DRI-309 for week of 8-25-13: What Does ‘Social’ Mean Today?

An Access Advertising EconBrief:

What Does ‘Social’ Mean Today?

For decades, European political parties have rallied around the banner of “social democracy.” Today, Catholic churches throughout the world solemnly urge their congregants to work for “social justice.” Businesses have long been advised to practice “social responsibility.” Certain investment funds are now organized around the principle of “social investing.” Celebrities advertise the possession of a finely honed “social conscience.”

The rhetorical weight carried by the word “social” has never been heavier. Judging by this, one would suppose that the adjective’s meaning is well-defined and universally understood. Assuming that to be so, it should be relatively easy to explain its meanings above, as well as many other similar ones.

That turns out to be far from true. A great economist and social theorist called “social” the great “weasel word” of our time. In the words of the old popular song, how long has this been going on?

Well over two hundred years, believe it or not. The great English philosopher Lord Action accurately observed that, “Few discoveries are more irritating than those which expose the pedigree of ideas.” Those people who invoke the word “social” as a holy sacrament will be outraged to learn its pedigree. For the rest of us, though, the knowledge should prove illuminating.

“What is Social?”
One man above all others made it his business to learn the history and meaning of the word “social.” F.A. Hayek was a leading European economist before World War II, and among his friends were the Freiburg School of German economists who styled themselves the “Soziate Marktwirtschaft” or “Social Market” economists. Why, Hayek wondered, didn’t they simply call themselves “free-market” economists? What magic did the word “social” weave to gain precedence over the idea of freedom?

Over the years, Hayek morphed from world-class economist to world-renowned social philosopher. His fascination with the rhetorical preeminence of “social” eventually produced the article “What Is ‘Social?’ What Does It Mean?” It was published in 1957, then reworked and republished in 1961. In it, Hayek performed feats of semantic archaeology in order to expose the pedigree of “social” in economics and political philosophy.

Hayek’s research produced a scathing assessment. He declared that “the word ‘social’ has become an adjective which robs of its clear meaning every phrase it qualifies and transforms it into a phrase of unlimited elasticity, the implications of which can always be distorted if they are unacceptable, and the use of which…serves merely to conceal the lack of any real agreement between men regarding a formula upon which… they are supposed to be agreed.” It is symptomatic of “an attempt to dress up slogans in a guise acceptable to all tastes.” The word “always confuses and never clarifies;” “pretends to give an answer where no answer exists,” and “is so often used as camouflage for aspirations that have nothing to do with the common interest… .” It has served as a “magical incantation” and used to justify end-runs around traditional morality.

Whew. Can one word that is thrown around so casually and so widely really justify this indictment? Let’s briefly take one example of its usage and try on a few of Hayek’s criticisms for size.

The Example of “Social Justice”
A popular reference source (Wikipedia) has this to say about the concept of “social justice.” “Social justice is justice exercised within a society, particularly as it is applied to and among the various social classes of a society. A socially just society is one based on the principles of equality and solidarity;” it “understands and values human rights as well as recognizing the dignity of every human being.”

The origin of the phrase is ascribed to a Jesuit priest in 1840. It was used to justify the concept of a “living wage” in the late 19th century. The Fascist priest Father Coughlin (curiously, his Fascism goes unremarked by Wikipedia) often employed the term. It became a mainspring of practical Catholic teaching and of the Protestant Social Gospel. Social theorist John Rawls developed a theory of equity intended to give substance to a secular version of social justice.

We can easily locate all of the characteristics identified by Hayek even in this short précis. The definition of “social justice” as “justice exercised within a society” is tautological; this expresses the communal syrup that the word pours over every subject it touches. The “principles of equality and solidarity” sound satisfactorily concrete, but the trouble is that there are no such principles – unless you’re willing to sign off on the notion that everybody is supposed to be equal in all respects. “Solidarity,” of course, is the complementary noun to “social;” each purportedly sanctifies without really saying anything substantial. As such, solidarity became the all-purpose buzzword of the international labor movement. It implies fidelity to an unimpeachable ideal without defining the ideal, just as “social” implies an ideal without defining it.

The reference to “human rights” may well seem obscure to those unfamiliar with the age-old left-wing dichotomy between “property rights” and “human rights” – a false distinction, since all rights are human rights by implication. There may some day be a society that recognizes the dignity of every human being, but the sun has not yet shone on it. Thus, social justice illustrates Hayek’s reference to an underlying lack of agreement masked by a façade of universal accord. The roll call of dubious subscribers to the concept, ranging from Fascists to socialists to left-wing extremists and simplistic activists, dovetails perfectly with a concept of “unlimited elasticity,” which masquerades “in the guise acceptable to all tastes” as a “magical incantation” used to justify dubious means to achieve allegedly noble ends.

The Basic Uses of “Social”
Devotees of the various “social” causes have used the word in certain basic recurring ways. Each of them displays Hayek’s characteristics. We can associate these generic uses with specific “social” causes and government actions.

First, there is the plea for inclusiveness. As originally developed, this had considerable justification. As Hayek admitted, “in the last [19th] century…political discussion and the taking of political decisions were confined to a small upper class.” The appending of “social” was a shorthand way of reminding the upper classes that “they were responsible for the fate of the most numerous and poorest sections of the community.” But the concept “seems somewhat of an anachronism in an age when it is the masses who wield political power.” This is probably the dawn of the well-worn injunction to develop a “social conscience.” We associate the mid-19th century with famous “social” legislation ranging from the end of debtor’s prisons and reform of poor laws to the repeal of the Corn Laws in England.

Second, “social” is a plea to view personal morality abstractly rather than concretely by assigning to it remote consequences as well as immediate ones. For example, traditional ethics implores the businessman to treat his employees and customers fairly by respecting their rights and not hurting them. But “social responsibility” demands that businessmen know, understand and affect the consequences of all their buying decisions as well. They should refuse to buy inputs produced using labor that is paid “too little,” even though this benefits their own customers and workers, because it ostensibly hurts the workers who produce those inputs.

This stands the economic logic of free markets on its head. Businessmen are experts on their own business and the wants of their customers. Free markets allow them to know as little as possible about the input goods they buy because this economizes on information – which is scarce – and on the use of businessmen’s time – which is likewise scarce. But the illogic of “social responsibility” demands that businessmen specialize in learning things it is difficult or impossible for them to know instead of things they normally learn in the course of doing business. This is so absurdly inefficient it is downright crazy; instead of doing what they do best, businessmen are supposed to divert their attention to things they know little about and disregard the value generated by the free market.

The crowning absurdity is that “socially responsibility” expects businessmen to accept on faith the assertions of activists that buying goods produced with low-wage labor hurts the workers who produce those goods. And this is dead wrong, since it does just the opposite – by increasing the demand for the goods labor produces, it increases the marginal product of labor and labor’s wage. The same illogic is sometimes extended even farther to consumers, who are even less well placed to gauge the remote consequences of their personal buying decisions and, thus, are even more at the mercy of the bad economics propounded by “social” theory activists.

Thirdly, “social” theory demands that government also reverse its traditional ethical role by treating individuals concretely rather than abstractly. The traditional Rule of Law requires government to judge individuals by abstract rules of justice – and that the same abstract rules apply to all individuals. But “social justice” requires government to judge individuals according to their respective merits, which requires treating different individuals by different rules; e.g., repealing the traditional Rule of Law. Contemporary examples of this repeal abound: affirmative action, bailouts for firms adjudged “too big to fail,” eminent domain for the benefit of private business, augmented rights granted to certain politically identifiable groups while basic rights are denied to others, and on and on, ad nauseum.

Finally, “social” theory clearly implies the upsetting of traditional morality by the substitution of “social” criteria for traditional moral criteria. Although it seems superficially that traditional moral criteria are without rational foundation, this is misleading. In fact, those criteria evolved over thousands of years because they were conducive to a successful order within humanity. As the Spanish philosopher Ortega y Gasset reminds us, “order is not a pressure imposed on society from without, but an equilibrium which is set up from within.” The word “equilibrium” implies the existence of change which culminates in a new, improved order. Social evolution is thus comparable to economic equilibrium, in which new goods and services are subject to a market test and accepted or rejected. Surviving moral criteria are abstract rules that may not benefit every single individual in every single case but that have demonstrated powerful survival value for humanity over thousands of years. And these rules are subject to a powerful evolutionary test over time.

In contrast, “social” theory substitutes the concrete, ad hoc rules adapted to each situation by self-appointed social theorists. These self-appointed experts reject free competition in both economics and political philosophy; thus, these social theories do not receive the same rigorous evolutionary tests that vetted traditional morality.

Both the impersonal workings of the free economic market and the abstract, impersonal workings of the “market” for morality and social philosophy seem to be harsh because there is no inherent spokesman or advocate to explain their operation to the public. Economists have failed to perform this task for free markets, while the influence of moral arbiters like clergymen and philosophers has waned in recent decades. The plans of “social” theorists appear to be kind because they are designed with appearance in mind rather than to actually attain the results they advertise.

Corollaries to the Uses of “Social”
Certain corollary effects of these uses are implied and have, in fact, emerged. When the appeal to the communal of “social” effects of our actions predominates over our personal actions, our personal responsibility for our own lives and welfare erodes. And sure enough, the widespread reluctance to take responsibility for individual actions is palpable. Why should we take responsibility for saving when the federal government takes our money by force for the ostensible purpose of saving and investing it for our individual retirement uses? Thus does saving decline, asymptotically approaching zero. Why should we accept responsibility for our own errors when we are forced to take responsibility for the errors of others by taxation, criminal justice, economic policy and a host of other coercive actions by government? Hence the growing tendency to claim universal “rights” to goods and services such as food, health care, housing and more.

The irony is that each of us is the world’s leading expert on our self. “Social” policy forces us to shoulder responsibility for people and things we aren’t, and can never be, expert on, while forswearing responsibility for the one person on whom our expertise is preeminent. In economic terms, this cannot possibly be an efficient way to order a society.

This leads to another important point of information theory. The demands of “social” theory imply that certain select individuals possess talents and information denied to the rabble. These are the people who decide which particular distribution of income or wealth is “socially just, which business actions are or aren’t “socially responsible, what linguistic forms are or aren’t “socially aware,” and so forth.

The elevation of some people above others is practiced predominantly by government. In order to reward people according to merit, government must in principle have knowledge about the particular circumstances of individuals that justify the rewards (or deny them, as the case may be). In practice, of course, government is so distant from most individuals that it cannot begin to possess that kind of knowledge. That is why the concept of group rights has emerged, since it is often possible to identify individual membership in a group. Race, gender, religion, political preference and other group affiliations are among the various identifiers used to justify preferential treatment by government.

The blatant shortcomings of this philosophy have now become manifest to all. One need not be a political philosopher steeped in the Rule of Law to appreciate that envy now plays a pivotal role in politics and government. Rather than concentrate on producing goods and services, people now focus on redistributing real income and wealth in their own favor. This is the inevitable by-product of a “social” theory focused on fairness rather than growth. The laws of economics offer a straightforward path toward growth, but there is no comparably unambiguous theory of fairness that will satisfy the competing claimants of “social” causes.

And once again, the shortcomings of “social” theory as magnified by a further irony. For decades, government welfare programs have been recognized as failures by researchers, the general public and welfare recipients themselves. Only “social theorists,” bureaucrats and politicians still support them. This is bad enough. But even worse, the rejection of free markets by “social” theorists has eliminated the only practical means by which individual merit might be used as the basis for compensatory social action. Although you are the world’s leading expert on you and I am the leading authority on me, you will sometimes gain authoritative information about me. By allowing you to keep your own real income and the freedom to utilize it as you see fit, I am also allowing to conduct your own personal policy of “social justice.” This concept of neighborhood or community charity is one form of tribalism that has persisted for thousands of years because it is clearly efficient and has survival value. Yet it is one of the first victims of government-imposed “social justice.” Bureaucrats resent the competition provided by private charity. Even more, they resent watching money used privately when it could have been siphoned off for their own use.

What is the relation between the adjective “social” and the noun “socialism?” Socialism had roots traceable at least to the Middle Ages, but its formal beginnings go back to the French philosophers Saint-Simon and Comte in the 18th century. It was Saint-Simon who visualized “society” as one single organic unity and longed to organize a nation’s productive activity as if it were one single unified factory.

It is this pretense that defines the essence of socialism and the appeal of its adjectival handmaiden, “social.” Participation in the sanctifying “social” enterprise at once washes the participant clean of sin and cloaks pursuit of personal gain in the guise of altruism and nobility. It makes the participant automatically virtuous and popular and “one with the universe” – well, part of a subset of like-minded people, anyway.

Socialism sputtered to life in 19th-century revolutionary Europe and enjoyed various incarnations throughout the late 19th and 20th centuries. It has failed uniformly, not just in achieving “the principles of equality and solidarity” but in providing goods and services for citizens. Failure was most complete in those polities where the approach to classical socialism was closest. (In this regard, it should be remembered that the Scandinavian welfare states fell far short of Great Britain on the classic socialist criterion of industrial nationalization.) Yet socialism as an ideal still thrives while capitalism, whose historical preeminence is inarguable, languishes in bad odor.

Hayek’s criticisms of “social” explain this paradox. Socialism’s shortcomings are its virtues. Its language encourages instant belief and acceptance. It smoothes over differences, enveloping them in a fog of good feeling and obscurantism. It promises an easy road to salvation, demanding little of the disciple and offering much. Words are valued for their immediate effects, and the immediate effects of “social” are favorable to the user and the hearer. True, it is an obstacle to clear thinking – but when the immediate products of clear thinking are unpalatable, who wants clear thinking, anyway?

“Social” keeps the ideal of socialism alive while burying its reality. As long as “social” prefaces anything except an “ism,” the listener has license to dissociate the adjective from the noun and luxuriate in the visceral associations of the former while ignoring the gruesome history of the latter.

Just One LIttle, Itsy-Bitsy, Teeny-Weenie Word
F.A. Hayek closed his essay on “social” by saying, “it seems to me that a great deal of what today professes to be social is, in the deeper and truer sense of the word, thoroughly and completely anti-social.” Hayek was right that “such a little word not only throws light upon the process of the evolution of ideas and the story of human error, but … also exercises an irrational power which becomes apparent only when… we lay bare its true meaning.”

Who would have dreamed that one word could say so much?

DRI-309 for week of 10-21-12: The Economic Logic of Gifts

An Access Advertising EconBrief:

The Economic Logic of Gifts

The approach of the year-end holidays releases a flood of gift-oriented online content. One such article appeared on MSN on October 19. “What Women Want Men Don’t Give,” by Emily Jane Fox, seized the publication of research by American Express and the Harrison Group as an opportunity for male bashing. The full findings, though, don’t provide ammunition to either side in the battle of the sexes. But they do supply grist to the mill of economists.

Economists study the practice of gift-giving carefully. This surprises most people, who view gifts and pecuniary purchases as antithetical behavior. Yet in both theory and practice, gifts loom large in economics.

Most laymen are aware that the bulk of retail sales are expended on holiday gifts during the Christmas season. But they are probably unaware that economists are even more interested in the individual motivations for giving than in their seasonal macroeconomic impact. Senator Jed Sessions recently identified nearly 80 separate federal welfare programs that dispense around $1 trillion annually. Whether cash or in-kind, these disbursements are gifts in the technical sense. War reparations demanded by victor nations from the vanquished have sometimes changed the course of history, the most famous example being the steep debts levied on Weimar Germany by the Allies after World War I. Such reparations are yet another form of gift, this time on the national level. Their effects are proverbial among students of international economics.

The MSN article is best understood as an exercise in the modern practice of rhetorical journalism. That is, it is intended not to report facts but to produce an effect on the reader. Economists study unintended consequences of human action, and in this case the author’s attempt to manipulate her readers has produced surprising revelations about the economic logic of gift-giving.

The Process Frustrates Everybody – Including the Author

The research, sponsored by American Express and a consulting firm called the Harrison Group, surveyed 625 households whose working members ranked in the top 10% of wage-earners by income. The survey questions probed respondents’ preferences in both gift-giving and receiving. The results found “…a wide gap between what people want and what they actually get.” Apparently, the gap occurs because people do not give gifts in accordance with recipients’ wishes. Indeed, they do not even behave the way they themselves want their own gift-givers to act.

The author showcases women as victims of this asymmetry. “Two-thirds of affluent American women want gift cards. But less than a fifth of men will [comply]…Instead, 70% of American women are gifted clothing or jewelry.”

Thus, the article begins in a familiar manner. The reader is presented with stereotypes – woman as practical consumers, men as selfish dinosaurs who persist in their ways heedless of feminine sensitivities. But just when the reader feels able to predict what is coming, the article changes course.

Men, too, suffer the pain of asking without receiving. Men “…want food and alcohol – a third are hoping for gourmet foods and fine wine, and another third want gift cards. But women like to give none of these – 30% are expected to give clothing and another 15% books… What wealthy shoppers are better suited for [is] giving gifts to themselves.”

The author’s frustration seems comparable to that of her subjects. Having begun with one agenda in mind – to reinforce the stereotype of male insensitivity – she runs up against the comparable worthlessness of female behavior. When her gender angle encounters a roadblock, she makes a last-minute detour in the direction of class envy by indicting the self-absorption of “wealthy shoppers.” But she lacks the space to start up another argument and must rest content with allowing the headline to do all her work.

What Do Women Want, Generically Speaking? Does This Differ From Male Wants?

Economists try to interpret facts in light of what they know – or think they know – about human motivation. Can we take the scenario as presented above and make sense of it?

“What do women want?” is an age-old question. Economics does not recognize separate male and female systems of logic, so the apparent frustration felt by the author does not affect them. The fact that men and women behave broadly alike is not shocking. The question is: Is their behavior logically consistent?

Some commenters on the online article showed disdain for the author’s willingness to question the value of a gift. Why not accept it in the (presumably charitable) spirit in which it was offered? That is a question worth tackling.

The exchange of gifts is a ritual dating back many centuries. The distinctive features of holiday gift exchange in the Western world are its reciprocal and quasi-compulsory character. Reciprocity implies that, roughly speaking, the net monetary value of the exchanges can be treated as cancelling out. Consequently, their only real value must be to achieve some sort of efficiency. Otherwise, why bother? When it comes to random gifts, the commenters have a point. The mouth of a non-reciprocal, fully voluntary gift horse is certainly not worth close examination.

There is much to criticize about the holiday gift-giving ritual, though. The custom of giving gifts in-kind runs afoul of the long-recognized economic presumption in favor of gifts in cash. Students of intermediate microeconomics courses are routinely shown the inefficiency of programs like the federal food-stamp program, which subsidizes the consumption of (somewhat) poor people by giving them subsidized food rather than a cash payment of equal value. (Technically, the term “equal value” must refer to the value of the subsidized good – food – that the recipient chooses, which can only be determined after the consumption choice is made on pre-selected terms. But it is easy to show diagrammatically or mathematically that giving the recipient an amount of cash equal to the value of the food they choose could never make them worse off and would probably make them better off.)

The inherent logic behind the demonstration is quite straightforward. The gift confers an increment of real income upon the recipient. An addition to real income creates a willingness to consume a larger amount and/or higher frequency of all normal goods, not merely more of one specific good. Hence, the new optimal basket of consumption goods will include increases in more than just one good or service. Receipt of real income in the form of cash allows maximum scope for distributing the increase among the different possible choices.

Why doesn’t this same logic apply to gifts? The short answer is that it does. Economists have devised various ad hoc explanations to rationalize the practice of in-kind gift giving, but none of them really satisfies. That is why these research results are so unsurprising. Women prefer receipt of gift cards to clothing and jewelry. If the gift cards are issued by specialty stores, they allow the recipient a wider range of choice among the styles, brands and sizes of clothing and jewelry. If the cards are to department stores, they allow even wider branching out to other types of goods and services. There is even a legal market for the exchange of gift cards for cash (at a discount), just as food-stamp recipients once traded stamps for cash illegally at discounts up to 50%.

Gift cards are also among the preferred options of men, but men display more willingness to delegate the shopping for their preferred choices of gourmet foods and liquor. This is probably owing to the traditional division of labor, in which women shop for and prepare food but men often purchase liquor. This is the rare case in which you will be willing to let somebody else make your consumption choices for you – they are an expert and you are not (or may not be).

In the light of this, the oft-expressed nostalgia for the Christmas of childhood is understandable. Children are typically net beneficiaries of the gift-giving ritual, with their gift exports being outweighed in number and value by their imports. This favorable holiday balance of payments casts a rosy glow over the holidays that gradually dims in intensity as increasing export responsibilities accompany the aging process.

Note that there is a role for gender in these research results, all right – just not the invidious one implied by the article’s headline. Another way to consider this matter is to ask whether women’s responses would differ markedly if the gift-giver were another woman, as opposed to a man. (Later, we will consider the significance of the degree of intimacy between giver and recipient.) Assuming the answer is no – and the article made no reference to any such distinction in this research – then the economic logic above is sound.

Modifying for the division of labor, the research results show both men and women displaying the basic utility-maximizing, economic preference for cash or cash substitutes rather than narrow in-kind gifts. What are we to make of the apparent fact that both sexes appear “better suited for giving gifts to themselves?”

Utility Maximization and Selfishness

The article’s author is apparently affronted by the possibility that some of us are better suited for giving gifts to ourselves than to others and she wants us to feel her outrage. She probably likes her chances because her target – the top 10% of wage earners – is a loose proxy for “the wealthy,” who are under assault from many sides these days. The overriding sin committed by the wealthy is alleged to be “greed” or “selfishness.” This has often been likened to the behavioral assumption underlying the economic theory of consumer demand, which is utility maximization. We assume that people try to become as happy as possible.

The equation of utility maximization with selfishness simply won’t wash. For one thing, utility maximization doesn’t say anything one way or the other about other people because the individual’s utility function is assumed to be independent of the consumption of other people. “Independent” means just that. It doesn’t mean that we set out to hurt other people or to studiously ignore them. It just means that our overriding goal is our own happiness.

And in fact it could hardly be any other way. The reality of our internal and external worlds dictates it.

Each of us instinctively recognizes the difficulty of ever really knowing another person as we know ourselves. The closest most of us ever come is through the institution of marriage, yet nearly half of U.S. marriages end in divorce. The same basic conflicts that drive couples apart also militate against optimal gift-giving – budgetary disagreements, differences in tastes and preferences, in maturity and temperament, in perception and grasp of reality.

Looking out for number one has been our evolutionary priority since day one. But ever since man began congregating in groups, an ethic of sacrificing individual wants to the needs of the group was promulgated. This ethic had survival value for the group, although it tended to be hard on particular individuals. And, over time, group leaders became adept at suspending the rules in their own case.

Meanwhile, mankind slowly developed a market process for increasing wealth and happiness. This market process ran counter to the group ethic because it increasingly demanded cooperation with individuals outside the group – indeed, cooperation between individuals who never met or even suspected that they were cooperating. This extended order of cooperation was one of the market’s greatest strengths, since it prevented political, religious or cultural differences from interfering with the growth of wealth and real income.

When the social order consisted of mated pairs living in caves, it was not unreasonable for one mate to control the consumption pattern of the pair. The choices were so few and so starkly simple, the human species so primitive that one could envision coming to anticipate the wants and desires of a spouse to a high degree. Today’s sophisticated world with tens of thousands of consumption choices made by evolved human brains makes nonsense of that concept. Even spouses cannot be expected to read each other’s minds well enough to reach the apex of consumption choice.

In this context, it is worthwhile to observe that women are apparently the ones who pretend to this level of expertise. They refuse to delegate their clothing and jewelry purchases but are more than willing to overrule mens’ consumption choices, to the point of substituting clothes for food and liquor in their “gifting.” (Why not “giving,” by the way?) We accuse government bureaucrats of paternalism, but it would appear that this should instead be maternalism.

It is luminously clear that there can be only one true expert on your consumption, and that is you. Nobody else in the world could begin to accumulate the objective information on the thousands of potential goods that you can or might consume, or the subjective data on your particular tastes, preferences and attitudes towards them. It is sobering to realize that not even a life mate can approach the degree of familiarity needed to truly run your life for you.

Small wonder, then, that “nearly half of women” in the survey “said they were extremely, or very likely to buy themselves presents this holiday season. A third of men have similar intentions.”

It is idiotic to call this behavior selfishness when it merely acknowledges the practical facts of life. We need a vocabulary to describe an inordinate preoccupation with self – the kind displayed by thieves, murderers, embezzlers and the like – and this is the proper preserve of words like “greedy” and “selfish.”

The Theory of Gifts and Public Policy

The economic logic of gifts has important implications for public policy. For over four decades, various researchers have estimated the amount of welfare expenditures necessary to lift every man, woman and child above the so-called poverty line. Then they have compared this irreducible necessary minimum expenditure on fighting poverty with the amount actually spent by federal welfare programs. The ratio between what we spend and what we would theoretically need to spend has fluctuating over time. It has been as low as two and as high as ten. Currently, according to the latest estimate, it is about five.

We are ostensibly trying to eliminate poverty. We are currently spending five times more on indirect ways of doing this than we would need to spend if we simply gave cash directly to poor recipients. And we are failing to achieve the stated objective of eliminating poverty, since even if the value of cash and in-kind subsidies is added to income there are still a substantial number of people living below the poverty line. We know that cash subsidies are more effective at increasing the happiness of recipients than the in-kind subsidies, such as food stamps, in which the federal government specializes.

So why are we still pursuing a horribly wasteful and inefficient policy of fighting poverty and failing instead of implementing a simpler, much cheaper and more efficient policy that will succeed?

Put this way, the answer stands out. It is reinforced by the experience of any classroom teacher who ever explored the issue. In droves, students insist that we cannot afford to give cash to welfare recipients because they will spend the money in unsuitable ways; e.g., ways that the students do not approve of. Expenditure on illicit, mind-altering drugs is the example most often chosen to illustrate the point.

Students persist in this view even after the irrefutable demonstration that current in-kind forms of welfare, such as food stamps in both its former and present incarnations, also allow recipients to increase their expenditure on “other goods” besides the subsidized good. (In-kind subsidies hinder the flexibility of recipients but allow them to buy the same amount of the subsidized good as before with less money, thereby freeing up more regular income for use in buying drugs or other contraband.)

Thus, it is clear that the actual rationale behind the government welfare system is not to improve the welfare of recipients by maximizing their utility. Instead, it is to maximize the utility of taxpayers by allowing them to control the lives of recipients while assuaging their own guilt. Taxpayers are responding to the vestigial evolutionary call of the group ethic that demands individual sacrifice for group preservation, while meeting their own need for utility maximization. They are countenancing interference in the lives of the poor that they would never sit still for in their own lives, and which they resist even in areas as relatively trivial as holiday gift-giving.

Economists look for ways to make everybody better off without making anybody worse off. Eliminating the federal welfare system would end an enormously wasteful and unproductive practice. Research shows that private charity is highly active and more efficient than federal efforts even though substantial taxpayer income is now diverted into federal anti-poverty efforts. If federal programs were ended, more funds would become available for private charitable purposes. Recipients could choose the degree of maternalism they found tolerable and donors could demand or reject maternalism, as they saw fit.

Meanwhile, resources would be freed up at the federal level to produce other things. Dislocations among employees due to agency closures would be no different than layoffs in the private sector due to shifts in consumer demand between different goods and services. Obviously, some federal employees would migrate to private-sector charities, where employment would rise.

Another extension of these principles applies to recent attempts by federal bureaucrats to fine-tune the pattern of consumption by banning or requiring the consumption of particular foods, minerals, vitamins, fats or other substances. In principle, a case might be made for provision of information allowing informed choice by consumers. The problem is that even here, the federal government’s past efforts have worsened the very problems it now purports to solve. But there is no case in favor of allowing government to dictate consumption choices made by citizens because government cannot possibly possess the comprehensive information necessary to verify whether its actions will improve or worsen the welfare of its subjects.

The Economics of Gifts

The research results reported in the MSN article may have frustrated its author, but they are consistent with the economic principle of utility maximization – properly understood. People request the kind and general form of gifts that tend to maximize their utility, but they take exactly the same tack when it comes to giving gifts to others – they tend to maximize their own utility, not that of the recipient. We can fume, fuss, moralize and complain about this behavior, but it is the only practical way to behave. Practical human limitations dictate it.

And when it comes to public policy, it is utterly futile to expect altruism and omniscience to suddenly triumph in an arena where they are even less potent than they are in private life. Private charity has its limitations, but it is best situated to cope with the inherent difficulties involved when one human being tries to help another.

DRI-380 for week of 8-26-12: Markets, Government, Law and Truth

An Access Advertising EconBrief:

Markets, Government, Law and Truth

You listen to the radio regularly. A manufacturer of health-oriented dietary supplements prefaces their infomercials with this disclaimer: “This product is not intended to diagnose, treat, prevent or cure any disease.” During each program, you note that the attributes of the products discussed and promoted are clearly intended to do one or more of the above. Is the disclaimer a lie, or are the products fraudulent?

You often browse business-related magazines and websites. In articles devoted to job interviews, you are startled by the asymmetrical advice given to employers and job applicants. Why are employers legally ordered not to ask many questions, while applicants are encouraged to ask as many questions as they wish?

You are a student of economic regulation of business by government. You followed FDA regulation of the cigarette industry from its inception to the agency’s recent proposal for large graphic warnings to appear on cigarette packages. You are unable to discern any logical thread unifying the series of agency rules and court rulings that have followed the onset of regulation. What is FDA trying to do?

You are a believer in the value of truth. What are the impact of markets and government, respectively, on the emergence of truth?

The Market, the Government and the Law

Economics is the science of rational human choice. Economists have long faced withering criticism from other scientists (physical and social) and from the general public. The standard criticism is that people do not act rationally – therefore economics is of little practical value.

The conclusion is wrong, but the premise contains a large grain of truth. Economics has tended to assume that producers, consumers and input suppliers possess all relevant information about the present and the future. This makes rational choice easy. Even when relaxing this assumption, the theory has substituted a probabilistic theory of uncertainty that is only slightly less unrealistic. As the late, great Nobel laureate F.A. Hayek pointed out in the 1930s and 40s, economics has ignored the true nature of the economic problem by assuming what the theory should prove. Rational choice demands the evaluation of a vast amount of data. But people don’t automatically possess the information economic theory assumes they do. The data doesn’t exist in one place or even in known information repositories. How are all this data assembled, evaluated and revised over time? How are the actions of billions of people coordinated to produce a coherent outcome?

Markets provide the incentive for individuals to contribute the bits of dispersed information necessary to comprise a functioning market. No individual possesses all the relevant information. Indeed, nobody has a full and complete picture of, let alone intellectual comprehension of, reality. Instead, each of us views reality fragmentarily through our own subjective prism. But markets bring each of us closer to comprehension by refining and revising that subjective view and drawing it closer to objective truth.

Any time somebody’s knowledge is incomplete or their perception is inaccurate, somebody can make a profit by acting within the market to expose the truth. Throughout human history, societies relying on markets have enjoyed more material success than those eschewing markets because objective truth is more productive of material wealth and human happiness than falsity.

By definition, governments exist to constrain human conduct. When governments prevent people from harming each other and violating basic rights, they contribute to wealth and happiness. When governments constrain lawful markets, they hinder the distribution of information and the gradual coalescing of objective truth from subjective perception. The Rule of Law evolved because governments that operated according to its precepts fostered prosperity. They confined themselves to narrowly limited proscriptive rules allowing citizens to understand and predict the impact of the law on their lives. Governments that took the opposite tack foundered, as did the totalitarian regimes of the 20th century.

This perspective on markets and truth helps us understand the relationship between government and truth.

Dietary Supplements

Throughout recorded history, man has eaten, drunk, sniffed, poulticed, smoked and otherwise consumed the bounty of nature to yield pleasure, reduce pain and promote health. Since the dawn of science and medicine, he has extracted vitamins, minerals, proteins, fats, carbohydrates, acids, alkalis, enzymes and various other substances for the same purposes. If all human beings were carbon copies and reacted identically to stimuli, the production of health and happiness would be straightforward. The actual range of human variation makes it anything but easy to ascertain the value of available substances for human purposes.

The success of science has posed a tempting pitfall. The temptation is to assume that scientific experts know – or can easily determine – what is safe and effective for human consumption. This implies that by giving a committee of experts legal dominion over this realm, we can avoid the problems associated with free-market provision of medicines, supplements and the like. Such problems include unfavorable reactions by individuals to products as well as products that do not live up to the billing of producers or the expectations of consumers.

Unfortunately, safety and efficacy are not only hard to determine, they also vary with each individual. Really, the only practical approach is to allow individuals and their physicians to make these determinations. Doctors will employ judgment informed by years of practice and results of continuing research. Research will be directed toward areas indicated by consumer demand, much as any other investment is guided by demand. The alternative is to put the process in the hands of government, which assumes that a small number of men are wise enough to know better than the mass of people what we want, what we should want and how to produce it.

Currently, “medicines” are controlled very strictly by the Food and Drug Administration (FDA). “Dietary supplements” are not. But the disclaimer noted above is included in advertisements to fend off product liability lawsuits. Failure to include it would allow consumers to sue the producing company because the supplements did not cure a disease, prevent its onset or ameliorate its spread. The question is: Does the disclaimer serve the cause of truth or hinder it?

Even the most casual observer of health and nutrition knows that thousands of health supplements are legally available to consumers. These range from fish oil in liquid and capsule form to resveratrol extract to vitamins A, B, C, D, E and K, including the various B subsidiaries. Ongoing research continually discovers new uses for known substances and devalues old uses. Currently, for example, research now suggests that vitamin D – long considered of secondary importance and easily obtainable with very modest exposure to sunlight – is vastly more important and difficult to maintain in optimal quantities without supplementation. The high hopes once held out for vitamins C and E in curing colds and preventing heart disease have been revised downward after considerable study and experience.

But the FDA wields tight control over the language that can be used in selling and advertising all these substances. And unless FDA-approved studies have been conducted specific to the treatment, prevention and cure of disease, the disclaimer noted above must appear on packaging and in advertising.

The undeniable drawback to this requirement is that the disclaimer is a lie.

Even a child knows that the purpose of all these products is obviously to treat and prevent disease. In some cases it is to cure disease. (It is unclear what health supplements would purport to diagnose disease; presumably this word is included so as to apply to devices and test kits as well as supplements.) Instances of this are legion.

When Linus Pauling began to promote vitamin C as the discovery of the age, it wasn’t merely in order to fulfill man’s daily requirements. No, he maintained that megadoses could cure colds and prevent cancer. Aspirin’s analgesic properties have been known for thousands of years, but it wasn’t until its blood-thinning action was touted as a preventative for cardiovascular artery closure that it became a therapeutic medicine. Subsequently, its active ingredient, salicylic acid, was implicated as a potential preventive of colon cancer as well. St. John’s Wort has been a folk remedy for prostrate enlargement for decades. Cranberry juice has been “prescribed” for urinary discomfort and kidney stones since time immemorial by old wives and do-it-yourself physicians.

How do people react when they read or hear the disclaimer? They are confused. One has only to peruse comments online to confirm this. “What’s the good of your product if it doesn’t ‘diagnose, treat, prevent or cure any disease’? is a typical question. The stock answer is that, in effect, the FDA mandates this disclaimer. This does nothing to allay fears of the timid and does nothing to deter the incautious. In short, it does nothing good. In turn, this begs one more obvious question: If the disclaimer does nothing good, what’s it doing there?

The answer is that the disclaimer protects sellers from product liability. By not promising anything, sellers cannot be held responsible if the product does not deliver anything. The fact that the sellers are lying does not seem to concern anybody. Everybody knows they are lying – except of course for the confused ones, who do not know. It is easy to blame tort lawyers for the confusion. But they are merely responding to the law as written or interpreted by the government. Why does this law exist?

When producers knowingly sell products that do not deliver stated benefits to consumers, that is fraud. A time-honored duty of government is to prevent and punish fraud. Presumably the law mandating the disclaimer exists because the government thinks it is wrong for producers to sell substances that may not always deliver their full intended benefits to consumers, even when producers knowingly intend and anticipate that outcome. But the effect of the disclaimer is to deceive consumers by lying to them about the intentions of producers and the benefits of their products.

The government’s position is as follows: It is terribly wrong for producers to deceive consumers by selling them non-existent benefits. But it is not wrong for producers to lie to consumers by deceiving them into not buying actual benefits; in fact, it is mandatory for producers to do this. (This is an implicit position, not an explicit one; it follows from the law governing FDA policy and the acquiescence to the course of tort litigation.)

An ancient principle of common law is salus populi suprema lex, meaning “the welfare of the people is the supreme law.” In other words, the overarching purpose of law is to improve the happiness and well-being of the citizenry. Does FDA policy do this? It is reasonable to suppose that FDA policy prevents some unhappiness resulting from unintentional deception of consumers by producers. It is worth noting, however, that markets themselves punish producers who promise benefits that they do not deliver. The punishment takes the form of lost customers, reduced revenues and foregone profits. The prospect of such losses acts as its own deterrent to laxity by producers in accurately describing and truthfully advertising product benefits.

Counterbalanced against the gains from the FDA policy are the losses from deceiving consumers by hiding or obscuring product benefits. Organizations like the Independent Institute and Economists Against FDA have told the story of the FDA’s ban on advertising the cardiovascular benefits of taking aspirin in response to first-heart-attack symptoms. The director of Cardiovascular Medicine of the Florida University College of Medicine estimated that as many as 10,000 lives per year could be saved if aspirin manufacturers were able to advertise these benefits. That estimate was made in 1995. As recently as 2008, the FDA was still threatening aspirin manufacturers who tried to market aspirin with labeling that claimed this benefit. And this is only one of the thousands of products with benefits that go unadvertised or that live under the cloud of the disclaimer.

Some may object to the characterization of the disclaimer as “confusing.” “Everybody knows that it doesn’t really mean what it says,” they may say. But if this is really true, then exactly what is gained by saying it- or rather, by having to say it? Let us leave aside the fact that there are clearly some people who are confused by the disclaimer. Compelling reasons exist for not insisting on a disclaimer that nobody takes seriously. When the law manifests itself in trivial, counterproductive and confusing ways, respect for the law in general declines. People begin to pick and choose which laws to obey, because they come to realize that they cannot know or hope to obey the complete body of laws. It becomes harder to law to perform its fundamental tasks. This shows up in small, seemingly random trends such as mounting disobedience of traffic and tax laws.

Job Interviews

Freedom of speech is commonly cited among the bedrock freedoms safeguarded by the U.S. Constitution and the American way of life. Thus, it is shocking to review a list of questions that employers and their representatives are legally forbidden to ask job applicants during an interview. Generally speaking, employers cannot inquire about applicants’ age, race, national origin, or status relative to marriage, disability or parentage.

Readers approaching retirement age will be stunned to discover that what once was small talk is now a crime. That includes conversational starters like “Where were you born?” and “Are you married?” The former is verboten because it might be a sneaky way of determining the applicant’s national origin, the latter because the employer might be trying to find out if the applicant’s home life might interfere with their work – an issue that they are entitled to probe only in government-approved ways. Similarly, “What is your native language?” is an obvious non-starter, as are “Do you have children?” and “Do you plan to get pregnant?”

“How old are you?” used to be one of the first questions asked of applicants whose age did not appear on their resume. Now it is taboo, prima facie evidence of the crime of ageism or age discrimination. The government is saying one of two things: Either employee productivity is assumed to remain constant with increasing age rather than falling or, alternatively, the employer has no right to get information about the employee’s productivity in advance of employment.

“Do you observe [insert name of religious observance day or days here]?” is a definite no-no, while “Are you available to work on holidays or weekends?” is permissible. This raises the potential for conflict by allowing the applicant to define a holiday. A Jew may treat Yom Kippur as a day of atonement but not a holiday, and may or may not choose to limit availability for work.

“Do you smoke or use alcohol?” is an infringement of the applicant’s rights because it “discriminates” against the use of a legal product consumed off the job and the business premises. The fact that the product has an obvious potential to affect job performance is irrelevant because the employer has only a limited right to inquire about the applicant’s productivity. Likewise, “Are you in the National Guard?” overlooks the fact that the employer has no unbounded right to inquire about the applicant’s availability/productivity. Viewed in this light, “Do you have a disability or chronic illness?” is a veritable abomination. After all, the employer can always ask if the applicant could perform particular tasks – “with reasonable accommodation,” of course, since each employer has a unilateral responsibility to create a level playing field between competing workers in the labor market.

After a suitable refractory period for recovery from the shock of seeing the burden placed on the employer, the student of job-interviews changes perspective 180 degrees and sits in the applicant’s seat. He expects to meet a comparable array of rules and prohibitions to those confronting the employer.

But there are none. Whereas the employer is verbally gagged like a juror at a murder trial, the job applicant enters a recumbent ACLU paradise of unhindered self-expression, free of legal duties, responsibilities and taboos.

As if this state of affairs weren’t incredible enough, the student who dips into characterizations of the interview process in the business press is whisked down Lewis Carroll’s fabled Rabbit Hole. Jacquelyn Smith of Forbes Magazine (7/6/2012, “Questions You Should and Shouldn’t Ask in a Job Interview”) informs us brightly that “A job interview is a two-way street. The employer asks questions to determine if the employee is an ideal fit for the job, and the smart candidate uses the interview [analogously].” She quotes “workplace expert” and author Lynn Taylor: “The fact that this is a two-way interview is often lost on many candidates, especially in this period of high unemployment when it seems like employers hold all the cards” [emphasis added].

The so-called “two-way street” of the job interview consists of clear, unimpeded driving on the applicant’s side of the road, while the employer’s side is lined with barricades, barrels and road hazards that a Joie Chitwood or Evel Knievel could hardly negotiate successfully. Not only do employers not “hold all the cards,” the federal government has marked the deck and stacked it in an effort to prevent the employer from accomplishing exactly what the magazine admits should be the objective of the interview – finding out if the applicant is an ideal fit for the job.

After all, in order to find out if the applicant is an ideal fit, the employer must be able to ask any and all questions deemed necessary. That must be true because that is what the word “ideal” means. But if there is one process in economic life that is implacably, unalterably opposed to truth, it is the job interview. With malice aforethought, the federal government has driven an Orwellian wedge between employer and applicant that has foreclosed all possibility of full informational disclosure.

The importance of this divide emerges from looking at just one of the forbidden topics listed above. We know that marital status is perhaps the key behavioral variable for the human female. The biological fact of women’s’ ability to bear children has intractable economic implications. Women are many times more likely to leave the labor force than men. These career detours mean that, in the aggregate and on average, their incomes and longevity-linked achievements will not equal those of men. But this does not mean that any individual woman might not be just as viable as any male job applicant. How can a rational employer, headhunting for a groomable CEO, distinguish between ideal and non-ideal female applicants? Clearly, marital status and/or family plan are the logical determinants. (The precise word is “discriminants,” but this word now has an unmerited pejorative cast – another Orwellian legacy of government policy.) And these are exactly the questions that the employer is forbidden from asking!

Unhampered, unhindered markets tend to promote truth. Truth enhances productivity. It also bolsters morality. In a purported effort to fight discrimination, federal-government labor-market policy harms the ostensible victims. Government regulation crushes truth to earth – and compliance officers are always on the lookout should it try to rise again.

By separating truth from hiring, government has vastly increased the costs of employment. When an input becomes more costly, other things equal, businesses use less of it. Consequently, what economists call the “natural rate of unemployment” rises – and up goes the actual rate of unemployment along with it. In Europe, governments have responded in true totalitarian fashion, much as Joshua ordered the sun to stop in the sky. They have made it incredibly difficult for businesses to fire or lay off employees. And businesses respond by not hiring employees in the first place. Unemployment rates exceeding 10% have been commonplace in Europe for decades.

In the U.S., the government responds in line with the age-old joke about a husband drying dishes washed by his wife: “Am I supposed to wipe off what you don’t wash off?” The U.S. government tries to wipe off with stimulative fiscal and monetary policies what its defective labor-market policies don’t wash off when they create higher unemployment. Unfortunately, contrary to popular belief, there is no successful theory of countercyclical government stimulus policies to fight recessions and end unemployment. And the created unemployment remains.

Thus, in the labor market as well, we are currently reinforcing George Orwell’s insight that a characteristic of totalitarian states is to suppress truth by suppressing markets.

Graphic Labels on Cigarette Packaging

The case of cigarette regulation parallels that of regulation of aspirin advertising. In both cases, freedom of “commercial speech” is subordinated to some ostensible greater good, as perceived by federal-government regulators. Yet despite this surface similarity, the underlying philosophy followed by FDA differed completely in the two cases. The agency’s reasoning was ad hoc; the only consistent thread was the insistence that its will prevail.

Cigarette packages have long carries text warning consumers of health dangers associated with smoking. Proponents of regulation have viewed this as a watershed in economic regulation. In fact, smoking has carried a de facto hazardous label in the market of public opinion since at least the 19th century. Textbooks dating to the early 20th century refer in general terms to its deleterious effects on lungs, breathing and longevity. Although the armed services provided them freely to their personnel, World War II movies like Thirty Seconds Over Tokyo referred to cigarettes as “coffin nails” – a nickname that testifies as strongly as any research study to contemporary public awareness of their dangers.

The impetus to the text warnings was a link between cigarette smoking and lung cancer. The link was forged by statistical correlation; populations and ethnic groups that smoked more had higher incidence of lung cancer. The precise medical pathway between the two was uncertain, primarily because the etiology of cancer itself was uncertain. Cigarette smoke irritates the nasal membranes of non-smokers and smokers alike, though, and this contributed to its growing unpopularity. As the size and strength of government grew, its use as a means of enforcing personal prejudice became more frequent. This was generally cloaked in more altruistic garb, and a public-health rationale for discouraging smoking was a convenient means of disguising prohibition as altruism rather than bigotry.

Gradually, more and more smokers have kicked the smoking habit. This has produced a sizable decline in the total number of smokers. Curiously, this has not prevented young people from continuing to pick up the habit, though. Not surprisingly, the former development has been ascribed to the beneficial effects of cigarette warnings, scientific “discoveries” of harmful effects, no-smoking laws and the like. The latter has been ascribed to the demonic motivations of cigarette executives and the baneful effects of their advertising campaigns targeting the youth market.

The real causes are more prosaic. For over a century, people continued to smoke although generally well aware of the possibility of a lethal result. They treated cigarettes the same way they treated any other tradeoff – by evaluating the degree of benefit and the likelihood of death (e.g., the cost). Lung cancer was not a pleasant prospect, true, but most cancers are incurred late in life. When life expectancy was less than seventy years – and the final years rated to be comparatively unrewarding – many people did not value the risk of losing those years to lung cancer as sufficient to forego a substantial benefit from smoking.

But as life expectancy steadily increased and medical science continually enhanced the quality of life by triumphing over disease and pain, the smoking tradeoff became less and less favorable. The later years of life became more productive and pleasurable, hence more valuable. The potential cost of losing them loomed larger. So people stopped smoking earlier and earlier. This effect operated least upon those for whom the prospective tradeoff was most distant; namely, the youngest prospective smokers.

All this had little or nothing to do with tobacco regulation and health warnings. But the money provided to state governments by progressive more draconian taxes and penalties levied against tobacco companies provided an attractive rationale for continuing the charade of regulation. In 2009, the regulatory zealots of the Obama administration took charge and instituted an across-the-board onslaught against health and pharmaceutical companies, as well as most other businesses. This included a demand for large graphic warnings on cigarette packaging.

The federal appeals court ruling illustrated the utter lack of regulatory coherence and unity across the spectrum of government. FDA was scored by Judge Janice Rogers Brown for failing to “present any data – much less the substantial evidence – showing that enacting their proposed graphic warnings will accomplish the agency’s stated objective of reducing smoking rates.” This does not justify abrogating cigarette manufacturers’ First Amendment rights, claims Brown, because “the First Amendment requires the government not only to state a substantial interest justifying a regulation on commercial speech, but also to show that its regulation directly advances that goal.”

The first thing to be said about Judge Brown’s verdict is that it is patent hooey, since the First Amendment says no such thing. Its five lines merely forbid Congress from “abridging the freedom of the press” – period. If there is more to it than that, it is to be found somewhere other than in the Constitution. Judge Brown’s pretense of solemnly measuring one weighty interest against another according to a formula specified by the Founding Fathers is merely a pretext for substituting her judgment for theirs.

The second point worth making is the inherent contradiction involved in requiring supporting data or substantive evidence for a policy not yet implemented. What sort of data could support that policy? Historic data on graphic images on cigarette packages in some other country? Why, yes, according to a representative of Campaign for Tobacco-Free Kids. Considering that it is already illegal to sell cigarettes to kids, this seems quaint indeed. He is apparently claiming that fear of death in the far future will succeed where fear of violating the law in the present failed.

The most absurd element of the ruling, however, is the idea that obedience to the First Amendment depends on the results of statistical investigation. If the science of statistics were as reliable as chemistry, that would be questionable enough. But social-scientific statistics are about as robust as a grass shack in a hurricane. The notion that we’ll tear up the First Amendment whenever a regulatory agency comes up with some really good numbers would be hilarious if it weren’t so terrifying.

It is hardly surprising that a previous Appeals Court ruling – focusing on the entire 2009 law rather than merely its graphic-warnings component – upheld FDA’s authority in full. The only point of agreement is that ultimate federal authority is unlimited; the warring government factions disagree about who wields it and what triggers its imposition.

The End of Truth

The raison d’être for the FDA is the preservation of lives and promotion of human happiness. In the aspirin advertising/dietary supplement case, the FDA took the position that it was entirely up to industry to demonstrate the benefits of aspirin. Even after the clinical studies did this, FDA continued to rely on First Amendment legalism and insist that expansive legal precedent allowed the agency to restrict manufacturers’ First Amendment rights to advertise benefits in spite of the confirming results of studies. In other words, FDA adamantly refused to take the welfare of consumers as their ultimate criterion of action.

In the cigarette case, FDA demands the right to force tobacco manufacturers to injure themselves by defaming their own legal product, not merely with warning text but now with inflammatory graphic warnings. The FDA asserts a sovereign right to abrogate the rights of individual and corporate U.S. citizens in order to attain a lowered aggregate statistical rate of cigarette smoking. Here, FDA is so obsessed with consumer welfare that they claim to be able to achieve better consumer outcomes than consumers themselves can.

Yet U.S. labor law asserts the individual worker’s right to consume the same legal product – cigarettes – that FDA claims the right to abrogate individual rights in order to discourage. Meanwhile, producers’ rights to produce and promote their own legal products are abrogated. Producers are told they have no right to avoid employing labor made less productive by consumption of the same cigarettes that FDA is moving heaven and earth to discourage.

The composite implications of these cases are roughly as follows: Producers have no rights at all except the right to go broke. Consumers have only the right to take what the government gives them, under the theory that government knows what is good for them better than they do. Workers have the right to do anything they damn please but not the power to do the only thing they really want to do, which is find and hold a job – because government has made jobs so expensive to create that producers have no incentive to offer them.

Finally, government has the right to do anything and everything, without limit. The only issues to be settled are which branch of government exercises that unlimited power and under what competing legal theory.

In markets, the assembling of dispersed information produces a tendency toward truth, owing to the continual incentive to earn profits by correcting error. In government, the only incentive is to accumulate and preserve power. Truth is an obstacle to this process. Orwell’s vision of totalitarianism as the end of truth is unfolding before our eyes.

DRI-392 for week of 8-12-12: Earth to NBC: Bhutan is No Shangri-La

Earth to NBC: Bhutan is No Shangri-La

During the just-concluded Summer Olympics in London, NBC spiced its coverage with some side profiles of athletes and countries. On Wednesday, August 8, the network featured the tiny kingdom of Bhutan, which lies squeezed between China and India in the shadow of the Himalayan Mountains. NBC’s female reporter was not content with noting the doubling of Bhutan’s competitive contingent this year from one athlete to two. She also dwelt at length on the monarchy’s official policy of measuring the happiness of its subjects.

It seems that, starting from an offhand comment made in 1972, the Bhutanese government has developed a method for quantitatively gauging the subjective well-being of its citizens. This revelation left the reporter quite breathless. Her account mixed solemnity with incredulity.

“Bhutan measures human happiness?” Gross Domestic Happiness (GDH) has supplanted the familiar Gross Domestic Product as the national index of welfare. All other political considerations are subordinate to it. It seems that the secret to happiness lies in abandoning our preoccupation with material wants and in awakening our inner selves to subjective criteria for happiness. Down with material striving and competitive strife! “So – no wars, no beggars in the streets?”

NBC’s brief profile conjured up images straight out of James Hilton’s Lost Horizon, a modern-day Shangri-La located right where Hilton and director Frank Capra situated it. No wonder the spot closed with assurances that governments throughout the world were hastening to study this real-life imitation of art. Wow! Studying happiness – why didn’t anybody ever think of this before? And who wouldn’t want to learn the full story behind this dream come true?

Well, NBC wouldn’t, as it turns out, since they took this fantasy-come-to-life entirely at face value.

Bhutan, the Olympics and Happiness

There is indeed a country called Bhutan. It covers some 14,000+ square miles of mountains, valleys and plateaus lying between China (to the north) and India (surrounding the other three sides) and Nepal (to the west). Long an absolute monarchy closed to foreigners – like its location, this isolation is another legitimate Hiltonian resemblance – the country opened to foreign travel, trade and tourism in 1974. At that time, its population was estimated at 1 million; however, a 2006 census downgraded that substantially to about 670,000, and the current figure is about 700, 000.

The religious loyalties of Bhutan are predominantly Buddhist, giving it another superficial similarity to the storied Shangri-La. Hindus are a minority. The topography is beautiful and awe-inspiring, more so even than the faux terrain supplied by the expert set designers at MGM for Capra’s 1937 classic. Daily life for most Bhutanese is as primitive as implied in the movie – 80% of the economy is given over to subsistence agriculture, with forestry and tourism accounting for the rest until quite recently.

The national sport of Bhutan is archery, which has supplied the country’s lone Olympic representative until this year, when a second athlete competed in 10-meter air rifle competition. No Bhutanese athlete has ever won an Olympic medal.

The fabled official preoccupation with happiness began in 1972 when the king made an offhand comment to the effect that Bhutanese might be poor, but they were happy. Since then, government surveys have been taken to measure the psychological well-being of the Bhutanese. The survey results have been codified to produce an index number denoted Gross Domestic Happiness. The salient feature of this process is its focus on so-called subjective factors, in contrast to the objectification of happiness by Western cultures that emphasize physical output in the form of Gross Domestic Product.

This theme – and NBC’s embrace of it – is shockingly wrongheaded. The claim that Bhutan’s focus on happiness is unprecedented is absurd; the science of economics has studied that condition obsessively almost since its earliest days. The notion that economics concentrates on objective contributors to happiness by valuing material goods to the exclusion of subjective factors is equally absurd, since the theory of economic demand has been a theory of subjective value since roughly 1871. Finally, the implication that happiness can be achieved without material wealth finds no support in modern life in general and especially not in the specific Bhutanese example.

Economics and Happiness

Adam Smith’s precursor to The Wealth of Nations was The Theory of Moral Sentiments, which correctly suggests Smith’s devotion to the objective value theory of classical economics. But beginning in the early 1800s, the Utilitarian school of philosophy developed a theory of human well-being or utility. This concept was nothing more than happiness or satisfaction. It differed only from our modern conception only in being objectively measurable. Men like Jeremy and James Bentham were convinced that an objective index of human happiness existed and could be used as the backbone of economic theory.

As the century wore on, a few individuals like the French engineer Jules Dupuit poked holes in this concept and paved the way for the development of modern demand theory. In 1871, three economists independently developed a theory of demand that relied upon subjective human perception and marginal valuation. It retained the concept of utility but jettisoned the idea of objective (or “cardinal”) measurability of utility in favor of a less rigid standard – namely, “ordinal” or comparative ranking of consumption choices without assignment of objective measurement to those choices. That is, the three economists assumed that consumers could choose between any possible combinations of consumer goods but could not give an objective meaning to the happiness or satisfaction they got from any consumption combination. Consequently, they could not compare their happiness with anybody else’s. (The three men, by the way, were William Stanley Jevons of England, Leon Walras of France and Carl Menger of Austria.) Utility remained important in the marginal or relative sense but not in the absolute or objective sense.

Using analytical created by 19th-century economists like F. Y. Edgeworth, 20th century economists John Hicks and Paul Samuelson later advanced demand theory by allowing the concept of utility to be dropped completely. Demand theory thus became utterly subjective. It has remained so for over 70 years. This completely gives the lie to the objective/subjective dichotomy put forward by the Bhutanese and by NBC.

NBC reported that the Bhutanese concern with happiness was unique, unprecedented. In fact, it has been the central focus of a discipline that NBC relies upon every day for a substantial fraction of its news output; namely, economics. NBC reported that the Bhutanese preoccupation with subjective analysis was new, unheard of. In fact, it has been inherent in economic demand theory for over 140 years. In other words, NBC purveyed gross falsehoods to its viewers. What could account for these ghastly errors?

By stretching imagination to the limit, one can dream up diaphanous excuses for NBC’s delinquency. The Bhutanese investigation of happiness has been just the sort of flimsy, New Age, touchy-feely approach Americans are used to associating with their feelings. The Bhutanese have taken surveys and asked people what they thought. Then they have summarized the results in a rather haphazard way. This doesn’t require much work or rigorous thought and can be tailored to accommodate pretty much any philosophy or desired result without creating controversy or discomfort. It accords with the facts of our everyday experience.

In contrast, economists from the beginning used the rigorous tools of logic at their disposal. At first, they included mainly the syllogistic logic employed by philosophy. This expanded to included mathematical tools of continually increasing sophistication. Finally the tools of modern statistical inference came into common usage as well. Theoretical philosophy? Mathematics? Statistics? What do these have to do with a touchy-feeling subject like happiness, which must surely be the domain of psychiatrists and self-help gurus? Such, at least, might be the visceral reaction of the man on the street.

Economists used the tools of formal logic because they wanted to devise a theory that was robust and would stand up at all places and times, regardless of culture and historical context. They wanted it to be clear and devoid of ambiguity. (If there is one thing that New Age thought thrives on, it is ambiguity.) Really, it is not so difficult to see how an NBC reporter, steeped in American culture and lacking formal training in economics, might have completely overlooked everything economics stands for. Of course, this utterly violates the canons of responsible journalism. But those canons evolved and were inculcated during the heyday of print journalism. That day is long gone and few of its expert practitioners remain.

There is somewhat more excuse for the failure to recognize the subjective character of economic theory. Economists have diligently striven to cover Gross Domestic Product under a heavy veil of objectivity, but professionals know all too well the subjective nature of categories like “imputed rental value of owner-occupied housing.” More broadly, the balance of accounting technique is insufficient to cover the checks written by economic theory on its definition of terms in the national income and product accounts. There is an unambiguous economic meaning for the term “depreciation,” for example, but no objective accounting method exists to give practical definition to the term. To the lay public, reported economic figures seem like the height of objective precision. Alas, they are very often little more than what former Missouri Governor Kit Bond called a “scientific wild-assed guess.”

The relevant point is that no subjective criterion adduced by the Bhutanese government is automatically ignored or ruled out by the formal economic theory of demand. It is a subjective theory, for all the objective trappings that the profession affects. Any anybody reporting on a subject like this should realize that.

Bhutan and the Culture of Competition

Much is made of the fact that, in the words of Bhutan’s Olympic archer, Ms. Sherab Zam, the country is “small but happy.” Yet in interviews given in London, Ms. Zam also expressed hope that exposure to Olympic competition would motivate Bhutan’s population toward greater heights of achievement – “especially our young people, troubled by unemployment and despair.” This does not square with the picture of a country untouched by the ills of modern life.

In London, archer Zam finished 61 out of 64 competitors. Her fellow competitor finished 56th (last) in air-rifle competition. This is ascribed to their lower priority placed on competition and their greater attention paid to sociability and camaraderie. (Olympic official Bruce Bunting: “I think it’s because they enjoy the spirit so much.”) Yet Zam also admitted that in local archery competitions, villagers gather to jeer and distract the archers of competing villagers, calling them names and urging them to fail. It would seem that Bhutanis strive to win, all right – but by harming the performances of their opponents instead of by elevating the level of their own achievements. When denied the effect of this competitive tactic, their performance standard suffers.

Bhutan as Shangri-La: GDH as Substitute for GDP

Outrageous as NBC’s reportorial misconduct was up to this point, it pales in comparison with the erection of Bhutan as a real-life Shangri-La. The contention that Bhutan has conquered the age-old problem of human happiness by trading off material welfare for psychological security should earn the creators of the Bhutan profile a Pulitzer Prize for malfeasance.

It is pertinent to recall that in the movie version of Lost Horizon, two of the stranded travelers taken to the utopian Shangri-La rebel against the authoritarian life in paradise and defiantly escape from Utopia. Bhutan has been a monarchy for centuries. Although it transitioned from “absolute” to “constitutional” in 2008, its authoritarian tradition sticks out like a Himalayan peak above the clouds. Foreigners have been allowed into the country only since 1974. Television and the Internet were banned until 1999 in order to preserve traditional folkways. Bhutan ranks only 111th (of 179 countries) in the Heritage Foundation’s 2012 Index of Economic Freedom.

The Fraser Institute, Canada’s version of the Heritage or Cato Institute, has its own index of the Economic Freedom of the World. Fraser has organized its list into quartiles and calculated extensive tables of economic date for each quartile, the purpose of which is to link the degree of freedom with the measure of economic performance. The Heritage ranking of 111 out of 179 would put Bhutan in the third of four quartiles in the Fraser ranking. Comparing the first and third quartiles may shed light on the general proposition that material wealth and economic freedom go hand in hand. Average per-capita GDP in the first (freest) quartile is #31,501; in the third quartile, it is $6,464.

In Bhutan, it is $2,299. This jibes fairly well with its ranking of 162nd in the world in terms of aggregate GDP. (One can usually discover about 184 countries with recorded GDP figures, although there were 204 countries represented in London.) It must be noted that international comparisons are difficult to translate into meaningful terms because of price-level differences between countries. The accepted procedure for doing this uses the principle of Purchasing Power Parity, which tries to equalize purchasing power across countries. (Using a PPP technique would yield a Bhutanese per-capita GDP of $6,112, but of course, the other magnitudes would need to be similarly adjusted as well.)

Up and down the line, economic comparisons yield similar results. First-quartile growth averages 3.07, third-quartile growth 2.27. Literacy rates average 92.21% for first-quartile countries, 79.4% for third-quartile countries. Life expectancy averages 79.4% in first-quartile countries, 67.9% in third-quartile countries. Incomes held by the lowest 10% of the population, both in absolute amount and percentage, are markedly higher in first-quartile countries than in third-quartile countries. (This flies in the fact of claims by dictators the world over that their seizure of power was necessary to attain social justice or fairness in income distribution for the poorest citizens.)

It is one thing for Bhutan to claim that a larger GDP, or larger material wealth, is unnecessary or even counterproductive to greater happiness. But can it be credibly maintained that all of the above variables – literacy, income distribution, even life expectancy itself – are similarly unimportant to happiness?

We may safely doubt whether even the government of Bhutan believes that. For it seems that they tell one story to the world at large and another one to the International Monetary Fund. In a recent IMF report, Bhutanese representatives brag about the fact that their GDP growth rate in 2011 exceeded 10% and unemployment was only 3.3%. How do we square this with the poverty-level incomes there? It seems that in mid-decade, the government of India loaned Bhutan the money, with the IMF as broker, for a vast hydroelectric project, whose electric power output was then exported back to India. It is this project, according to observers, that accounts for recent gains in income and employment in the country. This is rather piquant in view of the Bhutanese government’s public profession of distaste for GDP and material wealth and its portrait of its poor, but happy, citizens.

Up to this point in its history, what had the government of Bhutan actually done to promote the happiness of its citizens, other than (claim to) measure it? If rapid growth in 2010 and 2011 still left Bhutan with one of the world’s lowest per-capita incomes, it would seem that the de facto official position was that poverty was conducive to happiness while modernity and material wealth were corrosive to it.

Apart from this one large industrial project, however, the economic development picture in Bhutan is dismal. The government itself is funded by grants supplied by India and loans from several sources. In effect, these offset a sizable current-account trade deficit (over 20% of Bhutan’s GDP). It is against this backdrop that the NBC reporter’s golly-gee-whiz chronicle should be judged. It is certainly no trick to abolish war when the government lacks even the wherewithal to fund an army. Bhutan has “no beggars in the street” because it is a nation of beggars. Beggardom is relative; beggars in the U.S. would be “the rich” in Bhutan, where the beggars live in the farms, the forests and the mountains.

The “Field” of Happiness Economics

As it happens, sociologists and psychologists have done extensive research into happiness, using rather more sophisticated statistical and research techniques than those originally used in Bhutan. A few economists have entered this field, carrying with them the apparatus of left-wing theory (or ideology, depending on how one views it). In particular, the Relative Income Hypothesis of the late James Duesenberry posited that people’s well-being depends not only on their own real income but also on their standing relative to the incomes of others. An increase in their real income might leave them worse off if others enjoyed larger increases.

Economist Richard Easterlin has claimed that the larger real incomes produced by Western industrial nations have not markedly increased happiness in those countries. Specifically, he cited an average real per-capita income of around $15,000 as the point at which further increases in real income show a diminishing return in additional happiness. British economist Richard Layard has broadened Easterlin’s insights into a field of “happiness economics,” which purports to show that, left to their own devices, people will work more than is good for them. When the resulting gains in real income are offset by the gains enjoyed by others – leaving their relative standing unchanged or reduced – the result is a reduction in personal well-being. Naturally, Layard claims that only government intervention via taxation and other means will cure this “external diseconomy” of modern industrial life.

Without probing the shortcomings of these views, it is sufficient to note that the case of Bhutan does not fit within their boundaries. Bhutan’s real income is miles below the $15,000 threshold. Its government cites a claim that the country is the world’s eighth happiest, but of the 20 happiest countries identified by proponents of happiness economics, only Bhutan suffers brutal poverty. All the others are among the leading developed nations. The notion of Bhutan’s subsistence farmers, herders and loggers worriedly comparing incomes in an effort to “keep up with the Joneses” is a grim joke.

What’s Going On?

A sober and skeptical analysis would explain the Bhutan story as follows. In the mid-1970s, the Bhutanese monarchy found it convenient or necessary to finally allow entry into the country. But with access came scrutiny, and the government had to justify the fact that most of its budget came from grants, aid and loans by India and the IMF – yet its people were living in the direst poverty. So it invented what economic theorists call a “convenient fiction” – that its people may have been poor, but they were happy, among the happiest in the world. Actually, this was due to the efforts of the government itself, which had (roll of drums) discovered a brand new technique of governance, known only to the mysterious East and anathema to the materialistic West. Thus was born the measurement of Gross Domestic Happiness.

When Bhutan’s youth began to get restless and the truth about the prosperity of the outside world could no longer be kept from them, the government had to do something to drum up some real income. Hence the gestation of the hydroelectric project, which has held the wolves of revolution temporarily at bay. But mass electric generation for export does not comport with the picture of Shangri-La that the government has sold the outside world, so – for Olympic-publicity purposes – the old Lost Horizon model was trotted out.

Sure enough, along comes a reporter from NBC who falls for this cover story like the proverbial egg from a tall chicken (with apologies to Peter Stone). She (or whoever is responsible for writing the story) omits to perform even the tiniest bit of due diligence. And that is how viewers of the London Olympics were treated to some of the most outrageous propaganda since the fall of the Soviet Union.