Market-Based Management®

When No One is Accountable

There is a fantastic post by former Treasury Secretary Larry Summers over at Creative Capitalism (HT: EconLog’s Arnold Kling) on the bubbling problems at Fannie Mae and Freddie Mack. I will let the post speak for itself, but for decades politicians have trumpeted the idea of public-private partnerships, as a sort of “third-way” where the supposed deficiencies of markets and government cancel one another out. Unfortunately, as evidenced by the growing troubles at Fannie and Freddie, this combination of conscience and profit is probably responsible for much of the trouble. What does one of these partnerships tell its private shareholders when there are no profits? It tells them that the company’s social obligations are to blame. What about when the partnership fails in its social obligations? The company explains that it has done so in order to fulfill its obligations to profit its private shareholders. As for the shareholders, should they keep an eye on the company’s books or question its debts and lending practices? Why bother, since the partnership’s debts are guaranteed by the government. In the end, we are left with a perfect storm of unaccountability—be careful of mixing two worlds, you may get the worst of both.

Not from the Onion but it belongs there

At first I thought Don Boudreaux over at Café Hayek had a hold of my leg with this post about the Onion Futures Act of 1958—until I noticed that he had linked to this Wall Street Journal article and a quick Google search turned up that there really is an Onion Futures Act of 1958. The Onion Futures Act bans futures trading in onions, and came into effect after onion farmers blamed “moneyed interest” and “speculators” for volatile onion prices. The act still remains on the books, and (as far as I know) no other bans on commidity futures exist. So with folks blaming oil prices on “moneyed interests” and “speculators,” what would a ban on oil futures do to the price? Of course onions ain’t oil, but since no other commodity has suffered the same ban, it remains the only example we have.

Despite the ban, onion prices continued to remain volatile. Actually, they became even more volatile after the prohibition of futures trading. Contrary to what had been believed, onion futures trading had actually helped to stabilize prices. Futures are an excellent hedge on risk and a valuable knowledge process. They encourage traders to do their homework and collect and vet mounds of information on what might be the future price. This allows consumers and producers to plan on these prices and respond accordingly. Hopefully, decision makers will come to understand the valuable knowledge provided by futures market and not repeat the onion mistake.

Creative Destruction Threatens Snail Shortage

Where have all the good snail collecting jobs gone? The answer appears to be nowhere—the problem is finding people willing to fill them. Snail gathering is hard work, but someone has to do it—otherwise Europe’s gastropod lovers (the French in particular) will go without escargot. Unfortunately, relatively high wages in France and the extension of protections to some species of snail nudged the French snail industry into slow decline some years ago. Fortunately, the demise of the Berlin Wall brought a flood of slimy molluscans from Eastern Europe, as impoverished villagers in Poland and Bulgaria proved only too happy to perform the dirty work and keep the escargots flowing.

That was until economic development in Eastern Europe brought better things to do, and would-be snail gatherers have moved on to more rewarding occupations. Now there is consternation in France that foreign supplies of snails may dry up and deprive Frenchmen of their beloved escargot. The pending snail crisis is an example of newer and better jobs crowding out the old—a process the great economist Joseph Schumpeter popularized as “creative destruction”. By providing greater opportunities, the rising tide of Eastern European prosperity is simultaneously destroying its snail industry. This is a telling reminder that, while we are bombarded with tales of this or that industry failing or moving oversees, the truth of the matter is this is often a symptom people of a country finding better things to do. At the same time I fear not for the French. I am sure they will get their snails from somewhere, as the nations of Eastern Europe pass the torch of snail gathering to peoples with lower opportunity costs, who will be delighted (and much better off) for receiving it.

The Importance of Vetting Knowledge

MBM talks a lot about collecting and sharing knowledge. However, we sometimes don’t stress the need to understand exactly what that knowledge means. Often what appears a clear connection is really quite meaningless. I was reminded of this by an article in today’s Arizona Republic (HT: Coyoteblog). The article complains that consumers are being “gouged” by faulty gas pumps. Apparently, about 9 percent of Arizona’s inspected gas pumps failed tests by the State’s Department of Weights and Measures. The article is full of innuendo and numbers implying there is something rotten in the state of Denmark (or at least Arizona). Despite the tone of the article, the fourth sentence begs some curiosity:

Half of those [pumps] were malfunctioning to the detriment of customers.

Faulty pumps are not good, and people getting ripped off is not good; but if half of the malfunctions cause detriment to customers, then what about the other half? Are some of the good people of Arizona getting a little free gasoline? Of course, I do not doubt the need for governments to standardize and inspect weights and measures (the practice dates to the Magna Carta (clause 35) in the Anglo-American tradition), but the little nugget on the impact of these inaccuracies tells us that this situation is probably happenstance or, at worst, neglect on the part of the pump owners. Interestingly, the article also mentions that it can cost up to $800 to recalibrate a pump, which considering the thinness of margins in retailing gasoline (only a few pennies on the gallon), is probably incentive enough to recalibrate infrequently—as opposed to deliberately fiddling the pumps. Furthermore, as the fine for a first time offense is only $300, it makes perfect sense for the gas station owners to have the state come out and do the inspections for them (paying the fine and fixing the affected pumps should be much cheaper than constantly re-calibrating of all of them). So, while malfunctions of 1 out of 11 inspected pumps causes us to quickly jump to conclusions, a little vetting of information reveals nothing more than perhaps the nature of pumps, happenstance, poor incentives, or the combination of all three—meaning only a few lines tell the whole story, and they don’t match the rest of it.