DRI-248 for week of 1-6-13: Rights vs. Power

An Access Advertising EconBrief: 

Rights vs. Power

Two recent examples of an endlessly recurring debate afford the opportunity to revive one of the most vital distinctions in political philosophy – between rights and power.

One example popped up at the Indiana University Health Goshen Hospital. Eight of its employees were fired for refusing to submit to flu vaccination via injection. Three of the eight were veteran nurses.

The hospital cited recommendations by the American Medical Association, the American Nurses’ Association and the Center for Disease Control that all Americans over 6 months of age undergo flu shots. One of the nurses, 61-year-old Ethel Hoover, insisted that “this is my body. I have a right to refuse the vaccine.” Website coverage of the incident by ABC News reporter Sydney Lupkin portrayed the dispute as a classic debate over “…which should come first: employee rights or patient safety.”

The other case occurred in Kansas City, MO, where Rockhurst High School, prestigious local Catholic high school, announced a policy of testing all students for the effects of drugs and binge drinking. A columnist for the Kansas City Star condemned the policy as “intrusive” and “unfair,” opining that experienced staff should be able to detect habitual users without the need for testing everybody.

The endless stream of back-and-forth debate over these cases suggests that the true governing principles have been long forgotten.

The Economic Implications of Political Rights

Few things arouse American ire as quickly as the subject of “rights.” The term is as old as the nation itself, appearing prominently in the Declaration of Independence and the Bill of Rights to the U.S. Constitution. And those references inform our understanding of the term.

Take the Declaration’s famous assertion that we possess the “right to life, liberty and the pursuit of happiness.” Why confer the right to pursue happiness – why not happiness itself? We sense the presence of a vital distinction. Our intuition tells us that government cannot very well grant a legal, constitutional right to happiness. Why not?

Of course, we realize that happiness is a subjective term and that it is impossible for one person to gauge whether another is happy or not. But we can make this point much more concrete by importing economic logic into the discussion. Economists gauge an individual’s happiness as a function of his or her real income or utility. This, in turn, depends on the consumption of life’s good things, both tangible and intangible.

Now we reach the nub of the problem. Goods are limited or finite in quantity while wants are infinite. Governments cannot promise happiness to everybody because governments cannot assure the supply of an unlimited volume of goods to satisfy wants. Again, this refers both to physical goods and services and to aesthetic wants such as beauty, truth and justice.

Although we may not realize it, we are all competing with each other for the limited supply of means with which to satisfy our unlimited wants. Naturally, we find it expedient to cooperate in order to serve our mutual interest in enlarging the volume of those means. Free markets and the price system are the evolutionary systems that have evolved for that purpose.

The Declaration of Independence enshrines the notion of the Rule of Law – or equality before the law – by granting to all alike the right to engage in the pursuit of happiness. But that does not imply that we all will achieve it. Indeed, stating the issue in this form makes it clear that we will not. Nonetheless, freedom allows everybody a shot at it and promotes cooperation not only in enlarging the size of the economic pie but in dividing it voluntarily through charity to help those who are least successful in fending for themselves.

The Economic Definition of Rights

A right is defined as something that can be enjoyed by one or more individuals without reducing the amount available for others to enjoy. This removes economic goods and services from the list of things to which a political right can be granted. Giving one person a guarantee of an economic good implies the necessity of denying a right to it (or, equivalently, to alternative goods) for others, since the good is not available in infinite quantities.

Guaranteeing a right to life means that others are not permitted to arbitrarily end your life unless you threaten theirs. Guaranteeing your liberty – and your right to pursue happiness – can be done without threatening the liberty of others. Indeed, the right to liberty must be guaranteed on equal terms for all law-abiding citizens in order to maintain the Rule of Law. That is why government exists in the first place.

The same reasoning applies to the other freedoms granted in the so-called Bill of Rights. It is vital to heed the Constitution’s explicit reminder that our rights are not limited to those explicitly listed in those first ten amendments. On the contrary, the Constitution limits the power of government by limiting it to its explicitly stated duties. (More than every, we are now coming to appreciate the wisdom of those who opposed ratification of the Constitution because they feared that the Bill of Rights would eventually come to be seen as limiting rather than reaffirming our rights.)

The Key Role Played by Competition

The case of nurses ordered by their employer to take flu shots is being treated by mainstream media as weighty and imponderable, a legal version of the clash between the irresistible force and the immovable object. But the principles outlined above – political and economic – provide the answer to this seeming quandary.

The nurses have committed no legal infraction and denied nobody their rights. Patients do not have an absolute right to good health any more than they have an absolute right to any other good or service. Ethel Hoover’s insistence that she owns her own body is impeccably correct. She has the right to refuse the flu vaccine. The government cannot force her to take it – not for the good of her patients or even for her own good.

But the government is not the entity requesting that she get a flu shot. Her employer is requesting that she do so as a condition of her employment. This request is perfectly valid and legitimate. The hospital chain serves customers. Those customers do not want to catch the flu while in hospital; they have just as much right to pursue happiness as nurses do. Hospitals compete with other hospitals. If some hospitals are forced to employ nurses who successfully resist flu shots, those hospitals may go out of business. Hospital owners have just as much right to pursue happiness as nurses do.

Are nurses being forced to take the flu shots by their private employer? No, because private employers cannot force employees to do anything. Employees can exercise the sovereign right of all employees – they can quit. Nurses are not guaranteed a particular job by law any more than they are guaranteed the right to a consumption good or service.

In this particular case, as it happens, the nurses in question apparently have lots of reasonable alternatives. They can pursue administrative jobs where their contact with patients is limited or nonexistent. They can pursue teaching opportunities within nursing. They can leave the profession and go elsewhere.

One other thing the nurses can do is pursue nursing employment elsewhere. Perhaps the fear of patient contamination is overblown, in which case competition between hospitals will provide an incentive for another hospital to exploit their veteran talents. Competition between hospitals works in their favor as well as working against them.

The pertinent distinction is between government action, which is coercive and allows no room for maneuver or escape, and marketplace action, which presents voluntary choices and alternative possibilities. When the government nails you, you either comply or go to jail. When an employer makes a request, you choose from a range of alternatives that normally offer much smaller decrements of loss.

By definition, competition means the presence of alternatives. By definition, government means their absence.

The All-Important Distinction: Rights vs. Power

Nurse Ethel Hoover wants to assert a “right” to refuse her employer’s request that she take a flu shot while at the same time retaining her job. In effect, she wants the right to hold her job in spite of her employer’s insistence that she is unsuitable to perform it.

This is not a right. The only way she can retain her job under these circumstances is by forcing the employer to give up his right to pursue happiness by producing health care profitably and safely and by forcing consumers to forego their rights to purchase good health. Nurse Hoover is demanding power – the power to force other people to forego their rights. Of course, she is cosmetically beautifying her claim by cloaking it in the faddish language of “rights.”

The debate over freedom vs. power goes back a long time. In the 20th century, it was wages between F.A. Hayek on the right wing and John Dewey on the left wing. Dewey defined freedom as the “power to do effective things” while Hayek defined it as “the absence of external constraint.” Hayek observed in his classic polemic The Road to Serfdom that Dewey confused freedom with power. Modern political philosophy has continued to observe the distinction with the dichotomy between “positive liberty” (Dewey’s version, which is really power, not liberty) and “negative liberty” (Hayek’s version).

The left wing has traditionally conflated power with freedom. It has tried to salvage its position by insisting that only government can solve cases like those of Nurse Hoover. Employers are unable and/or too venal to judge the safety of flu shots; consumers can’t choose safe health care for themselves. Thus, allowing markets to work will wrongly exile Nurse Hoover from her profession and stick us with inferior health care. Governments must objectively determine the safety of flu vaccines, once and for all and for everybody. Government must give Nurse Hoover her rights; otherwise, she won’t have any since markets always do the wrong thing.

The left’s position is untenable. It is logically absurd to contend that consumers not only make wrong choices about their own health but also continue to persist in those choices. It is absurd to maintain that bureaucrats somehow possess both the expertise and the wisdom to make life choices for people about whom they know nothing. It is absurd to suppose that bureaucrats – notoriously insulated from the consequences of their own mistakes – can judge safety better than doctors and managers whose livelihoods are on the line.

The Non-Sequitur of Childhood

The Rockhurst High School case is also being wrongly perceived. Here, the confounding factor is childhood, a factor that nowadays invariably puts the brain in neutral while shifting the emotions into forward gear.

Once again, the issue is being put as a conflict of “rights.” Does a high school have the “right” to “force” students to undergo drug tests? Do students have the “right” to refuse them? In this case, the presence of childhood in the equation turns some people into paternalists and others into public defenders.

The paternalists insist that kids cannot possibly perceive their own interests and that it is therefore up to us to step into the breach. Of course, this places overwhelming importance on the content of “us” – is that parents, teachers, administrators, judges, doctors or some artfully contrived mixture of the above? The public defender insist that children are helpless victims of the high school/teachers/administrators/judges/doctors (take your pick) and require the services of advocates provided by government or the press (to the extent that those two differ).

Economics has long realized that consumption decisions are made jointly within families and nominates “the household” as the family choice unit. As a practical matter, this means one or more parents with varying degrees of input from children. There is no reason to think that a system that makes choices on food, clothing, housing, entertainment, transportation and communications cannot also handle education and personal privacy.

Of course, households choose among competitive suppliers of food, clothing, housing, etc. And this particular situation actually deals with personal privacy rather than education, doesn’t it?

Yes and no. Large numbers of households are hamstrung by quasi-monopolies in secondary education; that is, they cannot afford to pay twice for the competitive alternative of private schools. In that sense, they are actually in the “government” case as outlined above. The law requires them to send their kids to school but doesn’t allow them the luxury of choosing alternative suppliers of public education if their school’s policy on personal privacy is obnoxious to them.

As it happens, Rockhurst High School is one of – perhaps the – most exclusive private high schools in the Kansas City metro area. There is little doubt that its families can afford to search out alternatives if necessary. Thus, Rockhurst should certainly have the alternative of offering drug testing to its students and parents. While the policy may well be unpopular with students, parents may just as well like it. Parents who don’t like it can enroll their children elsewhere.

If the policy proves unsuccessful, we all benefit from having learned this truth. Certainly it would have been better to have known it in the first place and avoided the hassle and unpleasantness of testing, but it isn’t always possible to know everything in advance. Sometimes we have to try things. That is one of the things that free markets are all about. If the policy proves successful, that will vindicate it in spite of initial objections – provided the objectors weren’t forced to undergo it.

But what about a policy of drug testing in the public schools? That’s a lab specimen of an entirely different color, to suit the metaphor to the occasion.

Time and again, this generic problem arises. Should public schools have a dress code? If so, which one? Should they teach evolution – or creation? And what does “teaching” either one of those mean, anyway? It turns out, then, that drug testing is not a unique issue at all. It is the same old issue in different guise.

There is no “solution” to questions like dress codes or religion in schools – no unique, one-size-fits-all solution, that is. The solution is competition. The solution is to allow different families to choose the alternatives they like best – and to change their minds when things don’t work out.

There is only one route to that solution. It lies through a free, privatized market in education. Mirabile dictu, this just happens to be the same economic solution to the decades-old problem of rising education spending and falling educational quality. Education reform dates back to the early 20th century, but results have been dismal. Economists know the source of the problem and they know that the answer is not more money spent on education. The bromide “you get what you pay for” is correct only when there is competition for the product being purchased.

Thus, a policy of drug testing in public schools should be rejected for the same reason that Nurse Hoover should be allowed to reject flu shots. Government has no right to force students to undergo drug testing against their will because public education is a quasi-monopoly provider. But the monopoly provision of public education should be ended, for this reason among a multitude of others.

Drug testing may be a good thing or a bad thing. Indeed, it may be a good thing for some people, in some environments or cultures, and bad for others. The only way to find out is to allow competition to prevail. And the only way to do that is to get government out of it.

The Politicization of Practically Everything

Today we face the Balkanization of American life, with interest groups facing off in the legislatures and courts. The executive branch of government (mayors, governors and the U.S. President) has come to view as a prerogative the ability to decide questions involving “rights.” In effect, this means deciding which people will have more goods and services and which people will have fewer. This is not the promotion of true rights. It is the exercise of power.

This abrogates the Rule of Law. It erodes respect for the law. It turns republican government into a form of totalitarianism called absolute democracy. Under that system, we vote to elect political representatives and they grant “rights,” or entitlements, to their supporters while depriving their opponents of true rights. This is what comes of elevating politics above all and ignoring economics.

The most recent manifestation of this aberrant democratic virus is the obsession to punish the rich. The party in power – the Democrats – has essentially unlimited power to write rules through legislation, regulation, executive order and judicial interpretation. That allows them the luxury of writing rules that reward their supporters and punish their opponents. Their supporters include plenty of rich people, but they are predominantly those who gain real income from foundations and carried interest. So Democrats write tax rules that favor those practices. Democrat rules define the “evil rich” as those who earn high annual incomes from entrepreneurship and salaries; i.e., Republicans. So Democrats raise taxes on “the rich” in the name of fairness by increasing marginal rates of taxation on high incomes. (Democrat entrepreneurs are granted waivers from Democrat rules and regulations such as ObamaCare legislation.)

Meanwhile, Republicans sit dazed and sullen. They await their return to power. At that point, they can implement their agenda by elevating the interests of their supporters and punishing the Republican analogues of the “evil rich,” such as immigrants and homosexuals.

George Orwell characterized a totalitarian society as one in which everything is politicized; everything is either mandatory or forbidden. The reflexive tendency to turn employment conditions and student privacy policies into political firefights is a symptom of neuropathy in the body politic. We have become insensitive to the freedoms of others.

The inherent purpose of government is to coerce, to promote conformity. Markets are not all-or-nothing propositions. They accommodate variety. They move incrementally. They promote diversity. By insisting that government do more and more, we are allowing markets to accomplish less and less. We are methodically chipping away at the zone of human freedom.

DRI-285 for week of 11-18-12: Twinkie Recipe: Separate Politics from Economics, Bake Cheaply and Deliver Efficiently

An Access Advertising EconBrief:

Twinkie Recipe: Separate Politics from Economics,

Bake Cheaply and Deliver Efficiently

Contemporary economic theory is now so heavily formalized by high-level mathematics and statistics as to be inaccessible to non-specialists. This has many drawbacks. Among them is the difficulty of integrating the effect of politics on markets. This is one of the few points of agreement between left- and right-wing commentators, who insist that we have a system of political economy rather than a system of markets as such.

Both sides are correct. Unfortunately, this realization causes them to neglect economics rather too much and concentrate on politics too heavily. Faced with a controversy, they tend to choose sides as if engaged in a war – by looking at the political uniform worn by the participants. Their most recent skirmish has attracted national attention. The baker, snack-food and confectioner Hostess, Inc. has filed for bankruptcy after a protracted dispute with its unions. One union in particular, the bakers’ union, has drawn the focus of attention.

The Decline and Fall of Hostess

Hostess was formerly Interstate Brands Corp., of Kansas City, MO, producer of over 30 brands of breads, cakes and snacks. These include legendary names like the Twinkie, Wonder Bread and Hostess Ding Dongs. The current dispute between Hostess and its unions is only the terminal event in a decades-long history of gradual decline. Hostess’s bankruptcy is its second; the first resulted in reorganization and the name change from IBC to Hostess. How could a company with such a distinguished roster of popular brands have fallen so low?

Some of the decline is due to a change in consumer tastes. High-calorie, high-fat, high-sugar snacks have lost favor. The realization that carbohydrate consumption carries just as much danger as fat consumption, if not more, has dampened the American enthusiasm for bread and cake. This is only part of the explanation for Hostess’s problems, though.

The longtime popularity of brands like Twinkies and Ding Dongs allowed the company to endure some highly uneconomical labor practices. The Teamsters Union – one of 12 unions operating under more than 300 collective-bargaining agreements with Hostess – forbade drivers from helping to load and unload their trucks. A stocker had to be employed to drive to the store and stock retail shelves with products transferred from storage. Some brands, such as Wonder Bread, could not share space on trucks with others.

When the falloff in brand popularity hit, Hostess could no longer subsidize this sort of inefficiency. The company has operated in bankruptcy reorganization for most of the preceding decade. The final crisis occurred within the last week, when Hostess announced that it had asked for contract concessions from the baker’s union, having already received concessions from the other 11 unions. It could not operate under the current contract and the law forbade operation without a contract. Thus, it announced that unless the bakers agreed to a deal, Hostess would once more file for bankruptcy and this time would proceed to liquidate the company’s assets.

The bakers refused. The company filed for bankruptcy. A federal judge intervened with by demanding that the parties undergo mediation. That process failed, and the bankruptcy and liquidation will now proceed.

The Left-Wing Reaction

The response on the hard left-wing, particularly among union proletarians, is that once more a company was undone by “vulture capitalism.” Private-equity firms took over the firm and ran roughshod over the rights of honest workers, raping and pillaging the firm’s assets. These commentators are doubtless fortified by the election returns, which suggest that the campaign of career-character assassination against former Bain Capital CEO Mitt Romney worked well enough to secure re-election of a fairly unpopular President.

The commentators looked at the day-to-day uniforms worn by the managers of Hostess and saw “venture capital” emblazoned thereon. Had they looked behind the scenes, however, they would have noticed that many of the particular venture capitalists involved with Hostess were closely associated with the Democrat Party. That’s right – the party of compassion, of equality and fairness, of comparable worth and social justice and the 99% and share-the-wealth and soak-the-rich. How could this be?

Actually, the real question is: How could it be any other way? Take-over artists and private-equity managers are primarily engaged in turning around businesses, not liquidating them. A liquidation is a fire sale, in which assets are generally sold at rock-bottom prices. That is why potential buyers tend to wait out dramas like the Hostess episode rather than riding to the rescue like the Lone Ranger. The rate of return on an asset depends crucially on the price paid for it. Who wouldn’t rather pay a low price rather than a higher one? Private-equity managers are business experts, right enough, but there’s no such thing as an expert in getting a high price at a close-out sale. Ask any business owner who ever went bust or any grieving son or daughter who ever liquidated their parent’s possessions at an auction. It’s pretty tough to profit from this process and it’s just as tough to earn fees from producing outcomes like this, since nobody has an incentive to pay the fees.

No, the people who bought Hostess bought it in order to run it, not break it up. Their record shows they usually succeed in doing that. They’re liquidating Hostess now because they failed this time and there’s no point in throwing good money after bad by failing to play their hole card. That card is the fact that Hostess’s 30+ brands still have considerable market value. In fact, their individual market value – outside the company and freed from the dead weight of union presence – probably exceeds its collective value inside Hostess.

The link between private-equity and the Democrat Party is eminently logical. It is economic, not political; that is, it has no necessary connection with the political sympathies of the vulture capitalists involved. Takeover targets are failing companies that have the potential to succeed. Why does a potentially successful company fail? Answer: it is being dragged down by unions, just as Hostess was. How to overcome this roadblock? Answer: persuade the unions to cease and desist from their uneconomic practices for their own good as well as the good of the shareholders. The best people to do this are not card-carrying Republican Party members or Ayn Rand sympathizers. They are fellow Democrats, who can at least gain the ear of the union bosses and perhaps retain a shred of credibility with the rank and file. And look what happened here – Hostess’s managers succeeded in keeping the company going for over a decade and persuaded 11 of the 12 unions to sign off on their latest resuscitation plan.

So much for the standard left-wing boilerplate view of the Hostess affair. Alas, the view from the right wing is not much more cogent.

The Right-Wing Reaction

Somewhat surprisingly, the right-wing view has gained considerable momentum even in mainstream media. The baker’s union suffers from false consciousness, say the mavens of talk radio. They stubbornly cling to their high union wages and benefits at the cost of their own jobs – and the 18,500 other jobs at Hostess in the bargain! How selfish can you get? Just one more case of what “union bloody-mindedness…at work.”

Wall Street Journal columnist Holman Jenkins (11/21/2012) provides a refreshing antidote to the stereotypical thinking of both right and left. He reveals that the Hostess story is a tale of two unions, not just one. It is the Teamsters who are the stereotypical hard-liners, insisting on featherbedding work rules that have driven Hostess’s product distribution costs into the stratosphere. The bakers (the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union) have made repeated concessions, to the point where production costs hardly exceed industry norms.

From the bakers’ standpoint, they are being asked to make even more concessions now in order to protect the current status of the Teamsters, whose work rules are still hamstringing the company. No matter what you may have heard, solidarity is not “forever” – that is merely a song lyric.

As organized under laws mostly passed in the 1920s and 1930s and reinforced by labor regulations handed down for decades by the federal government, a labor union is a cartel. It is analogous to cartels set up by businessmen who sell products and services. Cartels strive to emulate the outcome of a monopoly, which is to thwart the competitive process and attain the same collective profit-maximizing outcome theoretically open to a pure monopoly seller.

In practice, a pure monopolist cannot even approach that theoretical outcome without the aid of government in restricting competition. That is even truer of cartels and much truer of labor unions. That is why the federal government has conferred their coercive powers upon unions. Unions operate to raise wages above the level that would otherwise prevail in a free labor market. The only ways to do that are to artificially hold wages high or to artificially restrict the supply of labor to the market. Unions do one or the other, depending on circumstances.

Both of these practices reduce employment in the unionized sector. This drives workers into unemployment and/or into non-unionized sectors, thereby driving down wages there. Union workers have no particular incentive to sacrifice on behalf of other union workers, who are after all merely workers like the ones whose interests have already been harmed by the union cause.

Jenkins points out that the bakers had a strong case for not agreeing to Hostess’s offer. Why not “hold back further concessions, let the company liquidate, and try their luck with a new owner or owners who might materialize for its bakery operations. These new owners presumably would be in a position to invest cash in marketing and promotion… They would benefit from the deluge in free media that has befallen the Twinkies brand this week. All the more so given that Hostess plans to close or sell some of the bakery plants anyway, that unemployment benefits are generous, that bakery jobs have become crummy-paying thanks to previous givebacks, that the government-run Pension Benefit Guaranty Corp. will be assuming the Hostess pensions in any case.”

So it seems that the bakers are not dumbbells after all. They are pursuing their own interests rationally given the cards they were dealt under a system they didn’t design. The right wing is repeating a frequent mistake of blaming victims of progressive socialism for acting in their own behalf. The right should instead expend all its energies working to change the system.

Jenkins observes that “one could always ask about the wisdom of a labor-law structure that causes companies like Hostess to drag on for decades without adapting to their marketplaces.” Indeed. This is a structural consequence of the substitution of politics for economics.

The Vocabulary of Political Theater

The medium of political theater employs a vocabulary of perception rather than one of real meaning. Words are assigned a political meaning unrelated to their substantive economic impact. One such word is “corporation.”

A corporation is a set of meanings that assign claims to various assets. But the political meaning of the word “corporation” describes a personified entity that is “large,” “wealthy,” “powerful,” “insensitive,” and “evil” when remotely viewed, or “paternalistic,” “secure” and (still) “wealthy” when viewed up close – say, from the perspective of an employee. All these traits are those of individual human beings; the political view of a corporation equates it to a person.

When a corporation goes out of business, it closes – often declaring bankruptcy – and its assets are liquidated. When a person goes out of business, he or she dies. A person cannot undergo “asset liquidation” even though a person’s assets can be liquidated. Thus, a person is not a corporation. But because politics views a corporation as a person, bankruptcy is viewed as akin to human death, even though it is not.

Bankruptcy is a process of evaluating the business to determine whether, and in what form, the business should go forward. That evaluation will gauge whether the business’s assets are worth more in combination or singly. This determination is a vital social process because your welfare and mine suffers if business assets are misused. True, we may not be owners of the business, but the real beneficiaries of a business are consumers, who benefit from what the business produces. That, after all, is the whole purpose of businesses – to produce goods and services for consumption.

When companies like Hostess die lingering deaths of a thousand union and bureaucratic cuts, all of us experience imperceptible losses. We pay more for government regulatory and bureaucratic functions. We pay more for the goods and services those businesses produce and we get less. Perhaps we are able to buy less in the coin of a depreciated currency.

Bankruptcy is in no sense analogous to human death. If an analogy is absolutely necessary, the “burnoff” of dead, accumulated brush that occurs in nature would be a good one. This pruning away of dead, useless stuff enables the remaining ecosystem to thrive.

One of the most destructive of all political terms is “economics,” which means “macroeconomics.” Currently, there really is no such coherent economic theory. Even less is there a set of valid, generally recognized policy prescriptions that could be grouped under that heading. The only valid meaning for the term “economics” would be described by the sub-head “microeconomics,” with the proviso that this would include the specialty of monetary theory and the study of business-cycle dynamics. One of the two sub-disciplines of microeconomics is the theory of the firm. That logic is of more help in understanding Hostess than anything provided by the Council of Economic Advisors.

A politico-economic term that has no meaningful economic referent is “job creation.” The purpose of economics is not to create jobs but to create value. Human labor is the key means of doing that, but it is the value, not the labor itself, that is the desired end product. Totalitarian regimes are wonderful job creators; there was no unemployment in ancient Egypt or in Soviet Russia or Communist China under Mao. The trick is not putting people to work; it is getting the most out of the work they do. That is what the “labor-law structure” referred to by Holman Jenkins completely overlooks.

Whither Twinkies, et al?

A few observers are sheepishly acknowledging that maybe we haven’t seen the last of Twinkies after all. The current owners of Hostess intend to sell the rights to produce all those branded products, which portends a bright future for any brand not encumbered by the same union rules that felled Hostess. And it may well mean a brighter future for many of those in the baker’s union as well.

DRI-398 for week of 8-5-12: ‘Buying Local’: Reinventing the Wheel – Square

‘Buying Local’: Reinventing the Wheel – Square

According to popular folklore, the 1950s were temperamentally straitlaced and artistically straitened, a time of airless conformity and retrograde sentiment. By contrast, the present day is technologically advanced, artistically avant garde and politically progressive.

Neither stereotype stands up to scrutiny. The 50s produced critically acclaimed cinematic masterpieces like Vertigo, The Searchers, Singin’ In the Rain, Touch of Evil and The Night of the Hunter. They spawned the Civil Rights movement, Jack Kerouac, the Beats and the birth of National Review magazine. The current cinema is top-heavy with inferior remakes of previous classics, knockoffs of television series and comic-books. Our politics is poisoned by the zero-sum implications of the bi-partisan devotion to big government. We stand on the verge of repudiating the commitment to freedom and individualism made by the Founding Fathers over two centuries ago.

Historians will one day cite the doctrine known as “political correctness” as one of the most toxic pollutants of the political climate. One ingredient in the politically correct brew is the behavioral posture known as “buying local.”

The Principle of Buying Local

The guiding principle behind “buying local” (hereinafter, “BL” for purposes of brevity) calls for consumers to confine their purchases, as much as possible, to production originating in the local community. This program is deceptively simple. Close examination, however, reveals that it is adherents who are deceived.

The simplicity of the plan dissolves as soon as one tries to put it into practice. In order to limit purchases to goods produced in the local community, one must distinguish local from non-local. For exemplary purposes, consider the metropolitan area of Kansas City, MO/KS. This is an area of over 2 million people, overlapping the border between two states, consisting of over 30 separate, contiguous municipalities.

Does each one of those municipalities constitute a “local community?” Do the residents of Fairway, KS (population 3,952) pointedly refrain from shopping in neighboring Westwood, KS (population 1,533)? Should they both religiously shun neighboring Kansas City, MO (population 440,885), immediately across the state line to the west and MIssouri’s largest city? In practice, it is safe to assert, virtually nobody does. After all, Kansas City is where the lion’s share of gastronomic, artistic, athletic and cultural amenities are located – not to mention more mundane but even more practical venues like Wal Mart, Target, Costco and the Country Club Plaza (the world’s first outdoor shopping center) are located.

Very well. We will assume that advocates of BL will stipulate that the entire Kansas City metro area qualified as a “local community.” Once that’s settled, we confront questionable cases like Olathe, Leavenworth and Lawrence, KS and Peculiar, Harrisonville and Belton, MO – all small towns lying within a 40-mile radius of Kansas City. And the argument is reversible, since residents of Kansas City will want to travel to and import goods and services from these outlying communities.

Suddenly, it dawns that there is no objective, universal meaning to the term “local community.” This effectively torpedoes the concept. But that does not destroy its usefulness, which is utterly independent of economic logic and practical value.

Emotion and Politics

BL is a useful concept because pretending to use it allows people to regard themselves favorably. Because they associate the term with pleasant feelings, they do not react badly when they see the concept used to practice economic protectionism;that is, totake money away from efficient producers and give it to inefficient producers. Thus, buying local is useful to those who advocate and promote protectionism. Mostly, these are left-wing sympathizers like union members, environmentalists and central planners.

Ever since the dawn of the Industrial Revolution and the advent of mass production, small-scale production has been gradually but continually displaced by large-scale, mass production. The assembly line allowed larger quantities of output to be produced at lower unit cost than older production systems such as handicraft and piecework. All other things equal, the law of demand states that consumers will wish to buy more of any good at lower prices of that good. A corollary implication is that consumers will prefer to buy a lower-priced good to a higher-priced one – provided they view the two goods as otherwise homogeneous.

Mass production allowed firms to serve national markets. Larger firms tended to displace small, local firms. This trend began in the 18th century and continues today. Decades ago, Wal Mart established itself by entering small-town markets and displacing the monopolies enjoyed by local merchants through Wal Mart’s low prices and tremendous variety of goods. Now it faces competition from discount retailers like Target and Costco.

The economic logic underlying this historical evolution is unassailable. Countries, states, regions, cities and municipalities specialize in producing goods that highlight their “comparative advantage,” which means goods whose production they can accomplish with the smallest sacrifice of alternative output. After production, the goods then travel throughout the world via trade – international, intranational, inter-state and inter-local. Money tends to obscure the underlying barter nature of this trade by interposing itself as a medium of exchange.

Although efficient trade tends to optimally enhance the real income of just about everybody, less efficient producers often object to the outcomes realized under competition. That is where BL comes in. Promoters use it as a pretext for preventing consumers from buying lower-priced outside alternatives to local goods, or trying to, or scolding consumers who succeed. The local producers and their employees gain from this interference. The promoters of BL gain power and influence as brokers of the benefits enjoyed by local producers. And these gains come at the expense of everybody else.

The Tribal Roots of BL

The pleasant feelings associated with BL are stimulated by human instincts traceable to the evolution of our species. When male/female pairs began to aggregate into groups, the human race spent thousands of years developing habits conducive to the survival and growth of the local tribe. Production was organized to benefit the group; dependence on outsiders was dangerous. Although trade dates back as far as recorded history, the full realization of its advantages developed slowly.

Over time, more sophisticated institutions took the place of the tribe. Religion provided a form of group identification, as did geographic origin and residence. With the nation state came confederations bringing together towns, states and regions under one banner. The common denominator of appearance made ethic membership another popular source of group differentiation.

The ambiguity of the word “local” makes the concept of buying local to stretch far enough to cover all of these bases. Jews can feel good about keeping kosher. Residents of Tightwad, MO can feel virtuous about keeping their deposits at Tightwad Bank instead of Bank of America. Without quite realizing why, we can all bask in the inner glow of belonging to the tribe.

What’s the Harm?

Casual boosters of BL may object to the objections raised by economists. What’s the harm in a little local color, a little local favoritism? After all, we’re going to buy our vegetables somewhere, aren’t we? Surely economists aren’t suggesting that we shouldn’t root for local sports teams and nourish local traditions, are they?

An example may clarify the relevant distinction. Professional sports leagues were organized by creating teams linked to geographic localities (typically cities). Observation indicates that most people root for and identify with teams based on “tribal” factors like geography. On the other hand, some people derive pleasure from sports based purely on the athletic excellence displayed, regardless of geographic loyalty. If tribal loyalty is itself an originary source of happiness or utility, economists have no basis for decrying it. But the suggestion that tribal loyalty should be artificially elevated above otherwise higher-ranking considerations of economic efficiency is wrong.

There is nothing wrong with being a fan of the New York Yankees. There is nothing wrong with living in New York and being a fan of the New York Yankees. But saying that New York residents must (or should) be Yankees fans is wrong. And the inherent meaning of buying local is that natural market outcomes cannot be trusted and must be overridden in favor of local loyalty. Otherwise, why would we need the slogan?

Most people are quite willing to subordinate the appreciation of athletic excellence to tribal loyalty because it costs them little or nothing to do so. But in cases where it does cost- perhaps quite heavily – to elevate the tribe above all else, it is idiotic to do so.

Price and Perishability

This is the moment to point out that local production has its own set of countervailing advantages and efficiencies, sometimes offsetting those of mass production and national markets. The beauty of free markets is that these are already reflected in the data generated by market competition – we do not need the artificial intervention of BL to make us aware of them.

One of the most frequently cited products by BL advocates is local produce. This is hardly surprising. Consumers across America have come to know and love the products purchased in New York’s Fulton Fish Market, San Francisco’s Fisherman’s Wharf and the Farmer’s Market in Los Angeles’ Westwood Village. There are sound economic reasons why these markets arose and endured throughout the era of corporate farming and aquaculture.

After goods are produced, they must find their way into the hands of consumers. Since the locus of production is chosen to minimize production costs, it will be close to some consumers but distant from others. The price of any good must reflect not only the costs of production but also the costs of transportation from production site to the consumer. In this respect, local production has a built-in advantage – by definition, transport costs are lower for local production than for non-local. But this advantage is automatically conveyed to consumers via the price system, in the form of a lower price – or rather, a lower transport-cost component of the price. This invisibly nudges consumers towards local production. There is no need to interpose BL in the decisionmaking process. Of course, the influence of lower transport costs may not be decisive, since other factors may more-than-counterbalance it.

Although economics textbooks sometimes downplay the fact, quality is a choice variable no less important than price. One drawback of produce is its perishability. Local production enjoys another automatic advantage over non-local here and in the closely-related characteristic of freshness. And once again, markets transmit the qualitative superiority of local produce to consumers without the quasi-coercive force of BL being applied. The continuing survival of city produce markets and roadside vegetable stands is tacit evidence of this.

BL in Action

In its most innocuous form, BL is found in casual references on a variety of media. Hosts and callers to sports-talk shows will urge fans to support the home team by implying or stating outright that “loyalty” demands it. While analytically indefensible, this is comparatively harmless. The relevant comparison is to demands that taxpayers be made to support sports teams with subsidies ranging from operating subsidies to sweetheart stadium leases to bond issues supporting stadium construction. Although the rationale for sports-team subsidies often invokes secondary, multiplier benefits and job creation – none of which has the slightest logical or empirical validity – the tacit premise lurking underneath the pseudo-economic jargon is that tribal loyalty, usually disguised as civic pride, should rule.

In hiring, there may be something to be said for resolving toss-ups or obscure choices in favor of local candidates. For one thing, familiarity with local conditions may carry some advantages in buying, negotiating or adhering to protocol. But BL is a time-honored means of delivering graft by requiring city contracts to give preference to local contractors, vendors or labor.

An all-star example of the BL fallacy is the insistence that BL will “keep your money in the local economy” – as if that were a desideratum devoutly to be wished. The best way to apprehend the money-leakage fallacy is to compare a local community to a country in international trade. When U.S. citizens buy foreign goods, they send dollars outside the country – or, more precisely, to the foreign-exchange market, where the dollars exchange for foreign currencies. But this dollar exodus is not permanent. Foreigners do not consume dollars directly by eating them or using them to mop their brows. As a first approximation, they will buy them from foreign-exchange dealers to use in buying U.S. goods. Now the dollars return home. (Observe that the fundamental nature of exchange is barter, the trade of goods for goods, even though money greatly facilitates this exchange process.) This logic applies to purchases of financial assets as well; the only effect of BL will be to prevent local residents from enjoying a higher rate of return on their money.

Movements in exchange rates and trade in financial assets will tend to equalize the value of a nation’s imports and exports over time. This even holds true when exchange rates are fixed and invariant, although the outcome is accomplished not through movements in exchange rates but through money flows and changes in real income and employment. The same thing applies to local communities – trade inside the U.S., for example, is conducted in a common currency, so imports and exports between the community and the rest of the country tend to equalize. It is true that occasionally a “dying” community will suffer when business leaves and money flows in only one direction. BL will not rescue this situation, though – it will merely lower the standard of living of remaining inhabitants. Lack of tribal loyalty did not cause the civic mortality and BL cannot cure it.

The international realm is the venue for perhaps the most popular display of BL. It is also the only one to attract much serious support from economists. This is the demand for preference towards “indigenous production” in developing countries. In practice, it is usually invoked in support of local agriculture. Expressed concisely, it invokes a scenario in which the real income effects of price changes overshadow the substitution effects. Farmers are so numerous that they cannot benefit from purchases of imported agricultural products, even when those products are lower-priced. The resulting loss of demand for their output causes farmers to lose more as producers than they gain as consumers. Farming is so dominant that the gains in non-agricultural sectors cannot compensate for the net losses suffered by farmers.

The remedy prescribed by the left-wing is BL on a national scale – the restriction or outright prohibition of agricultural imports from developed nations. The problem with this cure is that its success keeps the patient on permanent life support. The only hope for economic growth is to diversify the economic base sufficiently to achieve some measure of balanced development. Protecting domestic agriculture has the opposite effect; it keeps resources employed in agriculture instead of diverting them into alternative sectors.

BL, Raw Materials and Economic Development

The case of (potential) immizerizing trade is by far the exception in international economics. The typical case is that of a developing country producing raw materials, particularly extractive substances such as tin, oil, or rare minerals, or raw agricultural commodities such as cocoa or coffee beans. It would be absurd to limit consumption of these substances to their production locus; in fact, they are transported throughout the world and used as production inputs in thousands of goods and services. Less developed countries are heavily dependent on income from their export. Yet the BL doctrine, taken literally, would dictate their exclusion.

Really, the current flap over BL is simply the same as the “buy American” imbroglio that periodically emerges to bedevil U.S. consumers and economics instructors. Scratch almost any product and you discover that there is no such thing as a purely American good, because the complexity and efficiency of modern markets enables least-cost production to combine inputs from around the globe. Toyota is a “foreign” car because of its nameplate, but it is assembled in the U.S. and its so-called “American content” exceeds that of many domestic models. Meanwhile, goods with impeccable American pedigrees nonetheless employ inputs and labor from abroad.

A list of thousands of key imported inputs used in everyday U.S. production is sufficient to scotch any realistic notion of BL as an actual program. Some of these inputs are imported because they do not exist within our national borders. Others could be produced here, but only as astronomical cost. Still others were domestically produced or still are, but cannot be produced in sufficient quantities to meet domestic demand.

BL and Environmentalism

BL is so economically unsound that only political coercion could even begin to put it into widespread practice. Thus, it has much in common with environmentalist doctrine, which is likewise based on emotive, tribal considerations that dissolve into contradiction when subjected to scrutiny.

The modern reaction against “globalism” is clearly related to BL; indeed, “localism” may be viewed as the opposing metaphor to “globalism.” Environmentalists have hopped onto the anti-globalist bandwagon and made common cause with such fellow left-wingers as labor unions and socialists. Labor unions oppose international trade because trade seeks out least-cost production, and this enables producers to circumvent the local labor monopolies created by unions by importing goods created using non-union foreign labor. Consumers and foreign workers gain from this trade, but union monopolists are left out in the cold – at least in their capacity as sellers of labor, anyway.

The environmentalist link to BL Is forged by the trendy recourse to the theory of man-made global warming, which pinpoints the atmospheric release of carbon dioxide as the culprit. The environmentalist mania for reducing individual and corporate “carbon footprints” has provided a pretext for BL, on the presumption that less transport must mean less carbon usage. Not only is this an unsound generalization, it is also wildly impractical. Even the most powerful socialist dictatorship would not possess the necessary knowledge to calculate the carbon footprints of the hundreds of thousands of goods and services produced and consumed by billions of humans, let alone to successfully coordinate economic life in such a regime. The problems posed are those of “buy American” increased exponentially. And, of course, all this assumes the correctness of the initial theory.

BL is BS

BL pretends that economic problems can be reduced to a crude level and solved with reference to simple geography. But the only valid points made by the BL program are already automatically incorporated into the data transmitted by the free, competitive price system. Meanwhile, that price system also integrates a vast amount of additional subtle and complex data that BL does not even begin to contemplate. Thus, BL not only represents an attempt to reinvent the wheel – it reinvents it square.

In sum, then, BL veers between meaningless platitude and hard-core protectionism. Sliced either way, it is baloney. BL is BS, a victory of style over substance in the great politically correct tradition of the left wing.