsidise the rich in poor countries."

"Aid doesn’t go to the miserable creatures you see on your television screen, it goes to the rulers. And the rulers tend to be the most prosperous people in their countries."

Will the Jeff Sachs-type ever learn the great wisdom contained in the above quotes?

The above quotes are from Lord Peter Bauer. And he also warned us that using the word "aid" is misleading, a better description is "government-to-government" transfer. Read an excellent interview of Lord Bauer by IEA's John Blundell here.

In this interview Lord Bauer also pointed out using the Marshall Plan as an example in support of aid was bogus. "There was no comparison at all between foreign aid and the Marshall Plan. The economies of western Europe had to be restored, not developed. The economies of the so-called Third World, to use a fashionable cliché, had to be developed. With Marshall aid, West Germany and western Europe had to be restored, not developed."

BTW, Lord Bauer was awarded Cato's Milton Friedman Prize for Advancing Liberty in 2002.

Antitrust Law is Central Planning by Another Name

In a Wall Street Journal story on the recent record of antitrust enforcement in the US, it concluded that:

"These shenanigans have little economic or legal merit,

and increasingly look to be examples of antitrust lawyers

trying to justify their employment."

Read the whole story here, subscription required.

How is antitrust law cooked up? It is basically done like this: you hire a bunch of game theorists (used to be economists who know a bit of statistical analysis, now it gets more "sophisticated") and a bunch of lawyers, gather them in a room or a cubicle depending on the size of the bureau's budget and ask them what they think a particular market should operate without even knowing tiny bits of how it actually works!

Seriously, if these guys are that good, ie that they can bring genuine improvements to market operations by perfecting them, then theoretically you can gather up a bunch of these wunderkinds and set them loose in in different markets. What will you get if this is done?

Central planning will result, my friend. Yes, you hear it right, the outcome will be the same as if the whole economy is planned!

As an aside, as the WSJ report above mentioned, it is not difficult to understand why most if not all lawyers are strong advocates of antitrust law. This applies to Hong Kong as well. Increasingly there seems to be a concensus emerging in Hong Kong that we "need" a competition law, read this Policy Address by our Chief Executive Donald Tsang. And the supporters of competition law in Hong Kong are mostly....Lawyers!

Among lawyers, Legislator Ronny Tong is the most active, and here is his report on why Hong Kong "needs" a competition law. Ronny's apparent lack of knowledge on both basic economic theory and what useful functions particular business practices serve is indeed appalling. Will you let him take charge of the competition law? Dare you trust him with our economy? You tell me.

Seriously, if other countries have already adopted some sort of competition law can be a reason why Hong Kong "needs" one, you really have to start wondering how those folks get their degree!

Why We Should NOT be Excited about Ben Bernanke's Nomination

It is official, Ben Bernanke (subscription required) probably will be US's next Fed-chief. Pundits from all quarters give his nomination a big thumbs up, including my teacher Tyler Cowen up at George Mason.

I beg to differ, and here is why.

Inflation is always and everywhere a monetary M Friedman told us long ago. In modern day monetary arrangements, that means bad monetary policies originated from central banks are to blame whenever inflation occurs. Because of this, who is calling the shot at the Fed's helm matters a great deal. That explains the intense interest people have, especially those who work in the financial sector, on who is going to succeed Mr. Greenspan.

Things do not have to be this way. We free market believers do not trust government intervention, period. So to be consistent, we should not trust central banking as well. And we do know that a better monetary arrangement exists. That is free banking. With free banking, we can do away with central banking completely and we have no need to sweat over who is going to succeed Mr. or Mrs XXX as the next Fed chief.

Free banking will set market forces free, and instill monetary stability. For a short overview on what free banking is, read this note by Professor George Selgin at U of Georgia. George is an expert in free banking, both in terms of its theoretical underpinnings and its history. One of his historical pieces investigated "Free Banking in Foochow" during the Ching Dynasty (1644-1911). (I was his research assistant for the paper)

For a more in depth look on the relative merits of free banking vs central banking, read this book by Vera Smith here. Vera Smith was Hayek's student when Hayek was teaching at LSE. The book set out to examine: "the relative merits of a centralized monopolistic banking system and a system of competitive banks all possessing equal rights to trade" (p. 3).

Hong Kong's Democrats Suck, Big Time!

Hong Kong government has just released its democratic blueprint for this former British colony, read it here. Bottom line is Hong Kong is not going to have universal sufferage anytime soon.

Insistence on having univeral sufferage, the democrats are of course furious.

The SAD facts about Hong Kong's democrats are these:

1) They hate most of the government's policies not because these policies will bring about BIGGER GOVERMENT. They do so because they are not the ones who propose them in the first place.

2) They support competition law, minimum wage, and more government spending on welfare. And they are COMPLETELY ignorant about how real markets work and what they are advocating will mess up the smooth functioning of the markets.

3) Who gets to vote IS THE ONLY thing that democrats care about as if democracy means nothing other than everyone should get to vote. There is no mentioning of how the government's hands should be tied, there is no mentioning of how to reduce government expenditure, there is no mentioning of how to reduce red tapes so that the market can work better, there is no mentioning of how property rights should be further strengthened...and so on.

Add 1 to 3 together, seriously, I just cannot image what kind of damage this crowd will do to Hong Kong's economy if they are in the driver's seat. That's why I think Hong Kong's democrats SUCK, BIG TIME!

Economic Growth is Good for Morals

I recently got hold of a book by Benjamin Friedman, yes the lefty and Keynesian economist Benjamin Friedman up at Harvard.

Why?

One rarely sees 2000 Nobel Prize (economics) winner Jim Heckman writes advance praises for other economists. So when he wrote one for Ben Friedman's new book, I took notice.

This is what he wrote for Friedman's new book:

"Friedman demonstrates how economic growth promotes the social, political and economic well-being of a citiznery, and he refutes popular myth that economic growth is inconsistent with the development of human liberty and dignity. Fascinating and well documented."

The book's title is "The Moral Consequences of Economic Growth." Joe Stiglitz has a book review in the latest issue of Foreign Affairs, read it here.

Does Economic Growth Foster Democracy?

China has just released its very first White Paper on democracy last week. Bottom line is we are not going to see China adopts Western style democratic system anytime soon.

According to the theory propounded by political scientist Seymour Martin Lipset, with average annual GDP growth rate over 9 % since 1980, one would expect economic prosperty should help bring about some sort of democractic reform in China by now. Professor Lipset, now the Hazel Professor of Public Policy at George Mason University, in his classic 1959 article "Some Social Requisites of Democracy: EconomicDevelopment and Political Legitimacy" in American Political Science Review argued that economic growth fosters democracy.

His idea, in simple terms, is that income growth will eventually create a middle class that will demand for a open democratic form of government. Apparently with more than two decades of breakneck growth, China's example seems to contradict Lipset's theory. And the question is why?

In a recent article in Foreign Affairs entitled "Development and Democracy", two political science professors from New York University Bruce Bueno de Mesquita and George Down provide an answer to the question.

Their argument in a nutshell is this: To stay in power, modern autocrats have to do two things. On the one hand, they have to promote economic growth in order to make people happy. On the other hand, economic growth will make it easier for people to organize thus posing a threat to the autocrats. The autocrats then face a dilemma. They need to promote economic growth for survival but do not like the threat posed by the lowered costs of organizing for opposition that comes as a byproduct of that growth.

The way to resolve that dilemma, the professors argue, is for the autocrats to be picky on what kind of public goods they offer. The autocrats should continue to provide the kind of public goods that are conducive to economic growth but with minimal political consequences. Examples are roads and bridges. The autocrats should avoid supplying the kind of public goods that will enable the people to organize at low costs. Examples are higher education and press freedom. The two professor call the latter kind of public good "coordination goods." Through careful manipulation of the composition of the supply of public goods, the authors argue, modern autocrats can ensure the longevity of their rule.

What about Hong Kong? It has high income per capita (about US $ 24,000) yet democratic political system is apparently missing there. And insufficient supply of coordination goods should not be a reason as we enjoy a relatively high degree of press freedom, human rights are decently protected and most Hong Kong do receive a decent amount of education. What prevents Hong Kong from having a democratic political system then? I have no clue. Comments are open though.

Planning or Pure Luck?

To prevent overheating, China has initiated a macro retrenchment programme since early last year. What sets this latest retrenchment programme apart from those which came before is that the economy does not come to a grinding halt as a result. In the first 9 months of this year, the economy grew by 9.4%.

Goldman Sachs economist Hong Liang told Wall Street Journal reporter (subscription required) the success can be attributed to two factors:

(1) a fresh group of savvy technocrats with access to better-quality data that have enabled them to fine-tune economic management;
(2) good luck

For reason 1, you can almost picture a bunch of rocket scientists gathering in a small room endlessly shifting the IS-LM curves around in order to figure out the best monetary-fiscal policy mix for China's economy. How can that be?

As private sector grows in importance in the Chinese economy, it should be MORE, not less, difficult for these rocket scientists to do good to the economy. This should be so in spite of the improving quality of the data mentioned by Liang.

Bottom line: Given the two reasons provided by Liang, I would bet money on luck to be THE ONLY reason that explains why China can avoid overheating without slowing the economy.

I Scratch Your Back and You Scratch Mine

In the US, the Department of Housing and Urban Development concluded following a yearlong review that Fannie Mae used its regional partnership offices to "engage in activities that were primarily designed to obtain access to or influence members of Congress."

The Wall Street Journal reported earlier that "Fannie used its partnership offices largely through its American Communities Fund, an affordable-housing program, to finance a disproportionate amount of projects in certain congressional districts. About half the ACF projects reviewed by the Journal were in the home districts of House and Senate lawmakers who sat on the banking committees that directly oversee Fannie, or the appropriations housing subcommittees that fund its federal regulator." Read the whole thing here, subscription required.

Have you ever wondered why your tax bill is increasing most if not all of the time, but you do not seem to get any benefits from those hard-earned dollars. The story above should explain why. Tax-payers' money is not being channelled to whereever there is a greater demand for affordable housing. Rather, taxpayers' money is being directed to areas where the popularity of those in Congress who have the mandate to oversee Fannie will receive a big boost because of increased spending.

And if the story cannot convince you tax is theft, I don't know what can.

20% of GDP = Small Government?

Chief Executive Donald Tsang, in response to a question asked at a luncheon, claimed that the size of Hong Kong's government is small with a roughly 20% share in GDP.

For a place like Hong Kong, where no military expenditure is required, a government that has a 20% share in GDP is definitely too much.

And if you wonder what makes Hong Kong's government so expensive, check out this guy, who is supposedly the "central banker" for the territory. He earns many, many, many times more than that of other central bankers around the globe, and yes including Alan Greenspan. And he is not even a central banker in the real sense!

Strong Governance = Good Governance?

Hong Kong's new Chief Executive just delivered his maiden Policy Address a couple days ago, you can read the whole thing here.

It is not the content of the Policy Address that has caught my eye though, rather it is the title of the Policy Address, "Strong Governance for the People", that gets me thinking:

Now for those of us who are being governed, all we care about is whether the government has good or bad governance.

Who cares whether governance is strong or weak, as long as it is good? May be it's just me, but I simply cannot see any logical relationship between strong and good governance.

If strong governance means the government is vested with more power to carry out its functions, and few limitations are imposed on that power(which is the case in Hong Kong), then common sense would suggest bad governance is far more likely to be the outcome.

God bless Hong Kong!

Watershed in China's Economic Reform

You know China has come a long way in establishing a free market economy when it gives up the practice of having a five-year plan, read it here. (From the Economist, subscription required). What do they call it now? A five-year programme!

Tom Schelling

Tom Schelling up at U. of Maryland gets the Nobel prize this year. He really deserves it. I first came to know about his work while I was a graduate student at George Mason University, taking a course in Industrial Organization taught by Tyler Cowen. And one of the required texts of that course was Tom's Strategy of Conflict. Incidentally, Tom was one of Tyler's thesis advisers before Tom left Harvard. Read Tyler's posts on his mentor's contributions to economics here.

On an overview of Tom's work, read his interview here. Still curious about how important Tom's work is? Take a look at my mentor Dick Wagner's syllabus for his graduate macroeconomics course last fall. There were only 3 required texts for the course and one of them is Tom's Micromotives and Macrobehavior!

Mickey Loses its Magic?

September 16 marked the officially opening of the very first STATE-OWNED Disneyland in Hong Kong. Why state-owned? Well, the Hong Kong government turns out is the major shareholder of the theme park with a 57% share.

When the plan for building a Disneyland in Hong Kong was still on the drawing board, hopes were high that it will be a boon for local tourism. It was expected that tourists, espeically those from the mainland, would flock to the former British Colony because of Mickey.

"The government emphasizes that the project's spillover effects on the economy as a whole can outweigh the low financial returns from the project itself. The official assessment of the project's contribution to gross domestic product is a maximum of HK$148 billion in 40 years." Read more here and here as well.

Well, sad to say, the government is....WRONG and DEAD WRONG on that. This just in, read this and this as well.

But should we be surprised at the result? Yeung W Hong up at Next Magazine and myself months ago have predicted that HK Disneyland is doomed to be a failure. (Sorry, no links are available as our writings are in Chinese only)

Democracy = Voting?

Hong Kong government is soon to release its latest consultation paper on political reform. The sad thing about the democratic camp is that to members of this camp, democracy means one and one thing only: right to vote. Read some of their thoughts here. Sad.

"Not the right to be free from arbitrary arrest and to the writ of habeas corpus; not the right to acquire, use, transfer, and be secure in the possession of property; not freedom of speech; not the right to a trial by jury – no. The right to vote. The right to yank a lever in a booth on intermittent occasions, along with thousands or millions of other people, the collective outcome of which is the election of a handful of power-mad, glib dissemblers who specialize in picking each of our pockets, transferring the booty to special-interest groups, and persuading us that we are strengthened, enriched, and raised to glory by it all."

That is from Don Boudreaux, a professor of economics from my alma mater George Mason University, read the whole post here.

Political Economy Book of the Year

The book "Economic Origins of Dictatorship and Democracy" by Daron Acemoglu at MIT and James Robinson at Harvard is slated to be one of the most important books in the field of political economy for years to come.

Daron incidentally just got the J.B.Clark award this year. The award is given every two years to an American economist under the age of 40 for making a significant contribution to economic thought and knowledge.

Can't wait for the book to come out later this year. You can download the manuscript here and read for yourself how good it really is.

More Healthy Older People + Democracy = More Redistribution

"The benefits of (for example) medical technology accrue mainly to the elderly, and by extending the life of the elderly advances in that technology increase their political heft, resulting in still more redistribution from young to old."

That is Richard Posner discussing the pros and cons of population growth, together with Gary Becker, read here.

Why Can't Legislators Be More Intelligent?

As Hong Kong's economy continues to grow, rents go up as well. That is simple economics. Apparently this is not so to our elected legislators.

Emily Lau, one of the legislators here, has recently received a lot of complaints from restaurants and retailers that the high rents are killing them. That they cannot afford the high rents. She is urging the government to allocate more space for the use of these two businesses, read on.

Rental space is scarce. The fact that retailers and restaurants can no longer afford high rents means the valuable and limited rental space can be put to higher valued uses in other businesses.

Why? It is because other businesses are willing to pay higher rent than the restaurant and retail outlet owners, and that is why the rent is being bid up in the first place. The underlying issue is scarcity and there is nothing the government can do about it except by messing things up!

Another point made by her is also wrong.

She said that "high rents in the retail and restaurant trade may force employers to cut salaries of employees." Can that happen?

Suppose a restaurant pays an employee $100 a month and the labor market is competitive. Then the rent gets higher, and the restaurant boss tells her employee that with the higher rent she can only afford to pay $ 50. Will the employee say yes to the pay cut? Of course NOT. In a competitive labor market, the employee will be better off seeking alternative employment where the pay is still $100. And if the restaurant owner continues to offer $50 for the post, she will end up having no one working for her. Soon she will have to offer a bit more, say $75 but still no one applies, then a bit more say $ 95 but still no one applies, the process continues until she has to raise the pay until it is back to where it begins ie. $ 100.

A Pretty Face is Not Enough

Remember her? Pretty? Sure. Smart? Well....

The lady in the picture is Yulia Tymoshenko, who a week ago was kicked out of her seat as prime minister of Ukraine.

Reason for her ouster: It turns out that Ms Tymoshenko is a big fan of big government. And while in office, she messed up Ukarine' economy through government policies that undermined property rights.

The result: For the past eight months, "economic growth has plummeted from an annual 12 per cent last year to 2.8 per cent so far this year, driven by a fall in investments." This is from FT, read on.

Hat tip to my former teacher Tyler Cowen up at Marginal Revolution for the pointer.

Price Gouging: Who's Fault is it Anyway

Due to various reasons, gasoline price at the pump has risen a lot of late in the US. Politicians of course are the very first ones who come out and complain about this price gouging behavior on the part of gasoline suppliers. Russell Roberts at Cafe Hayek has this very good post on price gouging.

What I find a bit strange is that not too many commentators have analyzed the issue from the demand side. Why blame it on suppliers alone?

Suppose all car owners, fearing to pay a high price for gasoline knowing something has happened that will casue its price to rise, start using public transport rather than their own cars when they go to work, when they run their errands , when they do their grocery shopping. Then I believe that no matter what happens on the supply side that will cause a rise in gasoline price, the magnitude of increase will be minimal if it happens at all due to the incidental inward shift of the gasoline demand curve as more and more people switch to public tranport. So why blame it all on the part of "greedy suppliers"? Demanders could have done the adjustment to the negative supply shock on gasoline equally well.

In other words, for all those critics that have their fingers pointed at the "greedy suppliers of gasoline", they should have their fingers pointed in reverse direction as well. Demanders of gasoline are equally at fault in not making less use of gasoline just when its supply is experiencing some kind of negative shock.

So from now on, suppliers of gasoline should organize themselves and start blaming the demanders of gasoline for failing to conserve on the usage of gasoline just when its supply is reduced temporarily for various reasons.

Is Debt Relief the Right Way to Help?

"A deal to forgive up to $56 billion in debts owed by poor nations cleared an important hurdle Saturday, winning the endorsement of the International Monetary Fund's steering committee." This is from a story in Wall Street Journal, read on.(Subscription required)

But is that really the right way to help poor countries around the globe?

A commentator characterizes the current approach to help poor countries on the part of the rich world, including the debt relief plan mentioned above, utopian. Following are what the commentator believes as the problems inherent in this approach to helping the world's poor countries: "It is promising more than you can deliver. It is seeing an easy and sudden answer to long-standing, complex problems. It is trying to solve everything at once through an administrative apparatus headed by "world leaders." It places too much faith in altruistic cooperation and underestimates self-seeking behavior and conflict. It is expecting great things from schemes designed at the top, but doing nothing to solve the bigger problems at the bottom."

No, the commentator is not Hayek, he is Bill Easterley at New York University, read on. If you find Bill's comments sensible, learn more about the subject from his justly famous book "The Elusive Quest for Growth" and preorder his forthcoming one here.

Economics is Easy, Applying it is Hard

Russell Roberts up at Cafe Hayek has a very good post on the topic of whether economics is easy or not, read on. What I find more interesting though is his quote from Milton Friedman:

"Economics is easy. All you have to remember is that people act in their own self-interest and demand slopes downward. It's applying these insights that's hard."

Steven N.S. Cheung has almost said the same thing using the same language, albeit in Chinese in his three volume works entitled "Economic Explanations".

Another thing I notice is that it seems no longer common for economists to use the term Price Theory, instead they call it Microeconomics...as if there is no difference between the two.

Will Conditional Fees Lead to More Frivolous Lawsuits?

"Conditional fees are a form of "no-win, no fee" arrangement. If the case is unsuccessful, the lawyer will charge no fees. In the event of success, the lawyer charges his normal fees plus a percentage "uplift" on the normal fees.

Conditional fees are different from the American form of contingency fee, where the lawyer's fee is calculated as a percentage of the amount of damages awarded by the court. At present, conditional fees, like other forms of "no win, no fee" arrangements, are unlawful for civil legal proceedings involving the institution of legal proceedings. The restriction has its origins in the ancient common law crime and tort of champerty and maintenance."

The above is from a consultation paper just released a few days ago here in Hong Kong, read more here.

Some commentators here have already voiced their concern about the rise of frivolous lawsuits if current ban on such payment scheme is lifted. I am no expert in this area, but I do have two observations to make regarding this legal service pricing scheme.

1) The current payment arrangement between lawyers and their clients here in Hong Kong might not be the most efficient one from an economic standpoint. Restriction on conditional fee arrangement artificially limits contractual forms that are available to parties involved in transactions. That inevitably will force some legal cases that would best be handled through such a pricing scheme to be handled instead by other pricing/contractual schemes that are less suitable. In other words, limited choice on payment arrangments between lawyers and their clients raises the cost of operating the legal system. (Note that I am only drawing out the implications of the prohibition on conditional fees here. There may be a very good reason why such a ban is introduced in the first place, but that is not my concern)

2) Though conditional fees arrangement as described above is not exactly like the contingency fee scheme used in the US, incentives generated by the two schemes are quite similar. And the US experience suggests, contrary to the dire consequences predicted by some pundits here, that "contingent-fee lawyers reduce the number of frivolous cases!" This is from a study conducted by my former classmate at George Mason, Alex Tabarrock, now a professor at the same university. Read on.

The Beauty of Simple Economics

Economists sometimes tend to forget how simple tools can go a long way in helping us to understand the real world. So we spend a great amount of time trying to construct complicated models that ironically driving us further and further away from reality.

A lot of real world puzzles can indeed be explained by concepts as simple as demand and supply. Take the example of the real estate boom in the US. Many pundits have pointed their fingers to irrational expectations on the part of buyers' as the root cause of the recent housing boom. That may be true. But we have also learned from Econ 101 that prices are determined by supply and demand.

Irrational acts on the part of buyers that result in high prices do not explain why suppliers of housing fail to profit from the high housing prices by simply building more houses. So what is the reason that prevents suppliers from taking profit from the real estate boom in the US. Steven Landsburg at Slate has the answer, read on. Once you finish reading it, you may not yell eureka but I bet you will agree with me that simple economics does go a long way in helping us to understand the real world.

Learn from Hong Kong, not Harvard

Bryan Caplan at George Mason University has this to say regarding the latest World Bank report on business regulations around the globe (which I mentioned in earlier post), read the report here.

One gets a sense of big relief after reading Bryan's post and knowing that Jeff Sachs has not been involved in China's economic reform. Put it in another way, it is China's great fortune not to have Jeff Sachs on board of its economic reform team during it's past twenty five years of economic reform.

Steven N. S. Cheung and the New Empirical Economics

I have mentioned Steven N.S. Cheung as deserving a Nobel prize in my previous post. I would argue the case for Cheung not only because of his contribution to the economics of contract and property rights, but for his instillation of a new sense to the term "empirical economics"that has long been treated as equivalent to econometrics to most economists.

What is this new empirical economics that Cheung creates?

Starting out with the simple premise of constrained maximization, and the simplest economics tools available (doward sloping demand curve), Cheung urges fellow economists to go out to the real world to examine exactly what the real world contraints are in affecting peoples' choices.

Indeed, he has written an extremely important piece on how economists should go about conducting research on real world constraints. The paper is entitled "A Theory of Price Control," Journal of Law and Economics, 1974. If you have access to JSTOR, you can read it here. If not, you can wait for Steve's forthcoming collection of essays that is due out in October.

Singaporization of Hong Kong

The World Bank has just released its third study on the burden of business regulations around the globe, read some background info about this report here.

The top ten business environments in the world, as measured by the 'Ease of Doing Business index':
1. New Zealand 2. Singapore 3. United States 4. Canada 5. Norway 6. Australia 7. Hong Kong, China8. Denmark9. United Kingdom 10. Japan.

The surprise here is that Singapore gets a much higher ranking than that of Hong Kong. Hong Kong has long been seen as much less interventionist than that of Singapore, and one would naturally incline to think that the former should have obtained a much higher ranking than the latter. So what is going on here?

I do not have the full answer. But my sense is that Hong Kong, used to be seen as the last bastion of the free market, is undergoing some sort of transformation right now. It is turning itself into a place that looks very similar to what Singapore used to be. Hong Kong government, with the backing from Beijing, not only wants to have a tight grip on all matters political, at the same time it slowly but gradually has extended its visible hand on economic matters. Witness the increasing number of "public-private partnership projects" that are launched since the handover of Hong Kong back to China in 1997. The list includes projects like Cyberport, Hong Kong Disneyland....

In sharp contrast, Singapore is trying very hard to become more and more like Hong Kong. Not the Hong Kong as is now, but the one when the principle of Lasseiz-Faire used to rein. Thus, Singapore has recently lifted the ban on gambling, partially lifted the ban on importing chewing gum, asking people to be more bold and not afraid to express themselves in a bid to boost entrepreneurship....all with the aim of letting people to have more say in what they do.

Bottomline: Hong Kong is gradually drifting away from its free market past and getting more and more interventist right at the same time that Singapore tries hard to shed its interventionst past to embrace the free market. Ironic? Yes. Sad? Definitely.

And the Winner is....

Come October, it is again time for the annoucement of this year's Nobel prize winner in economics. A few names have surfaced of late and they are considered to be serious contenders for the prize.

The list includes, Bob Barro at Harvard, J. Bhagwati up at Columbia, Gene Fama at Chicago, Paul Romer at Stanford Business School, and yes Paul Krugman's name is on it as well. And Tyler Cowen at Marginal Revolution has this to say with regard to the list, read on.

What about Steven N.S. Cheung? Some people may say he has not written much since his last piece "The Contractual Nature of the Firm" appeared in the 1983 issue of Journal of Law and Economics. My response is one should always judge the importance of an economist on the basis of whether he has made substantive contribution to the field of economics, not on the basis of whether that contribution is made twenty or two years ago.

Moon Cake Economics

Mid-autumn festival is coming soon and businesses across China are busy preparing all kinds of things that consumers will want to buy for celebration. One of the things people will usually buy to celebrate the festival is moon cake, a cake-like confection.

In the name of protecting the interests of consumers, the local government in Shanghai has recently promulgated a law restricting the amount of expenses that moon cake producers can spend on packaging. Starting from now, packaging costs cannot exceed 20% of the retail price of a box of moon cake. (Usually there are four pieces of moon cakes in a box)

But why 20%? If indeed the government thinks packaging is useless to a consumer, then to protect the interests of the consumer, one will certainly think that the smaller the ratio of packaging expenses to the retail price of a box of mooncake the better it is to the consumer. So why stop at 20%, why not limiting that ratio to 15%, 10%, or 5%? Even better, why not the government simply sets down a rule that prohibits packaging. Once we ponder questions like these, one immediately sees the folly of governmental regulation in the name of safeguarding our interests.

A deeper question regarding government protecting our interests is: how does the government know what are our interests? In a market, we reveal our interests through money votes. Without such mechanism, how can the government discover what our interests are.


Furthermore, given each individual's interest is different from one another, how can the government set a one size fits all policy that protects all consumers' interests. In the moon cake example above, what if the very reason I purchase a box of moon cake is simply for the sake of its packaging but nothing else. If so, then how can the government policy that restricts the amount spent of packaging enhances my interests?

Another question I would like readers to think over is this: Let say for some mysterious reason, the government actually knows what each and every individuals' interests are, and all officials do not have hidden agendas of their own other than serving the interests of the public, is there ground for having the government setting policies to safeguard our interests? Comments are open.

Ronald Coase on Opportunity Cost

I presume most if not all economists have read Ronald Coase's essays on the nature of the firm and on the problem of social costs. But probably not too many people know that Coase has written a piece on the concept of opportunity cost. The essay, entitled "Business Organization and the Accountant," is now online.

And You Think the Concept of Opportunity Cost is Easy

In any introductory economics textbook, the concept of opportunity cost is usually defined and explained in the first few chapters. So anyone who has taken an introductory economic class can legitimately claim he or she understands the concept.

Is the concept really that simple? It turns out that such a seemingly "easy" concept is not well grasped by even professional economists!! You hear it right, PROFESSOINAL ECONOMISTS who do economics for a living!

Read this and this as well. And my former professor at George Mason University Tyler Cowen has this to say, and I totally agree with his conclusion about the concept of opportunity cost being a gross but not a net concept.

Paul Krugman's Mentor

In the latest issue of Finance and Development, a magazine published by the IMF, there is a very nice article on free trade guru J. Bhagwati, a professor of economics at Columbia University. Who is J. Bhagwati? Better save it for you to discover by reading through the article. All I will say is that he was Paul Krugman's teacher. Read on.

Japan's 9/11

I am not suggesting anything like the tragedy that occured on 9-11-01 in the US is going to repeat in Japan on that day. However, something equally important is also going to happen in Japan that same day this year. I am talking about the parlimentary election that will be held on that day. Here, I try to provide a story about why events are unfolding this particular way. Comments are open.

In Mancur Olson's 1982 book "The Rise and Fall of Nations", he attributes the post war economic success of Japan to the devastation of intimate ties formed between various interest groups and the government.

Such ties tilt the playing field towards those who are connected to the government. Without such connection, the rest of the society suffers from all sorts of discriminatory policies. As a result, the cozy relationships between interest groups and government retard economic growth. WWII changes all this. Without the hinderance created by the tight connection between special interests and the government, Japanese economy recovers rapidly in the aftermath of the war.

However, with social and political stability in Japan soon restored after the war, interest groups reappear and ties are once again formed between them and the government. A symbol of this tight link between the interest groups and the government is the almost uninterrupted rule of the LDP in Japan for the past five decades since the war. Signs of weaknesses begin to surface in the Japanese economy in the late 1980s.

Japan has to reform to survive under such circumstances. But reform will not be easy to push through as long as the cozy relationships between the LDP and its supporting interest groups are intact. The burst of the property bubble in the early 1990s together with the gradual accumulation of huge governmental debt that simply cannot be maintained indefinitely into the future thus act sort of like what WWII does to the tight relationships between the interest groups and the LDP old guards. These factors generate momentum for reform.

When the attempt to privatize postal service failed earlier last month, prime minister Junichiro Koizumi immediately called for a snap election of the parliament. This election, held on the eleventh of this month, will definitely be a watershed in Japanese history. For if Olson is right, and Koizumi's faction within LDP wins, that will mean ties between the LDP old guards and the special interests (like the construction companies, farmers, and postal workers) are permanently gone. And Japanese economy's rise from the ashes will only be a matter of time.

Government is Always and Everywhere the Wellspring of Problems

The book by Martin Meredith entitled "The Fate of Africa" is reviewed in the August 31th edition of the Wall Street Journal (link here, subscription required). To reviewer Robert Guest, the book successfully shows:

"Most African countries have been atrociously governed in the past half-century. A lack of institutional checks has allowed an array of incompetent strongmen to rule as they pleased until the money ran out, at which point northern donors oftern tossed them an extra bundle of cash."

Foreign aid advocates, Jeff Sachs and Bono type folks should all get hold of a copy of this book.
Bottom line: Government Sucks. Period.

Supersize It

The State-owned Assets Supervision and Administration Commission (SASAC), the government body in China responsible for overeeing state-owned enterprises under central government control, recently annouces its plan to merge some of the firms under its supervision to create giant enterprises that can compete in the world market.

The sad thing about this piece of news is that after more than 20 years of miraculous economic growth, Chinese officials still don't get the message that planning does not work. How do we know large is necessarily better? How large is large? How do we know combing A firm and B firm will bring synergies but not merging firm B and firm D?

They simply just do not get it. Firm size is a result of market competition. No one knows when Sam Walton first started his business that Walmart will turn into a giant multinational business. And herelies the marvel of the market: NO ONE NEEDS TO KNOW. Competition in the market place will sort it all out!

Two Wrongs Do Not Make One Right

Recently there is an oil shortage in the sourthern part of China. Long lines develop and the government is concerned such incidents may eventually lead to social unrest. In today's Hong Kong Economic Journal (the journal is a local equivalent to Wall Street Journal focusing on economic news), there is a story saying that the Chinese government has announced a ban on the export of oil (refined oil not crude) in a bid to bring the shortage problem under control.

This is a typical case of how one regulation, after producing some unwanted and unintended consequences, leads to more regulation. The reason why there is shortage in the first place is simple: In China today, the government still controls the retail price of refined oil but not the price of crude as the price of the latter is determined by world demand and supply. So with the retail price set below the market level while the price of crude is shooting up like there is no tomorrow, it is not hard to see that firms will have no incentive to import crude and process it. That is one reason why shortage develops in China: Firms simply stop production to minimize losses.

Another reason is export. As processed oil can fetch a far higher price in the world market than the domestic one, it is only rational for firms in China to sell their processed oil abroad. So supply originally planned to sell domestically is now diverted overseas as a result of the price control.

The source of oil shortage in China thus originates from state regulation, and now the government wants to rectify the shortage problem not with eliminating the price control but through introducing yet another regulation: banning the export of processed oil! But can they? Smuggling activity is definitely going to rise generating lots of opporunities for corruption. Will more corruption help in maintaining social stability, you tell me.

In China, the oil producing firms are privatized in name only. The central government remains the absolute majority shareholder. After shortage surfaced, the central government prevailed upon these oil companies to assume greater social responsibilities, i.e. to ensure adequate supply so as to prevent social unrest, even if that means they will have to suffer temporary losses. In other words, private minority shareholders' interest be damned -- for the time being anyhow.

How Far is Washington From Berkeley?

Whenever we think of transaction costs economics, the name O E Williamson (at UC Berkeley) immediately comes to mind.

But there are actually two strands of thought that can be subsumed under the rubric of transaction costs economics.

In addition to the Williamsonian approach to transaction costs economics, there is another one originated from the department of economics at U of Washington back in the 1970s. And the person at UW who started it all is a Chinese from HK, yes from HK, whose name is
Steven N.S. Cheung.

There are major differences that seperate the Williamsonian approach to transaction costs economics from the one advanced by Steve. In his attempt to resurrect neoclassical economics by incorporating the concept of transaction costs into it, O E Williamson tries to do so by going beyond the narrow confine of economics. Hence, he relies heavily on the work by organizational theorits and sociologists. Steve, in sharp contrast, still works within the good old Marshallian partial equilibrium, price theory tradition. He does modify the traditional tools a lot, but one can still see the imprints of Marshall that pervade his work throughout. There are other differences and I will write more about them later.

One important reason why so many people will usually associate transaction costs economics with O E Williamson alone is that he has a lot of books and collected essays out there. While other than his Ph.D. thesis Theory of Share Tenancy and two short monographs (Will China go Capitalist and Myth of Social Costs, both are IEA essays), all of Steve's work is scatted in scholarly journals.

But that is about to change. A collection of all the important papers by Steve will be out this Fall.

Hayek in China

My former professor Tony Fu-lai Yu now teaching in Taiwan just went to a conference in China about Hayek. Yes, the conference was all about Hayek! It was the inaugural conference organzied by the newly formed Hayek Society in China.

Tony told me that the quality of the papers presented at the conference is good though all of them in Chinese. A story Tony told me suggests it is still not completely safe to openly discuss Hayek in China. There was no sign whatsoever at the hotel lobby to suggest there was a conference about Hayek going on. The only sign, if you can call it a sign, was a little piece of paper saying that an academic conference was held, and yes there was no mention of the name Hayek on that small piece of paper.

If my memory is correct, so far only two books of Hayek's have been translated. One is the Constitution of Liberty and the other one is Individualism and Economic Order.

Another mentor of mine, Yeung Wai Hong up at Next Magazine here in HK, is the only person here in the territory that popularizes Hayekian ideas. And yes, he even mentions the concept spontaneous order at least once in one of his recent columns !