The Wages of Sin

February 8, 2011

“You want a toe? I can get you a toe, believe me. There are ways, Dude. You don’t wanna know about it, believe me.”
Walter Sobchak

“They’re turning kids into slaves
Just to make cheaper sneakers.
But what’s the real cost?
Because the sneakers don’t seem that much cheaper.
Why are we still paying so much for sneakers when you’ve got little kid slaves making them?
What are your overheads?”

Flight of the Conchords

You all know I don’t care about anyone or anything, so I have a business plan that’s gonna make me rich. It’s pretty simple. Walmart is one of the largest and most profitable companies in America, and for good reason: they are able to offer their products at lower prices than the competition, thus attracting shoppers to their stores. Well, I’m going to undersell Walmart. How? Easy. Recall that I have no scruples. My business plan consists of two easy steps:

1. Steal merchandise from Walmart.
2. Sell stolen merchandise.

Obviously, with a zero cost-of-goods-sold, I’m guaranteed to make money at this enterprise.

The example was silly, yes, but at least I didn’t write something long and drawn out. Now, let’s think about why this business plan wouldn’t work, and what impact that has on the ongoing debate as to whether the prices of goods are a reasonable indicator of total “cost to society.”

Sitting here in my chair, I can think of one very excellent reason why I wouldn’t be able to make money following steps 1. and 2. above, no matter how unscrupulous I am. The excellent reason is that Walmart would use the legal system to stop me from stealing their stuff.

I might have a decent chance of stealing some merchandise from Walmart, but in the end, if I tried to do it on a large enough scale, the cost of fines and the loss of my time from being in jail would more than outweigh the benefits. The same would be true if I tried to hire someone to go and steal stuff for me. The job of procuring merchandise for me is dangerous, what with possibility of fines and jail time. That means nobody is going to do it for me unless I pay a high wage. Which means I’m practically paying for the merchandise again. Dang.

When you run through all the calculations, just buying the stuff from Walmart turns out to be the cheapest way to procure it. It’s a cliché to say that crime doesn’t pay, but it’s an important cliché because it basically has to be true in order for the business of a society to function at all. If you could actually succeed in business by following my business plan, there would be no Walmarts left to plunder. And the stores that replaced them would hire private security forces if police protection was still insufficient to guard their stuff.

In the original “The Story of Stuff” video, Annie Leonard makes the point that portable radios at Radio Shack are artificially cheap because “we’re not paying for the cost of workers going without health care.” My initial and extended reaction to that line was that it’s silly, but on further consideration, maybe it’s not. The prices of goods reflect the legal regime of a society as much as anything else.

A famous example from Harold Demsetz points out that if we were to enact a law prohibiting people from prosecuting automobile theft, or even installing anti-theft devices, the price of cars would immediately drop, since no one would buy one with confidence in maintaining it in his possession.

I would argue that a law requiring a certain amount to be spent on health care for every employee you hire is a bad law, but if we did have such a law, prices would reflect that fact, just as now they reflect the fact that we don’t have that and a bunch of other crazy laws.

Let me start writing about the point. A lot of people argue that the price we pay to burn gasoline or coal is artificially low, because we don’t pay the real cost of environmental destruction caused by our carbon emissions. That’s true in a sense, but it doesn’t necessarily have the implications that people think it does.

One of the basic things you learn in Economics class is that goods should be produced up to the point where marginal benefit equals marginal cost. Otherwise, production is inefficient. It’s a fine idea, but it doesn’t apply everywhere, and economists’ favorite examples happen to be, unfortunately, situations where it doesn’t apply.

Consider that managing and using a system of property rights is a hassle. Imagine, for example, that we had to purchase the right to breathe air from everyone in our community. It is certainly true, as you can see in the basic “marginal cost/marginal benefit” diagram, that there are externalities to breathing that people do not take into account. So unpriced breathing is inefficient. But if we tried to start pricing the air, the time spent negotiating with other people, the cost of buying breathing monitors to make sure we weren’t breathing too much, and adjudicating disputes would far outweigh the benefit of greater “efficiency” in production. Not pricing was inefficient. But, as it turns out, pricing is also inefficient, in that you are refusing to economize on the cost of market transactions. The act of pricing is itself can be so costly that it’s not worth the hassle.

Right now, emitting carbon is free. The price system isn’t telling us that therefore our carbon emissions have no effect on other people. Rather, it is an indication that the costs involved in pricing and having a market in carbon emissions, at present, are too high for it to be worthwhile for anyone to take them into account.

Then again, as Coase taught us, the government is a giant transaction-cost reducing machine. If the reason there is no market in carbon emissions is because creating such a market is too costly and too much of a hassle for it to be in people’s interest, then government can help with that problem.

The danger with government is two-fold. First, when they set prices, they necessarily have to just make them up. If you emit a ton of carbon, you pay $200. If you kill a US citizen, you go to jail for forty years. In both cases, they’re just making up prices to change people’s behavior. We hope they will make up a good price and it will improve overall efficiency, but it’s impossible to be sure one way or the other. When you bring transactions out of the market, you lose the external checks on validity that make the market work.

The second potential problem I see in government control of carbon emissions is that a government big enough to control carbon emissions is big enough to kill us all. This second worry is much more speculative and more specific to libertarians, so I won’t say any more about it.

I’m glad no one will read this long post, because if they did, they would see that I basically  just admitted that I have been wrong on government action all along. But to summarize, the important point here is that the price system as a description of how things are tend to be a lot truer than a description of how things should be. If I purchase the toes of Bangladeshi children, the price I pay reflects the cost of finding the children, subduing their parents, shipping the toes, etc. When I buy products produced with slave labor, the price reflects the cost of keeping the slaves fed and in line, which is less than the cost of just paying them wages, apparently.

To summarize my summary: When I say the price system gives us a measure of the “cost to society,” don’t say “no it doesn’t.” Yes, it does. The problem for me is that that fact by itself doesn’t really get me anywhere.

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