DRI-211 for week of 3-29-15: Which First – Self-Driving Cars or Self-Flying Planes?

An Access Advertising EconBrief: 

Which First – Self-Driving Cars or Self-Flying Planes?

As details of the grisly demise of Lufthansa’s Germanwings flight 9525 gradually emerged, the truth became inescapable. The airliner had descended 10,000 feet in a quick but controlled manner, not the dead drop or death spiral of a disabled plane. No distress calls were sent. It became clear that the airplane had been deliberately steered into a mountainside. The recovery of the plane’s flight data recorder – the “black box” – provided the anticlimactic evidence of a mass murder wrapped around an apparent suicide: the sound of a chair scraping the floor as the flight crew’s captain excused himself from the cabin, followed by the sound of the cabin door closing, followed by the steady breathing of the co-pilot until the captain’s return. The sounds of the captain’s knocks and increasingly frantic demands to be readmitted to the cabin were finally accompanied by the last-minute screams and shrieks of the passengers as they saw the French Alps looming up before them.

The steady breathing inside the cabin showed that the copilot remained awake until the crash.

As we would expect, the reaction of the airline, Lufthansa, and government officials is now one of shock and disbelief. Brice Robin, Marseille public prosecutor, was asked if the copilot, Andreas Lubitz, had – to all intents and purposes – committed suicide. “I haven’t used the word suicide,” Robin demurred, while acknowledging the validity of the question. Carsten Spohr, Lufthansa’s CEO and himself a former pilot, begged to differ: “If a person takes 149 other people to their deaths with him, there is another word than suicide.” The obvious implication was that the other people were innocent bystanders, making this an act of mass murder that dwarfed the significance of the suicide.

This particular mass murder caught the news media off guard. We are inured to the customary form of mass murder, committed by a lone killer with handgun or rifle. He is using murder and the occasion of his death to attain the sense of personal empowerment he never realized in life. The news media reacts in stylized fashion with pious moralizing and calls for more and stronger laws against whatever weapon the killer happened to be using.

In the case of the airline industry, the last spasm of government regulation is still fresh in all our minds. It followed in response to the mass murder of 3,000 people on September 11, 2001 when terrorists hijacked commercial airliners and crashed them into the World Trade Center and the Pentagon. Regulation has marred airline travel with the pain of searches, scans, delays and tedium. Beyond that, the cabins of airliners have been hardened to make them impenetrable from the outside – in order to provide absolute security against another deliberately managed crash by madmen.

Oops. What about the madmen within?

But, after a few days of stunned disbelief, the chorus found its voice again. That voice sounded like Strother Martin’s in the movie Cool Hand Luke. What we have here is a failure to regulate. We’ll simply have to find a way to regulate the mental health of pilots. Obviously, the private sector is failing in its clear duty to protect the public, so government will have to step in.

Now if it were really possible for government to regulate mental health, wouldn’t the first priority be to regulate the mental health of politicians? Followed closely by bureaucrats? The likely annual deaths attributable to government run to six figures, far beyond any mayhem suicidal airline pilots might cause. Asking government to regulate the mental health of others is a little like giving the job to the inmates of a psychiatric hospital – perhaps on the theory that only somebody with mental illness can recognize and treat it in others.

Is this all we can muster in the face of this bizarre tragedy? No, tragedy sometimes gives us license to say things that wouldn’t resonate at other times. Now is the time to reorganize our system of air-traffic control, making it not only safer but better, faster and cheaper as well.

The Risk of Airline Travel Today: The State of the Art

Wall Street Journal Holman Jenkins goes straight to the heart of the matter in his recent column (03/29-29/2015, “Germanwings 9525 and the Future of Flight Safety”). The apparent mass-murder-by-pilot “highlights one way the technology has failed to advance as it should have.” Even though the commercial airline cockpit is “the most automated workplace in the world,” the sad fact is that “we are further along in planning for the autonomous car than for the autonomous airliner.”

How has the self-flying plane become not merely a theoretical possibility but a practical imperative? What stands in the way of its realization?

The answer to the first question lies in comparing the antiquated status quo in airline traffic control with the potential inherent in a system updated to current technological standards. The second answer lies in the recognition of the incentives posed by political economy.

Today’s “Horse and Buggy” System of Air-Traffic Control

For almost a century, air-traffic control throughout the world has operated under a “corridor system.” This has been accurately compared to the system of roads and lanes that governs vehicle transport on land, the obvious difference being that it incorporates additional vertical dimensions not present in the latter. Planes file flight plans that notify air-traffic controllers of their origin and ultimate destination. The planes are required to travel within specified flight corridors that are analogous to the lanes of a roadway. Controllers enforce distance limits between each plane, analogous to the “car-lengths” distance between the cars on roadways. Controllers regulate the order and sequence of takeoffs and landings at airports to prevent collisions.

Unfortunately, the corridor system is pockmarked with gross inefficiencies. Rather than being organized purely by function, it is instead governed primarily by political jurisdiction. This is jarringly evident in Europe, home to many countries in close physical proximity. An airline flight from one end of Europe to another may pass through dozens of different political jurisdictions, each time undergoing a “handoff” of radio contact for air-traffic control between plane and ground control.

In the U.S., centralized administration by the Federal Aviation Administration (FAA) surmounts some of this difficulty, but the antiquated reliance on radar for geographic positioning still demands that commercial aircraft report their positions periodically for handoff to a new air-traffic control boss. And the air corridors in the U.S. are little changed from the dawn of air-mail delivery in the 1920s and 30s, when hillside beacons provided vital navigational aids to pilots. Instead of regular, geometric air corridors, we have irregular, zigzag patterns that cause built-in delays in travel and waste of fuel. Meanwhile, the slightest glitch in weather or airport procedure can stack up planes on the ground or in the air and lead to rolling delays and mounting frustration among passengers.

Why Didn’t Airline Deregulation Solve or Ameliorate These Problems? 

Throughout the 20th century, the demand for airline travel grew like Topsy. But the system of air-traffic control remained antiquated. The only way that system could adjust to increased demand was by building more airports and hiring more air-traffic controllers. Building airports was complicated because major airports were constructed with public funds, not private investment. The rights-of-way, land acquisition costs, and advantages of sovereign immunity all militated against privatization. When air-traffic controllers became unionized, this guaranteed that the union would strive to restrict union membership in order to raise wages. This, too, made it difficult to cope with increases in passenger demand.

The deregulation of commercial airline entry and pricing that began in 1978 was an enormous boon to consumers. It ushered in a boom in airline travel. Paradoxically, this worsened the quality of the product consumers were offered because the federal government retained control over airline safety. This guaranteed that airport capacity and air-safety technology would not increase pari passu with consumer demand for airline travel. As Holman Jenkins puts it, the U.S. air-traffic-control system is “a government-run monopoly, astonishingly slow to upgrade its technology.” He cites the view of the leading expert on government regulation of transportation, Robert Poole of the Reason Foundation, that the system operates “as if Congress is its main customer.”

Private, profit-maximizing airlines have every incentive to insure the safe operation of their planes and the timely provision of service. Product quality is just as important to consumers as the price paid for service; indeed, it may well be more important. History shows that airline crashes have highly adverse effects on the business of the companies affected. At the margin, an airline that offers a lower price for a given flight or provides safer transportation to its customers or gives its customers less aggravation during their trip rates to make more money through its actions.

In contrast, government regulators have no occupational incentive to improve airline safety. To be sure, they have an incentive to regulate – hire staff, pass rules, impose directives and generally look as busy as possible in their everyday operations. When a crash occurs, they have a strong incentive to assume a grave demeanor, rush investigators to the scene, issue daily updates on results of investigations and eventually issue reports. These activities are the kinds of things that increase regulatory staffs and budgets, which in turn increase salaries of bureaucrats. They serve the public-relations interests of Congress, which controls regulatory budgets. But government regulators have no marginal incentive whatsoever to reduce the incidence of crashes or flight delays or passenger inconvenience – their bureaucratic compensation is not increased by improved productivity in these areas despite the fact that THIS IS REALLY WHAT WE WANT GOVERNMENT TO DO.

Thus, government regulators really have no incentive to modernize the air-traffic control system. And guess what? They haven’t done it; nor have they modernized the operation of airports. Indeed, the current system meets the needs of government well. It guarantees that accidents will continue to happen – this will continue to require investigation by government, thus providing a rationale for the FAA’s accident-investigation apparatus. Consumers will continue to complain about delays and airline misbehavior – this will require a government bureau to handle complaints and pretend to rectify mistakes made by airlines. And results of accident investigations will continue to show that something went wrong – after all, that is the definition of an accident, isn’t it? Well, the FAA’s job is to pretend to put that something right, whatever it might be.

The FAA and the Federal Transportation Safety Board (FTSB) are delighted with the status quo – it justifies their current existence. The last thing they want is a transition to a new, more efficient system that would eliminate accidents, errors and mistakes. That would weaken the rationale for big government. It would threaten the rationale for their jobs and their salaries.

Is there such a system on the horizon? Yes, there is.

Free Flight and the Future of Fully Automatic Airline Travel

A 09/06/2014 article in The Economist (“Free Flight”) is subtitled “As more aircraft take to the sky, new technology will allow pilots to pick their own routes but still avoid each other.” The article describes the activities of a Spanish technology company, Indra, involved in training a new breed of air-traffic controllers. The controllers do not shepherd planes to their destinations like leashed animals. Instead, they merely supervise autonomous pilots to make sure that their decisions harmonize with each other. The controllers are analogous to the auctioneers in the general equilibrium models of pricing developed by the 19th century economist Vilfredo Pareto.

The basic concept of free flight is that the pilot submits a flight plan allowing him or her to fly directly from origin to destination, without having to queue up in a travel corridor behind other planes and travel the comparatively indirect route dictated by the air-traffic control system. This allows closer spacing of planes in the air. Upon arrival, it also allows “continuous descent” rather than the more circuitous approach method that is now standard. This saves both time and fuel. For the European system, the average time saved has been estimated at ten minutes per flight. For the U. S., this would undoubtedly be greater. Translated into fuel, this would be a huge saving. For those concerned about the carbon dioxide emissions of airliners, this would be a boon.

The obvious question is: How are collisions to be avoided under the system of free flight? Technology provides the answer. Flight plans are submitted no less than 25 minutes in advance. Today’s high-speed computing power allows reconciliation of conflicts and any necessary adjustments in flight-paths to be made prior to takeoff. “Pilots” need only stick to their flight plan.

Streamlining of flight paths is only the beginning of the benefits of free flight. Technology now exists to replace the current system of radar and radio positioning of flights with satellite navigation. This would enable the exact positioning of a flight by controllers at a given moment. The European air-traffic control system is set to transition to satellite navigation by 2017; the U.S. system by 2020.

The upshot of all these advances is that the travel delays that currently have the public up in arms would be gone under the free flight system. It is estimated that the average error in flight arrivals would be no more than one minute.

Why must we wait another five years to reap the gains from a technology so manifestly beneficial? Older readers may recall the series of commercials in which Orson Welles promoted a wine with the slogan “We sell no wine before its time.” The motto of government regulation should be “we save no life before its time.”

The combination of free flight and satellite navigation is incredibly potent. As Jenkins notes, “the networking technology required to make [free flight] work [lends] itself naturally and almost inevitably to computerized aircraft controllable from the ground.” In other words, the human piloting of commercial aircraft has become obsolete – and has been so for years. The only thing standing between us and self-flying airliners has been the open opposition of commercial pilots and their union and the tacit opposition of the regulatory bureaucracy.

Virtually all airline crashes that occur now are the result of human error – or human deliberation. The publication Aviation Safety Network listed 8 crashes since 1994 that are believed to have been deliberately caused by the pilot. The fatalities involved were (in ascending order) 1, 1, 4, 12, 33, 44, 104 and 217. Three cases involved military planes stolen and crashed by unstable pilots, but of the rest, four were commercial flights whose pilots or copilots managed to crash their plane and take the passengers with them.

Jenkins resurrects the case of a Japanese pilot who crashed hid DC-8 into Tokyo Bay in 1982. He cites the case of the Air Force pilot who crashed his A-10 into a Colorado mountain in 1997. He states what so far nobody else has been willing to say, namely that “last March’s disappearance of Malaysia Airlines 370 appears to have been a criminal act by a member of the crew, though no wreckage has been recovered.”

The possibility of human error and human criminal actions is eliminated when the human element is removed. That is the clincher – if one were needed – in the case for free flight to replace our present antiquated system of air-traffic organization and control.

The case for free flight is analogous to the case for free markets and against the system of central planning and government regulation.

What if… 

Holman Jenkins reveals that as long ago as 1993 (!) no less a personage than Al Gore (!!) unveiled a proposal to partially privatize the air-traffic control system. This would have paved the way for free flight and automation to take over. As Jenkins observes retrospectively, “there likely would have been no 9/11. There would have been no Helios 522, which ran out of fuel and crashed in 2005 when its crew was incapacitated. There would have been no MH 370, no Germanwings 9525.” He is omitting the spillover effects on private aviation, such as the accident that claimed the life of golfer Payne Stewart.

The biggest “what if” of all is the effect on self-driving cars. Jenkins may be the most prominent skeptic about the feasibility – both technical and economic – of autonomous vehicles in the near term. But he is honest enough to acknowledge the truth. “Today we’d have decades of experience with autonomous planes to inform our thinking about autonomous cars. And disasters like the intentional crashing of the Germanwings plane would be hard to conceive of.”

What actually happened was that Gore’s proposal was poured through the legislative and regulatory cheesecloth. What emerged was funding to “study” it within the FAA – a guaranteed ticket to the cemetery. As long as commercial demand for air travel was increasing, pressure on the agency to do something about travel delays and the strain on airport capacity kept the idea alive. But after 9/11, the volume of air travel plummeted for years and the FAA was able to keep the lid on reform by patching up the aging, rickety structure.

And pilots continued to err. On very, very rare occasions, they continued to murder. Passengers continued to die. The air-traveling public continued to fume about delays. As always, they continued to blame the airlines instead of placing blame where it belonged – on the federal government. Now air travel is projected to more-than-double by 2030. How long will we continue to indulge the fantasy of government regulation as protector and savior?

Free markets solve problems because their participants can only achieve their aims by solving the problems of their customers. Governments perpetuate problems because the aims of politicians, bureaucrats and government employees are served by the existence of problems, not by their solution.

DRI-312 for week of 6-15-14: Wealth and Poverty: Blame and Causation

An Access Advertising EconBrief:

Wealth and Poverty: Blame and Causation

Among the very many cogent distinctions made by the great black economist Thomas Sowell is that between blame and causation. Blame is a moral or normative concept. Causation is a rational, cause-and-effect concept. “Sometimes, of course, blame and causation may coincide, just as a historic event may coincide with the Spring equinox,” Sowell declared in Economic Facts and Fallacies. “But they are still two different things, despite such overlap.”

Unfortunately, blame has overtaken causation in the public perception of how the world works. This is bad news for economics, which is a rational discipline rather than a morality play.

Economic Development

There is a specialized branch of economics called economic development. Not surprisingly, its precepts derive from the principles of general economic theory, adapted to apply in the special case of areas, regions and nation states whose productive capabilities rise from a primitive state to advanced status.

The public perception of economic development, though, is that of a historical morality play. Developed Western nations in Europe engaged in a practice called “imperialism” by colonizing nations in South America and Africa. Then they proceeded to exploit the colonial natives economically. This exploitation not only reduced their standard of living contemporaneously, it left them with a legacy of poverty that they have been subsequently unable to escape. Only government aid programs of gifts or loans, acting as analogues to the welfare programs for impoverished individuals in the Western countries, can liberate them and expiate the sins of the West.

The idea that moral opprobrium attaches to acts of national conquest has a considerable appeal. The conventional approach to what is loftily called “international law” – or, more soberly, “foreign policy” – is that military force applied aggressively beyond a country’s own international boundaries is wrong. But the impact of wrongful acts does not necessarily condemn a nation to everlasting poverty.

In fact, world history to date has been overwhelmingly a tale of conquest. For centuries, nations attained economic growth not through production but through plunder. Only since the Industrial Revolution has this changed. It is worthwhile to question the presumption that defeat automatically confers a legacy of economic stasis and inferiority.

That is why we must distinguish between blame and causation. We may assign blame to colonizers for their actions. But those actions and their effects occurred in the colonial era, prior to independence. Cause-and-effect relationships are necessarily limited to relationships in the same temporal frame; the past cannot hold the present prisoner. Even if we were to claim that (say) inadequate past investment under colonization is now responsible for constraining present economic growth, we would still have to explain why current investment cannot grow and eventually stimulate future economic growth.

Great Britain was the world’s leading economic power during the 18th and 19th centuries. She conquered and held a worldwide empire of colonies. She must have commanded great wealth, both military and economic, in order to achieve these feats. Yet Great Britain herself was conquered by the Romans and spent centuries as part of the Roman Empire. The “indigenous peoples” of the British Isles (perhaps excluding the Irish, who may have escaped the Roman yoke) must have recovered from the pain of being subjugated by the Romans. They must have overcome the humiliation of bestowing upon William the title of “Conqueror” after his victory at Hastings in 1066. They must – otherwise, how else could they have rebounded to conquer half the world themselves?

Great Britain’s legacy of military defeat, slavery and shame did not thwart its economic development. It did not stop the British pound sterling from becoming the vehicle currency for world trade, just as the U.S. dollar is today. If anything, Great Britain and Europe prospered under Roman domination and suffered for centuries after the collapse of the empire.

Germany has been an economic powerhouse since the 19th century. It survived utter devastation in two world wars and calumniation in their wake, only to rise from the ashes to new heights of economic prominence. Yet its legacy prior to this record of interrupted success was a history of squabbles and conflict between regional states. They, too, were subjugated by Rome and arose from a long period of primitive savagery. Why didn’t this traumatize the German psyche and leave them forever stunted and crippled?

It is hard to think of any nation that had a tougher road to hoe than China. True, China was the world’s greatest economic power over a millennium ago. But centuries of isolation squandered this bequest and left them a medieval nation in a modern world. As if this weren’t bad enough, they reacted by embracing a virulent Communism that produced the world’s worst totalitarian state, mass famine and many millions of innocent deaths. At the death of Mao Ze-Dong in 1976, China was a feeble giant – the world’s most populous nation but unable to feed itself even a subsistence diet. Yet this legacy of terror, famine, defeat and death failed to prevent the Chinese from achieving economic development. Less than 40 years later, China is a contender for the title of world’s leading economic power.

It is certainly true that some countries in Africa and South America were colonized by European powers and subsequently experienced difficulty in raising their economic productivity. But it is also true that there are “countries mired in poverty that were never conquered.” Perhaps even more significantly, “for thousands of years, the peoples of the Eurasian land mass and the peoples of the Western Hemisphere were unaware of each other’s existence,” which constitutes a legacy of isolation even more profound and enduring than any residue left by the much shorter period of contact between them.

Economists have identified various causal factors that affect economic development much more directly and clearly than military defeat or personal humiliation suffered by previous generations. Most prominent among these are the geographic factors.

Mankind’s recorded history began with settlements in river valleys. A river valley combines two geographic features – a river and a valley. The river is important because it provides a source of water for drinking and other important uses. Rivers also serve as highways for transportation purposes. Finished goods, goods-in-process and primary inputs are all transported by water. In modern times, with the advent of swifter forms of transportation, only commodities with low value relative to bulk travel by water. But throughout most of human history, rivers were the main transportation artery linking human settlements. Oceans were too large and dangerous to risk for ordinary transportation purposes; lakes were not dispersed widely enough to be of much help.

If we contrast the kind and quality of rivers on the major continents, it is not hard to see why North America’s economic development exceeded that of Africa. Not only is North America plentifully supplied with rivers, but its largest rivers, the Mississippi and the Missouri, tend to be highly navigable. Its coastline contains many natural harbors. Africa’s rivers, in contrast, are much more problematic. While the Nile is navigable, its annual floods have made life difficult for nearby settlers. The Congo River’s navigability (including its access from the ocean) is hindered by three large falls. The African coastline contains comparatively few natural harbors and is often difficult or impossible for ships to deal with – a fact that hindered international trade between Africa and the outside world for decades. The Congo is the world’s second largest river in terms of water-volume discharged; the Amazon River in South America is the largest. Yet the tremendous hydropower potential of both rivers has hardly been tapped owing to various logistical and political obstacles.

Valleys contrast favorably with mountainous regions because they are more fertile and easier to traverse. Sowell quotes the great French historian Fernand Braudel’s observation that “mountain life lagged persistently behind the plain.” He cites mountainous regions like the Appalachians in the U.S., the mountains of Greece, the RifMountains in Morocco and the ScottishHighlands to support his generalization. Not only do both Africa and South America contain formidable mountain barriers, their flatlands are much less conducive to economic development than those of (say) North America. Both Africa and South America contain large rainforests and jungles, which not only make travel and transport difficult or impossible but are also hard to clear. As if that weren’t a big enough barrier, both continents face political hurdles to the exploitation of the rainforests.

South America differs from its northern neighbor particularly in topography. The AndesMountains to the west have traditionally divided the continent and represented a formidable geographic barrier to travel and transportation. One of the great stories in the history of economic geography is the tale, told most vividly by legendary flier and author Antoine de Saint-Exupery in his prize-winning novel Night Flight, of the conquest of the Andes by airline mail-delivery companies in the formative days of commercial North America, the flatlands of South America do not consist primarily aviation.

Climate has similar effects on economic development. A priori, temperate climate is more suitable for agriculture and transportation than either the extremes of heat or cold. Both Africa and South America contain countries located within tropical latitudes, where heat and humidity exceed the more temperate readings typical of North America and Europe. Indeed, Africa’s average temperature makes it the hottest of all continents. While North America does contain some desert land, it cannot compare with northern Africa, where the Sahara approaches the contiguous U.S in size. The barrenness of this climate makes it less suitable for human habitation and development than any area on Earth save the polar regions. Speaking of which, subarctic climates can be found on the highest mountain regions on each continent.

The economic toll taken by geographic barriers to trade can be visualized as akin to taxes. Nature is levying a specific tax on the movement of goods, services and people over distance. The impact of this “transport tax” can extend far beyond the obvious. As Sowell points out, the languages of Africa comprise 30% of the world’s languages but are spoken by only 13% of the world’s population. The geographic fragmentation and separation of the continent has caused cultural isolation that has produced continual fear, hatred, conflict and even war between nations. The civil war currently raging between Sunni, Shiite and Kurd is the same kind of strife that T.E. Lawrence sought to suppress during World War I almost a century ago. Thus, an understanding of basic geography is sufficient to convey the severe handicap imposed on most countries in Africa and South America compared to the nations of Europe and North America.

Political Economy

It is certainly true that geography alone placed Africa and South Africa behind the economic-development 8-ball. Still, each continent does contain a share of desirable topographies and climates. History even records some economic-development success stories there. Argentina was one of the world’s leading economic powers in the 19th century. Not only was its national income ranked among world leaders, its rate of growth was high and growing. Its share of world trade also grew. Today, its status is dismal, exactly the reverse of its prior prosperity – its GDP is barely one-tenth of ours. But it was not conquered by a colonial power, nor was it “exploited” by “imperialism.”

Argentina won its independence from Spain well before it rose to economic prominence. Unfortunately, its political system gradually evolved away from free-market economics and toward the dictatorial socialism epitomized by Juan Peron and his wife, Evita. This produced inflation, high taxes, loss of foreign trade and investment and a steady erosion of real income.

Elsewhere in South America, economic evolution followed a similar course, albeit by a different route. Most countries lacked the same experience with free markets and institutions that lifted Argentina to the heights. Even when independence from colonial rule brought republican government, this quickly morphed to one-party rule or military dictatorship. Although the political Left insists that South America has been victimized by capitalism, South America’s history really reeks of the same “crony capitalism” that reigns supreme in the Western nations today. This means authoritarian rule, unlimited government and favoritism exerted in behalf of individuals or constituent groups. Moreover, erosion of property rights has weakened a key bulwark of free-market capitalism in the West today, just as it did throughout the history of South America.

In Africa, the situation was even worse and has remained so until quite recently. After crying out for independence from colonial oppressors, native Africans surrendered their freedom to a succession of dictators who proved more oppressive, brutal and bloodthirsty than the colonizers. Now, with the rise of the Internet and digital technology, Africans at last possess the ability to exist and thrive independently of government. They also can overcome the costs of transacting to protest against dictatorship.

The importance of markets and institutions can be divined from a roll-call of the most successful countries. Great Britain, Japan, Hong Kong, Singapore and Scandinavia are all small countries that lack not only size but also abundance of natural resources. One thing that Africa and South America did possess in quantities rivaling that of Europe and North America was resource wealth. But the ability to turn resources into goods and services requires the other things that Africa and South America lacked: not only favorable geography and climate, but also favorable institutions, laws and mores. Even in North America, the U.S. had all the favorable requisites, while Mexico lacked the legal and institutional environment and Canada lacked the favorable geography and climate.

Viewed in this light, it is not chauvinism to invoke a principle of “American exceptionalism;” it is just clear-eyed analysis. The country that later became the United States of America was blessed with ideal geography and climate. While it faced aboriginal opposition, that was much less fierce than it might have been. Great Britain’s colonial stewardship allowed the colonies to develop economically, albeit in a restricted framework. Moreover, the colonists developed a close acquaintanceship with British laws and institutions. This proved vital to the eventual birth of the American Declaration of Independence and Constitution. The U.S. was indeed the exception when it came to economic development because it faced few of the obstacles that hampered the development of almost all other countries. Coupled with the most favorable constitution ever written for free markets and a century and a half of virtually free immigration, the result was the growth of the world’s greatest economy.


Through the ages, historians have accorded culture an increasing emphasis in their studies. Oddly, though, it has seldom been linked to economics in general and almost never to economic development in particular. Yet even a cursory glance suggests it as an explanation for some of what otherwise would stand as paradoxes.

India has long ranked as the “phenom” of economic development – perennially expected to bust loose to assume its rightful place among the world’s economic powerhouses, and perennially a disappointment. As a legacy of centuries of colonial rule by Great Britain, it inherited a cadre of well-trained and educated civil servants. The world’s second-largest population provided a ready source of labor. The country did not lack for capital goods despite the abject poverty of most of its citizens, thanks to British investment. What, exactly, was holding India back?

The political left supplied its standard answer by attaching blame for India’s poverty to its “legacy of colonialism.” Movies like Gandhi portrayed British behavior toward Indians as beastly and sanctified Gandhi’s policy of passive resistance within a framework of civil disobedience. These answers were less than complete, however. They did not explain how the U.S., also a British colony and occasional victim of British beastliness for a century and a half, was able to succeed so brilliantly while India failed so dismally. Nor did they explain why India failed while employing the same socialist economic policies that England had incubated throughout the early 1900s before installing them at home just before granting India’s independence.

India’s adoption of socialism was the political complement to its cultural reverence for poverty, created and nurtured by Gandhi. India could hardly have picked a worse symbol for hero worship. Fortunately, India’s independence was delayed until after World War II, in which India refused to embrace Gandhi’s pacifism and participated significantly in her own defense and that of the Eastern theater. Then, after independence, India continued to stoke regional hostilities with neighbors China and Pakistan in subsequent decades, ignoring Gandhi’s views in the one context in which they might have done some good. Meanwhile, the country’s steadfast unwillingness to adopt a commercial ethic, root out public corruption and eradicate traditional taboos against the unhindered opposition of markets foreclosed any possibility of real economic growth.

If there was ever a culture that seemed impervious to economic growth, it was India’s. Even China never seemed such a hopeless case, for Chinese who emigrated became the success story of Southeast Asia; clearly Chinese institutions were holding up economic development, not her culture. Well, India’s cultural head is still buried in the sands of the past, but her institutions have changed sufficiently to midwife noticeable economic growth beginning in the late 1990s.

Foreign Aid and Foreign Investment

Two great myths of economics relate to foreign aid and foreign investment. For decades, intellectuals and governments sang the praises of foreign aid as a recipe for prosperity and cure for poverty. Alas, institutions like the World Bank and International Monetary Fund – both of which were created for completely unrelated purposes – have failed miserably to promote economic development despite decades of trying and billions of dollars in loans, grants and consulting contracts.

The failures have been particularly glaring in Africa, where real incomes were the lowest in the world throughout the 20th century. In retrospect, it is not easy to figure out why international aid should have succeeded in raising real incomes. After all, one of the signature measures employed by newly independent regimes in Africa and South America was to expropriate wealth owned by foreigners through nationalization. This raised the incomes of government officials and their cronies but did not raise real incomes generally. As Sowell observes, “there is no more reason to expect automatic benefits from wealth transfers through international agencies than from wealth transfers through internal confiscations.” And indeed, “the incentives facing those disbursing the aid and those receiving it seldom make economic development the criterion of success.” Aid agencies simply strive to give money away; host governments simply strive to get money. And that is pretty much what happened.

Lenin developed a theory of imperialism to explain why capitalism did not succumb to revolution on schedule. When the declining profit from capital threatened their viability, capitalists would turn to the less-developed nations, where their foreign investment would earn “super profits” at the expense of the host peoples. Unfortunately, his theory was overturned by experience, which showed that capitalists in developed countries invested mostly in other developed countries. (Today’s neo-Marxism has returned full-circle to the exploitation theories of original Marxism with the newly popular theory of French economist Piketty. His theory postulates a return to “capital” that is greater than that from investment in labor, which promotes a greater level of (hypothesized) inequality in income and wealth. Having failed to sell a theory of inequality based on a declining rate of profit, the Left is switching tactics – the return on capital is too high, not declining.)

The real recurring example of successful “foreign investment” has come through immigration. Welsh miners have come to the U.S. and mined successfully. Chinese entrepreneurs have migrated throughout Southeast Asia and dominated entrepreneurship in their adopted countries. Jews have migrated to countries throughout the world and dominated industries such as finance, clothing, motion pictures and education. German workers helped Argentina become a world leader in wheat production and export. Indian immigrants have become leading entrepreneurs in motels and hotels in the U.S. Italian and Lebanese immigrants migrated to Africa and the U.S. and achieved entrepreneurial success in various fields. Yet, ironically, immigration has typically been opposed by natives in spite of the consistent benefits it generates.

Causation, not Blame

History is a record of strife and conflict, of conquest and submission. At one time or other, practically every people have been conquered and subjugated. Colonial status has sometimes been disastrous to natives, as with some countries colonized by Spain in the Age of Exploration. Sometimes it has been relatively beneficial, as it was in the early stages of the American colonies. Often it turned out to be a mixed bag of benefits and drawbacks. But economic development has never been either guaranteed or foreclosed by the mere existence of a colonial past. Economic logic lists too many causal factors affecting development for us to play the blame game.

DRI-322 for week of 4-6-14: How the Dead Hand of Regulation Is Holding Back the Future

An Access Advertising EconBrief:

How the Dead Hand of Regulation Is Holding Back the Future

Self-Driving Cars: What’s the Hurry? 30,000 Annual Deaths are Nothing to Get Excited About

Self-driving cars are automobiles that drive themselves. This is possible because they possess a system of sensors and computer programs that perform the basic driving functions of starting, shifting, steering, navigation, “seeing” obstacles and avoiding them, “observing” (coded) traffic and geographic signage and stopping. Most people are aware that Google has built a fleet of self-driving cars. Many people know that self-driving cars have been extensively tested, not only on private courses but also on public roads in states such as California. Some people know that self-driving cars have had no accidents during these tests.

It would seem that these facts have enormous significance. Currently, deaths due to motor-vehicle accidents constitute the leading cause of accidental death in the United States. In 2012, the most recent year for which complete data are available, over 34,000 people died on U.S. roads from motor-vehicle accidents. (This was an increase from the 2011 total of 32,000+, for which the figure of 1.10 deaths per million vehicle miles travelled was an all-time low since this safety statistic was first measured in 1921.) This does not count an additional 2,000+ pedestrians and motorcyclists who also died due to accidents in which motor vehicles were implicated.

Combine the information in the first paragraph of this section with the information in the second paragraph. This amalgamation is tantamount to saying that a disease epidemic currently kills over 30,000 people yearly, and we have a nearly foolproof cure for the disease. And we are doing virtually nothing to implement that cure.

In this case, the “cure” entails making the necessary changes in infrastructure and law to allow self-driving vehicles (SDVs) to operate in the U.S. Whether SDVs are or are not ready for mass adoption tomorrow or the next day is irrelevant – at the moment, we couldn’t adopt them even if they were ready for prime time. What we should be doing is paving their way (no pun intended) so that when all their bugs have been exterminated, we can put SDVs into use post haste.

The federal government has assumed the role of safety czar for the nation. Superficially, one would expect federal agencies to be making rules, suggesting law changes and beating the drums for the dawning new era in American transportation in the same manner as (say) they have been propagandizing for Obamacare.

Instead, this is how the federal the federal government has reacted to the prospect of self-driving cars:

“The National Highway Traffic Safety Administration (NHTSA) does not recommend that states authorize the operation of self-driving vehicles for purposes other than testing at this time.” The NHTSA, as its name implies, is the agency within the U.S. Department of Transportation whose specific mandate is traffic safety. Yet, incredible as it seems, NHTSA not only is not proceeding full speed ahead with plans for the future of self-driving cars – it recommends that states do not authorize their general use in spite of the fact that states are doing just that.

Uh…what does NHTSA recommend that states do about self-driving cars, then? “NHTSA recommends that states require issue separate driver licenses, or at least special driver-license endorsements, for those who wish to operate autonomous vehicles.” A licensure requirement is a classic example of what economists call a “barrier to entry” into an activity. In other words, the NHTSA is trying to make it harder for people to drive SDVs.

The Secretary of the Department of Transportation, Ray LaHood, had this to say about his department’s policy on SDVs: “…Our top priority is to ensure these vehicles and their occupants are safe.” Picture this hypothetical scenario: We are suffering an epidemic in which tens of thousands of people die every year. Some people step forward and volunteer to test a vaccine that will almost certainly cure the disease that causes the epidemic. Suddenly a Federal Cabinet head steps forward with hand upraised to place controls on the testing process. “Our top priority is to make sure this vaccine and these test volunteers are safe.” No, dummy! Your top priority is to keep the nation safe! Thousands of people are dying every year! If a few people have to endure a slight risk to eliminate those deaths, your job is to get out of the way and let that happen as quickly as possible!

That hypothetical scenario is an excellent analogy to the status of SDVs today.

At this point, the reader must be shaking his head in utter disbelief. Are these people crazy? Are they completely unaware of the progress of SDVs? Oh, no. NHTSA goes on to blandly admit that “self-driving cars are seen as having the potential to save many thousands of lives annually by avoiding deadly crashes caused by human error, the reason for the vast majority of auto accidents.” This means that NHTSA is placing roadblocks in the path of SDVs while knowing full well their lifesaving potential. In other words, the NHTSA will save those thousands of lives when it is good and ready or, as the late Orson Welles might put it, the NHTSA will save no lives before its time.

NHTSA to Americans: Drop dead.

Just in case the full picture isn’t clear by now, the NHTSA currently has power to affect the lives of virtually American and control the activities of all drivers. SDVs have the potential to leave the NHTSA with nobody to regulate, since there would be virtually no safety issues left other than purely mechanical ones that would gradually fall almost to zero. (But you can be sure that the agency will fight tooth and claw to retain safety regulation of SDVs anyway, to justify its existence in downsized form.)

NHTSA wants to set up its own tests for SDVs. In fact, these “tests” will be used to delay the progress of SDVs as long as possible. As precedent for this prediction, we can cite the long-drawn out deregulation and subsequent technological revolution in telecommunications, much delayed in America compared to many other countries.


“Someday All Planes Will Be Drones”

Ask the average American what he or she knows about “drones” and chances are the reply will focus on pilotless aircraft controlled by a military operator on the ground and used in Middle Eastern countries to assassinate terrorists. In a way, this is fitting, since drones began as military weapons over half a century ago.

The word “drone” connotes a mindless worker performing rote tasks, in the manner of worker bees. When mechanical, drones are under the control of a human operator. The earliest drones were developed for military-intelligence purposes in the late 1950s. When Francis “Gary” Powers was shot down while piloting a U-2 high-altitude spy plane in 1961, the U.S. military began substituting pilotless craft for U-2s to avoid incurring propaganda setbacks from the capture of live prisoners.

Drone technology was perfected in successive wars from Vietnam to Kuwait to Afghanistan to Iraq. Today drones are anything but an embryonic innovation, full of kinks and bugs. It is long past time for their debut in commerce. Amazon’s Jeff Bezos recently attracted attention with a plan to deliver packages via drones. Speculation about the fate of Malaysian Airlines Flight 370 has raised the possibility of pilotless commercial airliners. After all, the most common cause of airline crash, as with automobiles, is pilot error. The general public is barely aware of the fact that most basic functions of commercial airline flight have already been automated.

Whenever scientific innovation threatens to make the world a better place, government regulators can be relied upon to build barriers to progress. This sounds highly pejorative to most people, yet it is really a perfectly logical state of affairs. Entrepreneurs and business owners use scientific innovations to make our lives better, not necessarily because they long to help us but because the only way they can profit is if we approve of their business decisions. Government regulators cannot earn profits and they do not benefit personally from making our lives better by (say) improving workplace safety or blocking a dangerous drug or process from coming to market. Consequently, they strive to improve their own welfare by maximizing government budgets and payrolls and minimizing risk of public-relations disaster. They do that by strangling innovation and risk-taking by the private sector.

Aren’t government regulators members of the society they regulate? If their decisions rebound to our disadvantage, don’t they lose by that, just as we do? Yes, but for any one regulatory decision there is only a small chance that the regulator’s consumption will be reduced markedly by restrictive regulation. But a too-favorable regulation that turns out wrong – a drug allowed on the market that later causes illness or death, for example – will kill the regulator’s career. And in the case of innovative technologies like self-driving cars, laissez-faire regulation will kill the entire regulatory agency or vastly reduce its scope. The political left has made its bones by insisting that corporations cheerfully kill their customers in pursuit of profits. In reality, it is obvious that government regulators are the ones who will send tens of thousands of Americans to their deaths annually rather than face the prospect of losing their regulated captives when self-driving cars replace human-driven ones.

Any doubts about the cogency of this analysis should be erased by consideration of federal regulatory policy regarding commercial drone use. While American businesses are lining up to use drones for various applications, this is the policy of the Federal Aviation Administration (FAA) on the commercial use of Unmanned Aircraft Systems (UAS):

“The first annual UAS Roadmap addresses future policies, regulations, technologies and procedures that will be required as UAS operations increase in the nation’s airspace.” “Policies, regulations, technologies and procedures” that will be “required?” This sounds as though the FAA plans to micromanage UAS by creating a thicket of bureaucratic rules that will slow the industry to a crawl. And sure enough: “The Joint Planning and Development Office (JPDO) have developed a comprehensive plan to safely accelerate the integration of civil UAS into the national airspace system.” To a professional economist, the words “comprehensive plan” specifically mean complete control by a central authority in the manner of the former Soviet Union’s GOSPLAN. The phrase “safely accelerate” has an Orwellian ring; it means that the government is going to slow down UAS development while pretending to move it forward with all deliberate speed.

We are now observing an excellent example of the FAA’s “safe acceleration” in action. The agency announced earlier this year that it would hold a public meeting on May 28, 2014 to “discuss the agency’s plans to establish a new unmanned aircraft system (UAS) center of excellence (COE).” The FAA considered 24 U.S. cities as candidates for sites to test the safety of UAS. It “considered geography, climate, location of ground infrastructure, research needs, airspace use, safety, aviation experience and risk” in selecting 6 test sites.

Wait a minute – if the military has been using drones for over a half-century, why do we need a civilian agency (presumably lacking the military’s expertise) to test the safety of the technology? Drones have already been interacting within civilian airspace in the course of performing their military duties, both inside the U.S. (in transit) and outside it (accomplishing their mission). The testing sites and center of excellence are a classic regulatory stall. (A bureaucratic rule thumb is that the more seriously a bureaucracy takes itself by employing elevated, obfuscatory rhetoric and lengthy acronyms, the less valid is its mission.)

Superficially, the stakes may seem lower than with SDVs. There are no 30,000 lives to be saved immediately by the commercialization of drone technology. But that is deceptive. If it is possible to deliver Amazon’s goods, it is also possible to deliver vital foods, fuels and medicines, too. Public attention has focused on the possible abuse of privacy by drones, but why not focus on the potential to enhance privacy and security by using drones? History supplies plenty of cases in which the ultimate uses of technology differed dramatically from their initial ones.

In an incisive Wall Street Journal column, Holman Jenkins pointed out that most routine functions of commercial aircraft have been automated already. “Someday all planes will be drones,” Jenkins said. Predictably, his words elicited indignant denials by airline pilots whose jobs were threatened by the prospect of drones. But Jenkins is right. It remains true that airliner accidents are (still) due predominantly to human error – the very thing that drones will eliminate.

The War on HIgh-Frequency and High-Speed Stock Trades

Technology is also in the forefront of the latest regulatory jihad waged against the financial community. This particular war is waged against traders of financial assets, particularly stocks. The erring traders are not buying or selling the wrong stocks; they are trading in the wrong way. At this point, things become confusing. At times, the traders are trading too often; that is, they are engaging in high-frequency trading. Other times, though, the traders are trading too fast, engaging in high-speed trading.

Do the two sound like the same thing? Well, if you think so, you’re in bad company, because regulators apparently think so, too. A little thought will show that this need not be so. Even in the old days of trades penciled on slips of paper and consummated via open outcry, it was possible to trade many times per day, although it was rather uncommon. Of course, high-speed trades were ushered in with computer technology and became dominant during the digital Internet era. But regulators have recently issued overwrought bulletins suggesting that they view these practices as equivalent shady practices.

“The FBI has developed fact patterns of potentially illegal trading,” announced one of these bulletins. This sounds ominous, to say the least. But “because high-speed trades are executed by computer programs, it is often more difficult to detect nefarious activity and to prove that it was executed intentionally.” This astounding qualifier is enough to send a knowledgeable analyst’s eyebrows flying off his forehead. Potentially illegal trading? What on earth could merit this denomination? Why does cybernetic origin cloud the issue of intention? After all, somebody had to program the computer. And why on earth does computer trading make it hard to detect wrongdoing? Was wrongdoing unheard of back in the primitive, pre-computer days? This sounds as if regulators want to demonize high-speed trading but lack evidence of any real wrongdoing – so they have to content themselves with hinting darkly that something funny must be going on.

This impression was reinforced by subsequent comments by an FBI spokesman, who cited “the practice of placing a group of trades… to create the false appearance of market activity.” But this kind of “churning” and allegations of it have been going on for a few centuries, since the days when trades were conducted outdoors under shade trees. The FBI purports to investigate “whether high-speed trading firms are engaging in insider trading by taking advantage of fast-moving market information unavailable to other investors.” Surely the FBI must be kidding. Since time immemorial, the slogan on Wall Street has been “buy on the rumor, sell on the news.” The idea has been precisely to move fast to take advantage of market information before it becomes generally known. If that constitutes insider trading ipso facto, then Wall Street might as well close up shop and go home.

But the FBI is really serious. “There are many people in government who are very focused on this and who are very concerned about it and who think it breaks the law.” The only thing missing seems to be a Ten Most Wanted Financial Traders List.

Grizzled veterans of financial markets feel an overwhelming sense of déjà vu at all this. They remember Richard Ney, for example. Ney was the young actor who starred alongside Greer Garson as her son in the 1941 Oscar-winning film Mrs. Miniver. The next year, Garson and Ney startled the film world by marrying. Ney’s film career fizzled out despite solid work in a few more films. After working in television, Ney became a Wall Street stockbroker and wrote bestselling exposes explaining why the stock market was rigged against the small, non-professional investor and in favor of proprietary trading firms.

Ney’s complaints were focused on the activities of specialists, people hired by the exchanges to insure that a market always existed for any listed stock. The specialist was required to take the other side of any trade for which either buyers or sellers were not soon forthcoming. As compensation for the potential financial inconvenience of playing this role, the specialist was accorded the benefit of a bid-ask spread; e.g., a kind of brokerage fee embodied in the differential between buying price and selling price. This size of this spread serves as a direct index of risk in the trade of the asset.

It is ironic that the advent of computer trading has consigned the specialist, if not quite to the fate of the dodo, at least to relative insignificance. How? Well, the whole purpose of specialists was to guarantee a liquid market, but computer trading has made practically everybody a potential trader. Not only that, but the presence of John Q. Public, Joe Doakes and Joe Sixpack in the stock market has meant that more trades are being done with a lower average size of each trade. And that happens to be the hallmark of high-frequency trading, as pointed out in a recent Wall Street Journal op-ed (“HIgh-Frequency Hyperbole,” WSJ, 4/2/2014) by two veteran money managers who are not themselves high-frequency or high-speed traders (Clifford Asness and Michael Mendelson).

So Ney’s bogeyman, the foe of the small investor, has now been put in his place by high-frequency computer stock trading. This doesn’t exactly sound like high-frequency trading is a threat to the public weal. Asness and Mendelson’s opinion of high-frequency trading is that “we think it helps us. It seems to have reduced our costs [by reducing bid-ask spreads] and …enable[s] us to manage more investment dollars.” In effect, say the pair, high-frequency traders have assumed the liquidity-provision function once provided by specialists and then inherited by the “market-makers” who succeeded them. But they do it cheaper and better and “competition forces them to pass most of the savings on to us investors.”

Of course, whenever interlopers come along to chip away at profits once earned by bigger, less competitive firms or individuals, the latter invariably cry bloody murder. That is what has happened here, and the screamers form the cheering public audience for the immorality play being cast by regulators.

But a receptive audience isn’t motivation enough. Why have the national police force (the FBI) been called out by security regulators to cope with this menace that is benefitting small investors and reducing trading costs for the market at large? Precisely because the success of the market threatens to leave regulators without anybody to regulate. If the market works so smoothly that specialists are unnecessary and bid-ask spreads become tiny, people will begin to wonder why the majestic edifice of securities regulation is required. Brokers are fast going the way of insurance salesmen; prospectuses can be found on the Internet and index funds are becoming a way of life. The SEC is going to have to create a threat to justify suppressing the technology that is making it as obsolete as other artifacts of the old days.

Once again, the pattern is familiar. Technology is steadily improving the lives of Americans across the country and government regulators are frantically trying to hold it back to keep from losing their jobs. And they are being aided by incumbents whose jobs and profits are threatened by the competitive innovations.

The Big Daddy of Regulation

The biggest, longest-lived and most pernicious regulator of them all is the Food and Drug Administration (FDA). The story of this behemoth merits an EconBrief all its own.