[Hint: You can get around The Economist‘s paywall by linking via Google – just put the URL into Google, then click on Google’s link to the article.]

Last month there was a story about various dirigiste steps the Japanese government might take to deal with the post-tsunami electricity shortage in The Economist (of all places).  They published my response in the May 14 issue, again with some unfortunate editing (see “The market for electricity”, halfway down the page).  Here is my original version:

Date: Sat, 07 May 2011 19:06:22 -0400
To: letters [at] economist.com
From: Dave <dave [at] mugwumpery.com>
Subject: Or, you could let the market work

Dear Sir:

I agree with your assessment (“A cloud with a green lining”, 30 April) that Japan’s government has many options to deal with the electricity shortage resulting from the earthquake and tsunami.  As you say, they could encourage solar power, subsidize LED lighting, push for batteries to shift demand away from peaks, etc.

Alternatively, they could do nothing at all, and allow electricity users to bid up the price of power until demand drops to meet the limited supply.  The resulting high price would by itself encourage alternate sources of supply and force conservation without any need for “publicity” or nagging.   More, it would encourage people to find clever ways to increase supply and reduce demand that the mandarins in Tokyo might never have thought of.

And all without costing taxpayers a penny, or feeding subsidies to the politically-connected.

The sad thing here (on top of the greater tragedy of the earthquake itself) is the lost opportunity for entrepreneurs to come up with efficient and innovative solutions to address the electricity situation.

But the market works even when governments attempt to suppress it – just less efficiently. If the Japanese government decides to dole out subsidies and propaganda instead of letting the electricity price rise, that won’t end the shortage. Rolling blackouts will still cause electricity consumers to increase their own electricity supplies, and adapt their demand to the blackouts, by buying their own generators, investing in battery storage to supply power during down-times, etc. But there will be a lot less incentive to cut consumption, since cheap power will still be available in bursts.

Eventually the Japanese electric grid will be rebuilt to handle the demand, but in the meantime adaptation will be slower, and the pain more prolonged, than it would be had the authorities let the market do its thing.  But despite the best efforts of the government, electricity users will adjust and find ways to get by with the limited supply.  And that is the market in action.

Another letter to the Economist:

Date: Thu, 24 Feb 2011 09:06:36 -0600
To: letters [at] economist.com
From: Dave <dave [at] mugwumpery.com>

Subject: Re “Ending the open season on artists”, 19 February

Dear Sir,

As a an “aghast” digital libertarian, I object to your presumption that stronger copyright enforcement is good or necessary for artists.

No one disputes that  artists must be rewarded for successful creation.  (Middlemen are another story.)  Copyright was a reasonably effective system when copying was expensive anyway and the means of reproduction were relatively centralized publishers and distributors, easily policed.  Now that works can be copied costlessly by any individual, the principle of limiting copying is both unworkable and inappropriate, as copying (although illegal) is not theft – because copying does not deprive the original owner of anything.

Certainly, artists must eat.  The challenge is to find new business and legal models to accomplish that without needlessly depriving the public of the full enjoyment of the fruits of creation.

Attempts to perpetuate obsolete business models by law are not the solution.

It is hard to make a strong argument in a letter short enough to get published.

My larger point is that there is what economists call a “deadweight loss” when someone who would have enjoyed a creative work doesn’t because of costs imposed by copyright.

Say we’re talking about a copy of The Beatles “A Hard Day’s Night” (which, completely off-topic, has some of the lamest lyrics imaginable – “…to get you money to buy you things“??).

Some consumers are willing to pay the asking price for the song under the copyright system.  In that case the artists get 10 or 20%, and the middlemen get the rest.  (And yes, the studio technicians, etc. need to get paid too, but not necessarily by a record company – painters seem quite able to buy blank canvas without middlemen to help.)

But more consumers (usually far more) are not willing to pay that much.  They’d enjoy having a copy of the song, but not enough to justify the price.  These people are going to be in the majority almost regardless of the price asked.  This is the deadweight loss; value that could have been realized without cost to anyone, but wasn’t.

To make it clearer – imagine we’re talking about a $1000 copy of Adobe Photoshop instead.  How many of the people who would benefit from using it are willing to pay that much?  Very few.  Yet it would cost Adobe nothing at all to let them use it for free – if that didn’t discourage those few who would pay from doing so.

Of course, under the copyright system this loss is necessary to make the system work – otherwise no one at all would pay.   And this is precicely the problem with the copyright system – it necessitates the deadweight loss to work.

As I implied in the letter, this wasn’t such a terrible flaw when copying was expensive anyway.  Records couldn’t be produced for free; paying the artist  a royalty only increased the price a little bit, so not much harm was done.   But that’s not true in a world where copying is free.

So we need a new system to reward creators for successful creation that other people value.  I can imagine a half-dozen ways to do it; so can you.  It will take some experimentation and evolution to get there, but propping up the obsolete copyright system is not going make it come sooner.

Wind turbine, 43°45’39″N 15°57’11” E

Last week I came back from a brief visit to Croatia (visiting family).

I took along my trusty iPhone, having first jailbroken and unlocked it, so I wouldn’t get whacked with AT&T’s international data roaming fees.

Over the course of 10 days, I used 44 Mbytes of data; I consider that quite moderate – a little Web browsing, minimal email, and some Google Maps. (I’d expected to use about 10x as much.)

I bought a SIM card from one of the local networks, VIP (a Vodafone affiliate, I think).

VIP’s deal was as follows: For HRK 100 (US $17.40 at today’s exchange rate), you get a prepaid SIM card loaded with HRK 100 of credit. Calls come out of that at $0.14 to $0.44/minute, depending on time of day and what network you’re calling (landlines are less). International calls are $0.47 to $1.08/minute, depending on where you’re calling (calling the US is the $1.08/min rate).

Again out of your HRK 100 credit, you can buy data service – 20 MBytes for HRK 15 ($2.61) or 100 MB for HRK 30 ($5.23). (Don’t believe me? Look here. ) I went for the 100 MByte deal, using up HRK 30 of my HRK 100 credit.  Since I only used 44 MBytes of that, the rest went to waste. I don’t really know how much credit was left when I came back to the US; but I know I was able use voice and data both in the Munich airport and in the USA using the same card.

So, 10 days’ use of the iPhone, voice and data, cost me $17.40. And I didn’t use it all up. (Service was great, by the way – much better 3G data coverage in rural areas than I get in the USA.)

Just for curiosity, I checked how much AT&T would have charged me for the same thing.

Their standard international data roaming rate is quoted as $0.0195/kByte. That’s just shy of 2 US cents per 1024 bytes, or $20/MByte. I used 44 MBytes so that would have been $879. Yes, nearly nine hundred dollars. For very light usage; I could easily have used many times more if I’d been traveling for business.

But, of course, AT&T says if you’re going to be travelling internationally, you really ought to buy one of their “Data Global” packages – 20 MB for $25/month, 50 MB for $60/month, and $120 for 100 MB. (Recall that I bought 100 MB from VIP for $5.23.) And if you go over your monthly allowance, it’s $10/MB.

What is AT&T thinking?

Google on “iPhone international data roaming” and you’ll find lots of horror stories about multi-thousand-dollar AT&T bills from short trips. I didn’t get whacked, but what does AT&T think is going to happen when someone gets a $3000 bill after two weeks in London, or a $60,000 bill after downloading one episode of “Prison Break”? They might or might not get paid, but for sure they are going to lose a customer – forever. Each and every time they send out a bill like that.

It may be legal, but it is bad business – incredibly bad business.

One of the things that has made the US such a wealthy country is a business culture that includes the idea of a “fair price”. Although it’s generally legal to charge any price the market will bear – even taking advantage of buyer ignorance or desperation – mainstream American culture supports the notion that there is a “fair price” – the price that an informed buyer would pay in a competitive market, considering circumstances of location, quality, convenience, etc.

So, for example, Americans frown upon selling generators for $10,000 during a blackout, if they go for $1000 at normal times. Or the rural tow truck driver who wants $2000, cash, to pull your car out of the muck, just because the next closest tow truck is hours away.

Many economists wouldn’t have a problem with that – in a certain narrow sense, those kinds of price spikes (“gouging”, if you like) may be efficient. But a society in which most sellers feel revulsion toward “taking advantage” is one in which buyers are more willing to engage in transactions. If buyers feel they’re unlikely to get screwed because of their ignorance (as in the the case of AT&T here) or desperate circumstances, then there is more commerce and less effort expended in investigation of deals and precaution against getting caught by local monopolists. In short, transaction costs are lower for everyone.

I’m not advocating legislation here. But the American attitude has it merits. And AT&T is not making itself any friends or building any customer loyalty.

I have to credit my lovely wife for this theory, who discovered it by experience with her own employees.

Urban sprawl is caused by wage-and-hour regulation.

Most places have regulations requiring overtime pay (in the US, the usual rule is 1.5x wages past 40 hours/week).

Employers usually can’t afford overtime wages, so most employees can’t earn more by working longer hours.  But many employees would rather work and earn more.

So, instead of working more hours, they spend those hours commuting from the suburbs, where housing is cheaper than in the city.  Commuting from the suburbs is a way of “working” to get a larger disposable income that isn’t regulated.

I’m willing to bet that the growth of urban sprawl closely tracks the introduction of wage-and-hour regulations.

Regulations are like squeezing a balloon – what goes in where you squeeze comes out somewhere else.  When you force people to do what you want, they tend to find other ways to get what they want.

I see today that the MIT Red Balloon Challenge Team has won the DARPA Network Challenge, in a little less than 9 hours.

In case you don’t know, the challenge was for a single individual to report the locations of 10 red weather balloons moored, for a few hours yesterday, at random public places around the USA.  The idea was to see if social networks can be used to quickly coordinate the solution of difficult distributed problems.

As has become common, DARPA offered a prize of $40,000 to the winner.  This is a tremendously efficient use of government funds to do research and get challenging projects accomplished – surely it cost DARPA more than the $40k prize money just to deploy the 10 balloons and setup the website about it.  If they’d contracted the problem to a defence research organization, it’d have cost them 50x the amount or more.

The MIT team won by organizing thousands of people to report their observations, with the promise of a cleverly-allocated share of the prize money.

Goal-driven prize competitions just about disappeared for 50 years after World War II.  Prior to that, they were a common and successful way of encouraging challenging achievements – the British longitude prize that led to the development of the chronometer and the Orteig aviation prizes including the one won by Charles Lindbergh for his non-stop transatlantic flight are among the most famous.

Something about the Depression or World War II led to the decline of these prize competitions – I suspect a loss of confidence in the ability of individuals vs. large organizations to accomplish great things had much to do with it.

The Ansari X-Prize – $10M to the builder of a reusable, manned, sub-orbital spacecraft – was organized by Peter Diamandis in the 1990s,  and won by Burt Rutan (with funding from Paul Allen) in 2004.  This seems to have been the turning point for the return of such prizes.

Years ago at a business meeting in France, I said something nice about competition – some truism about how it’s a good thing and should be encouraged.  One of my French hosts mentioned to me later, “you know, in France, we are taught that competition is a bad thing”.  She was entirely serious – to her, competition was the opposite of cooperation (not of monopoly), and could only lead to a cutthroat society of winners preying on losers.

As Eric Drexler likes to say, what most people forget is that almost all competition is about who can cooperate the best.

Economic competition between firms is about who can best cooperate with customers, suppliers, and employees.  Those who cooperate best grow bigger, while the “losers” release people and and resources, making them available to other, more cooperative, organizations.

Perhaps the only significant exception to “competition-is-about-cooperation” is athletic competitions such as the Olympics – which, oddly, enjoy a much more favorable popular opinion than does economic competition.  Somehow people understand that in the field of athletics, there can be no excellence without competition.

But competition is far more important to society in the field of economics – without it, every business would resemble the Department of Motor Vehicles.  (A succinct description of Soviet communism, perhaps.  Or American public schools.)

The renaissance of prize competitions makes me optimistic about the future of American society and culture.  If both private and government organizations can use prizes to spur achievement, and be proud of it, the US may be in the process of getting it’s mojo back.

My wife and I were comparing school experiences today.

I grew up in Massachusetts, she in a communist country.

My experience was horrible. I was in high school in the 1970s. The teachers were droning idiots (mostly), the students asleep most of the time. I learned, to a first approximation, nothing. (What little I know I learned outside of school; I’m lucky to be one of the few who is able do this.)

Her experience was totally different. She was challenged and, like most Europeans of my acquaintance, learned a lot in school.

Why?

I think it’s the quality of the teachers. In the US, teaching is a lousy job. It pays poorly and has low social status. Teachers are not respected.

In her country, teaching was (at least at that time) a highly respected and well-rewarded profession (as communist jobs go). So the best and brightest were attracted to the teaching profession. Both her parents were high-school teachers (biology and mathematics). Her father, retired more than 20 years now, is still called “professor” when he goes around town (with respect, not irony).

Naturally, there are good reasons why teachers aren’t respected in the US. They aren’t respectable. When I was graduating from high school, the best students were going into law, medicine, or engineering. The middling students went into business or the arts. The worst – the bottom of the barrel, the ones who could barely get accepted into any college at all – into teaching.

Because they could. There was essentially no competition in the teaching profession; anyone could get in.

It’s a vicious self-reinforcing cycle – teaching pays poorly, is low-status, so no capable person wants to be a teacher. So only the incompetent and dull become teachers. And so teaching becomes even less attractive as a profession – your colleagues are drones, the pay is poor, the administrators (drawn from the ranks of teachers) are idiots, and your friends think you’re a loser.

It gets worse. The incompetent are insecure (understandably so) and so push for unionization and bureaucratic rules to make the job less challenging, and oppose all efforts to measure or reward excellence, as they know they have little of it. (With exceptions, of course. There are always a few outliers, but early in their careers most of these either quit in frustration or are scooped up by private schools.)

So why was the situation different in communist Europe? One of my themes on this blog is the importance of competition as a necessity for excellence, yet communist primary schools, like American ones, didn’t compete with each other. (Actually they did, a little, but I think this was a minor factor.)

In less-developed countries, most people have to do manual labor – work in the fields, a factory, etc. Only a very few can hope for a profession (or even office work). These coveted slots are reserved for the best and brightest. Teaching is well-paid compared to most other jobs (and offers lots of vacation time). As a result, there is great competition to enter the teaching profession. Bright people become teachers, do a good job, and earn the respect and admiration of students and parents. They are, rightly, seen as the best, and have high social status.

A wise farmer doesn’t eat his best produce – he saves the best seeds to plant next year. We in the US have been using our worst, instead of our best, to educate the next generation, and we are reaping the rewards.

The situation in colleges and universities is completely different – US higher education is widely considered the best in the world. Why? Because universities compete with each other for professors and students. Judging from the amount and intensity of marketing materials my high-school senior son received, running a university is incredibly profitable (a racket, I suspect, but that’s for another essay). The tremendous competitive pressure forces universities to seek the best professors.

Well-paid and well-perked, being a university professor in the US is a good job that attracts highly competent people – who compete with each other for the few tenured professorship slots. Again, the self-reinforcing cycle works, but this time in the positive direction: Competent, articulate, erudite professors enjoy high social status and (reasonably) good pay.

Yet the lure of alternative professions detracts from the quality of teaching even in US universities – if 150 years ago professors were drawn from the top 0.1% of minds, today they are drawn from the top 20%. But this is a far cry from the situation in primary schools.

What is to be done?

The simplest solution is to make teaching an attractive profession again.  If teachers were paid on a scale similar to, say, lawyers, far more competent young people would be attracted into the profession.  To throw out rough numbers, say $150,000/year for starting salaries, rising to $350,000 – $400,000 for a senior teacher with an excellent reputation.

It would take a generation to make the change.  At first, only the mercenary would be attracted.  Over time, as the social status of the profession improved, others would be attracted as well.

In the early days of the change there would be understandable outrage at the idea of paying such sums to the existing incompetents.  But what alternative is there?  Any system that limited the new salaries to the competent would be bitterly fought by the powerful teaching lobbies.  And if the new salaries were offered only to new teachers entering the profession (in the unlikely event that such a scheme was politically possible), this would drive the few existing competent teachers out of the schools in protest at the unfairness.

Of course, given a fixed budget, there is always a necessary tradeoff between quality and quantity.  If teacher salaries are raised by 4x, class sizes must increase by the same amount.  So the change needs to start at the highest grades, in the high-schools, and gradually work its way toward the lower grades, as the public becomes used to the idea of larger class sizes.  (Numerous studies show that teacher quality matters far more to educational outcome than class size.)

At some point, perhaps below 5th or 6th grade, it may be better to keep the existing low-paid teachers and small class sizes.  Young children are not capable of learning very much (my mathematics professor father-in-law started school, illiterate, at the age of 14; but that’s another story), and probably need more supervision.  And it doesn’t take a tremendous intellect to teach young children.

One way to get from here to there is through competition between schools, however created.  If schools had to compete for the custom of students and parents, the successful competitors would have to improve outcomes through better teaching (and the unsuccessful ones would disappear, as they ought to).

But as the communist example shows, vast improvement is possible even without competition between schools – as long as the incentives are put in place for competent people to compete to become teachers.

I love when seemingly disparate things synchronize in unexpected ways.

According to The Legal Underground,  Nobel laureate Friedrich von Hayek (1899-1992) “was exceedingly fond of t-shirts, especially those portraying images of Mick Jagger…”

Surprising enough; doesn’t fit our image of Hayek.

But it gets better.  Sir Mick is a fan of Hayek (see 3:35 in the clip below):

Before quitting to start the Rolling Stones, Jagger attended the London School of Economics, where Hayek had taught.

Supposedly, Jagger’s adviser at the LSE “said that Mick Jagger did a careful net present value analysis of the value in attending LSE as compared to the foregone revenue from playing rock and roll. When the dollars came out higher for music, Mick came by and apologized to the adviser, but said he couldn’t afford to continue in school; LSE was just costing him too much money.”

Did I mention that Jagger also owns an Enigma machine?  The rare 4-rotor type.

Now if I could just work Salma in there somehow, it would be perfect.

Here’s another letter to The Economist, this one from 2006-11-27.  I didn’t expect them to publish it, and they didn’t.  But I had to get it off my chest (hey, that’s why I post here, too).

SIR –

Tongue-in-cheek, David Crawley suggests a defence against alien invasion [Letters, 18 November].  If it were possible to evaluate and counter the capabilities of aliens, such a plan might be wise.  Unfortunately, any hostile aliens able to bring a force to our planet are likely to be so advanced as to make any defence we might offer entirely ineffectual.  (We have no way to estimate the likelihood of such an attack, as we have no information about the distribution of intelligence in the universe. ) Yet the absence of radio signals from other stars is, if anything, ominous, as we have known since Copernicus that Earth’s situation is in no way special or unique – if our neighbor’s transmissions have been suppressed, perhaps ours will be as well.

That said, a defence against global warming [the real subject of Mr. Crawley’s letter] is not in the same category – there are remedies such as increasing the Earth’s albedo (reflectivity) – a requirement that future roads and rooftops be painted white would be an inexpensive start, or reducing the sun’s heating of the Earth, for example by placing large inflatable sunshades at the Lagrange point between the Earth and Sun.  Others will have better suggestions.  We do not need to freeze in the dark.

This guy Crawley sent a sarcastic letter criticizing governmental action on “the risk of something really catastrophic” resulting from global warming, because “only a minority of scientists perceive this as a threat and the costs of such a defence are enormous”, then comparing it to the results of an alien invasion.

I thought it was a lousy analogy, and said so above. I should have avoided getting side-tracked with a discussion of Berserkers (scary and interesting as that may be, The Economist is not ready for it).

While I’m at it, here’s another letter to The Economist, this one on 2009-01-09.  They didn’t print it, altho I got a very nice reply from the science editor.  Maybe I was a little late getting it in.

Dear Sir,

In “Darwinism”, 2008 December 20, you report that people tell
researchers “they would rather be richer than their peers even if
that means they are absolutely worse off”.

It is one thing to benefit oneself at the expense of others – but to
harm others even at one’s own expense, surely that is the very
definition of evil.

Letter to The Economist sent 2009-05-03.  I’m guessing they won’t print it – it’s too far from the mainstream.  (Also, my Hayekian slant is showing; few people get it.)  We’ll see.

Update May 25 – I was wrong.  They printed it in the May 14 issue, with some unfortunate editing.

Dear Sir:

You say (Briefing – Central Banks, 25 April) “The business cycle was supposedly subdued, yet the world is in the deepest recession since the 1930s.”

Indeed.  Perhaps there is a connection.

For many decades, forest fires were suppressed by well-meaning officials.  Fuel was allowed to build up, eventually resulting in far more devastating fires than would have occurred naturally.  Today we allow fires to serve their necessary functions, while making efforts to limit damage to people and property.

I suspect the business cycle, and attempts to subdue it, are much the same – deadwood must be cleared out, inefficient practices curbed.  The economy, like an ecology, is far more complex than we can comprehend; attempts to control it are more than likely to produce unintended results.