Risk and uncertainty are two different things.
When we looked at the product transformation curve for Joe's garden production, we saw a curve that reflected potential outcomes based upon the conditions. Joe was able to predict a certain output from his work in his garden, based upon "normal" conditions. We took a brief look at those normal conditions, knowing as we do that when in comes to growing vegetables there are some conditions that need to be met, in terms of rainfall, sunshine, fecundity of the soil, pest and disease control.
When the conditions of a growing season were sub-normal, we see a reduction of garden output, as output moves down the curve to the left. When Joe is the benefactor of above normal growing conditions, the output from his garden moves up and to the right on the curve.
These are conditions of risk, and Joe knows that under conditions of risk that some of these risks can be ameliorated by his effort. Lower than normal rain-fall? Irrigate. Colder weather? Hot-housing. (My dad used to do this for our tomatoes: drive four stakes around the plant, then wrap plastic around your sets. Tomatoes love the warm.) Bugs? Spray.
Any farmer can tell you that there's no sure thing. Every day presents a risk of failure. And, a risk of reward. If you work hard your chances of success increase. Some catastrophic losses occur. There are times that, when listening to folks talk about the Man/Mother Gaia nexus, that there exists a blithe belief that Man is doing a job on Mother Gaia. Place your bets on agriculture, and you'll soon find out that Mother Gaia is a dispenser of tough love. She can wipe you out in a heartbeat, and never shed a tear. We never laid a glove on her.
So, there's risk.
And then there's uncertainty.
Of the two, I'd rather deal with risk. Let's look at Joe and find out what his predicted behavior will be in the face of uncertainty.
We are blessed in this country with a legislature. Well, two. A national legislature and a state legislature. To be fair, we also have to include local governments as well, since they legislate on a local level, although they do not pass law, but rather, ordinances.
We have a national election, and the party of Change! gains unimpaired control of the levers of legislative authority. Typically, these kinds of party movements haven't meant much to Joe and to producers of carrots in general.
See, what motivates Joe to raise additional product from his effort is an attempt to improve himself, to create a surplus and to create greater wealth. When Joe grabs his lunch-box and heads down to the garden for a day of weeding and hoeing, he does so knowing that the reward for his effort is deferred. He will not receive the fruits of his labour until the garden is harvested, and he takes his surplus to market.
When Joe realized that you had carrots and I had apples, and that I had offered you apples for carrots, Joe decided that he would love to add apples to his menu. While you were unwilling to provide me your excess (surplus) carrots for my excess (surplus) apples, Joe looked at it as an opportunity.
Economists have an awareness of opportunity. They refer to opportunity as having rewards and as having costs. Perhaps you've heard the expression "opportunity cost". Decisions have costs. When you decide to increase your carrot production, the costs can be viewed in two ways: the cost of adding an additional row of carrots (carrot seed, increase toil in creating a new row, increased costs of pest and disease control, increased watering demand) and the cost of "not" planting something else.
Joe planned and planted an additional row of carrots, knowing that there was a potential market for his surplus of carrots: my apples. But, what is the cost of giving up a new row of something else, entirely?
What if he had decided to use the additional row for gardenias? Maybe there is a market for gardenias that Joe is unaware of. Maybe, a single gardenia is worth ten apples, while it takes five carrots to get a single apple.
The apples Joe doesn't get--from choosing carrots instead of gardenias--is his opportunity cost. Even though Joe may not be aware of it, his decision to grow additional carrots instead of gardenias has a cost--in terms of future apples--that Joe doesn't even know about. Even though Joe is unaware of this cost doesn't mean that this cost, the opportunity cost, doesn't exist.
Why are opportunity costs important? Remember when Joe first found out about the possibility of getting apples for carrots? It was Joe's recognition of opportunity costs that first led Joe to consider the possibility of creating a surplus of carrots, in order to provide himself with apples. He didn't need to grow more carrots than he needed to grow to sustain himself. He chooses to grow more carrots in order to benefit himself. He was able to create a life that was richer than mere subsistence by varying his diet, in order to enjoy the taste and healthful aspects of apple consumption. Or, mebbe, he just liked the way they looked. (Apple of his eye kinda thing.)
Whatever, he wanted apples. Saw an opportunity. Acted upon that opportunity. And within the range of growing outcomes, expects to receive apples and achieve the goal of his self, personal, pursuit of happiness.
May he fail? Perhaps. And that is the risk. Could he have done better? Perhaps. And making a decision means that all other potential outcomes have been restricted by the commission of a decision to invest, grow and harvest. Regardless of the choices you make, you may find that a better decision would have brought you greater rewards. These are risks.
So, what about uncertainty?
When we began looking at the concept of dynamic economic forces, we talked about how difficult it is to ride a bicycle around a track. Even in a closed system, like a velodrome, there are a lot of forces at work in the successful completion of a lap. We looked at the role that governments can play in assessing the risks of this bicycle riding. And that there are different forms of government action that can take place to make bicycle racing better.
One of the reasons why I am not a Libertarian is my conviction that we are better of, as individuals, with a clear understanding of the rules that govern certain behaviours and choices.
From the early codes--whether you refer to the
Tablets of Moses, or the
Code of Hammurabi--there are some pretty basic rules that we all, pretty much, choose to follow.
So, too, are there some pretty basic economic rules which you choose to break at risk. Not that you can't break them. It's just that things tend to get screwed up real fast when you break them.
Want to screw up a bicycle race? Set a height requirement for bicycle seats. Mandate shorter peddles. Require solid tires. Build corrugated tracks.
When we talk about bicycles and racing, it's pretty easy to see that some mandates are dumb. Some are smart. Stop a race if there's an oil spill on the track. Require racers who cross the foul line to leave the track. Mebbe even requiring members of a team to wear the same colours.
Some rules make sense. Some don't.
Unfortunately for us, when it comes to economics, the policy makers in the main lack the training or perception to make rules that make sense. And when legislators make bad rules, we introduce uncertainty into markets.
What happens to Joe if the government decides that it wants to regulate the market for carrots?
When Joe finds out that there are going to be regulations imposed upon the market for carrots, two thoughts will cross through his head: one, this won't affect me, and; two, how will this affect me?
We've introduced uncertainty for Poor Old Joe. His impulse is one of common sense; what is it that government can do, in terms of carrot production, which would cause me harm? Because we are used to things making sense, and carrot production being a rather straight forward pursuit, how is it that any regulation of the carrot market could impose a negative effect upon Joe and his pursuit of carrot production?
Governments work mainly in terms of hysteria. Call it the squeaky wheel. Call it the vox populi. Whatever it is, any problem becomes the most important problem.
(Otherwise, it wouldn't be a problem, would it?)
Take the case of carrots. It has been determined by our Governor that we are looking at a possible shortfall in the production of carrots. Because carrots are important, we need to pass a law that deals with this possible crisis.
We know what caused Joe to increase his carrot production. His own self-interest. And, lacking barriers to production, an increase in the demand of carrots should result in an increase supply of carrots.
How do we know this? Because of what is referred to as the Law of Supply and Demand. When we began our series into Carrots and Bicycles, we found out that just because carrots and apples were supplied to the market, that that fact didn't insure any of the normative goals of policy makers. If carrot suppliers--or apple suppliers--fail to find a market for their goods, they can turn to policy makers to provide them with assistance in pursuit of establishing such a market. This is why Command Economies are so loved by politicians. Politicians are hired to do good. Politicians find out a group of their constituents is having problems. Politicians pass laws to fix problems.
But instead of looking at the participants of the race, their bicycles and their track, Team Blue complains that under the current conditions they are unable to compete. Adjustments to the rules must be made to assure fairness of outcome. Normative values replace objective values. Outcomes become more important than process. Fairness--as defined by a level playing field--is replaced not with the outcomes determined by individual effort, but by equality of result.
In public schools you see a lot of posters that warn our children about the horror of the bully. Woe unto you if you're smarter, faster, or whatever. Because every child has dignity, there should be equality in result. Everyone wins because there are no losers. (Yes, our schools have adopted the credo of the Special Olympics. And no, your child being an Honor Roll student doesn't do anything for me. Keep the bumper sticker at home.)
Under command economies, equality of result has become defined as the result of fairness. And it rears its ugly head through all sorts of crisis driven goals.
Let's take a look at carrot production.
The Governor has determined that there is going to be a lack of carrot production. This is bad. What to do? Well, the Governor has determined that if we could only produce bigger carrots that fewer carrots would have to be produced. If I normally eat two carrots a day, if I were to eat a larger carrot I would only need to eat one.
Brilliant.
Unfortunately for the Governor, no variety of carrot exists that produces a gargantuan of the carrot world. So what does the Governor do? He mandates the goal under a program of carrot production that he refers to as his Vision for Carrots. Under this plan, government resources are going to be put into carrot research. The goal is to create a new carrot technology to replace the outdated and unsustainable carrot technology of the past. And, the Governor is going to require that all carrot producers grow at least twenty percent of their carrots in Gargantuan carrots within two years.
This Vision creates uncertainty for carrot producers. Currently, Joe is looking at picking up some apples for come carrots. But what happens to Joe's carrot production if he's required to produce Gargantuan carrots? Well, for one thing, there's no Gargantuan variety available for carrot production. He's heard that some research has been done, but that the cost in time, water, sun, and garden space makes growing Gargantuan carrots economically unfavourable. Even though Gargantuan carrot production is possible, it costs more to produce Gargantuan varieties by size and weight than regular carrots--for the same amount of production by size and weight. So while it may be feasible to produce Gargantuan carrots, the economic return on Gargantuan carrot production is less in terms of possible apples.
How does the Governor respond? How about billions of dollars in subsidies for Gargantuan carrot production? There are federal dollars available for Gargantuan carrot production. There are lottery funds available to the Governor to subsidize the production of Gargantuan carrots. And now Joe may look at Gargantuan carrot production--under federal and state subsidies--as being as attractive, or more attractive, than regular carrot production. Voila! The Governor has fixed carrot production!
Or, has he?
One of the beautiful features of being a politician is the wonderful power to fix things. And he has made things (?) better off for those of us who choose to consume carrots. The supply of carrots has been assured. And he's done it by taxing apple growers their apple production to incentivise Joe in his quest to provide the government mandated provision of Gargantuan carrots in order to achieve the Vision of the Governor's Carrot Plan. Carrot growers wouldn't normally attempt to grow Gargantuan carrots because they're so costly, but since apples will be given to those who plant and grow Gargantuan carrots, Gargantuan carrots will be produced!
By subsidising Gargantuan carrot production, uncertainty has been replaced by certainty. Regardless of the lack of desirability of Gargantuan carrots--whether by price, production costs, texture and taste--Gargantuan carrots will be produced because of the overwhelming return on Gargantuan carrot production.
Without these subsidies, what would Joe do?
When the government mandates a thing, it views its actions as costless. Really.
Just ask a state representative or senator "who pays for this?" Would you be shocked, dear Reader, to find out that most of these folks have no idea of what it is you are referring? They see on one hand that the costs of increasing regulation are paid for by those who consume a good. Or, by the producer of that good.
What they fail to account of is the opportunity cost of such mandates.
In the case of Joe, producing his little garden of carrots was a means to a better life. Now, in the face of mandates on the type of carrots he must produce, he looks at the costs of producing carrots and realizes that his economic potential has been reduced by this mandate. Growing Gargantuan varieties will actually reduce his output of carrots because it costs more to produce a pound of Gargantuan rather than a pound of regular carrots. How should he proceed?
What we have found out after years of government intervention into markets is that fewer of a thing is produced due to the imposition of government mandates. Whether it's fixed rents on housing for low-income renters, or carrots, when the government mandates outcomes, that producers of that commodity tend to reduce rather than enlarge their production of that good or service.
But when governments--or Governors--are dead set on implementing their Vision for goods and services, they are more than willing to take apples from apple producers to give to the producers of unwanted or unaffordable products and services in order to achieve the goals of their Visions. And everybody is better off...except for the producers of apples. And now we must examine the certainty, or uncertainty, of continued production of apples, shan't we?
We have removed the uncertainty of Gargantuan carrot production for Joe. But what has happened to you, as the producer of apples? If the government is going to come in and increase its levy of apples against you--to transfer your apple wealth to Joe--what is the outlook for you in terms of increased apple production? Might you not be better off doing something else? Like, producing carrots?
Politicians usually have never had a "job". School teachers? Yep. Lotsa those. Lawyers. Yeah. Lotsa those. But guys who have actually made or grown a thing? Not many of them. And the outlook doesn't look good. After all, when you look at your local high school, do you know how many of the teachers there are, for instance, qualified to teach calculus? Or, worse, having listened to some of our math teachers attempting to teach geometry or trigonometry, how many are--while technically qualified to teach--incompetent? That this is true is not in dispute. What is sad is, that due to union rules, unqualified teachers cannot be removed. Why would we look to teachers and lawyers to pass laws? Or community organizers?
I think it's because being smart is hard. Learning to feel good about yourself?
Easy.
I come to this conclusion after listening to an NPR show on the way back from Corvallis for the Oregon State-Cal game. I think the show was called "E Town".
What struck me was how similar this show was to the old time revival shows I've heard. As participants got up to talk about corporate evil and the steps they had taken to overcome the evilness of the corporate villains, environmental "amens" were issued and awards were given for good behaviour. This was reminiscent for me of an early summer bible school I attended, where, after reciting the Ten Commandments, I was awarded my very own, first copy of the New Testament. I had won it from my own effort. It was my first "real" book. It was Holy. It was mine.
I listen to the Left and understand their excitement and zeal as they confront the oppressors of Mankind. The evil corporations. The evil Republicans. The evil Capitalists. The Sexists, Rankists, angry, middle-aged white guys. And every stone placed in the way, every barrier is to be praised and rewarded. Hallelujah!
And, the funny thing is, the more they denigrate and repudiate religion and faith, the more they become like those whom they mock. But I'm not the first guy to notice this, am I?
The Left has no uncertainty. You do. I do. And Joe has. Unless we're bought off.
