DRI-166 for week of 4-19-15: What’s Wrong With the Immigration Laws?

An Access Advertising EconBrief:

What’s Wrong With the Immigration Laws?

One of the perennial items on Washington’s reform agenda is “comprehensive immigration reform.” Everybody claims to favor it, although the two major parties differ radically on the content they assign to the term. Indeed, there is vast intra-party difference as well, particularly among Republicans. And yet economists – the people who supposedly can’t agree among themselves about anything – align very closely on the subject of immigration.

Why does the subject of immigration trigger this startling role reversal? It should come as no surprise that economic logic and theory play a starring role in the explanation. But the co-star is the existing corpus of immigration law, which is a leading contender for the title “worst existing body of law.”

The Four Paths to Legal Immigration

Prior to the 20th century, there were almost no barriers to immigration into the United States of America. The sole exception was the anti-Chinese laws passed to placate fears over the “yellow peril” in the 19th century. But beginning in the 1920s, organizations like the Ku Klux Klan successfully agitated for laws broadly restricting immigration into the country. Thus began a gradual accretion of immigration law that has worked its way into the fiber of American society.

Today, restrictions on immigration are so severe that it is easier to talk about the relaxation of barriers to entry than it is to talk about restrictions on entry. The question isn’t “Is immigration restricted?”; it’s “How can anybody get in legally?” There are basically four paths to legal immigration into the U.S. today. We will discuss each in turn, together with the economic logic (or lack of it) underlying each.

Legal Path #1: The Visa Lottery

Foreigners who reside in the U.S. legally are called aliens. In order to obtain legal status, an alien must be issued a visa, a document that attests to the alien’s fulfillment of one of the conditions for valid entry. Every year, a certain number of visas are issued to applicants on a random basis by means of a visa lottery. This lottery is sometimes referred to colloquially as the “green-card lottery” because the green card is the document attesting to an alien’s status as a permanent resident of the United States. The green card is sometimes mistakenly viewed as a document permitting an alien to enter the country, but it is the stamp affixed to the card by the Bureau of Customs and Border Protection (CBP) at the port of entry that accords this privilege.

The official name of the visa lottery is the “Diversity Immigrant Visa Program.” It is held annually by the State Department in accordance with Section 203c of the Immigration and Nationality Act, as amended by Section 131 of the Immigration Act of 1990. This created a quota of 55,000 visas open to foreign nationals from countries “deemed to have low rates of immigration to the U.S.” in the 5 years previous to the lottery. The purpose of the program is to “diversify the immigrant population” of the U.S.

Residents of countries whose total number of legal immigrants to the U.S. in the preceding 5 years exceed 50,000 are ineligible to apply for participation in the lottery. Among the countries whose residents have recently been ineligible are included Mexico, Canada, the Dominican Republic, El Salvador, India, South Korea, the United Kingdom (but not Northern Ireland) and Vietnam, among many others. The entry period for the 2015 lottery lasted from October 1 to November 3, 2014.

Typically, there are millions of applicants – over 13 million in 2008, for example. Despite the selectivity involved – and the fact that eventual lottery winners withstand scrutiny from various government agencies – at least one notorious terrorist is known to have entered the country legally via the lottery. (One minor technical note: Excluded from the 50,000 five-year exclusion threshold are refugees admitted as legal immigrants, about whom more will be said later.)

Economic evaluation of the visa lottery: The visa lottery illuminates the central significance of the immigration laws; namely, that their purposes are entirely political rather than economic. And since politics all too often runs counter to the logic of economics, we can expect the immigration laws to be economically perverse. So they are.

First, the visa lottery imposes a quota upon visa awards and stringent conditions upon applicants. In contrast, economic logic imposes no quota upon the mobility of individuals in response to economic conditions. Just the opposite, in fact – economic efficiency demands either that people move in response to geographic price and cost differentials or that goods and services move. Sometimes it will be more economic for people to move; sometimes it is more efficient for the goods to move. (Sometimes services can move, too – particularly financial services – but this is less common.)

These days, we are implored to seek “diversity” in all things, particularly in the makeup of populations. But there is no economic reason to “diversify the immigrant population.” In practice, economics will almost surely argue against it. All other things equal, geographic distance should be inversely related to the propensity to emigrate, so we should expect to see more immigration from countries closer to the U.S. But the visa lottery actively discourages this with its five-year/50,000 immigrant disqualifier. Indeed, any factor favorable to immigration – distance, language, cultural congruity, education qualification, et al – will tend to put a country above the 50,000 threshold over time and thereby disqualify its citizens from the lottery. And, as we will see, each of the other three paths to legal immigration has its own limiting factors. So the visa lottery clearly violates the precepts of economic logic.

Why does the quota exist, then? Why, to thwart economic efficiency and protect domestic workers particularly vulnerable to foreign competition. This anti-competitive effect comes at the expense of – well, just about everybody else in the two countries involved. Because it is particularly obvious to the import-competing workers that they gain from the restrictive quota and much less obvious to the rest of the world that they are harmed, the government is not called to account for this egregious behavior. Imagine New York State devising a lottery to determine how many people it will accept from the other states and excluding people in Pennsylvania, New Jersey and New England from participating!

Legal Path #2: Refugee Status Visa

The second means of obtaining a legal immigrant visa is by applying for status as a refugee from harm in the resident country. This protected status is known as “asylum.” Each year, roughly 10% of legal immigrants fall under this rubric. Since 1980, over two million aliens have taken refuge in the United States. That would average out to somewhat fewer than 70,000 per year, but the variance around this average has been substantial. The current system of granting visas to refugees establishes quotas by dividing the world into regions and setting a quota for each one, then including a small additional quota for an “unallocated reserve.” The 5 regions (and their quotas as of 2009) are: Africa (12,000), East Asia (19,000), Europe and Central Asia (3,500), Latin America and the Caribbean (4,500) and the Near East and South Asia (37,000). The unallocated reserve quota is 5,000, bringing the total refugee quota to 80,000. Total refugee admissions in 2010 were 73,293; this is the only case we discuss where a quota was not completely filled.

From the applicant’s perspective, the problem with the application for asylum status is that acceptance is not automatic. There is a veritable laundry list of possible reasons for the denial of that application. This is the official list:

  1. Possession of a communicable disease of public-health significance.
  2. Possession of a serious physical or mental disorder.
  3. Status as a drug abuser or addict.
  4. Status as a former U.S. citizen who renounced citizenship for tax purposes.
  5. Status as a criminal guilty of “moral turpitude.”
  6. Violation of laws pertaining to controlled substances.
  7. Status as a criminal twice convicted of felony crimes.
  8. Having been convicted of prostitution within the previous 10 years.
  9. Having gained immunity from criminal prosecution to avoid penalty.
  10. Having the intention to practice polygamy in the U.S.
  11. Having the intention to violate (or abet the violation of) the immigration laws.
  12. Having been involved in international child abduction in any way.
  13. Having the intention to commit a crime.
  14. Status as someone whose admission would have adverse foreign-policy consequences for the U.S.

By far the most important element of an application for asylum, though, is the showing of a need for protection. There are 3 elements of this need:

  1. The applicant must demonstrate a fear of persecution.
  2. Government must be either the cause of the persecution or shown to be ineffectual in counteracting it.
  3. The basis of the persecution must be race, religion, nationality, political opinion or social group.

Economic evaluation of the refugee status visa: Once again, the particular of this section of the law betray its political intent. While some of the disqualifiers make sense, such as the communicable disease, criminal conviction and child abduction provisions, others seem obviously designed as pretexts for exclusion. The latter include the provision denouncing tax exiles and those referring to the intentions of applicants rather than their past deeds. In the criminal law, the principle of mens rea (literally, a “bad mind” or evil intent) plays a key role. This makes sense because proving commission of a crime will ordinarily involve a showing of intent. But in this case it is not clear exactly how the United States Customs and Immigration Service (USCIS) are to go about determining intent on the part of would-be immigrants. Equally dubious are provisions putting the finger on those with “mental disorders” and those guilty of “moral turpitude.”Then there is the provision excluding would-be refugee polygamists, which inserts a much-needed note of comic relief into the proceedings.


The easiest way to visualize the significance of this list would be to apply it to the passenger list of the Mayflower and the other pioneering voyages to the American colonies in the early 1600s. How many would-be colonists in early Virginia and Massachusetts could have passed this test? How many people who settled the American West could have run the above gauntlet unscathed? Throughout mankind’s history, immigration has been the leading means of making a new start in life, getting a second chance. Today, the U.S. immigration laws seem determined to foreclose this option. Just as the age-old saying holds that the best time to apply for a loan is when you don’t need one, the U.S. government apparently holds that people who are already successful are the only people who are genuinely welcome to come to the U.S. But if they’re already successful, what is their motivation to pick up stakes and move to a new country?

The persecution provision of the refugee provision is further proof of the political nature of the immigration laws. It is one thing to say (or imply) that the very nature of “asylum” implies protection from a threat, and that simple economic necessity is not a threat posed by human beings against other humans but rather a fact of nature and scarcity. That much is true enough. But this attitude implies that the immigration laws will have a section – somewhere – specifically devoted to legal immigrants who come to the U.S. solely to make a better life for themselves and their families. Well, this obviously isn’t the lottery visa or the refugee visa. Later, we will see that it doesn’t apply to the H1-b visa or the immediate-relative visa, either. In other words, the motivation spelled out on the Statue of Liberty, the one that impelled most new arrivals to America and made this country what it is today… is now absent from the immigration laws. Is it any wonder that illegal immigration swelled to epidemic proportions until dampened by the onset of the Great Recession?

Legal Path #3: The H1-B “High Skills” Visa

For at least two decades, U.S. employers have complained about the shortage of job-seekers with polished science, technology, engineering and math (STEM) skills. Congress responded to these complaints by creating a category of visa catering to applicants with those specific job-related skills. And once again there is a quota attached to this visa category. There is annual quota of 85,000 visas for this H1-b category, which has a minimum education requirement of a bachelor’s degree or the equivalent in a STEM subject.

Each year, this “high skills visa” attracts an oversupply of applicants. In 2013, there were 124,000 applicants for the 85,000 vacancies. In 2014, the oversupply increased again. And for 2015, some 233,000 applicants have applied. Given this burgeoning response to a crying longtime demand, the question arises: Why not at least bump up the quota? A bit of legislative history suggests that the answer lies exactly where an economist would expect to find it – with politics.

In 2012, a bill sponsored by House of Representatives Lamar Smith proposed increasing the quota by 55,000. But it also proposed to abolish the visa lottery, which many widely view as arbitrary and unfair – indeed, that was precisely how the 55,000 figure was arrived at. At the same time, Democrat Representative Zoe Lofgren has a bill to extend the quota by exactly the same number, 55,000 – but without abolishing the visa lottery. One would expect these bills to be reconciled, given only that single discrepancy. But it wasn’t – and nothing was done. In early 2013, a Senate bill was developed to raise the quota to 300,000. But various Republicans outside Congress, notably Jeb Bush, rejected its provisions in favor of “comprehensive immigration reform.” Either alternative would have had the virtue of doing something to promote legal immigration – but nothing was done. Later in the year, the Senate put together a comprehensive bill in response to the earlier demand for comprehensive reform. Now, though, House Republicans rejected this bill in favor of piecemeal immigration reform, claiming that comprehensive reform was bound to include objectionable features that would compromise security and play politics with the issue. And, predictably, nothing was done.

It is now obvious that the H1-b visa is the economic bait allowing politicians to switch away from action on immigration to politically inspired inaction. If politicians and legislators were really serious about aiding economic efficiency by encouraging immigration of skilled migrants, why have a quota at all? Just allow anybody with the skills to apply for a visa and accept applicants who can demonstrate the relevant skills, either in the form of academic credentials or work experience.

As it now stands, the H1-b visa is merely a blind permitting members of both parties to pretend to narrow – or rather, pretend to be always on the verge of narrowing without ever actually doing it – the yawning gap between the demand for skilled labor and its supply.

Legal Path #4: The K (Immediate Relative) Visa

U.S. citizens may petition the U.S.C.I.S. for a temporary immigrant visa (K visa) for spouse, fiancées and unmarried dependent children of those spouses and fiancées who are currently foreign nationals. (This is done via an I-130 form.) This temporary visa gives the recipient a maximum of 1 year to transform their status into that of a permanent legal resident. For example, fiancées have 90 days to marry the petitioner and apply for adjustment of status to that of legal permanent resident. Failure to comply will “subject them to removal proceedings;” e.g., deportation. (By the way, there are limits on the number of K-visa applications a petitioner can file without seeking a waiver of limitation.)

To obtain a V visa, signifying legal permanent status, a spouse filed an I-485 application for adjustment of status to that of legal permanent resident (LPR). This is accompanied by an I-693 (Medical Examination of an Alien) andG-325A (Biographic Information). These forms verify that the alien relative has not acquired undesirable medical conditions or bad habits (idleness or shiftlessness) since arrival. A date is set for fingerprinting, photographing and signature-gathering by the FBI, which runs a background check on the petitioner. All personal information is introduced into the U.S.C.I.S. database. The final step is an interview with a U.S.C.I.S. officer.

Economic evaluation of the immediate relative (K) visa: If there is anything at the opposite pole from economics, it is emotion – and that is the foundation of this section of immigration law. It exists to counter the specter of families and loved ones torn apart by the exigencies of economic necessity and the toils of bureaucracy. “See?” The K visa is supposed to whisper in the public’s ear. “The government does have a heart after all. When the husband has to labor in foreign vineyards, his wife and children are not left to pine away at home.”

The first thing to notice is that only U.S. citizens can petition for a would-be K visa holder. Thus, illegal immigrants cannot use this section to summon their relatives or loved ones to the U.S. Second, to the degree that the petitioner is an immigrant, this will reinforce the geographic patterns established by the other sections of the immigration laws. Wives, fiancées and children of permanent resident aliens will be predominantly nationals of the same country. Since the other sections of the law are inimical to economic efficiency, this one will be, too. Third, a close reading of the provisions banishes any notion of government as a sympathetic matchmaker who is reuniting spouses and lovers torn apart by cruel circumstance.

The minute the spouse or fiancée steps down from the gangplank or jetway, the government starts the clock ticking on the time available to them. Fiancées have 90 days to get married – or else get moving back where they came from. Wives have a year to get started on the road to full citizenship – or else. And for five years everybody is watched like inmates on parole. Then they get an examination worthy of an astronaut – or an applicant for a top-secret security clearance. And the rewards for enduring this endurance test include membership in one of our great involuntary clubs, a national database chock full of your own personal data. Doesn’t all this just call up strains of “Isn’t It Romantic?”

The Economic Purpose and Value of Immigration

The first thing that college students usually learn in an economics course is that “cost” is a real economic variable, not merely a monetary one, and that it is represented by the highest-valued foregone alternative in any human decision. The second thing is that resources (or inputs, or factors of production) should flow to their highest-valued uses. When economists say this, they do not qualify it by saying, “but this applies only when the resources exist within a household, or a neighborhood, or a city, or a region, or a state, or a country.” The statement is global in scope; it applies worldwide.

How important is it? Well, suppose we applied it in a limited way – only to global labor markets. According to Alex Nowrasteh, the Cato Institute’s specialist in international trade: “What would happen… if we took a radical policy – global open borders – and introduced it tomorrow? What would happen, in other words, if anybody could move to any other country and work legally? The estimate is that global GDP would increase between 50 and 150 percent, which is 35 to 105 trillion dollars in annual extra growth per year.” Nowrasteh estimates the present value to the U.S. specifically over the next 20 years at about 800 trillion dollars.

Ho hum. To paraphrase the late Everett Dirksen: A hundred trillion here, a hundred trillion there. Pretty soon you’re talking about some real money.

The upshot is that we want people to move between countries in response to the signals provided by money prices and costs. These signals are stand-ins for the underlying real tradeoffs in production and consumption. In particular, money wages are a stand-in for real wages, or wages relative to productivity. They affect the production decisions made by firms and the actions of workers – both domestic and foreign. It is vital that workers be allowed to move in response to wage differentials favorable to their interests, because this allows firms to take advantage of potential productivity enhancements. In turn, this enables the productivity enhancement to be passed along to consumers. That is what has happened in America ever since colonial days, when global-high wages first began attracting a steady stream of immigrants. Over time, the burgeoning supply of labor was more-than-counterbalanced by an increasing supply of productive capital goods that made existing labor more productive and kept wages high.

In the U.S. today, people routinely move from one neighborhood to another in search of a better job. People who live near a state line think nothing of crossing it to go to work. They will relocate within a country if the new job is sufficiently remunerative.

So why shouldn’t we cross international boundaries to pursue job opportunities? As a matter of fact, Americans take jobs abroad fairly often. Nobody thinks anything about that, other than to speculate on how much they will miss living here. But when an immigrant crosses the border to take a better job – or look for one – that is somehow… different. The same people who take American emigration completely for granted start looking for reasons to object to foreign immigration into America.

There is a standard list of those objections in every textbook on international economics. All of them are bogus – or rather, they apply with equal force to immigration within a country, just as objections to free international trade in goods and services are exposed as bogus when they are applied to intranational trade within countries. We would be crazy to restrict immigration between Missouri and Kansas, or between Kansas City, MO and Independence, MO, or between different neighborhoods in Kansas City. And it’s just as crazy to restrict immigration between the U.S. and foreign countries.

If anything, it’s crazier. Natural barriers to trade always exist. These include geographic distance, geographic obstacles such as mountains, oceans and climate, and language and culture. On net balance, these natural barriers loom larger between countries than within countries. Such barriers can allow very large productivity differences to arise and temporarily persist between nations. This makes it even more important to allow the natural corrective forces of free markets to overcome them.

When we factor in the artificial barriers created by quotas like those embedded in U.S. immigration law, the inducement to illegal immigration can become irresistible. At various times, estimates have appeared (in The Wall Street Journal and elsewhere) suggesting that low-skilled Mexican labor was worth five times more in the U.S. than in Mexico – that is, its productivity was five times greater here than in its native country. It is no wonder, then, than when economists Stephen Moore and Julian Simon surveyed a roster of economists, almost all of them said that the benefits of illegal immigration were the same as those of legal immigration.

This speaks inferential volumes about the value economists place on the U.S. immigration laws. In Charles Dickens’ Oliver Twist, the character of Mr. Bumble is accused of stealing jewelry belonging to Oliver’s mother. Bumble denies guilt, placing the blame on Mrs. Bumble. He is informed that this would actually increase his liability, “for the law supposes that your wife acts under your direction.” Indignant, Bumble responds that “If the law supposes that, then the law is a ass, a idiot!”

When it comes to the U.S. immigration laws, economists are prone to agree with Mr. Bumble that “the law is a ass.”

DRI-319 for week of 6-22-14: Redskins Bite the Dust – and So Do Free Markets

An Access Advertising EconBrief:

Redskins Bite the Dust – and So Do Free Markets

The Trials and Appeals Board (TTAB) of the United States Patent and Trademark Office (USPTO) recently suspended validity of the trademarks previously held by the Washington Redskins professional football team of the National Football League (NFL). The legal meaning of this action is actually much more complex than public opinion would have us believe. The importance of this action transcends its technical legal meaning, however. If we can believe polls taken to test public reaction to the case, 83% of the American public disapproves of the decision. They, too, sense that there is more at stake her than merely the letter of the law.

The Letter of the Law – and Other Letters

The federal Lanham Trademark Act of 1946 forbids the registration of “any marks that may disparage persons or bring them into contempt or disrepute.” That wording forms the basis for the current suit filed by a group of young Native American plaintiffs in 2006. The hearing was held before TTAB in March, 2013. This week the judges issued a 99-page opinion cancelling each of the 6 different trademark registrations of the name “REDSKINS” and the Redskins’ logo, an Indian brave’s head in silhouette with topknot highlighted on the left. The decision called the trademarks “disparaging to Native Americans at the respective times they were registered.” The wording was necessary to the verdict; indeed, the dissenting judge in the panel’s 2-1 ruling claimed that the majority failed to prove that the registrations were contemporaneously disparaging.

This was not the first attempt to invalidate the Redskins trademarks – far from it. The previous try came in 1999 when the TTAB also ruled against the team. That ruling was overturned on appeal. The grounds for rejection were both technical and substantive. The judges noted that the plaintiffs were well over the minimum filing age of 18 and that the registrations went as far back as the 1930s. Thus, the plaintiffs had undermined their claim to standing by failing to exercise their rights to sue earlier – if the trademarks were known to have been such an egregious slur, why hadn’t plaintiffs acted sooner? The plaintiffs also cited a resolution by the National Congress of American Indians in 1993 that denounced the name as offensive. The Congress claimed to represent 30% of all Native Americans, which the judges found insufficiently “substantial” to constitute a validation of plaintiffs’ claim.

Meanwhile, an AnnenbergPublicPolicyCenter poll found in 2004 that “90% of Native Americans [polled] said the name didn’t bother them,” as reported in the Washington Post. Team owner Daniel Snyder’s consistent position is that he will “never” change the team name since it was chosen to “honor Native Americans,” the same stand taken by NFL President Roger Goodell. Various Native American interest groups and celebrities, such as 5000-meter Olympic track gold-medalist Billy Mills, have sided with the plaintiffs. Senate Majority Leader Harry Reid jumped at the chance to play a race card, calling the team name a “racial slur” that “disparages the American people” (!?). He vows to boycott Redskins’ games until the name is changed. Roughly half his Senate colleagues sent a letter to the team demanding a name change.

The Practical Effects of the Ruling

Numerous popular sources have opined that anybody is now “free” to use the name “Redskins” for commercial purposes without repercussions. Several lawyers have pointed out that this is not true. For one thing, this latest decision is subject to judicial review just as were previous ones. Secondly, it affects only the federal registration status of the trademarks, not the right to the name. The enforceability of the trademark itself still holds under common law, state law and even federal law as outlined in the Lanham Act. The law of trademark itself takes into account such concepts as “pervasiveness of use,” which reflects actual commercial practice. In this case, the name has been in widespread use by the team for over 80 years, which gives it a strong de facto claim. (If that sounds confusing, join the club.) Finally, the appeals process itself takes at least two years to play out, so even the registration status will not change officially for awhile.

Thus, the primary impact of the ruling will be on public relations in the short run. The same commentators who cast doubt on the final result still urge Daniel Snyder to take some sort of token action – set up a foundation to benefit Native Americans, for instance – to establish his bona fides as a non-racist and lover of Native Americans.

Why the Law is an Ass

There are times when you’re right and you know why you’re right. There are other times when you’re right and you know you’re right, but you can’t quite explain why you’re right. The general public is not made up of lawyers. If judges say the trademark registrations are illegal, the public is prepared to grant it. But, like Charles Dickens’ character Mr. Bumble, they insist that the law is an ass. They just can’t demonstrate why.

The provision in the Lanham Act against disparaging trademarks is the kind of legal measure that governments love to pass. It sounds both universally desirable and utterly innocuous. Disparaging people and holding them up to ridicule and contempt is a bad thing, isn’t it? We’re against that, aren’t we? So why not pass a law against it – in effect – by forbidding disparaging trademarks. In 1946, when the Lanham Act passed, governments were big on passing laws that were little more than joint resolutions. The Employment Act of 1946, for example, committed the federal government to achieving “maximum employment, purchasing power and income.” There is no objective way to define these things and lawmakers didn’t try – they just passed the law as a way to show the whole world that they were really, really serious about doing good, not just kidding around the way legislatures usually are. Oh, and by the way, any time they needed an excuse for spending a huge wad of the taxpayers’ money, they now had one. (Besides, before the war a famous economist had said that it was all right to spend more money than you had.)

The law against disparaging trademarks was passed in the same ebullient mood as was the Employment Act of 1946. Government doesn’t actually have the power to guarantee maximum employment or income or purchasing power and it also doesn’t have the power to objectively identify disparagement. Unlike beauty, a slur is not in the eye of the beholder. It is in the brain of the author; it is subjective because it depends on intent. Men often call each other “bastard” or “son of a bitch”; each can be either deadly serious invective or completely frivolous, depending on the context. The infamous “n-word,” so taboo that it dare not speak its name, is in fact used by blacks toward each other routinely. It can be either a casual form of address or a form of disparagement and contempt – depending on the intent of the user.

Everybody – including even Native Americans – knows that Washington football team owner George Preston Marshall, one of the legendary patriarchs of the NFL, did not choose the team name “Redskins” in order to disparage Native Americans or hold up to ridicule or contempt. He chose it to emphasize the fighting and competitive qualities he wanted the team to exemplify, because Indians in the old West were known as fierce, formidable fighters. Whether he actually meant to honor Native Americans or merely to trade on their reputation is open to debate, but it is an open-and-shut, 100%, Good-Housekeeping-seal-of-approval-certified certainty that he was not using the word “Redskins” as a slur. Why? Because by doing so he would have been committing commercial suicide by slandering his own team, that’s why.

That brings us to the second area resemblance of between the Lanham Act and the Employment Act of 1946. The Employment Act was unnecessary because free markets when left to their own devices already do the best job of promoting high incomes, low unemployment and strong purchasing power than can be done. And free markets are the best guarantee against the use of disparaging trademarks, because the inherent purpose of a trademark is to promote identification with the business. Who wants their business identified with a slur? We don’t need a huge bureaucracy devoted to the business of rooting out and eradicating business trademarks that are really slurs. Free markets do that job automatically by driving offending businesses out of business. Why otherwise would businesses spend so much time and money worrying about public relations and agonizing over names and name changes?

If the only reason for the persistence of legislation like the Employment Act and the Lanham Act were starry-eyed idealism, we could write off them off as the pursuit of perfect justice, the attempt to make government write checks it can’t cover in the figurative sense as well as the financial. Idealism may explain the origin of these laws but not their persistence long after their imposture has been exposed.

Absolute Democracy

By coincidence, another political-correctness scandal competed with the Redskins trademark revocation for headlines. The story was first reported as follows: A 3-year-old girl suffered disfiguring facial bites by three dogs (allegedly “pit bulls”). She was taken to a Kentucky Fried Chicken franchise by a parent, where she was asked to leave, after an order was placed for her favorite meal of sweet tea and mashed potatoes, because her presence was “disrupting the other customers.” Her relatives took this story of “discrimination” to the news media.

Representatives of the parent corporation were guarded in their reaction to the accusation, but unreserved in the sympathy they expressed for the girl. They promised a donation of $30,000.00 to aid in treatment of her injuries and for her future welfare. They also promised to follow up to confirm what actually happened at the store.

What actually happened, according to their follow-up investigation, was nothing. This was the result of their internal probe and a probe by an independent company they hired to do its own investigation. Review of the store’s surveillance tape showed no sign of the girl or her relatives on the day in question. A review of transactions showed no order for “sweet tea and mashed potatoes” on that day, either. KFC released a finding that the incident was a hoax, a conclusion that was disputed by another relative of the girl who was not one of those supposedly present at the incident.

Perhaps the most significant part of this episode is that KFC did not retract their promise of a $30,000.00 donation to the girl – despite their announced finding that her relatives had perpetrated a hoax against the corporation.

The Redskins trademark case and the apparent KFC hoax are related by the desire of interested parties to use political correctness as a cover for extracting money using the legal system. Pecuniary extortion is crudely obvious in the KFC case; $30,000 is the blackmail that company officials are willing to pay to avoid being crucified in a public-relations scandal manufactured out of nothing.

Their investigation was aimed at avoiding a charge of “discrimination” against the girl, which might have resulted in a six- or seven-figure lawsuit and an even-worse PR scandal. But their willingness to pay blackmail suggests an indifference to the problem of “moral hazard,” something that clearly influences Daniel Snyder’s decision not to change the Redskins’ team name. Willingness to pay encourages more blackmail; changing the team name encourages more meddling by activists.

The Redskins case is more subtle. Commentators stress that plaintiffs are unlikely to prevail on the legal merits, but doubt that the team can stand the continuous heat put on it by the PR blowtorch lit by the TTAB verdict. That is where the money comes in – owner Daniel Snyder will have to pony up enough money to the various Native American interest groups to buy their silence. Of course, this will be spun by both sides as a cultural contribution, meant to make reparations for our history of injustice and brutality to the Native American, and so on.

Of course, Snyder may turn out to be as good as his word; he may never agree to change the Redskins’ team name. The NFL – either the Commissioner or the other owners exerting their influence – may step in and force a name change. Or Snyder may even sell the team rather than be forced to change their name against his will. That would leave the plaintiffs and Native American interest groups out in the cold – financially speaking. Does that invalidate the economic theory of absolute democracy as applied to this case?

No. Plaintiffs stand to benefit in an alternative manner. Instead of gaining monetary compensation for their efforts, they would earn psychological (psychic) utility. From everyday observation, as well as our own inner grasp of human nature, we realize that some people who cannot achieve nevertheless earn psychic pleasure from thwarting the achievements of others. In this particular case, the prospective psychic gains earned by some Native Americans from overturning the Redskins name and the prospective monetary gains earned from blackmailing the Redskins’ owner are substitute goods; the favorable verdict handed down by TTAB makes it odds-on that that one or the other will be enjoyed.

This substitution potential is responsible for the rise and continued popularity of the doctrine of political correctness. “Race hustlers” like Jesse Jackson and Al Sharpton have earned handsome financial rewards for themselves and/or clients by demonizing innocuous words and deeds of whites as “racist.” What is seldom recognized, though, is the fact that their popularity among blacks at large is owed to the psychic rewards they confer upon the rank-and-file. When (let us say) a white English teacher is demoted or fired for teaching the wrong work by Mark Twain or Joseph Conrad, followers of Jackson and Sharpton delight. They know full well that the exercise is a con – that is the point. They feel empowered by the fact that they may freely use the n-word while whites are prevented from doing so. Indeed, this is simply a reversal of the scenario under Jim Crow, when blacks were forced to the back of the bus or to restricted drinking fountains. In both cases, the power of the law is used to earn psychic rewards by imposing psychic losses on others.

Legal action was necessary in the Redskins’ case because plaintiffs were bucking an institution that had been validated by the free market. The Washington Redskins have over 80 years of marketplace success on their record; the free market refused to punish their so-called slur against Native Americans. In fact, the better case is that the team has rehabilitated the connotation of the word “redskins” through its success on the field and its continuing visibility in the nation’s capital. Goodness knows, countless words have undergone this sort of metamorphosis, changing from insults to terms of honor.

When plaintiffs could not prevail through honest persuasion they adopted the modern American method – they turned to legal force. However tempting it might be to associate this tactic exclusively with the political correctness of the left, the truth is that it is the means of first resort for conservatives as well. That is the seeming paradox of absolute democracy, which represents the dictatorship of the law over free choice.

Inevitably, advocates of political correctness cite necessity as their justification. The free market is not free and does not work, so the government must step in. The planted axioms – that free markets usually fail while governments always work – are nearly 180 degrees out of phase. The failures of government highlight our daily lives, but the successes of the free market tend to be taken for granted. The famous episode of Little Black Sambo and its epilogue serves as a reminder.

The Little Black Sambo stories and Sambo Restaurants

The character of Little Black Sambo and the stories about him have been redefined by their detractors – that is to say, demonized as racist caricatures that dehumanize and degrade American blacks. This is false. In the first place, the original character of Little Black Sambo, as first portrayed in stories written in the late 19th and early 20th centuries, was Tamil (Indian or Sri Lankan) – a reflection of the ecumenical reach exerted by the term “black” in those days. Eventually, the character was adapted to many nationalities and ethnic identities, including not only American black but also Japanese. (Indeed, he remains today a hero to children of Japan, who remain blissfully untouched by the political correctness familiar to Americans.) This is not surprising, since the stories portray a little boy whose heroic perseverance in the face of obstacles is an imperishable life lesson. Presumably, that is why the stories are among the bestselling children’s storybooks of all time.

When American versions of the story portrayed Little Black Sambo as an American or African black, this eventually caught the eye of disapproving blacks like the poet Langston Hughes, who called the picture-book depiction a classic case of the “pickaninny” stereotype. Defenders of the stories noted that when the single word “black” was removed and any similarity to American or African blacks deleted from the illustrations, the stories attracted no charges of racism. Yet black interest groups echoed the psychologist Alvin Poussaint, who claimed that “I just don’t see how I can get past the title and what it means,” regardless of any merit the stories might contain. The storybooks disappeared from schools, nurseries and libraries.

In 1957, two restaurant owners in Santa Barbara, CA, opened a casual restaurant serving ethnic American food. In the manner of countless others, they chose a name that combined their two nicknames, “Sam” (Sam Battistone) and “Bo” (Newell Bohnett). Over time, Sambo’s Restaurant’s popularity encouraged them to franchise their concept. It grew into a nationwide company with 1,117 locations. Many of these were decorated with pictures and statuary that borrowed from the imagery of the “Little Black Sambo” stories.

The restaurants were a marketplace success, based on their food, service and ambience. But in the 1970s, black interest groups began raising objections to the use of the “Sambo” name and imagery, calling it – you guessed it – racist. Defenders of the franchise cited the value and longstanding popularity of the stories. They noted the success and popularity of the restaurants. All to no avail. By 1981, the franchising corporation was bankrupt. Today, only the original Santa Barbara location remains.

This was certainly not a victory for truth and justice. But it was a victory for the American way – that is, the true American way of free markets. Opponents of Sambo’s Restaurants went to the court of public opinion and made their case. Odious though it seemed to patrons of the restaurants, the opponents won out.

So much for the notion that free markets are rigged against political correctness. In the case of Sambo’s Restaurants, people concluded that the name tended to stigmatize blacks and they voluntarily chose not to patronize the restaurants. The restaurants went out of business. This was the appropriate way to reach this outcome because the people who were benefitting from the restaurants decided that the costs of production outweighed the benefits, and chose to forego those benefits. The decisive factor was that bigotry was (apparently) a cost of production.

Instead of achieving their aim through legal coercion or blackmail, activists achieved it through voluntary persuasion. Alas, that lesson has now been forgotten by both the political Left and Right.

DRI-248 for week of 1-26-14: Economics as Movie ‘Spoiler’: Some Famous Cases

An Access Advertising EconBrief:

Economics as Movie ‘Spoiler’: Some Famous Cases

Motion pictures evolved into the great popular art form of the 20th century. In the 21st century, many popular cultural references derive from movies. One of these is the “spoiler” – prematurely revealing the ending of a book, play, movie or presentation of any kind.

Economists sometimes experience a slightly different sort of “spoiler.” Their specialized understanding often defeats the internal logic of a presentation, completely spoiling the author’s intended effect. Movies are especially vulnerable to this effect.

The casual perception is that our attitude toward movies is distorted by the high quotient of improbably beautiful and talented people who populate them. While it is true that physical beauty has always been highly prized by Hollywood, it is also true that plain or even ugly people like Wallace Beery, Marie Dressler, Jean Gabin and Rodney Dangerfield have become champions of the movie box office. The locus of unreality in movies has actually been the stories told.

Movies are best regarded as fairy tales for adults. They over-emphasize dramatic conflict and exaggerate the moral divide between protagonist and antagonist. It is difficult to find a real-world referent to the “happy ending” that resolves the typical movie. Protagonists are all too often “heroes” whose actions exceed the normal bounds of human conduct. In recent years, this tendency has escalated; veteran screenwriter William Goldman has complained that movie protagonists are now not heroes but “gods” whose actions exceed the bounds of physics and other natural laws.

In this context, it is hardly surprising that movie plots have sometimes ignored the laws of economics in order to achieve the stylized dramatic effects demanded by the medium. Since public knowledge of economics is, if anything, less well developed than knowledge of natural science, these transgressions have generally gone unremarked. Indeed, the offending movies are often praised for their realism and power. Thus, it is worthwhile to correct the mistaken economic impressions left by the movies, some of which have found their way into popular folklore.

In each of the following movies, the major plot point – the movie’s resolution – rests on an obvious fallacy or failure to apply economic logic.

Scrooge (U.S. title: A Christmas Carol) (1951)

We know the plot of this most classic of all Christmas tales by heart. Victorian businessman Ebenezer Scrooge, famed miser and misanthrope, abhors the spirit of Christmas. He is visited by three ghosts, emblematic of his youthful past, his empty present life and the lonely, friendless end that awaits him in the future. Their guidance awakens him to the waste of his single-minded pursuit of material gain and rejection of personal affection and warmth. He realizes the cruelty he has visited upon his clerk, the good-hearted family man, Bob Cratchit. Most of all, he keenly regrets the fate of Cratchit’s crippled son, Tiny Tim, who seems doomed by Cratchit’s poverty.

Having witnessed Scrooge’s emotional reformation, the audience is now primed for the crowning culmination. On the day after Christmas, Bob Cratchit shows up at Scrooge’s office, a bit late and encumbered by holiday festivities. Fearfully, he tiptoes to his desk, only to be brought up short by Scrooge’s thunderous greeting. Expecting a verbal pink slip, Cratchit receives instead the news that Scrooge is doubling his wage – and that their working relationship will be hereafter cordial. Tiny Tim’s future is redeemed, and the audience has experienced one of the most cathartic moments on film.

Unless, that is, the viewer happens to be an economist – in which case, the reaction will be a double take accompanied by an involuntary blurt like “I beg your pardon?” For this is a resolution that just simply makes no sense. In order to understand why, the first thing to realize is that the scriptwriter (translating Charles Dickens’ timeless story to the screen) is asking us to believe that Bob Cratchit has heretofore been working for half of what Scrooge is now proposing to pay him.

In the 17th and 18th centuries, historical novelists like Charles Dickens played the role played by filmmakers in the 20th century. They brought history alive to their audiences. Ideally, they stimulated further study of their subject matter – indeed, many famous historians have confessed that their initial stimulus came from great storytellers such as Dickens and Dumas. But many readers searched no further than the stories told by these authors for explanations to the course taken by events. Dickens was an exponent of what the great black economist Thomas Sowell called “volitional economics.” In this case, for example, the wage paid by Scrooge and received by Cratchit ostensibly depended on Scrooge’s will or volition, and nothing else. No role existed for a labor market. Cratchit was not a partisan in his own cause, but rather a passive pawn of fate.

This is not a theory likely to commend itself to an economist. Scrooge and Cratchit are working to produce services purchased by their customers. Who are these? Well might you ask, for neither Dickens nor the filmmakers chose to clutter up the narrative with such extraneous considerations. Yet it is this consumer demand that governs the demand for Scrooge’s output, which in turn values the productivity of Cratchit’s work. In a competitive labor market, the market wage will gravitate toward the marginal value product of labor; e.g., the value of Cratchit’s product at the margin translated into money with the aid of the market price for Scrooge’s services. And in crowded London, there is no doubt about the competitive demand for the low-skilled labor provided by Bob Cratchit. That is what attracted the Bob Cratchits of the world to London in the first place during the Industrial Revolution.

Two possibilities suggest themselves. Either Bob Cratchit was working for half of his marginal value product previously and is only now being elevated to that level, or Scrooge is now proposing to pay Cratchit a wage equal to twice Cratchit’s marginal value product. The first possibility requires us to believe not only that Cratchit was and is a complete idiot, but that henot Scrooge as Dickens clearly implies – is responsible for Tiny Tim’s tenuous medical situation. After all, all Cratchit had to do was step outside Scrooge’s firm and wander off a block or two in order to better his circumstances dramatically and pay Tiny Tim’s medical tab without having to bank on Scrooge’s miraculous reformation. Cratchit was guaranteed a job at slightly less than double his then-current wage by simply underbidding the market wage slightly. But he inexplicably continued to work for Scrooge at half the wage his own productivity commanded.

Alternatively, consider possibility number two. Scrooge is now going to pay Cratchit a wage equal to twice his (Cratchit’s) marginal value product. If Scrooge insists on raising his price commensurate with this wage hike, he will go out of business. If he keeps his price the same, he will now be working for much less net income than all the other business owners in his position. (See below for the implications of this.)

There is no third possibility here. Either Cratchit was (is) crazy or Scrooge is. And either way, it completely upsets Dickens’ cozy suggestions that all’s right with the world, Scrooge has restored the natural order of things and everybody lived happily ever after.

Of course, Scrooge may have accumulated considerable assets over the course of his life and business career. He may choose to make an ongoing gift to Cratchit in the form of a wage increase, as opposed to a bonus or an outright transfer of cash. But it is important to note that this is not what Dickens or the filmmakers imply. The tone and tenor of Dickens’ original story and subsequent films adapted from it unambiguously suggest that Scrooge has righted a wrong. He has not committed a random act of generosity. In other words, Dickens implies – absurd as it now clearly seems – that possibility number one above was his intention.

It is clear to an economist that Dickens has not provided a general solution to the problem of poverty in 19th century England. What if Scrooge were the one with the sick child – would his acquisitive ways then be excusable? Dickens makes it clear that Scrooge’s wealth flows directly from his miserliness. But if miserliness produces wealth and good-heartedness promotes poverty, economic growth and happiness are simply mutually exclusive. After all, the message of the movie is that Scrooge promises to reform year-round, not just one day per year. Henceforward, when approached by collectors for charity, he will refuse not out of meanness but out of genuine poverty, his transformation having stripped him of the earning power necessary to contribute to charity.

In actual fact, of course, Scrooge never existed. Neither did Cratchit. And they are not reasonable approximations of actual 19th-century employers or workers, either. But these figments of Dickens’ imagination have been tragically influential in shaping opinions about the economic history of Victorian England.

The Man in the White Suit (1951)

This comedy from England’s famed Ealing Studios (the world’s oldest movie studio) is justly famous, but for the wrong reasons. It highlights the inefficiency of British socialism and the growing welfare state, but its fame derives from its plot highlight. Inventor Alec Guinness worms his way into the R&D division of a local textile business, where he develops a fabric so durable that it will never wear out. Instead of gaining him the wealth and immortality he craves, it gains the opprobrium of the textile owners, who fear that the fabric will ruin them by cutting replacement sales to zero. They block his efforts at production and the film ends when his formula is revealed to contain a flaw – which he may or may not ever get the chance to de-bug, since he is now a pariahin the industry.

The film is often cited as an example of how big business prevents new technology from empowering consumers – that is, it is cited as if it were a factual case study rather than a fictional movie. Actually, it is a classic example of the failure to deploy economic logic.

Would a textile firm find it profitable to produce an “indestructible” fabric of the sort depicted in the film? Certainly. The firm would achieve a monopoly in the supply of fabric and could obtain finance to expand its operations as necessary to meet the immediate demand. In practice, of course, such a fabric would not really be indestructible in the same sense as, say, Superman’s costume. It would be impervious to normal wear but would suffer damage from tearing, fire, water and other extreme sources. Changes in fashion would also necessitate replacement production. Nevertheless, we can safely grant the premise that the invention would drastically reduce the replacement demand for fabric. But that would not deter an individual firm from developing the invention – far from it.

The film depicts textile firms striving in combination to buy out the inventor. Perhaps overtures of that kind might be made in reality. They would be doomed to failure, though, because in order to afford to pay the inventor’s price the firms would have to compensate the inventor for the discounted present value of the monopoly profits available in prospect. But in order to raise an amount of money equal to those monopoly profits, the firms would themselves have to be monopolists willing to mortgage their future monopoly profits. Textile companies may enjoy legislative protection from foreign competition in the form of tariffs and/or quotas, but they will still not possess the kind of market power enabling them to do this, even if they were so predisposed. Thus, both of the movie’s key plot points are undermined by economic logic.

This reasoning explains why there is so little proof for longstanding allegations that large corporations buy off innovators. While it will often be profitable to acquire competitors, it will normally be prohibitively expensive to buy and suppress revolutionary inventions. The value of a competitive firm reflects its competitive rate of return. The value of a revolutionary innovation reflects the value of a (temporary) monopoly, heavily weighted toward the relatively near future.

The Formula (1980)

The Formula was one of the most eagerly awaited movies of its day because it starred two of the most legendary stage and screen actors of all time, Marlon Brando and George C. Scott. It also boasted a topical plot describing a conspiracy to suppress a secret formula for producing synthetic gasoline. Who was behind the conspiracy? None other than “the big oil companies” – in the 1970s and 80s, as today, the oil companies were periodically trotted out as public whipping boys for the adverse effects of public policies on energy prices.

The film begins during World War II with the escape into Switzerland of a German military officer carrying secret documents. In the present day, Scott plays a homicide policeman investigating the grisly murder of his former supervisor. The decedent was working abroad for a large oil company at the time of his death, and his boss (Brando) reveals that his duties included making payoffs to Middle Eastern officials. Scott’s character also learns about the existence of a formula for conversion of coal into petroleum, supposedly developed secretly by German scientists during World War II and used by the Nazis to fuel their war machine.

Scott’s character seeks the killer and the formula for the remainder of the film. Each successive information source is murdered mysteriously after speaking with him. Eventually he learns the formula from its originator, who tells him that the oil companies plan to suppress it until its value is enormously enhanced by the extinction of remaining petroleum reserves. Brando’s character blackmails Scott’s character into relinquishing the formula and the film ends with the understanding that it will be suppressed indefinitely. The world is denied its chance at plentiful oil and the oil companies enforce an artificial oil shortage.

Novelist Steve Shagan also wrote the screenplay, but it should be noted that the version of the film released to theaters was the result of a conflict with director John G. Avildsen. Although no claim was advanced about the veracity of events depicted or information presented, the audience is clearly invited to take the film’s thesis seriously. Alas, history and economics preclude this.

The film makes much of the fact that Germany was able to conduct military operations around the world for a decade despite having no internal source of petroleum and only tenuous external sources. Germany must have had the ability to manufacture synthetic fuels, we think; otherwise, how could she have waged war so long and effectively?

The premise is sound enough. Germany’s oil refineries in the Ruhr Valley were perhaps the leading military target of Allied bombings; both crude and refined oil were in critically short supply throughout the 1940s. And there really was a “formula” for synthetic fuel – or, more precisely, a chemical process. But the film’s conclusion is all wrong, almost banally so.

The Fischer-Tropsch process was invented by two German scientists – not in World War II, but in 1925. It was not secret, but rather a matter of public knowledge. German companies used it openly in the 1930s. During World War II, when Germany had little or no petroleum or refining capability, the process provided about 25% of the country’s auto fuels and a significant share of other fuels as well. After the war, the process traveled to the U.S. and several plants experimented with it. In fact, it is still used sparsely today. Possible feedstocks for conversion into petroleum are coal, natural gas and biomass.

The reason that few people know about it is that it is too expensive for widespread use. Biomass plants using it have gone broke. Natural gas is too valuable for direct use by consumers to waste on indirect conversion into petroleum. And coal conversion wavers on the edge of commercial practicality; just about the time it begins to seem feasible, something changes unfavorably.

In real life – as opposed to reel life – the problem is not that secret formulas for synthetic fuels are being hidden by the all-powerful oil cartel. It is that the open and above-board chemical processes for conversion to synthetic fuel are just too darned expensive to be economically feasible under current conditions.

Erin Brockovich (2000)

Erin Brockovich is the film that sealed the motion-picture stardom of Julia Roberts by earning her an Academy Award for Best Actress. It was based on events in the life of its title character. Erin Brockovich was an unemployed single mother of three who met liability attorney Ed Masry when he unsuccessfully represented her in her suit for damages in a traffic accident. She took a job with his firm interviewing plaintiffs in a real-estate settlement against Pacific Gas & Electric.

In the course of her interviews, Brockovich claimed (and the film portrayed) that she unearthed a laundry list of diseases and ailments suffered by the 634 plaintiffs, who were residents of Hinkley, CA. These included at least five different forms of cancer, asthma and various other complaints. Brockovich was surprised to learn that PG&E had paid the medical expenses of these residents because of the presence of chromium in the drinking water, despite having assured the residents that the water was safe to drink. Eventually, Brockovich interviewed a company employee who claimed that corporate officials at PG&E were aware of the presence of “hexavalent chromium” (e.g.; chromium from multiple sources) in the drinking water and told employees in Hinkley to hide this information from residents. The whistleblower had been told to destroy incriminating documents but kept them instead and supplied them to Brockovich.

The film does everything but accuse the company of murder in so many words. It reports the jury verdict that awarded the Hinkley residents $333 million in damages. (The standard contingency fee to the law firm is 33%.) Brockovich received a $2 million bonus from her delighted boss. The film received a flock of award nominations in addition to Roberts’s Oscar, made a pile of money and got excellent reviews.

However, a few dissenting voices were raised in the scientific community. Scathing op-eds were published in The Wall Street Journal and The New York Times by scientists who pointed out that little or no science backed up the movie’s claims – or, for that matter, the legal case on which the movie was based.

It seems that the only scientific black mark against hexavalent chromium was lung cancer suffered by industrial workers who inhaled the stuff in large quantities. In contrast, the hexavalent chromium in Hinkley was ingested in trace amounts in drinking water. The first law of toxicology (the science of toxicity) is “the dose makes the poison.” Ingestion allows a substance to be attacked by digestive acids and eliminated via excretion; inhalation would permit it to be absorbed by organs like the lungs. Ironically, lung cancer wasn’t among the varieties identified by Brockovich.

What about the lengthy list of cancers grimly recited in the movie? Doesn’t that constitute a prima facie case of wrongdoing by somebody? No – just the reverse. As the scientists pointed out, biological or industrial agents are normally targeted in their effects; after all, they were usually created for some very specific purpose in the first place. So the likelihood of one agent, like hexavelent chromium, being the proximate cause of various diverse cancers is very remote. In any town or city, a medical census covering a reasonable time span will produce a laundry list of diseases like the one Brockovich compiled.

Economics provides equal grounds for skepticism of the movie’s conclusions. The movie imputes both wrongdoing and evil motives to a company. Somewhere within that company, human beings must have harbored the motives and committed the wrongs. But why? The standard motivation behind corporate wrongdoing is always money. The monetary category involved is normally profit. Presumably the imputed rationale would run somewhere along these lines: “Corporate executives feared that admitting the truth would result in adverse publicity and judgments against the company, costing the company profits and costing them their jobs.” But that motivation can’t possibly have applied to this particular case, because PG&E was a profit-regulated public utility.

Public-utility profits are determined by public-utility commissions in hearings. If a utility earns too much profit, its rates are adjusted downward. If it earns too little, its rates are adjusted upward. For over a century, economists have tried but failed to think up ways to get utility managers to behave efficiently by cutting costs. Economists have even argued in favor of allowing utilities to keep profits earned in between rate hearings, hoping that managers will have an incentive to cut costs if the company could actually keep profits in that scenario.

But here, according to the filmmakers, PG&E executives were so fanatically dedicated to safeguarding profits that the company couldn’t keep anyway that they were willing to knowingly poison their customers. They were willing to risk losing their jobs and going to jail (if their deception was uncovered) to guard against losing their jobs for loss of profits that were never going to be gained or lost in the first place. No economist will swallow this.

If the filmmakers had an explanation for this otherwise insane behavior, they didn’t offer in the movie. And without a scientific case or an economic motive, it is impossible to accept the film’s scenario of corporate conspiracy at face value. Instead, the likely motivational scenario is that PG&E executives didn’t confess their crimes and beg forgiveness because they had absolutely no scientific reason to think they had committed any crimes. They didn’t warn Hinkley residents about “known dangers” because they didn’t know about any dangers. They didn’t need to admit the presence of chromium in the drinking water because everybody already knew there were trace amounts of chromium in the drinking water. But they certainly weren’t going to advertise the presence of non-existent dangers for fear that somebody would seize the opportunity to make a legal case where none really existed.

Movies are Fairy Tales for Adults

The moral to these cases is that movies are fairy tales for adults. Given that, the absence of economic logic in the movies is not hard to fathom. How much economic logic did we learn from the fairy tales we heard in childhood?

This is not to indict movies – or fairy tales, either. We need them for the emotional sustenance they provide. Fairy tales help cushion our childhood introduction to reality. Movies help us cope with the wear and tear of daily life by recharging our emotional batteries.

But we must never confuse the fairy tale world of movies with the rational world in which we live. Our ultimate progress as a species depends on our reliance on markets, rational choice and free institutions. Of necessity, movies operate according to the visual logic of dramatic action. We expect reel life to liberate us from the conventions of real life and this is why movies seldom make economic sense.

DRI-219 for week of 12-16-12: The Economics of Dickens’ ‘A Christmas Carol’

An Access Advertising EconBrief:

The Economics of Dickens’ ‘A Christmas Carol’

Charles Dickens’ “A Christmas Carol in Prose,” written in 1843, is one of the hardiest of all Christmas perennials and a seminal example of the Christmas story. Dickens’ gift for evoking emotion and vivid ingredients like ghosts, sickly children and hearty Christmas celebrations made the tale a natural for the movies. Memorable versions came out of Hollywood in 1938 and Great Britain in 1951, while television gave us a distinctive reprise in 1984. (Herein, we follow the example of the movies, which typically shorten the title by omitting the last two words.)

As he did with many of his novels, Dickens used his authorial prerogative to criticize elements of Victorian English society. His protagonist, Ebenezer Scrooge, is a businessman whose lack of Christmas spirit, parsimonious habits and eye for the bottom line have made his name a byword for misanthropy. Scrooge’s relationship with his clerk, Bob Cratchit, would attract unfavorable comment by the EEOC, the NLRB, OSHA and the rest of today’s regulatory alphabet soup.

Over the decades, various commentators have suggested that Dickens’ motives were not purely literary and commercial – that he sought to censure capitalism or, at the very least, its perceived excesses. This story has moved and inspired countless millions through many incarnations over a century and a half, so it is well worth inquiring into its economic significance.

The Carol

Dickens introduces us to Ebenezer Scrooge the aging miser and misanthrope. Scrooge’s life is devoted entirely to his business, formerly a partnership but now a sole proprietorship employing a clerk named Bob Cratchit. It is Christmas Eve, but in Scrooge there dwells none of the Christmas spirit. “Christmas? Bah! Humbug!” is his reaction to the holiday. He refuses a Christmas-dinner invitation from his nephew and niece-in-law. Grudgingly, Scrooge gives Cratchit the day off on Christmas Day. Approached to donate to the poor, Scrooge is indifferent to their misery. “Are there no prisons?” he demands. “Are there no work houses?” Apprised that some might die from starvation and exposure, he snaps that “they had better do it and decrease the surplus population.”

Alone at home on Christmas Eve, Scrooge is visited by the ghost of his former partner, Jacob Marley. Marley’s ghost endures eternal torment for mistakes he made in life; namely, avarice and lack of generosity and compassion for other human beings. The ghost warns Scrooge to mend his ways or suffer a similar fate. Scrooge will be visited by three more ghosts, each with a life lesson designed (so to speak) to scare him straight.

The Ghost of Christmas Past transports Scrooge back to his forgotten youth. He revisits his lost love – his longing to provide for her produced the steely resolve to accumulate wealth. The sight of her moves him deeply. We begin to glimpse a – heretofore unsuspected – sympathetic side to Scrooge.

The Ghost of Christmas Present allows Scrooge to see himself as his contemporaries see him; notably, as he is seen by his nephew and the nephew’s wife. The scathing picture they present sobers him, but he is touched by his nephew’s stubborn belief that goodness lies buried underneath Scrooge’s flinty exterior. Scrooge is taken aback by his visit to Bob Cratchit’s home, where Cratchit’s ailing son, Tiny Tim, bolsters the family’s spirits with his pluck. The lesson is driven home to Scrooge by the sight of two poor, hungry children in the streets of London, each sporting a sign. One sign reads “Ignorance;” the other “Want.” Scrooge recalls his earlier dismissive rejection of the poor and hungry with bitter remorse. Once more we sympathize with Scrooge.

The Ghost of Christmas Future brings Scrooge face to face with his fate. It is a terrifying experience. Scrooge enters dilapidated quarters in which scavengers pick the figurative testamentary bones of a shroud-covered corpse. Their conversation leads Scrooge to suspect the worst. This is confirmed when the Ghost leads him to a cemetery and points with empty sleeve to a tombstone on which the horrified Scrooge sees his own name carved.

Now desperate and bereft of emotional resource, Scrooge begs for reprieve. Is the future irrevocably writ or is there still hope? He receives no answer but is instead transported back to his own time and quarters just as Christmas Day dawns. Intuitively, he recognizes that he has been given a second chance to rectify his mistakes and remake his life.

Scrooge is miraculously revitalized. He purchases a huge fowl for delivery to the Cratchit family for Christmas dinner, tipping the messenger boy extravagantly. He buttonholes the charity solicitors and reverses his previous stance by donating generously to their cause. He makes a surprise – and surprisingly welcome – appearance at his nephew’s Christmas Day celebration. And the following day, Scrooge reproves Cratchit for arriving late to work by … raising his wage and inviting him to imbibe some holiday cheer.

Speaking in narrative voice, Dickens ends by informing us that Scrooge followed through on his reformation by financing successful medical treatment for Cratchit’s son, Tiny Tim. Tiny Tim’s valediction may be history’s most beloved bit of literary Christmas lore: “God bless us – every one!”

The Carol at Face Value

Most people react to “The Christmas Carol” viscerally. Consequently, evaluations of its economic content – and intent – have followed parallel lines. Scrooge is a businessman. Scrooge is a miser. Therefore, Dickens is saying that businessmen – or at least, successful businessmen, which Scrooge was – are misers. Scrooge is single-mindedly devoted to wealth accumulation. Scrooge is unhappy and makes others unhappy. Therefore, Dickens is saying that the pursuit of wealth will end badly and is a bad thing. Since businessmen and wealth accumulation are portrayed unfavorably, it is only a small step to the conclusion that Dickens was excoriating capitalism in general in “A Christmas Carol.”

There is indirect support for this conclusion both inside and outside the story. The plight of the poor is stressed and Scrooge – in his pre-reformation, presumptively-pro-capitalist persona – is indifferent to that plight. In life, Dickens was a noted philanthropist and promoter of causes intended to benefit the poor. In particular, Dickens was bitterly opposed to child labor and relentlessly publicized what he saw as unsafe and unconscionable living and working conditions for poor children. He placed most of the blame for these conditions on wealthy businessmen.

These considerations have been ample to persuade most interested parties of Dickens’ anti-capitalist bent.

The Carol Reconsidered

Not surprisingly, economists view “A Christmas Carol” in a different light. A recent blog by Jacqueline Otto serves up stimulating insights. “I would go so far as to say,” she avers, “that ‘A Christmas Carol’ is a story about capitalism.” Ms. Otto offers three arguments in defense of this thesis.

First, she spotlights what Dickens does not say. “Dickens never condemns capitalism [or] business owners [or] trading… the only criticism Dickens makes is that Scrooge… and Marley… were not generous.”

Second, she points out that business success plays a central role in the tale. “There would never have been a story if Scrooge and Marley were not successful businessmen (e.g., if they had been unhappy poor men instead of unhappy rich men).”

Third, she makes the telling point that when Scrooge reforms, “he does not then become poor,” but instead “uses his wealth to help those around him” by saving Tiny Tim’s life with medical treatment, buying food for local families, donating to charity and raising Bob Cratchit’s salary.

Economist and editor David Henderson observes that today it is political liberals who play the role of Scrooge. Research done by Arthur Brooks (now president of American Enterprise Institute) and compiled for his book, Who Really Cares? strongly shows that contemporary donors to charitable causes are predominantly conservatives or inhabitants of the political right wing. Left-wing poll respondents indicate that they consider their tax payments supporting government programs as sufficient unto their causes.

In other words, Henderson declares, the left wing is reacting much as Scrooge did to pleas for charity for the poor: “Is there no Medicaid? Are there no food stamps?” In effect, their position is that they gave at the office via their withheld payroll taxes. Henderson’s point is that Dickens’ tale supports the conservative position that charity must be voluntary in order to be morally defensible.

Otto’s and Henderson’s parsing of Dickens follows in the footsteps of pioneering work by one of Ronald Reagan’s chief aides, Edwin Meese. In 1983, Meese seized the occasion of a news conference to comment extensively on the relationship between Scrooge and Bob Cratchit. Scrooge, claimed Meese, didn’t “exploit” Cratchit. Unlike many workers of his day, Cratchit lived in a house rather than a tenement. He could afford a Christmas dinner with goose and plum pudding. He was paid 10 shillings a week [actually, 15 shillings], a good wage for that day. The free market, Meese judged, would not permit Scrooge to exploit Cratchit, for it would allow Cratchit to escape an intolerable employment for a better one. For his pains, Meese was stigmatized by the news media of that day as “Edwineezer” Meese.

Readers of Dickens will recall that Cratchit’s inability to afford a full-blown Christmas dinner elicited the sympathy of Scrooge and motivated the (anonymous) donation of a Christmas fowl. An aide to a conservative President resolves to brave the scorn of the liberal news media by using a contrarian interpretation of a beloved Christmas classic to make points about economics – shouldn’t he at least take the time and trouble to get the details right? Still, Meese’s economic logic and history were eminently correct even if his recollection of the source material was shaky. He opened the door to our deeper understanding of the meaning of Dickens and “A Christmas Carol.”

In subsequent years, one point has often been made in passing reference to Dickens and “A Christmas Carol.” Scrooge’s triumphant redemptive gesture is to raise Cratchit’s salary. (In a few of the dozens of movie, television or stage versions, he doubles it.) This is perhaps the surest indicator of Dickens intentions and his view of the economic system of Victorian England. It reveals a mindset best described by economist Thomas Sowell as “volitional economics.” Economic outcomes are determined not by the impersonal forces of markets but rather by the will (volition) of powerful market participants – in this case, employers. Employers are the prime movers; employees are not actors but rather are the passive, helpless recipients of employers’ actions.

Modern economic theory utterly rejects this primitive conception of volitional economics. In the strictest sense, an employer doing what Scrooge did in a competitive market – arbitrarily raising the salary of a key employee – would go broke. In practice, various frictions and modifications to theory might lessen that penalty, but economists nonetheless view Scrooge’s capricious behavior with amusement. In Victorian England, pay policies of employers were constrained by the markets for labor and goods, not by personal whims. Neither personal generosity nor parsimony came into it.

The Carol as a Classic Case of Unintended Consequences

“A Christmas Carol” is one of the most emotionally compelling fictional works ever penned. “The story…has become so well known,” conclude John Tibbets and James Welsh in Novels Into Film, “that it has transcended its origin as a work of fiction and has entered the public consciousness with the life-changing power of scripture. Even those who have never read [the] story, or seen…the movie adaptations…know… what a ‘scrooge’ is and what ‘Bah! Humbug!’ means.”

Dickens himself, in common with other great novelists such as Dumas, was overcome by the force of his own writing. By his own account, he “wept and laughed, and wept again” during the six weeks it took him to complete his work.

Thus, it is not shocking that even economists, hardcore rationalists though they are, should bend over backwards to judge that work favorably. A clear-eyed appraisal suggests that Otto, Henderson, et al have been caught up by the same extravagant spirit of generosity that captured Dickens himself as well as subsequent generations of readers.

Calling “A Christmas Carol” a story about capitalism is overdone for at least two reasons. The first is that the term “capitalism” has not been coined yet. Karl Mark published Das Kapital in three volumes nearly thirty years apart, in 1867, 1885 and 1894 – long after Dickens wrote “A Christmas Carol.” Devotees of free markets eventually appropriated Marx’s pejorative descriptor to characterize the system he abhorred. But Dickens could hardly have intended to defend a system that had not yet been characterized as such.

To be sure, this cuts both ways. Dickens also could not have been criticizing capitalism per se. But he did criticize the institutions and practices that comprise it. Somehow, it is easier to criticize piecemeal than to defend, perhaps because the defense usually invokes the systemic role played by the piece as part of the defense.

Then there is the equally obvious point that the way an author deliberately goes about praising a social system is by…well, praising it outright – not by failing to condemn it.

As economists like Carl Menger and F. A. Hayek have pointed out, a major task of economics is to point out the unintended consequences of human action. Here, Otto and Henderson have demonstrated that – without in any way intending to – Charles Dickens mounted a significant defense of Victorian capitalism in “A Christmas Carol.”

Dickens as 20th Century Liberal

In Playback, Raymond Chandler’s legendary detective protagonist, Philip Marlowe, responds to a woman’s expression of surprise at his amatory gentleness by philosophizing: “If I wasn’t hard, I wouldn’t be alive. If I couldn’t ever be gentle, I wouldn’t deserve to be alive.” Toughness and rationality are the qualities needed to preserve and extend human life. Tenderness and empathy are qualities necessary to make life enjoyable as well as long. In our modern age of specialization, it is common to find toughness and tenderness distributed in a skewed manner rather than in equal measure.

Dickens certainly did not intend to praise or even defend capitalism as such in “A Christmas Carol,” but that does not devalue his work as literature or even as unwitting exercise in economic pedagogy. Like many on the political left, Dickens did not possess highly developed rational skills. His powers to stir and move his readers were prodigious, however. The emotional resonance of “A Christmas Carol” is its principal gift.

Dickens was ahead of his time in several ways. Although he inhabited the 19th century, he was a 20th-century liberal in his lack of ironic self-awareness. “A Christmas Carol” was a straightforward story of personal avarice and excessive preoccupation with wealth and pecuniary aggrandizement. But Tibbets and Welsh note that Dickens “did not necessarily intend to create a deathless and beloved work of literature. His aim was far more prosaic: to earn some much-needed money.” Dickens was mired deeply in debt in 1843 and his current project, the novel Martin Chuzzlewit, was not proving successful in its initial serial form. “A Christmas Carol” succeeded beyond Dickens’ dreams; it has not been out of print since it first appeared.

Thus we have the industrial-strength irony that the world’s greatest cautionary warning against love of wealth and avarice was written to make money and ended up earning a fortune for its author. Even since, leftists have set out to do good and ended up doing right well in bookstores, art galleries, theaters, cinemas and on university campuses. They followed Dickens’ example by remaining unaware or at least untroubled by the glaring contradiction.

In his books and in his private life, Dickens stridently criticized the conditions of life for English children of poor or modest means. Ever since, conventional thinking has blamed the Industrial Revolution for making life in Victorian England hellish for children. Meanwhile, painstaking research begun by men like Ronald Hartwell and continuing on down to present-day quantitative economic historians like Deirdre McCloskey has refuted this portrayal, showing that technological progress and free markets midwived economic growth and gains in longevity and hygiene among the poor. But because Dickens creates more excitement than economic statistics, the conventional view continues to overshadow the facts. In his contribution to economic myth-making, Dickens also foreshadowed his 20th-century counterparts.

Unlike modern liberals, though, Dickens should not be called to account for his failure to square perception with reality. By 1843, among the great economists only Adam Smith, David Ricardo and James Mill had made much impact on the public. It is certainly not clear that Dickens knew or understood much of their works. We do know that Scrooge’s biting comment that the poor had better “[die] and decrease the surplus population” was a veiled reference to the over-population theories of the economist Thomas Malthus, whom Dickens disliked. Although Malthus is recognized today for having done pioneering work in certain areas, he was then known and is still best remembered for his errors in population growth (failing to take technology into account) and consumption theory (supporting a theory of chronic underconsumption). It is hardly fair to blame Dickens for failure to apprehend an economics that was still lingering in its formative stages. For example, Dickens’ enslavement to the concept of “volitional economics” (as outlined above) could have been ended only by exposure to a systematic theory of labor and product markets that did not develop until after Dickens’ death.

“A Christmas Carol” Properly Appreciated

Works of art must be evaluated in temporal and historical context. Dickens’ “A Christmas Carol” is a memorable work whose beauty and tenderness rightfully continues to warm us all. Properly appreciated, it does not condemn capitalism but in fact bolsters free markets and free trade. The fact that Dickens himself was unaware of the full moral of his story may be ironic, but it does not detract from that moral. It shows that even when seeking in a primitive way to overturn the basis for capitalism, even one of the world’s greatest authors ended up doing just the opposite.