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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

The economics of privacy

Written by Sara Williams | Wednesday 04 August 2010

A recent WSJ article about Microsoft’s browser security brings up many interesting points about privacy, advertising, and competition.

When people hear about internet privacy and tracking, the common reaction is fear of spyware, identity theft, and our information being published. These are certainly issues that ought not be belittled, but if critical information can easily be hacked by malicious spyware on a certain browser, how many people will continue to use it? Consider the case of Internet Explorer.

The main issue here is advertising. The trackers can record and analyze each mouse click. Then, the firms can target likely potential consumers for various kinds of ads. There are real benefits to the internet user. What benefit would an elderly man extract from an ad for nail polish? The more effective online ads are, the less online content for which consumers have to pay. Internet users ought to think of these ads as a selection of window displays made just for them, or even billboards.

Privacy is important though. Competition, however, rectifies many of the internet’s privacy harms. First, there are many browsers in competition with one another (Google Chrome, Safari, Firefox, Internet Explorer). With each browser come different trade-offs. For example, Safari is safe but slow compared to Chrome or Firefox. Internet Explorer, as the article explains, is notoriously susceptible to harmful third party trackers. There are also complements to browsers such as anti-virus software that contribute to the competitive internet marketplace of access and protection. There is also competition in how much certain browsers allow tracking firms or the government to track. Internet software companies can easily show how protected it is as leverage to increase use.

People value privacy; people also value convenience and free internet. The balance for each individual, I believe, can be best achieved through competition.

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€500 notes and thank you notes

Written by Sara Williams | Saturday 31 July 2010

Who would have thought you would want to thank your local drug lord? A recent WSJ article outlines how the black market is keeping the central bank afloat. Higher valued notes, like the €200 and €500 bills, are in high demand, but cost little to produce. The demand is high because it is easier to conceal large amounts of money with higher notes. The Euro produces the highest, which attracts international demand as well as within the EU. So, the central bank is profiting by creating money at little cost and selling it back for high premiums. This profit contributes to the central bank’s solvency and therefore helps in preventing a banking crisis.

Not that I condone the government profiting from illegal trade, but it is extremely interesting. The government makes certain goods and practices illegal. The government also gives itself and maintains a monopoly on the production of money. So really, both sides of the transaction (supply and demand) are artificial. It is purely a legal phenomenon.

If you look at this purely in incentive terms, the government should increase enforcement for catching drug dealers and money launderers to where there is a perfect cost effectiveness for the criminals to demand more large bills. If they enforce too much, the underground economy will find substitutes. Of course, this strategy would increase taxes, and not help the economy in real terms.

Still, when looked at closely, the situation say a lot about the leverage of government power and its citizens.

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The private law of gypsies

Written by Sara Williams | Friday 30 July 2010

Economist Peter Leeson has come out with another compelling and fascinating example of private law in his essay “Gypsies.” Gypsies, as Leeson writes, use their superstition as a means of substituting the public law and order from which they exile themselves.

Gypsies’ religious views, such as the belief that “the lower half of the human body is invisibly polluted, that supernatural defilement is physically contagious, and that non-Gypsies are spiritually toxic” are foreign and strange to most. But they are the glue of sustainable order for the Gypsy community. For example, the idea that non-gypsies are toxic makes the threat of exile more severe. Leeson explains how it creates an inherent cost to disobedience and an inherent base for laws. The beliefs may seem primitive to some, but they nearly perfectly engineer a set of incentives to deter unwanted behavior for a society. The paper goes through how the superstitions and belief system creates a self-enforcing rule of law and system of community organization.

All of Leeson’s work expertly analyzes in an informal and nontraditional manner. It deters from mainstream analysis to reveal how people interact without institutions we see as vital and non-substitutable. Research such as this opens the discussion for alternative policies and methods of social coordination by understanding how groups so different than the norm can have such order. By understanding the dynamics and cost-benefit situations of various different forms of community structure, we can then understand how existing formal institutions work and can be improved.

This essay is interesting for anyone with even a hint of curiosity about human interaction and coordination. Leeson has a knack for making economic analysis peculiarly intriguing.

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New annotated The Wealth of Nations

Written by Sara Williams | Thursday 29 July 2010

An annotated edition of Adam Smith’s legendary The Wealth of Nations has recently been published. ASI director, Eamonn Butler, wrote the foreword. The subtitle of the edition is plain but true: The Economics Classic. Adam Smith, the father of economics, essentially created the study with this book. The most fundamental observations and assertions Smith expresses in the book are still relevant and remain the foundation of every microeconomics class. Every student and scholar of economics knows the famous quote, “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.” This edition highlights such fundamental concepts that are useful to everyone

Eamonn Butlers’ foreword highlights the relevance of Smith’s groundbreaking ideas and stresses how it was a catalyst for change in economic thought. Mercantilist ideas of zero-sum trade and wealth were erroneous and harmful to everyone. Smith, as outlined in the foreword, had tremendous influence on policies that have dramatically increased the wealth for all. The treasure of an unhampered market is its ability to help those who need it most, while rewarding those that supply it.

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Greenpeace vs. BP

Written by Sara Williams | Wednesday 28 July 2010

Greenpeace protesters successfully stopped the flow of oil to around 46 BP stations in London yesterday. It was an effort to convince BP to “go beyond petroleum.” Yet this does little to solve any real problems, instead it was just a publicity stunt for special interest policies and increased the revenue of BP's competitors’ for the day.

The means of communication Greenpeace choose may be more infantile than others, but the central idea of the protest is often vocalized in the media. Voters and non-profits worry about our society’s reliance on oil and its harm on the environment. Common arguments mention how we are sucking our oil dry because of our addiction and obsession. The harm the BP spill had on the environment was indeed horrible, however this is not a reason to push policies dictating the amount and quality of oil allowed into a country.

The fundamental fallacy in the argument is the scarcity of oil. Studies and foundations have been predicting when oil will be completely consumed for a long time. However, these dates given are never correct. Critics of oil as a means of energy sometimes look at only scarcity, not the price system. As oil decreases in supply, the price will rise naturally. There is no need to regulate quantity for fear of overuse. As price increases, there will be more incentive to find undiscovered oil. So, the price mechanism will not only decrease consumption if depletion is near, it will increase innovation.

Greenpeace and others also overlook the importance of innovation. There are clearly the technologies to dramatically decrease consumption, as Greenpeace well knows. However, there are various problems with each of these. Electric, wind, and other popular alternatives are expensive compared to oil. There’s virtue in cleaner energy, but its viability can’t come from policy. It must come from actual changes in consumer preferences and relative prices through innovative technology. After all, the reason we use oil and electricity today instead of kerosene, is not because of policy but because innovative technology created a cheaper alternative. So, instead of vandalizing central London BP stations and shifting demand to Shell stations, Greenpeace should search for ways to make cleaner energy cheaper. It certainly has the resources to do so.

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Taking a gamble

Written by Sara Williams | Tuesday 27 July 2010

The Economist’s website is hosting a debate on the legality of gambling. While both those in favour and against make interesting points, Radley Balko’s approval of legal gambling is most compelling.

Balko points out that criminalizing consensual activities does little to stop the actual acts. People like to gamble and bet. Whether it is an informal wager with friends or blackjack at the casino, it’s inevitable. People take value out of betting whether it’s to a healthy extent or not. Companies that “exploit” the so-called sick and twisted addictive lifestyle of gamblers are really no different that any other company. Groceries, after all, exploit our most basic need for survival. Moreover, when we are starving from not eating all day, we exploit Tesco by paying only a few pounds for a very valuable (to us) meal. The idea of exploitation is misleading, especially when applied to emotionally loaded topics such as gambling.

There is also no external harm in gambling. In private gambling firms, no one outside the transaction is harmed. Dissenters may cite the harm to families and friends of the gamblers. There is no denying that addictive gambling can ruin relationships. Many things can do this. Drinking, depression, illness, etc can break a home and hurt loved ones. Very few argue for prohibition of alcohol, or punishing unhealthy lifestyles. Why should gambling be different?

Balko also points out that a heavily regulated gambling industry is more dangerous than gambling in a free market. Not only does it put tax dollars to waste, it ruins competition in the industry. Gambling may have no virtue, but there’s no need to criminalize it. The UK luckily has a relatively liberal approach to most breeds of gambling. The fundamental issue here, as Balko argues, is the encroachment on personal liberty.

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Bernanke assures rescue

Written by Sara Williams | Thursday 22 July 2010

The US Federal Reserve chairman Ben Bernanke has assured active monetary policy if the US economy remains fragile. At the same time he recognized the uncertainty of the economy and financial markets. After this testimony, financial markets fell. A recovering economy must overcome natural uncertainties of regrouping and reinvesting. Active monetary policy only adds to the uncertainty. Bernanke is an intelligent man though, why is he trying to put out a fire with oil?

The Fed has been using aggressive monetary policy, in an attempt to heal the markets, since about 2008. The low interest rates, loans to insolvent banks, and the purchase of toxic assets have not solved the problem. The biggest worries cited were unemployment and market confidence. Unemployment always lags behind economic recovery and may not be fixed with near zero interest rates. The unemployment issue could be remedied with increased investment, but that’s avoiding the real problem. Investment isn’t increasing for a reason, and that reason is not the interest rate. Market uncertainty is a plague on recovery. Without consumer and investment confidence, the process is slow and sometimes stagnant. However, certainty does not come from the government. Confidence comes from real returns. Sure, the first investors to step in the water bear substantially more risk, but that doesn’t mean they won’t step in at all.

Why then is Bernanke pushing such a radical policy? Well, a large portion of President Obama’s political legitimacy rides on the success of his stimulus and recovery polices. Speaker Nancy Pelosi and Senate Majority Leader Harry Reid have joined Obama in pressuring the Fed to follow an active economic recovery scheme. Also, Americans not only looked to regulators during the financial crisis, they looked at the Fed. The Fed is expected to maintain the financial system on an even keel. So, it politically behoves the Fed to seem actively involved and not to be thought sitting there doing nothing. Another speculation is his fear of deflation. As a student of the Great Depression, he knows the dangers to unemployment. However, regardless of the reasons, the US economy won’t recover through stimulus policies or cheap money.

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A step closer to legalization?

Written by Sara Williams | Wednesday 21 July 2010

Bar Council Chairman, Nicholas Green QC publically considered the rationality of decriminalising personal drug use according to the Telegraph. He began a new and much needed serious discussion on drug policy. Current drug laws encroach on individual rights and suck resources out of the economy.

Green points out the high cost of enforcement and punishment. He states, “If the prison population could be reduced from circa 85,000 to 80,000 it could save over £200million per annum.” The article quotes a dissenter with an excellent point: "It is a ludicrous argument to say let’s legalise drugs to take pressure off the police and the courts. That is an argument to legalise everything.” There is another side to the coin. Drugs like marijuana is proven to show little harm. Most favour its illegality because it’s seen to lead to worse drugs that do cause a great deal of harm. Are we saving society from enough harm to where it’s worth the time and money spent?

If some drugs are legalized, the state could regulate accordingly. There would obviously be an age requirement and special taxes. This would increase tax revenue and decrease costs to the justice system. Although I don’t support this, the state could even hold monopoly rights to sell the drugs. Despite a strong black market, the state would still profit off the setup.

This issue is not just about cost-benefit analysis though. It’s also a matter of individual rights. A grown man or woman should be able to use personal discretion to make lifestyle choices. Drug use that does not harm any third parties directly needs no state intervention. Take alcohol, driving under the influence and bar brawls can be dangerous but we trust adults to make good decisions.

Green is not alone. The Economist writes how in America some states have begun serious reforms in their approach to recreational drug use. California, the pioneer state of the matter, has already legalized medical marijuana. Several states soon followed. Now, recreational use is being considered. Yes, the price of marijuana will fall. And yes, perhaps more people will try it. But jails will be filled instead with harmful criminals, budgets will be healthier, and individual rights restored.

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In support of speculation

Written by Sara Williams | Tuesday 20 July 2010

A recent World Development Movement report blames financial speculation and banks for increases in certain food prices and subsequently worsening world hunger. The report adamantly supports banking reform towards heavy regulation similar to the recent US Wall Street legislation.

Prices of basic crops and food processing have indeed increased over the passed decade. The culprits however, are not speculators. The report claims investment banks exaggerated bad crop yields. This is irrational. The primary purpose and good thing about speculators is the smoothing out of resources and risk, and therefore prices. Crops are very volatile and cyclical in nature. Speculators and investors use information about the future conditions to stabilize against commodities like wheat skyrocketing during the winter months. They are not ‘gambling’ like the report suggests, but internalizing risk. Deborah Doane of World Development Movement is wrong is saying, “Nobody benefits from this kind of reckless gambling except a few City wheeler dealers.” Everyone who chooses to eat a wide variety of foods in all seasons will benefit. Ironically, we never see reports blaming speculators for decreases in prices.

It’s true that the prices can be over speculated, but not much. It’s the speculators job to be as close to reality when forecasting as possible. More importantly, the speculative prices will eventually equalize to the real present price if there is excess. The report also blames food speculation for inflation. This completely ignores the fact the government controls the supply of money and therefore any real inflationary problems.

The report argues for strict regulations similar to the new US banking reform that limits food speculation as well as many other financial regulations. This is sure to have unintended consequences. Strict regulations will tighten the markets. Information about the changes in market conditions will become more costly and blurred. Future prices will become more prone to misrepresentation. The UK should not follow the US in its decline financial regulatory entanglements. Instead it should increase free trade to attract more supply and open undistorted opportunities for entrepreneurship in the food industry.

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The reality of housing benefit cuts

Written by Sara Williams | Monday 19 July 2010

It is devastating to be without the essentials of life such as food and housing. Unfortunately, because of irresponsible government spending, many will become homeless. Some abuse the housing benefits system and live better than hard working self sufficient individuals, and some truly need temporary help to get back on their feet. Regardless, the housing benefit cap is necessary.

The cuts are vital. Now, just like everyone else, the government has to cut back because of the basic household money management problem of having spent too much and saved too little relative to income. This program needs to be capped because it is economically unstable and the alternatives are better. The market helps through adaptations to different demand. For example, dividing large flats into many smaller ones. Charities work to resolve the issue too. Welfare is unstable also because of the perverse incentives and absurd amount of money used. A major flaw in all welfare policies is that there is no way of being efficient. The beauty of non-profits and a free market is getting a deal for being benevolent. There is essentially no charity rating service for government handouts; taxpayers do not choose who deserves the help, for how long, and where.

Historically the standard of living of the poorest has risen substantially over the past fifty years. This is not because of the welfare state. This is because of private growth that inevitably brings all classes to a higher utility. Some may argue people are heartless and cruel just like the markets, which is why we need the government to care for the helpless. This cynical view combined with economic fallacies creates the situation we face today.

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