Applied Economics by Thomas Sowell

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Intellectual Humiliation

Confront your own ignorance.

Applied Economics by Thomas Sowell

Thinking beyond stage one

Politics Versus Economics 

When we are talking about applied economic policies, we are no longer talking about pure economic principles, but about the interactions of politics and economics. The principles of economics remain the same, but the likelihood of those principles being applied unchanged is considerably reduced because politics has its principles and imperatives. Virtually no one puts as much time and close attention into deciding whether to vote for one candidate rather than another as is usually put into deciding whether to buy one house rather than another.

The voter’s political decision involves having a minute influence on policies that affect many other people, while economic decision-making is about having a major effect on one’s well-being. One of how these decisions differ is in not thinking through political decisions beyond the immediate consequences. When most voters don’t think beyond stage one, many elected officials have no incentives to weigh what the consequences will be in later stages – and considerable incentives to avoid getting beyond what their constituents think and understand, for fear that rival political can drive a wedge between the national and their constituents by catering to public misconceptions. 

The very way that issues are conceived tends to be different in politics and economics. Political thinking tends to conceive of policies, institutions, or programs in terms of their hoped-for results – “drug prevention” programs, “profit-making” enterprises, “public-interest” law firms, “gun control” laws, and so forth. But for purpose of economic analysis, what matters is not what goals are being sought but what incentives and constraints are being created in pursuit of those goals. No economist is likely to be surprised when rent control laws, for example, lead to housing shortages and fails to control rent, so cities with such laws often end up with higher rents than cities without them. But such outcomes may be very surprising to people who think in terms of political rhetoric focused on desirable goals. 

The point is not simply that various policies may fail to achieve their purpose. The more fundament point is that we need to know the actual characteristic of the processes set in motion – and the incentives and constraints inherent in such characteristics – rather than judging these processes by their goals. Many of the “unintended consequences” of policies and programs would have been foreseeable from the outset if these processes had been analyzed in terms of the incentives and constraints they created, instead of in terms of the desirability of the goals they proclaimed. Once we start taking in terms of the aching of events set in motion by particular policies – and following these events beyond stage one – the world begins to look very different. 

Voters decided whether to vote for one candidate or another but they decided how much of what kinds of food, clothing, shelter, etc. To purchase. In short, political decisions tend to be categorial, while economic decisions tend to be incremental. 

From a political standpoint, this means that there are always numerous desirable things that government officials can offer to provide to voters who want them – even free of charge or at reduced, government-subsidized prices – even when these voters do not want these increments enough to sacrifice their own money to pay for them. Ultimately, the public ends up paying as tax-payers for things that they would not have to choose to pay for as consumers. The real winners in this process are the politicians whose apparent generosity and compassion gain their political support. 

One-stage Thinking

Most thinking stops at stage one. In recent years, former economic advisers to presidents of the United States – from both political parties – have commented publicly on how little thinking ahead about economic consequences went into decisions made at the highest level. This is not to say that there was no thinking ahead about political consequences. Each of the presidents they served was so successful politically that he was re-elected by wider argon than the vote that first put him in office.

Incentives and Consequences

Thinking beyond stage one is especially important when considering policies whose consequences unfold over years. If the initial consequences are good, and the bad consequences come later – especially if later if after the next election – then it is always tempting for politicians to adopt such policies. 

For example, if a given city or state contains several prosperous corporations, nothing is easier than raising money to finance local government projects that will win votes for their sponsors by raising the tax rates on these corporations. What are the corporations going to do? Pick up their factories, hotels, railroads, or office buildings and move somewhere else. Certainly not immediately, in stage one. Nevertheless, even under such restrictions on movements, the high taxes would begin to have some immediate effect. 

In high-tax cities and states, there is likely to be an increase in the rate at which businesses go out of business, as some struggling firms that might have been able to hold on longer, and perhaps ride out their problems, are unable to do so when heavy tax burdens are added to their other problems. Meanwhile, newly arising companies have options when deciding where to locate their factories or offices, and cities and states with high tax rates are likely to be avoided. 

Then comes stage two. Usually, the headquarters where a business’ top brass work can be moved before the operating units that have larger numbers of employees and much equipment. Moreover, if the corporation has other operating unites in other cities and states it can be shifting some of its production to other locations, where taxes are not so high, even if it does not immediately abandon its factories or offices at given sites. This reductions in the amount of business done locally in the high-tax location will in turn begin to reduce the locally earned income on which taxes are paid by both the corporation and its local employees. 

Stage three: corporations grow over time, they can choose to locate their new operations where taxes are not so high, transferring employees who are willing to move and replacing those who are not by hiring new people. 

Stage four: as more and more corporations desert the high-tax city or state, eventually, the point can be reached where the total tax revenues collected from corporations under higher tax rates are less than what was collected under the lower rates of the past when more businesses were paying those taxes. By this time, however, years may have passed and the politicians responsible for setting this process in motion may well have moved on to higher office in state or national government. 

In short, those responsible for such economic decline will probably escape political consequences, unless either the voters or the media think beyond stage one and follow the sequence of events over years. 

Looking at it in another sense, when you have agents or surrogates looking out for your interests, in any aspect of life – political or otherwise – there is always the danger that they will look out for their interests, which does not always coincide with yours. 

Like taxes, subsidies also have further repercussions that can mark the country as a whole worse off, even when subsidies are not paid for out of the government’s treasury but are created by having one good or service subsidize another. 

Those who think no further than stage one often regard the government’s power to control prices as a way of reducing the cost of various goods and services, thus making them more widely affordable. However, even in stage one, there is a fundamental difference between truly bringing down the cost of particular goods and services and simply forbidding prices from reflecting those costs. 

Price controls have been causing shortages in countries around the world for literally thousands of years of recorded history, whether the prices that were being controlled were the prices of food, housing, fuel, medical care, or innumerable other goods and services. Almost all these price controls were popular beyond stage one. 

Central Planning Versus Markets

In both cases – socialism and capitalism – the rationales of the systems must be compared with the actual results, the rhetoric with reality. The relegate question is not which system sounds more plausible but which produces what results. 

What must also be understood is that both system – in fact, all economic systems, including feudalism, fascism, and voluntary collective – operated within the inherent constraint that what everyone wants adds up to more than they can get. This means that all economic systems must find ways of restricting and denying the use of both resources and finished products through one mechanism or another. In some systems, this is done by imposing rationing or central allocation and in other systems, people ration themselves according to how much money they have available to spend on various items. 

All economic systems not only provide people with goods and services but also restrict or prevent them from getting as much of these goods and services as they wish since no economy can supply everything that everyone wants in the amounts that everyone wants. The systems differ in the manner in which they restrict consumption and in the effectiveness with which they allocate resources in ways that produce lower or higher standards of living. 

Central Planning

The term “planning” is often used to describe an economic system where the key decision is made by political authorities, whether there are democratically elected officials or representatives of a communist or other totalitarian government. However, there is just as much planning engaged in by owners and managers of private enterprises under capitalism. The difference is in who is planning for whom. In a free market economy, millions of consumers, business owners and managers, investors, and others have their plans – each for his or her well-being, leaving the overall coordination of these plans in the de only at large to changing prices and economic incentives that these prices provide for mutual accommodation. What has generally been called “planning” has been central planning – planning by a small group of officials for the economy as a whole. 

The most thorough-going control of entire national economies occurred during the era of the Soviet Union, which set a pattern that was later followed in China and other communist states. However, the governments of India and France also at one time either owned or controlled large segments of their respective economies. 

Although some have contracts with government planning with uncontrolled chaos in the private marketplace government central planning means overriding other people’s plans, since private individuals and organizations have their plans, which are coordinated with one another through price movements. How well either set of plans is likely to work out is the issue. For much of the 20th century, it was widely assumed that central planning was more likely to produce desired results than the uncontrolled competition in the marketplace. It was only after such planning was put into effect in a variety of countries around the world that the results turned out to be worse than anyone expected – leaving planned economies falling behind the economic progress in countries where the coordination of the economy as a whole was left to market competition and resulting price movements that directed resources and products to where they were most in demand. 

Priced not only direct goods and the resources needed to produce goods where they are most in demand, but these prices also force consumers to limit their consumption. 

The presence or absence of prices affects the use of the resources which go into the production of goods, as well as in the consumption of the goods themselves. The Soviet industry used more electricity than American industry, even though American industry produced more output. Enterprises in the United States had to pay market prices for electricity and keep their production costs below the prices that supply and demand in the market would allow the moto charger for their output. Otherwise, they would make losses and face the risk of bankruptcy. Soviet enterprises faced no such incentives or constraints. More material inputs and energy in general went into producing a given amount of output in the Union of Soviet Socialists Republic than was used to produce the same output in the United States, Germany, or Japan. 

What was missing in the USSR economy were the incentives and mechanisms capable of converting its abundant inputs into outputs at a rate comparable to that of the United States or other counties with price-coordinated markets. 

Although they had pries, those were prices set by central planners and did not reflect the relative scarcities of particular resources, as prices resulting from supply and demand in competitive markets tend to do. Nor was it clear how centrally planned prices could have reflected anything so complex and volatile as the ever-changing relative scarcities of innumerable resources and finished products since there were 20 million prices for central planners to set. The net result was that it was common for the Soviet Union to have warehouses bulging with unwanted and unsold goods, while people were lined up in queues for other things that they wanted and hoped to get before supplies ran out. 

In a capitalist economy, the prices of the surplus goods piled up in warehouses would have fallen because of supply and demand, forcing the enterprises which produced them to cut back production, to avoid continuing losses. This in turn would release resources (including labor) that would be in demand in other sectors of the economy, where shortages and rising prices would have produced higher profits – and thus greater demand for the labor and raw materials needed to increase the supply of the more profitable output. 

Hiring more central planners would not solve the problem, which was the million of prices had to be adjusted relative to one another, so you could not put one group of central planners in charge of setting prices for furs and another in charge of setting prices for undershirts, because the whole point was that too many resources had been devoted to producing animal pelts that were rotting in warehouses while people had trouble finding enough undershirts. 

Pre-coordinated Economies

There are many names for economies in which individual plans and actions are coordinated by price movements in response to supply and demand, which serve as incentives for the different individuals to accommodate their respective plans to the total resources available. These terms include capitalism and the free market. But what such economies do, regardless of what they are called, is dependent upon price movements to move resources, finished products, and people themselves to where they are in demand, without any central authority trying to control the whole process. 

Failure is a big part of a free market’s success. People fail to live up to their potential, or to carry out all their good intentions, in all kinds of economic and political systems. Capitalism makes them pay a price for their failures, while Sociales, feudalism, fascism, and other systems enable personal failures, especially by those at the top, to be ignored and the inevitable price to be paid by others with lower standards of living than they could have had with the existing resources and technology. 

The economic advantages of a market economy are accompanied by political disadvantages. More fundamentally, the main incentive of capitalism is self-interest, which is by no means an attractive quality, however effective it may be for producing economic results – for others as well as for oneself. 

The very expression “the market” suggests something impersonal, when in fact what is involved are simply all the very personal individual choices that are reconciled with one another through the competitive processes which are summarized as “the market.” When a newspaper headline asks, “Should the internet be left to the market?”, what this question amounts to is: should individuals be free to use the internet as they wish, or should some collective body restrict or direct what they do?


In contrast, the making of economic and social decisions through politics and the market is not to say that no other social processes can deal with such activities or issues. Families, philanthropy, cooperatives, volunteer organizations, and numerous other institution and arrangements can affect and influence many of the same things that meet and governments handle. 

Informal arrangements have many advantages over both markets and government but different things can be better handled by a variety of social processes. The persistence for centuries of both governments and market economies strongly suggests that each fills a vital role. The question of where the boundaries between them should be occupied much of the 20th century. 

Congressman Dennis Kucinich, for example, declared in 2003:

“Every human being has the right to clean water… I strongly believe that public contour and public admits traitor of the public’s water supply is the only way to guarantee the universal human right to access to clean water.”

Such statements make the difference between political statements and economic analysis sat and out in sharp cos trash. No doubt both politicians and economists can agree on the desirability of everyone’s having water to drink and that it is better when this water is not dirty. But to call water a “right” is meaningless in economic terms and questionable in legal terms. Rights in the sense of exemptions from the power of governments are very different from rights to things that can be provided only by incurring costs. Your right to free speech does not require someone else to pay for broadcasting what you say or to publish it in a newspaper or magazine. But if you have a water right, the others are forced to pay the inescapable costs of getting it to you. 

What economic analysis of markets does is utilize a body of knowledge, analysis, and experience that has accumulated and developed over centuries to systematically examine the consequences of various economic actions and policies. The fact that these consequences can determine the poverty or prosperity of millions of people – and billions of people worldwide – is what makes it important to understand economics. 

The real question is not which system would work best ideally, but which has produced better results far from ideal human beings. Even with the more modest task of evaluating different policies within a given system, the real question is not which policy sounds more plausible, or which would work best if people behaved ideally, but which policy turns out to produce better results with actual people, behaving as they do. 

Free and Unfree Labor

Slavery is one of the oldest and most universal of all human institutions. Slavery has existed among peoples around the world, as far back as recorded history goes, and archeological explorations suggest that it existed before humans learned to write. No one knows when slavery began. It is the idea of freedom for the great masses of ordinary people that is relatively new, as history is measured – and this idea is by no means universally accepted around the world, even today. Moreover, there have been, and still are, other kinds of unfree labor besides slavery. 

One of the many freedoms we take for granted today is the right to choose what kind of work we will and will not do. Yet, for many centuries, there was no such choice for most people in most countries. If you were the son of a shoemaker, then your job would be to make shoes. The difference between “free” and “unfree” labor in such times was whether or not you were paid for your work or were forced to do it without financial compensation. These forced labors might be temporary and range from drudgery in the fields of the nobility or serving under those same nobles in their military campaigns, after which you were allowed to return to your farm king or other work. Less fortunate people were full. time and lifelong serfs or slaves, with his status, also being inherited by their children. 

While free labor has become the norm in much of the world today, compulsory labor still survives, even in free democratic countries, in such forms as military drafts and compulsory jury duty. 

Despite the sharp dichotomy between free and unfree labor in principle, in practice, those who are free may nevertheless have many restrictions imposed on them by laws and policies, such as requirements to get an occupational license or belong to a labor union to work in some occupations, when in fact both union memberships or the necessary licenses may be arbitrarily limited in numbers. The wholly voluntary agreement between employer and employee in a free market exists as a model but not always as a reality. The employer’s freedom to hire whoever will work for him is Healy circumscribed by child labor laws, anti-discriminatory laws, and other regulations and policies, as well as by labor union contracts. 

At the other end of the spectrum, even some slaves had options, especially urban slaves, many of whom chose their employers and simply shared their earnings with slave owners who let them exercise this option. 

Free Labor

The advantages of a free labor market benefit not only the worker but also the economy. Since pay is usually based on productivity, and workers tend to seek higher-paying jobs, this whole process tends to place where they can contribute the most to the production of goods and services that other people want. Arbitrary restrictions on who can work where tend to sacrifice not only the interest of those who are denied jobs but also the interest of consumers, who are denied an opportunity to get the goods and services they want in the abundance they would like and at as low a price as possible. 

In one way or another, for good reason or bad, there are many restrictions on free labor and those who employ free labor. Among these restrictions are occupational licensing, job security laws, and minimum wage laws. It should also be noted that much of what is called “labor” is in fact capital. 

Human Capital 

Most people in modern industrial societies are called workers or laborers. However, people represent not only labor but also capital investments. Schooling, job experience, reading, experience gained tinkering with cars or computers, as well as absorbing the knowledge and experience of parents and peers, all contribute to the development of the skills, insights, and capabilities on the job that economist call human capital. Nor is the distinction between human labor and human capital just a set of abstract concepts without consequences. 

The ability to labor is usually greatest in early adulthood when people are in their physical prime. Back in the days when many workers did contribute little more than their physical exertions, a middle-aged manual labored was typically less employable than a young man in his twenties working in the same occupation. But today, when most people who work for a living earn more as they grow older, this is much more consistent with their earning a return on their human capita, which tends to increase with age. The human capital concept is also more consistent with narrowing income gaps between women and men, as physical strength counts for less and less in an economy where power increasingly comes from machines rather than human muscle, and an economy in which information and high-tech skills count for more. 

While the growing importance of human capital tends to create equality between the sexes, it tends to create greater inequality between those people who have been assiduous in acquiring knowledge and mastering skills and those who have not. In addition, like every other source of greater rewards for work, it tends to create greater inequality between those who work and those who do not. 

While almost all jobs today provided both pay and experience, at one time it was common for inexperienced and uneducated young people to take jobs that paid them nothing. This was an investment of their time and labor for the sake of acquiring human capital. 

In more recent times, minimum wage laws and public disapproval al of non-paying jobs have eliminated this particular way of acquiring human capital. However, many people continue to take lower-paying jobs than they could get elsewhere when they value the experience available to them in the less remunerative job and expect to cash in on it later on in their careers. They are taking beyond stage one. 

Those who disdain low-paying jobs as “menial” or who refuse to accept “chump change” for entry-level work are usually not thinking beyond stand-one. A study in America in the top 1% of wealth-holder found that the average age at which they began working part-time was 15 – which suggests that some may well have been working in violation of child labor laws. Despite the assumptions of fixed “classes” to which people belong for life, most Americans in lower income brackets do not stay in those brackets for more than a few years. 

Ironically, the notion of fixed “classes” to which people belong has acquired widespread influence at a time when increasing evidence from around the world believes that assumption. While it has become fashionable in many quarters to sneer at the idea of economic opportunity and upward mobility – fashion and sneers being substitutes for knowledge – the evidence keeps piling up that income mobility is the rule, not the exemption, in a free market economy. 

Put differently, whatever reduces opportunities for gainful employment for people with little or no experience has the effect of costing both them and society far more than the lost jobs which have been dismissed as “menial” or as paying only “chump change.” Nothing is easier than to take a lofty moral position that when minimum wage laws, for example, result in a reduction of low-paying jobs, it is nothing to regret, as some políticas and journalists have done:

“People who get up and go wot work each day deserve to make enough money to cover their essential needs. Employers that aren’t producing enough to provide such a basic level of compensation don’t belong in an affluent society.”

Having a wages rate set by third parties’ notion of worker’s “essential needs” would be a radical departure from having wages set by supply and demand – and it is by no means clear how either the allocation of resources in the economy or the interest of the workers themselves would be better served in this way. These workers may well feel their most “essential need” is a job and that destroying both jobs and the employers who provide them solves none of the workers’ problems. The only clear beneficiaries would be those who acquire and are thus able to feel both important and noble while leaving havoc in their wake. 

Those people who are working for employers whom third-party observers regard as expendable would not be working for them if there were better alternatives available. How does removing one of the options of people with few options make them better off? Similar one-stage thinking is also apparent in many observers who wax over low-wage workers employed in the third world by multinational corporations. While the pay of such workers is often low by comparison with that of workers in more affluent industrial societies, so too is their productivity.

There is a reason why output per worker is much lower in some countries than in others, and the reason need not be a lack of effort or intelligence on the part of the worker. The amount and quality of the equipment used by the worker, the level of sophistication in the management of the enterprises, and even the higher shipping costs in countries with poor roads and other inadequate infrastructure, all play a role. Management has much to do with the productivity of labor. 

In third-world countries with poor roads and inefficient rail lines, the net value of the goods shipped is reduced by the additional shipping costs that these entail. Poorer countries often also have higher levels of corruption, including a need to pay numerous bribes to do business without being delayed or harassed by officials enforcing innumerable regulations and red tape requirements. Since the value of the worker who produced widgets is based on how much money a widget adds to his employer’s revenue, the worker will be worth less when transportation and other cost are higher. 

The widget itself may sell for the same price in the world market, produce in the third world or a modern industrial nation, but the costs of getting the widget from the factory to the point of sale must be deducted in both cases. When the deduction is larger in a country with less efficient transportation and more corrupt officials, the net value of the widget to the enterprise producing it is less – and therefore so is the value of the labor that made it. 

The multinational corporation already pays about double the local wage levels in third-world countries, even though they did not pay as much as workers receive in more industrialized nations. Insisting that multinational corporations raise their employees’ pay scales in these third-world countries may sound good to those who do not think beyond stage one. But the consequences of such higher pay scales being imposed by law or public pressure can be that it becomes economically preferable for the multinational corporations to discontinue hiring many third-world workers whose output is worth less than what third parties want them paid. This in turn means that third-world workers lose not only jobs that pay more than their local alternatives but also that they lose the human capital that they could acquire from working in more efficient enterprises. 

Contrary to the theories of “exploitation,” most multinational corporations focus the bulk of their operations in counties where pay scales are high, rather than in countries where pay scales are low. While those who fear the exploitation of low-wage workers may regard that as a good thing, it is tragic that so many desperately poor people are denied both much-needed income and opportunities to increase their human capital, with it, their country’s prospects for future prosperity. 

Job Security

Another area in failing to think beyond stage one promotes policies whose unintended consequences backfire that of job security laws and policies imposed by governments or labor unions. The obvious purpose of such laws is to reduce unemployment but that is very different from saying that this is their actual effect. 

Job security laws and policies restrict an employer’s ability to law off workers for economic reasons or to fire them for unsatisfactory work. 

Although such laws protect workers who already have jobs, nevertheless the increased labor costs created by these laws discourage the investment needed to create jobs for workers who do not yet have jobs. These laws make it more profitable to buy labor-saving machines and to work existing workers overtime when more output is needed, rather than hire additional workers whom it would be difficult to lay off when output returned to previous levels. Countries with such job security laws typically do not have lower unemployment rates but instead higher unemployment rates than countries without such job protection. 

Unfree Labor 

Involuntary labor can range from jury duty to military drafters to inmates of forced labor camps to outright chattel slavery, in which people are bought and sold like cattle. 

The various categories of involuntary labor differ not only in duration but also in severity. Jurors do not usually serve as long as military-drafted, and inmates of forced labor camps may serve for years but not necessarily for a lifetime, as salve usually did. The severity of treatment also varies, being more severe for draftees than for jurors, and often more severe for inmates of government-run forced labor camps than for privately owned slaves, whose long-term productivity would be jeopardized by very severe treatment. But, because people in forced labor camps are not owned by anyone, their long-term productive matters less – if all to the decision makers directly in charge of them, who have no incentives to think beyond stage one. 

Productivity of Involuntary Labor

How does involuntary labor in general affect the allocation of scarce resources which have alternative uses – and therefore the economic well-being of the country as a whole? Because involuntary labor, by definition, does not have to be paid a price reflecting the value of the alternative uses of its time and capabilities, such labor is often sued for work that is less valuable than its alternative uses. A chemist may be drafted into the army and then used as a clerk handling clothing supplies in the quartermaster corps. In an all-volunteer army, it would be chapters for the military authorities to hire a civilian to perform such clerical duties than to pay enough to attract chemists or other highly skilled people to do this routine work. 

Involuntary labor is a less efficient way to allocate scarce resources which have alternative uses. 


Slavery has existed on every inhabited continent and among people of every race for thousands of years.

The roles played by slaves have covered an enormous spectrum. Some were used as human sacrifices by the Aztecs of Central America in Indonesia or parts of Africa, among other places. In the Roman Empire, some slaves were forced to fight each other to the death as gladiators, for the entertainment of crowds in the Coliseum. 

As a general pattern, the more highly skilled, the more intellectually demanding, and the more responsible the roles filled by slaves, the less they were treated with the brutality and contempt inflicted on slaves doing arduous manual labor. In short, although freedom and slavery are stark contrasts in principle, in practice there were degrees of slavery. In countries around the world, slaves who were domestic servants tended to be tried better than those who were field hands or other manual laborers, and those in higher-level occupations tended to be less and less treated as slaves, while for some at the highest levels their bondage was nominal. 

Slaves used as divers in the Carolina swamps, for example, had to exercise skills and discretion and were accordingly treated differently from plantation slaves, being rewarded with both financial incentives and greater personal freedom on and off the job. Similarly slaves in lumbering operations or the processing of tobacco, which likewise required skills and discretion. In one remarkable case, a slave was made captain of a riverboat, with a crew of both black and white sailors under his command. 

Slave owners who thought beyond stage had to take into account the incensed possibilities of escape as well as other costs such as financial incentives and better working conditions for slaves doing higher-level work. The incense value of that work had to be great enough to cover these additional costs and risks. 

These modifications of slaver implicitly recognized the inefficiencies of pure unmitigated slaver. For route I work that was easily monitored, such as growing sugar cane or cotton, slavery could extract the necessary efforts under the reheat of the lash. But for anything requiring judgment, initiative, and talent, other inventors must be invoked, simply because it is hard for someone else to know how much potential for judgment, initiative, or talent any other given individual has. Economic and other rewards cause the individual to reveal those qualities in exchange for being treated less like a slave and regarded in other ways. 

Where slaves populations were large enough to have a serious potential for social disruption and danger to the lives of the free population, the need to minimize such dangers limited the extent to which the slave population could be educated for higher roles since such education could also facilitate organized disruptions, escapes, and uprising among the enslaved people. Therefore educated slaves were forbidden by law throughout the Western Hemisphere in post-Colombian times. From an economic standpoint, this meant that, in addition to inefficiencies in using people of a given capability, slavery also limited the capabilities that could be developed among people of a given potential. Put differently, freedom has not only personal and political benefits but economic benefits as well. 

Markets for Involuntary Labor 

The wasteful use of unowned involuntary labor can be contrasted with a more careful allocation of involuntary labor that is owned and sold since both buyer and seller in free market economies have financial incentives to weigh the productivity of the labor in alternative uses. However, the desire of those held involuntarily to be free imposes costs to keep them in bondage, and these costs must be deducted from whatever gains their owners received from their involuntary labor. 

Indentured laborers and other forms of contract labor were usually a result of initially free choices, even if their subsequent assignments to individual purchasers or particular tasks were no longer a matter of individual free choice on their part. 

Most of the elements of choice open to most indentured workers were lacking in the market for slaves, where the choice was entirely in the hands of the buyers and sellers. This did not mean that the choices made by slave traders and slave owners were unconstrained expressions of personal whims because they were constrained by economic considerations in general and by supply and demand in particular. 

Cost of Enslavement 

Costs are crucially involved in the very choice of whom to es la ve in the first place. It is more costly to try to enslave people who have the army and navy of a major nation around them – costly not only in terms of the money and lives expended trying to capture such people but costly also in the risk of provoking retaliatory military action again the country that launched the slave raids. Broadly speaking, such costs defined those whom it was economically feasible to enslave and those whose costs of capture were prohibitively expensive. From the demand side, there must also be a sufficiently valued use for slaves to cover the costs of even moderately costly enslavement. 

Since some societies evolved in this way and others did not, or evolved more slowly for one reason or another, those people likely to be enslaved changed over the centuries. In ancient times, when Britain was a primitive island, fragmented into tribal regions, Julius Caesar raided Britain and brought British slaves back to Rome but, in later centuries, after Britain had a government, an army, and a navy, it would be too costly a place to raid for the sake of capturing slaves. However, many parts of the world were more difficult to consolidate into large states, sometimes because of geographic factors creating isolation in mountainous regions or on small islands spread across the vast sea. These more vulnerable regions rained major sources of slaves, whether in Europe, Asia, Africa, the Polynesian island, or the Western Hemisphere. 

Slave Prices

Even slaves destined for lowly manual labor were not simply labor but also represented human capital. Thus a slave in the American antebellum south cost about thirty times what he cost on the coast of Africa, and not all of that was due to transportation costs or even to an allowance for those who died en route. At a minimum, a slave in the United States had to be able to understand the English language. He also had to understand a new work routine, new work implements, and a living pattern different from those in Africa. The whole process of making these adjustments and acquiring various forms of human capital was known as “seasoning” and it often took place in the Caribbean before slaves were sold on the American mainland. Subsequent generations of slave descendants, raised in the new setting, would likewise command higher prices than someone new from Africa for the same reasons.

In addition to this more or less general human capital, some slaves possessed such specific skills as carpentry or animal husbandry, and these commanded a still higher price. Slave prices also varied with the distance from the source, so slaves in the United States – the most distant of the Western Hemisphere societies holding slaves from Africa – had higher prices than those in Brazil, which was closest to Africa. 

One consequence of this difference in prices was that the slave population in Brazil never reproduced itself, but was replenished with the new arrivals from Africa, while the slave population in the American south began reproducing themselves and increasing in size as early as colonial times. That is because Brazilian slave owners found it cheaper to get new slaves from Africa than to raise a new generation from the existing slave population. Thus, in Brazil, there was not only an overwhelmingly male slave population, but also a separation of the sexes, and such slave women who became pregnant were not given as much time off, or sufficiently lighter work, to enable them to ensure the survival of their offspring. In the American south, where the costs of slaves were higher, it paid the slave owners to have slave families and to lighten the chores of pregnant women to the extent necessary for them to bear and raise the next generation, who represented capital assets to the slave owners. The American south, therefore, became one of the few slave societies in the Western Hemisphere where the slave population reproduced itself at a level sufficient to replace existing generations. 

The magnitude of the difference made by these different prices, and the different treatment resulting from the, may be indicated by the fact that Brazil imported six times as many slaves from Africa as the United States did, but the resident slave population in the United States was larger than that in Brazil. Another example of the effect of economic incentives was in the treatment of slaves on plantations where the slave owner was in residence, as distinguished from their treatment on plantations run by an overseer serving an absentee owner. 

Incentives and Constraints 

Overseers tended to be paid by immediate results, such as the output of sugar in the tropics or cotton in the American south. Therefore the overseer had little incentive to think beyond stage one. Special care for pregnant women or the spending of plantation resources on the raising of children who were not yet old enough to produce enough output to cover their upkeep was therefore not something that overseers serving absentee owners had the incentive to do. It was the same story when it came to maintenance and repairs on the plantation or the care of animals or the soil.

Plantations with resident owners tended to operate more efficiently in long-run terms – with people the animals, the soil, and the structures and equipment better maintained, even if that meant somewhat less output than if everything was sacrificed for immediate production. While most plantations in the American south had resident owners, who could see to it that overseers did not sacrifice the owner’s long-run interest to the overseers’ immediate interest in getting paid for maximum output and getting a reputation for “results” that would serve as the overseers’ capital asset in finding his next job. In the West Indies, however, it was more common for the plantation owner to live in Britain, leaving residents overseers a far freer hand in making decisions. One consequence was that the infant mortality rate among slave ozone in the West Indies was some multiple of what it was among slave women in the American south. 

Slaves and Wealth

In many parts of the world, slaves were bought for their ability to produce wealth that could be appropriated by the slaveowners. Elsewhere, especially in parts of the Middle East, slaveowners of then had large numbers of slaves as a sign of the wealth they already possessed. These salves served as servants, concubines, entertainers, and providers of other amenities – in short, as consumers rather than producers of wealth. 

That the slaveowner gained wealth seems clear but whether the whole society gained is less clear. In Brazil and the United States, which had the two largest slave populations in the hemisphere, the regions of these countries where slavery was concentrated – northern Brazil and the southern United States – remained noticeably poorer during the era of slavery and for generations thereafter. 

The Economics of Freedom

A given individual’s value as a free worker was likely to be greater than the same person’s value as a slave, because of the constraints inherent in keeping someone in bondage. Whole categories of work were usually off-limits to western hemisphere slaves, such as work requiring extensive travel alone, work requiring the use of firearms, or the handling of large sums of money – all of which could facilitate escape. Education was also both an instrument and an incitement to freedom. Hence its ban on slaves thought the Western Hemisphere. This then limited still further the kind and quality of work that could be performed by slaves, even when the individuals were perfectly capable of performing these same functions as free workers. 

It is a common principle in economics that assets tend to move through the market to their highest-valued uses since that is where the bidding for them will be highest. Accordingly, the economic value of a slave would be greatest to the slave himself, even aside from the value of freedom, as such, while others could win the economic value of a slave, only that individual could own his higher economic value as free workers. Therefore an ideal free market would lead to slaves buying their freedom, since they would have the incentive to outbid others on economic grounds alone, even aside from their desire for freedom. Some slaves have done this in many places and times, whether in Ancient Rome or centuries later in the Western Hemisphere. Even where slaves had no money or inadequate amounts of money, ways have been found to arrange self-purchase on credit, to be repaid on the installment plan after achieving freedom. 

The practical institution difficulties of achieving self-purchase were not the only reasons why this procedure was not more widely used, which could have eroded the whole system of slavery. Where the political authorities did not want a large population of ex-slaves of a different race living among the free population, legal restrictions impeded manumission by the purchase or grant. Such restrictions became increasingly severe in the American antebellum south during the decades leading up to the civil war. Thus blacks who had acquired freedom, by purchase or otherwise, often owned other members of their own family as a legal formality, simply because the costs and difficulties of getting them office freedom papers were so great. Some southern whites who did not believe in slavery, such as the Quakers, likewise often owned slaves as a formality, while it was an open secret that those slaves lived the lives of free people. 

The Economics of Medical Care

Medical care is one of many goods and services that can be provided in a wide variety of ways. At one time, it was common for sick people simply to pay doctors and buy medicine individually with their own money. Today, both the medicines and the medical care are often paid for by third parties – either insurance companies or government agencies, or both, with or without some portion being paid by the individual patient. In some cases, medicines and medical care have both been provided by the government at no charge to the patient in Canada and some other countries, as they once were in China under Mao Zedong and in the Soviet Union under Stalin. Other countries have had, and some continue to have, various mixtures of government payment and private payment, with varying elements of voluntary choice by patients and physicians. 

Since governments get the resources used for medical care by taking those resources from the general population through taxation, there is no net reduction in the cost of maintaining health or curing sickness simply because the money is routed through political institutions and government bureaucracies, rather than being widespread popularity of government-financed health care means that many people expected some net benefit from this process. 

One reason is that government typically does not simply pay whatever medical costs happen to be, as determined by supply and demand. Government imposes price controls, to try to keep the cost of medical care from absorbing so much of their budgets as to seriously restrict other government functions. Government-paid medical care is thus often an exercise of price control.

Price Controls on Medical Care 

One of the reasons for the political popularity of price in general, in general, is that part of their costs is concealed – or at least, are not visible initially when such laws are passed. Price controls are therefore particularly appealing to those who do not think beyond stage one – which can easily be a majority of the voters. Artificially lower prices, created by government order rather than by supply and demand, encourage more use of goods and services while discouraging the production of those same goods and services. Increased consumption and reduced production mean a shortage. 

Quality deterioration often accompanies reduced production, whether what is being procured is food, housing, or numerous other goods and services whose prices have been kept artificially low by government fiat. Quality declines because of the incentives to maintain the quality of their products or services for fear of losing customers otherwise. But, when price controls create a situation where the amount demand is greater than the amount supplied – a shortage – fear of losing customers is no longer as strong an incentive. 

One way in which the quality of health care deterioration is in the amount of time that a doctor spends with a patient. 

Under government-paid health care in japan, patients also have shorter and more numerous visits than patients in the United States. After Canada’s Quebec province created its government health plan back in the 1970s, telephone consultation went down, office visits went up and time per visit went down. In other words, medical conditions that neither the doctor nor the patient previously thought serious enough to require an office visit, before price controls, now took up more time by both the patient (in travel time) and the doctor (in the office), thereby reducing the time available to people who had more serious conditions. 

In general, where the doctor is paid per patient visit, then a series of treatments that might have taken five visits to the doctor’s office can now take ten shorter visits – or more. Therefore political leaders can proclaim that price controls have succeeded because the cost per visit is now lower than it was in a free market, even though the total costs of treating a given illness have not declined and have risen. 

The costs in Britain’s government-run medical system have increased sharply, both absolutely and as a percentage of the country’s rising Gross Domestic Product. The National Health Service in Britain absorbed just under four percent of the country’s GDP in 1960 and rose over the years until it absorbed well over seven percent of the larger GDP by 2000. Nevertheless, the number of doctors per capita in Britain was just half as many as in Germany, where half the hospital beds were still in private hands, despite a larger role for government financing there.

Not only patients, but doctors as well, have the incentive to use medical treatments more extensively when the government pays the bills. Many diseases can be treated in a variety of ways, and how often the most expansive – and expensive treatments will be used can be affected by who is paying. 

The normal weighing of costs against benefits, which causes more urgent things to be done ahead of less important things when prices ration scarce resources, is less effective when costs are paid by someone other than the acute decision-makers. This can lead to less important things receiving medical attention while urgent things get neglected. When patients pay for their medical treatments, they are more apt to establish priorities, so someone with a fractured leg is far more likely to go to the doctor than someone with a minor headache. But, when both are treated free of charge to the patient, then people with minor ailments may take up so much of doctors’ time and medical resources that those with more serious medical conditions must be forced to wait. 

When prices are no longer rationed, then something else has to ration, since the underlying scarcity does not go away because the government controls prices or provides things free of charge. One of the alternative ways of rationing is by waiting. This is one of how the quality of goods and services deteriorates under price controls. Waiting for medical care is particularly costly in human terms, not only because of the needless pain that may be suffered while waiting but slap because the underlying malady may be getting worse when waiting is not simply a matter of hours spent in a hospital’s reception room but months or even years spent on the waiting list before being able to get treatment. 

Another feature of price controls that applies with special poignancy to medical care is the black market, which flourished in China under government-supplied medical care:

Rather than wait long for indifferent treatment, affluent Chinese traditionally “go through the back door” for better service, asking friends to provide an introduction to a doctor or giving gifts or payments to physicians and nurses. This practice, though illegal, can ensure faster, better, and friendlier treatment. 

The unrecorded human costs of price-controlled medical care are indirectly indicated by those who opt-out. These include patients, doctors, and medical facilities. Patients in countries with government-controlled medical prices have left the overcrowded government sector to seek private treatment at their own expense, either at home or in other countries. Doctors have also opted out in various ways. Some have gone into private practice, despite laws that make it illegal for them to do so if they treat any patient at all who are enrolled in government plans. Some Health Maintenance Organizations in the United States have stopped accepting certain categories of patients for whom the government’s reimbursement is inadequate to cover their costs. More than half the doctors of Britain, for example, were not trained in British medical schools but have been imported from many other countries, including third-world countries where the training may not be up to the standards of British medical schools. 

Paying less and getting less – whether less is defined as the quality or qualitatively – is no bargain, least of all in the case of medical care. 

Third-party Payments 

Even in the absence of price-control factors, having medicines or medical care paid for by third parties changes the way individuals used medical care. Despite the tendency to regard medical care as a more or less fixed “need,” the amount that is demanded can vary greatly according to who is paying. 

Free market prices, paid by the customers, do not simply convey more or less inevitable costs. They restrain costs by providing incentives for the individual to use a given good or service only to the extent that its incremental value to that individual is greater than its incremental costs. But, when third parties cover all or part of these costs, then additional increments continue to be used beyond that point. Often a given medical problem can be treated in more than one way. For example, an arthritic knee may be treated by taking medication, having therapeutic exercises, or undergoing surgery. Choices among those or other treatments depend not only on how serious the medical problem is but also on how much each of these treatments costs – and how one pays those costs. When third parties pay, the more expensive treatments become more likely than when the individual pays. 

Because health care is so often discussed in politics and media as if there is a more or less fixed amount of “need” and not the only question is how to pay for it, much attention has been focused on those who do not have any form of health insurance. But these finance arrangements are not ends in themselves. The real question is: how much medical care is available, whether or not particular individuals have health insurance?

Medical Malpractice 

One of the major costs of American medical care is malpractice insurance for doctors and hospitals. The average costs of this insurance for individual doctors range from about $14,000 a year in California to nearly $40,000 a year in West Virginia. In particular specialties such as obstetrics, the cost of malpractice insurance can exceed $100,000 a year. These costs of course get passed on to patients, the government, or whoever is paying for medical treatments. One-stage thinking has much to do with these costs and with the consequences that follow. 

The threat of lawsuits can impose costs on obstetricians which raise their insurance premiums high enough to cause many of these doctors to stop delivering babies, or to stop delivering them in places where jury awards on dubious evidence make it uneconomic to continue practicing obstetrics. The net result of this can be that pregnant women in those places are at more risk than before because there may be no doctor available in the vicinity to deliver their baby when the time comes. 

As in so many cases, political “solutions” to the malpractice problem can create new problems. One popular politician’s solution has been to put upper limits on the number of awards for “pain and suffering.” 

Pharmaceutical Drugs

While the process of creating a new pharmaceutical drug involves science, it also involves trial and error, often taking years. In the pharmaceutical drug industry, creating a new medicine to cure a particular disease can involve many failures before finally developing a drug that is simultaneously effective, affordable, and without major adverse side effects for most people. 

If the pharmaceutical company has spent years working on many different chemical components before finally coming up with one that meets all the criteria – and gets the approval of the Food and Drug Administration – the nits profits on the successful drug have to cover all its costs on the many unsuccessful ones. Otherwise, there will not be sufficient earnings to repay all the individuals, pension funds, and other investors whose money they use to finance the creation of new drugs. 

Since the creation of a single new drug typically costs hundreds of millions of dollars, keeping enough investors willing to supply such huge sums of money is essential to keeping the discovery of new drugs going. 

Those who do not think beyond stage one sees the situation in wholly different terms. Rather than examine what happens before and after a new drug is created, they essentially treat existing drugs as having been created somehow and focus on how these drugs are priced, what profits they earn, and how those prices can be brought down. Since the costs of manufacturing a pharmaceutical drug is often a small fraction of its total costs or the price paid by the consumer, there are ample opportunities for politicians, journalists, and others to decry the “unconscionable,” “outrageous” or “obscene” profits made by charging two dollars a pill when the ingredients in the pill cost only a quarter. 

By ingredients, they mean physical ingredients, which are usually inexpensive, rather than the knowledge ingredient which is usually astronomically expensive because of years of research, including much trial and error. The same misconception of costs can appear in another form when politicians, journalists, etc, contrast the high price charged for pharmaceutical drugs by the company that created it versus the much lower price of a “generic equivalent” produced by another company, which simply uses the same formula free of charge after the patent has expired. The second company’s costs are just the low costs of manufacturing the drug, so they may be able to make a profit selling a generic equivalent for a fraction of what the company that created the drug charged. 

While past costs are irrelevant to present decision-making they are history but they are not economics – those past costs do not matter for future decision-making, when pharmaceutical companies decided whether, or to what extent, to invest in developing more new drugs. If those past costs have not been covered, future costs may not be as readily incurred to create future drugs to cure or prevent such scourges as Alzheimer’s, AIDS, or cancer.

Those in political or the media who do not hinge beyond stage one may see in government control a means of bringing down the prices of existing medicines, without taking thought whether this will also bring down the rate of discovery of new medicines. However, these efforts at bringing down prices through collective action are usually successful in the short run. That is because Sheldon is a given medicine Theo, not one that can be used in treating a given disease, so a drug company’s ability to hold out against governments who impose price controls is very limited when those governments can buy someone else’s medications if they do not get the price they want from a particular pharmaceutical company. Moreover, in a country with a government-controlled comprehensive medical care system, there may be little or no market for a given medicine for the small, or non-existent, private sector. 

To those who do not consider the economics of this process – and that includes not only most of the public, but also politicians, journalists, and others – it can easily appear that the issue is simply one of getting lower prices and the case for government-imposed price controls may seem not only obvious but imperative. Price controls on pharmaceutical drugs have been common in countries around the world, with the United States being a notable exception. The United States is also a notable exception in that a wholly disproportionate share of all the new life-saving drugs in the world are developed in the United States. But few in políticas or the media see the connection between these two facts, even though price controls on many other things have reduced the amounts supplied. 

Since the fixed costs have to be paid by somebody if the development of new medicines is to continue, how can evasion of such payments of fixed costs fail to reduce the rate of investment and discovery of new medicines? 

It is not simply a theoretical question. The facts tell the same story. Not all counties have the strong patent protection system that the united states have, which enables American drug companies to have a period of monopoly in which to recover huge fixed costs before the patent expires. Making generic copies of drugs developed by others is easier in countries without strong patent laws, and consequently, the prices of these generic copies are typically much lower in such countries than in the United States. But the development of new drugs is also correspondingly much lower, or non-existent, in counties where there is less likelihood of being able to recover fixed costs because generic equivalents keep the prices down.

Policies or legislation prescribing the substitution of generic pharmaceutical drugs for similar or identical brand-name drugs can often rescue the cost to hospitals or health-insurance systems. 

Some demand that all drugs be generic, ending the high prices and presumably unconscionable profits of the brand-name drug producers. But here we must be a war of the fallacy of composition. What is true for some cannot necessarily be made true for all. The overlooked factor is that generic drug products are essentially getting a free ride on the costs and experiences built up at great expense by producers of brand-name drugs. Those costs cannot be made to disappear by government fiat or by organized pressure of hospitals and health insurance companies, even when these entities can force down the prices of drugs that have ready been developed. Reducing the brand-name drug producers’ ability to recoup their costs means reducing the incentives for continuing the development, pent of new drugs to deal with other diseases and conditions. 

Sometimes the claim is made that the costs incurred by pharmaceutical manufacturers are mostly for advertising, not research. But, however easy it may be for outside observers to dismiss advertising as an expense that accomplishes nothing for society and only increase the advertiser’s profits, that is not the case. The most wonderful drug ever created will help no one’s medical condition unless it becomes known. Advertising does that. Nor is making the drug known something that can be done once and for all, and advertising discontinued thereafter, without consequences. 

There is another aspect to advertising that is seldom understood. When a medication is approved by the FDA for one use and other uses are later discovered for it, the FDA can forbid the pharmaceutical company from advertising the other uses unless and until it has gone through the long and costly process of meeting FDA requirements for that new use. Depending on whether the anticipated additional sales would cover these additional costs – which can run into many millions of dollars – the company may or may not try to get the approval needed to permit advertising uses that medical science has already shown to be beneficial. 

What research does for the scientific community – provide the information they might otherwise not know – is what advertising does for doctors and patients. 


At the heart of the problems created by price controls on medical care and attempts to keep down the prices of pharmaceutical drugs is the belief that prices are just nuisances to be circumvented. In reality, prices coney, and underlying reality is not nearly as easily changed as the prices are. 

The costs of unnecessary Caesarean-section births do not go away because of price controls. Moreover, these costs are not simply money costs. Many of the costs of medical care are costs paid in pain and deaths, rather than in money. These costs are not going to be lower, but higher, when attempts to avoid paying the huge costs of developing pharmaceutical drugs lead to reduced creation of such drugs. 

Various organized groups in a position to bargain for lower medical charges or lower drug prices – government agencies, health insurance, companies, or large health maintenance organizations, for example – may receive preferential prices but the total costs of not go away and have to be paid by somebody. One consequence is a multi-tiered set of prices for the same medical treatment or the same dictation, with the highest prices of all being paid by patients who do not have health insurance, do not belong to a health maintenance group, and are not covered by any government program. Thus a given medical procedure at the UCLA medical center, for which Medicaid pays $127, is priced at $90 when converted by Medicare, up to $242 when covered by health maintenance organizations, and $460 when paid by individuals without insurance and who are not part of any of these plans. 

In short, misconceptions of the economic function of prices lead not only to price controls, with all their counterproductive consequences, but also to organized attempts by various institutions, laws, and policies to get those prices paid for by somebody else. For society as a whole, there is no somebody else. Yet few of those in politics seem prepared to face that fact. Economists may say that there is no such thing as a free lunch but politicians get elected by promising free lunches. 

Most of what is called attempts to “bring down the costs of medical care” are not that at all. They are attempts to bring down the prices charged by physicians, hospitals, and pharmaceutical companies. Many of those who are most active in trying to bring down these prices are most resistant to bringing down the real costs of medical care by such things as making it harder for lawyers to win frivolous lawsuits against doctors and hospitals or making the FDA approval process for new medicine less time-consuming, or reducing the layers of a bureaucracy administering various chimes of third-party payments. These things all drain resources that could otherwise be used to treat or cure diseases, or prevent them. 

Four things have almost invariably followed the impositions of controls to keep prices below the level they would reach under supply and demand in a free market: (1) increased use of the product or service whose price is controlled, (2) reduce supply of the same product or service, (3) quality deterioration, and (4) black markets. 

Increase use of the medical system by some leaves less time and resources for others. The time taken up in a physician’s office by people whose minor problems would be handled by a brief phone call to the doctor, or perhaps with just a chat with pharmacists, if they were spending their own money, means less time available at the doctor’s office for others afflicted with more resources illnesses. 

Reduced supply in the wake of short-sighted laws and policies that focus on price includes not only a reduced rate of discovery of new cures and preventing vaccines, but also a reduced supply of doctors as the growing hassle of bureaucracy and the growing hazards of unfound malpractice lawsuits lead some existing doctors to retire earlier than they might under less stressful conditions, and a lesser attraction to medical careers by some young people who find all the imposed requirements, restrictions, and hypocrisies to be things they would rather avoid by going into other fields. 

The Economics of Housing

Whether housing costs are high or low affects what kind of standard of living individuals and families can afford with what is left over after paying for a place to live. The old rule of thumb that housing should cost about one-fourth of one’s income has become outdated for 28 million Americans, who pay upwards of 30% of their incomes for housing. In some places, it is not uncommon for people to pay half their monthly income for the recant on their apartments. That restricts what kind of lifestyle they can afford with the other half. 

Despite the widespread recognition of the problem of high real estate costs in some places, the nature and causes of that problem have often been distorted, and much of the hand-wringing about a lack of “affordable housing” has been done by people who are themselves the major reason for sky-high housing prices. The political presentation of the problem differs greatly from the economic analysis of it. 

The price of housing varies according to many things. One is the quality of the housing itself. Madison generally costs more than bungalows, though there are places where bungalows cost more than it would cost to buy a mansion in some other places. When we say that housing prices are higher in one community than in another, we implicitly mean housing of a given quality. Prices mean little if we are comparing apples and oranges – say, a villa on the beach versus a cabin in the woods. 

What are prices for similar housing so radically different in different communities? Any number of factors might be responsible but the real question is: what does the empirical evidence suggest? Given those particular factors, what needs to be done – or undone?

Prices are not the only concern when it comes to housing. The quality of the housing matters, not just to those who live in it but also to others who can be affected by the appearance of neighboring houses, and by whether their decay or neglect threatens to lower the value of their own homes. What about rent control, land restrictions, property rights, housing segregation, slum clearances, and building codes?

Housing Prices

Housing prices may be higher in one place than in another for a wide range of reasons. The growth of industry, income, or population may be great in one place, leading to more competition for given amounts of land or housing. In addition to these or other effects on the demand for housing, there are effects on the supply side of the equation. Restrictions on the use of land or the building of housing can cause rising prices of homes or apartments. 

In the popular political and media vision of the “affordable housing” issue, this is a national problem for which government subsidies are a necessary part of any solution. In reality, it is not a national problem but a highly localized problem in relatively few places with sky-high rents and astronomical home prices. Moreover, it is seldom the housing, as such, that is expensive. What has an exorbitant price is a land on which the housing sits. 

Land Use Restrictions

An empirical study under the auspices of the National Bureau of Economic Research concluded that zoning laws “are highly correlated with high prices” of housing and that severe land use restrictions are confined to relatively few places, such as New York City or parts of California. In short, it is the land that is very expensive in these places, rather than the houses or apartments built on the land. As an example of how much the land adds to the cost of housing in various places,s the NBER study estimates that the value of a quarter-acre lot adds about $140,000 to the price of a house in Chicago, over and above the cost of construction. In San Diego, a quarter-acre lot adds about $285,000 to the cost of the house itself, and in New York City the same size lot adds about $350,000, and in San Francisco nearly $700,000.

Naturally, the higher the cost of a given amount of land, the greater the tendency to reduce the amount of land per house. In the case of apartment buildings, the tendency would be to build taller buildings, to increase the amount of rental income without increasing the cost of land on which the building sits. However, the same political tendencies which produce horizontal restrictions on land use can also produce vertical restrictions, limiting how tall buildings can be built, as well as prescribing how much land there must be around each house or apartment building. These two tendencies do not always go together so the higher housing prices which both produce may or may not result in homes packed closer together and payments buildings rising higher and higher. Where the law mandates an acre of land around each house or limits the height of residential buildings to eight stories, for example, housing costs tend to be especially expensive. 

Height restrictions on apartment buildings have other consequences as well. Obviously, the shorter the buildings, the more of the mare required to house a given population. This meant that more land will be used, resulting not only in higher rents per apartment but also in a spreading out of the community, sometimes referred to as “urban sprawl,” and longer commutes to work. Given the high man-made costs of various restrictions on land use, how and why do such restrictions occur? One reason is that many voters simply do not think beyond stage one – that is, they do not see the connection between land use restrictions and the various consequences which unfold over time. 

Another reason is that those who do see the connection may not pay those costs themselves, and may even gain financially from laws that cost others dearly, both financially and in terms of reduced quality of life. Those who already own their own homes will see the value of their homes rise as restrictions are put on the building of new homes. Many of the people who are hardest hit are those who cannot afford to live in the community, even if they work there. 

The most severe land use restrictions are those which simply forbid the building of any housing at all in specified areas. Such laws are typically described politically in terms of their ostensible goals – “open space” – rather than in terms of what they do, which is ban the building of housing and other structures. When more than half the land in San Mateo county, on the San Francisco peninsula, is legally off-limits to housing as “open space,” it can hardly be surprising that the price of the remaining land is higher than in place without such severe restrictions on land use.

History tells the same story as economics. Before such laws and policies spread through much of coastal California in the 1970s, housing prices in that state were very similar to what they were in the rest of the country. Afterward, California prices for vine housing became multiple of what they were in place without such severe land use restrictions. Housing prices in coastal California became some multiple of housing pictures in that same state’s interior valleys, where such policies either did not exist or were far less severe. 

The crucial point here, however, is not the good or bad fortune of landowners or developers, but the fact that it is the demand of home-seekers – including apartment tenants – which enables developers to profit by supplying that demand. In short, there are two competing sets of people who wish to use the same resources in different ways. Property rights allow this competition to take place in the marketplace, while court-sanctioned abridgments of property rights allow the competition to take place through a political process in which only one set of competitors can vote. 

While property rights are often thought of as rights whose purpose and effect are to protect those fortunate enough to own property, the larger purpose is to serve the economic needs of the whole society, including people who own no property. In the case of housing, property rights allow the interest of people who rent apartments to carry weight in economic competition because, although they own no housing and may have modest incomes, in the aggregate their purchasing power can exceed that of affluent residents in a community that wants to keep them out. 

Part of this process may include demonizing developers as “selfish” people preoccupied with making money. In reality, developers rarely want to acquire land and build different kinds of housing on it for their individual use or to indulge their tastes. They are intermediaries whose actions are based on what large numbers of other people want and are willing to pay for. To say that developers want to make money, as everyone must who is not independently wealthy, is to shift the focus from the large numbers of prospective renters and buyers of more modest houses, who are the real competitors bidding against existing affluent residents in a particular area. Nor is it clear that it is less selfish to deny others the same right to choose what kind of housing and community they prefer as one claims for oneself. 

The virtual impossibility of producing much housing that ordinary people could afford under severe land use restrictions led to various token amounts of affordable housing being created, either by government subsidies or by imposing legal requirements on private developers to build housing to be sold or rented “below market,” as a precondition for getting permits to build at all. The amount of “affordable housing” produced by either of these methods was of course very limited by the unwillingness of taxpayers to pay for massive amounts of subsidies and by the fact that developers could recover their losses on “below market” housing only by increasing still more the rent and home sale prices to others, who did not have unlimited resources either. 

The kinds of people affected by land use restrictions and the rise of housing prices they could not afford include many people that every community employs, such as school teachers, nurses, and policemen, but who are seldom paid enough to be able to live in the communities where they work, when those have skyrocketing housing costs. 

People with children are doubly affected because, if they are young enough to have small children, they usually have not yet reached their peak earnings years, and having extra mouths to feed reduces whatever resources they might otherwise have viable to pay for housing. Less affluent ethnic minorities are particularly affected by high prices for homes or apartments. All of these groups tend to decline as a share of the population in communities with severe land use restrictions. 

Population Displacement 

What happens to the people who find themselves forced to move out of communities whose rents and home prices they can no longer afford? They move into communities in the surrounding areas – nearby if they can afford it or farther away if they cannot. If their jobs are still in high-rent cities like San Francisco, then they commute, often from considerable distances. In any event, as the exodus from high-rent communities continues, housing prices are then forced up in the communities to which the displaced population moves. 

At one time, high housing prices in San Francisco drove many people to relocate across the Bay to Oakland or other parts of Alameda County. But, after a while, this increased demand drove housing prices in Almeida County to levels that many people there could not afford, and so they moved farther inland to find housing within the range of their incomes. 

The prices are lower out in California’s valleys, not only because they are father away from San Francisco and the ocean, but also because the restrictions on building are not as severe as they are on the San Francisco peninsula, where anti-growth forces have more political influence. Moreover, the time required to get permits to build is usually less in these more conservative areas, where there are not as many anti-growth activist groups to make objections and not as many officials who have to give their objections great weight, given their lesser political strength. The adage “time is money” applies especially in real estate, where millions of dollars are invested in home building that can be brought to a half while even unfounded complaints about “environmental impact” are investigated. Meanwhile, buildings that borrow these millions have to continue paying interest on all this money, and eventually, those costs are recouped in higher apartment rents and higher home prices. 

Rent Control

One solution to the problem of “affordable housing” that many find attractive is rent control. It shares both economic and political characteristics with other forms of price controls. Its political advantage is that its goals are attractive, so it gains the political support of those who think in terms of desirable goals, rather than in terms of the incentives and constraints created – and the consequences of such incentives and constraints.  

Among the consequences of price controls, in general, have been (1) a shortage, as the quantity demanded increases and the quantity supplied decreases, both in response to artificially lower prices, (2) a decline in quality, as the shortage makes it unnecessary for the sellers to maintain high quality to sell, (3) a black market, when the difference between the legal price and the price people are willing to pay becomes large enough to compensate for the risks of breaking the law. 

Perhaps the most basic principle in economics is that people tend to buy more at a lower price than at a higher price. Rent control enables people to demand more housing than they would otherwise. One reason, then, for the housing shortage under rent control laws is that more people occupy more housing than they would in a competitive market, where they would have to bid against others whose needs for housing might be more urgent than theirs or who would have two incomes from which to bid for housing. 

The other reason for a housing shortage is that less housing gets supplied at a lower price than at a higher price. Builders tend to reduce the amount of housing they build when their ability to recover their costs from the rents they charge is reduced. Where rent control laws are severe, there may be no new housing built at all, except for government-subsidized housing where the taxpayers make up the difference between the cost of supplying housing and the rents that can be changed under rent control. Therefore the consequence of rent control over time is an increase in the average age of housing, as the building of new housing declines or stops completely. 

Usually, rent control laws do not apply to office buildings, so there may surplus office space, with high vacancy rates, in the same city where there’s a housing shortage with virtually no vacancies available in rent-controlled apartment buildings. In some places, rent control laws do not apply to luxury housing, so there is a shift of resources from building ordinary housing for ordinary people to building luxury housing that only the very affluent or the wealthy can afford. 

Not only does rent control reduce incentives to build new housing, but it also reduces incentives to maintain existing housing. Painting, repairs, and other maintenance activities all cost money. In a competitive market, landlords have no choice but to spend that money, to attract tenants and keep their apartments filled. Under rent control, however, there are more applicants than apartments, so there’s less need to maintain the appearance of the premises or the functioning of the equipment that keeps the heating system and other systems working. In short, existing housing tends to deteriorate faster, as a result of reduced maintenance under rent control, and replacements are built more slowly, if at all. 

Shortages tend to spawn black markets, where illegal payments are made, to get more than is available through legal channels. Bribes to landlords or building superintendents to be put at the top of waiting lists have been one common form of black market activities under rent control. Other forms of illegal activity include the landlord’s abandonment of buildings after the service they were legally required to provide cost more than the rent they were legally able to collect. 

Although rent control is often thought of as a way to protect the poor from unaffordable housing, only the poor who initially occupied the rent-controlled housing benefit. Those who are on the inside looking out – whether rich or poor – benefit when rent control begins. Later, others on the outside look in benefit only to the extent that they are relatives or friends of the initial beneficiaries and have rent-controlled housing passed on to them when the original occupiers leave or die. Some outsiders bribe the original occupiers to get the rent-controlled apartment. 

As with others forms of rice control, rent control does not reduce costs. Many rent control advocates are often also advocates of other policies which increase the cost of building and maintaining housing. These include policies mandating various amenities that must accompany housing developments, including bike paths, open spaces, or recreational areas to be used by city residents in general, rather than just by tenants of the development itself. Providing such amenities can be the price that developers must pay to get building permits, but ultimately it is the tenant in such developments who reimburse the developers by paying higher rates. 

Often the same local authorities who impose rent control also impose environmental requirements that are not only costly in themselves but whose technicalities invite costly lawsuits by those claiming that the requirements have been violated. Restrictions on what building materials will be permitted, how much construction workers must be paid, and other requirements all add to the cost of housing. If rent control does not permit recovery of these costs, then the building of housing can be expected to decline or to stop entirely. 

Housing “Reforms”

For more than a century, polite and social movements in various countries have promoted laws and policies which override the decisions made by tenants, landlords, builders, home buyers, and others involved in the private marketplace. One of the most common of these interventions has been “slum-clearance” programs. Other interventions include laws intended to either promote or prevent the racial segregation of housing, as well as the direct building of public housing. 

Slum Clearance

Whether called “slum clearance” in the 19th century or “urban renewal” in the 20th century, government programs to demolish housing considered unsatisfactory by third-party observers have displaced vast numbers of low-income tenants, often supposedly for their good. However, all this activity, expense, and disruptions of lies are based on the crucial – and unsubstantiated – assumption that third parties who pay no cost know better what is good for a low-income tent than those tenants themselves. 

Slum clearance programs in the 19th century created no new housing and urban renewal programs in the 20th century created fewer low-income housing units than they destroyed, with rents on many of these new units being beyond the price range that the displaced tenants could afford. The net result was that these programs restricted, rather than expanded, the options available to low-income tenants. However disagreeable the pre-existing housing may have looked to journalists or social reformers, the tenants who lived there would have been living in better housing if they could have afforded it – consistent with their other goals and desires. 

There is no question that early Jewish immigrants lived in overcrowded tenements under conditions that most other Americans considered appealing. When the lower east side of New York was a predominantly Jewish slum, it contained three times as many people per square mile as it did when it was a low-income ghetto for other groups a hundred years later. Half of the Jews in this 19th-century ghetto slept three or four to a room, and nearly 1/4 slept five to a room. Moreover, mid-19th century slums had toilets in the yards and alleys behind the building. Only later in that century did running water come into the buildings themselves, to be shared by the tenants, who jointly had access to the same water faucets and toilets. 

There was no question that the housing in which these people lived left a lot to be desired. But there were other things that they also desired- such as saving their families abroad from starvation and death at the hands of anti-Semitic mobs. Moreover, they were also thinking beyond their immediate circumstances to a better future for themselves and their children in America. Their saves helped prepare for that future, which turned out to be far better than most people might have imagined at the time. What slum clearance did was force these and other slum tenants to use some of their hard-earned incomes to finance housing that left third-party observers feeling better, thought these tenants could have moved into much more expensive housing before if they had considered it worth the other things they would have to sacrifice to do so. 

It is always possible to make people better off in one dimension, such as housing, at the cost of making them worse off in other dimensions that are not so visible to third-party observers. Where this must be done against their will, by imposing the power of government through slum-clearance programs, it is by no means clear that the supposed beneficiaries of these programs are better off on net balance. 

Racial Segregation

The residential clustering or segregation of particular groups has been the result, rather than the exception, in countries around the world over the centuries. While this has been strikingly visible to the naked eye when the groups were different in appearance, as with blacks and whites in the United States, the same phenomenon has been common where the differences could not be seen with the naked eye.

Sometimes the groups cluster spontaneously and sometimes they are found clustered because they have been rejected by other groups, who don’t want them living in their neighborhoods, and sometimes governing authorities assign them to separate living areas. The term “ghetto” originated centuries ago in Europe, to describe the neighbors where Jews were confined, sometimes behind walls that were closed off at night. But Ibos from southern Nigeria were likewise confined to separate neighborhoods in northern Nigeria, even though both groups were black Africans whom others might have had difficulty telling apart. In the early centuries, the Chinese minorities in Southeast Asia were often likewise confined to neighborhoods prescribed by the ruling authorities, rather than being allowed to live at random among the indigenous populations or their European overloads. 

The term “segregation” has often been used to describe both spontaneous residential group clustering and residential separation imposed by authorities. In its strict sense, the term is used to refer to the latter. An intermediate pattern is group clustering due to an inability of a particular group to find acceptance – or perhaps even tolerance – in communities of other groups. There are also combinations. For example, for most of the 20th century, black in manhattan was largely confined to Harlem because they were not welcomed in other neighborhoods. However, within Harlem, there was further clustering of people voluntarily, according to their incomes, education, and times of arrival from the south, the more fortunate blacks living in the outer regions of Harlem and leading the expansion of the community into surrounding wither neighborhoods. It was much the same story on New York’s lower east side during the immigrant era, when Polish, Hungarian, and Romanian Jews lived clustered ser para tell within the larger Jewish enclave. 

May lament racial or ethnic residential clustering and see it as a “problem” to be “solved.” However, affinities of culture, kinship, and language have led many people to prefer to live among their groups, even when opportunities were available to live elsewhere. The immigrant generation, still speaking a foreign language, tended to cling to neighborhoods where they could communicate with others from the same country, even after they had moved up economically and could afford to move on to more prosperous neighborhoods inhabited by the native-born or indigenous population. Second and later generations, who tended to be more acculturated, could more readily move out of ethnic enclaves and into the mainstream of the larger society – which was correspondingly less resistant to their moving into the new neighborhoods. 

In other words, there may not be a flex amount of “racism” or other aversion restricting the residential housing of a given group. Change within the group itself over time can change the degree of acceptance or resistance, as the cost of associating with them changes. 


The economics of housing is very different from the politics of housing. In the politics of housing, issues can be framed in terms of the desirability of various goals, such as “affordable housing” or “open space.” The economics of housing can only make us aware of the costs of our goals – and that these costs are inescapable, whether or not we acknowledge their existence or asses their magnitude. 

Politics offer attractive solutions but economics can offer only trade-offs. For example, when laws are proposed to restrict the height of apartment buildings in a community, politics present the issue in terms of whether we prefer tall buildings or buildings of more modest height in our town. Economics asks what you are prepared to trade off to keep the height of buildings below some specified level. The question then is not simply whether you prefer shorter buildings but how much you prefer shorter buildings and what price are you prepared to pay to mandate height restrictions in your community.

Economics cannot answer such a question. It can only make you aware of a need to ask them. Economics was christened “the dismal science” because it dealt with inescapable constraints and painful trade-offs, instead of the more pleasant and unbounded visions, and their accompanying rhetoric, which may find so attractive. Moreover, economics follows the unfolding consequences of decisions over time, not just what happens in state one, which may indeed seem to fulfill the hopes that inspire these decisions. 

Risky Business

Nothing is more certain than risk. The insurance business is just one of the ways of dealing with risk. Having government agencies come to the aid of disaster victims is another. Mutual aid societies helped victims of social and natural disasters long before there were government agencies charged with this task. 

Whatever social mechanisms are used to deal with risk seek to do two crucial things: (1) reduce the magnitude of risk and (2) transfer that risk to whoever can bear it at a lower cost. Where the transfer of risk is accompanied by a reduction of risk this process makes it mutually beneficial for the person initially at risk to pay someone else to share the risk or to carry the risk completely. This in turn means that society as a whole benefits from having its risk minimized and the resource put aside for dealing with them reduced, making those resources available for other uses. 

Merely providing information or assessments of risk is also a valuable service, for which credit-rating services are paid, whether these are companies like TRW that provide businesses with information on the credit history of individual consumers, or companies like Moody’s or Standard & Poor’s which rate the relative risk of bonds issued by businesses themselves, states, or nations, so that investors can be guided accordingly. 

When trade associations of insurance companies test automobiles for safety in crash tests, that likewise creates benefits for the companies in these locations, by allowing them to determine how much to charge to insure different vehicles, and it also assists consumers in making choices of which kinds, makes, and models of vehicles to buy. Consumer choices in turn influence automobile manufacturers as to what kind of safety provisions to add to their cars, to compete successfully, leading cars in general to become safer over time. 

To some extent, reducing risk through insurance may cause people to take more risks. Just as lower prices for other things usually cause more to be demanded, so lowering the costs of given risks enables people to take on additional risks. 

While this is easy to understand from an economic perspective, it is also easy to distort from a political perspective. Blaming the owners of local stores and check-cashing agencies for the higher charges in such places, compared to charges in safer middle-class neighborhoods, is usually more politically effective than blaming those local inhabitants who create the costs which these institutions pass along to customers – especially if the business especially if the owners are mostly of a different ethnic background than the local people. Even without the incentives of politics, many observers who do not think beyond stage one blame high prices on those who charge these prices, rather than on those who create the additional risk and cost that these prices reflect. From this, it is a short step to advocating laws and policies to restrict how high local prices local check-cashing charges or interest rates will be allowed to go. 

However plausible such laws and policies might seem to those who do not think beyond stage one, the net result of preventing local businesses from recovering the higher local cost of the premises they charge is likely to be a reduction in the number of businesses that can earn as much locally as elsewhere – or that can even earn enough to survive locally. Given the existing meager availability of business in many low-income neighborhoods, anything that forces more local businesses to close aggravates the problem of the people living there. 

Risk-reducing Institutions 

Families, gangs, feudal warlords, insurance companies, partnerships, commodity speculators, and issuers of stocks and bonds are all in the business of reducing and transferring risk. 

All face the problem that reducing existing riskiness increases the willingness of the protected individual to take more risks. 

Those who are in the business of seeking insurance try to take into account not only the existing risks but also the increased amount of risky behavior that the policyholder may engage in as a result of becoming insured. For similar reasons, the family – the oilers’ insurer of all – cautions its members, both when they are growing up and on specific occasions afterward, against various kinds of risky behavior. All these things declined after many of these costs were shifted to government agencies. 

Government Agencies

The incentives of a government agency are very different from those of a family or an insurance company. As a matter of financial self-protection, both families and insurance companies must seek to discourage risky behaviors in one way or another. For a government agency, however, financed by taxpayers’ money, there is no such urgency about discouraging the increased risks that people may take because those risks are covered by others. Moreover, the agency gets its biggest political support from helping, not critiquing. Thus government emergency programs to help people stuck by floods, hurricanes, and other natural disasters make it easier for people whose homes have been destroyed to rebuild at the same locations, in areas where such disasters recur regularly over the years. Similarly, government programs to develop medicines and medical procedures to deal with AIDS, at costs subsidized by the taxpayer, have led to a resurgence of the kinds of risky behaviors that can lead to AIDS. 

Similar incentives produce similar results at the international level. Where both national and international institution stands ready to bail out governments facing bankruptcy and likely to have defaults on their debts that would hurt banks and other investors in other countries, the prospects of such bailouts allow private financial institutions to invest in countries where it would be too risky to invest otherwise. Sporadic calls for a “restructuring” of debt or a “forgiveness” of third-world debt encourage the debtor governments to borrow more money than they would if they knew that the loans would have to be repaid or an open declaration of bankruptcy announced, which would make it harder to borrow again, perhaps for many years. 

Since risk is inescapable, the question of how much risk to tolerate is a question of weighing one cost against another. Often this is not done, especially when those who make such a decision do not pay the costs of these decisions and do not think beyond stage one.

Ownership Sharing

Sharing ownership has long been another way of reducing risks. Back in the days of wooden sailing ships, the danger that one of these ships would be lost at sea was much greater than today. Some shipowners protected themselves by not owning a given ship alone but instead owning for example 1/10th of a share in ten different ships. While the increased number of ships meant a greater risk that one of these vessels would sink, it also reduced the likelihood that the loss would be as catastrophic as if one owned a single ship outright. 

Modern corporations are similar to make it possible for individuals to spread their risks by owning stock in several different businesses, without owning any particular business outright. However, employers who own stocks in the businesses they work for do not get the full benefits of risks spreading, since both their jobs and the money will depend on when they no longer have jobs – whether due to unemployment or retirement – depending on the fate of the same company. The consequences of concentration risks instead of spreading them proved to be catastrophic for many employees or corporations that went bankrupt amid various well-publicized scandals among American corporations in 2002. 

Not only businesses, but workmen as well, have long pooled their risk as a way of making them less onerous to individuals. Mutual aid societies have arisen among workers in a given occupation or industry, members of a particular ethnic group, or residents in a tie neighborhood. By paying small amounts into a common fund, members of mutual aid societies enable those among them who were stricken by illness or disabled by injuries to have the financial consequences cushioned by payments from the fund. Here the dangers of deliberately engaging in more risky behavior were minimized, first of all by the prospect of pain and death, but also by the fact of being known by other members of the mutual aid society, who could monitor malingering or fraudulent claims better than larger and more impersonal institutions could. 

Safety Movements

A very different kind of institution for dealing with risk has arisen in more recent times. This is the private organization or movement devoted to imposing safety requirements through publicity, litigation, or regulation. These include “public interest” law firms, ideological organizations and movements, such as the so-called Center for Science in the Public Interest, and government agencies such as the National Highway Safety Administration. Since these organizations do not charge directly for their services like mutual aid societies or insurance companies, they must collect the money needed to support themselves from lawsuits, donations, or taxes. 

Put differently, their money-making product or service is fear – and their incentive is to induce as much fear as possible in jurors, legislators, and the general public. 

Whereas individuals weighing risks for themselves are restrained in how much risk reduction they will seek by the cots, there are no such restraints on the amount of risk reduction sought by those whose risk reduction is paid for with other people’s money. Nor is there any such inherent restraint on how much fear they will generate from a given risk or how much credit they will claim for whatever risk reduction may take place, regardless of what the facts may be. 

The central question of how much risk is to be rescued at what costs is usually not relied on at all by third-party safety organizations or movements. Nor are alternative risks weighed against one another. Instead, the theme is that something is “unsafe” and therefore needs to be made safe. The argument is essential that existing risks show that current safeguards are adequate and/or the people in control of them are sufficiently conscientious, or both. Therefore power and money need to be vested in people and new institutions, to protect the public – according to this argument. 

This kind of argument can be applied to almost anything since nothing is 100% safe. It has been used against medications, pesticides, nuclear power, automobiles, and many other targets. 

In the case of nuclear power, the question of safety, in addition to costs, is compared to what? Compared to generating electricity with hydroelectric dams or burning fossil fuels or compared to reducing our use of electricity with dimmer lights or foregoing the use of many things that are run by electricity and taking our chances on alternative power sources? Once the discussion changes to a discussion of incremental trade-offs, then nuclear power becomes one of the safest options. 

These kinds of questions, which are central to safety decisions made by those who pay the costs, are conspicuous by their absence in third-party safety crusades. The rise of third-party safety advocates in the latter part of the 20th century has brought with it categorical rhetoric in place of incremental analysis, and incentives to maximize fears rather than minimize net injuries and deaths. 

Insurance and Re-insurance 

Insurance companies do not simply pay their policyholders who have suffered various misfortunes. Like families, they seek to reduce the risk that leads to those misfortunes in the first place. While families have more ability to caution and monitor their members than insurance companies have to restrain the risk taken by their policy-holders, insurance canines try to protect themselves financially in other ways. One way is by reducing risk as a precondition for issuing an insurance policy or varying the amount charged according to the level of risk. Smokers may be charged higher life insurance premiums than non-smokers. Insurance policies often require the policyholder to share the costs of risky behavior by paying a fixed amount of the damages incurred – the “deductible” – before the insurance company pays the remainder.

 Like a family, an insurance company also reduces its risks by providing individuals with information about those risks. 

Insurance not only reduces risks but transfers those risks to where they can be borne at a lower cost. 

These are not just financial arrangements that benefit particular insurance companies or their policyholders. From the standpoint of society as a whole, fewer resources are held idle in the economy as a whole when insurance reduces risk and the costs of those risks. Just as owners of homes and businesses transfer their risk of fire, flood, and other damage to insurance companies by paying premiums, so the insurance companies themselves can transfer part of their risk to re-insurance companies, at a price. In both cases, risks are not simply transferred but reduced. 

Government Regulation of Insurance

State regulations of insurance companies in the United States add another dimension to the industry. The politics of insurance regulation can be more complicated than economics because the very process by which insurance companies reduce risk is often under political attack. For example, some consider it “unfair” that a safe driver with an unblemished record is charged higher insurance premiums because he happens to live in a particular neighborhood where others have more accidents. However, the risk to an automobile does not depend solely on its owner or driver, but also on others who create dangers of accidents, theft, or vandalism. 

Similar issues arise when women live longer than men, making it more costly for an insurance company to offer an annuity to a woman than to a man, or when blacks have shorter lifespans than whites, making it more costly to offer life insurance to someone of a given age who is black. State laws and regulations may forbid insurance companies to form a king some or all of these distinctions among people when charging premiums to different policyholders. However, this sense of fairness to individuals can raise risk overall, leading to higher premiums to policyholders in general.

Two sets of motorists are especially affected by state regulation of automobile insurance rates – very safe drivers and very dangerous drivers. In a free market, the cost of car insurance to the former would be far less than the cost to the latter. However, under political definitions of “fairness,” safe drivers can end un subsidizing unsafe drivers, especially when policies are set without thinking beyond stage one. 

When the price of auto insurance is set by state officials, often they will not let the price rise to as high a level as it would reach in a free market, when insuring drivers with a record of accidents or serious traffic violations. 

When the price of auto insurance is set by state officials, often they will not let the price rise to as high a level as it would reach in a free market, when insuring drivers with a record of accidents or serious traffic violations. Since insurance companies will not want to insure such drivers when the premiums they pay are unlikely to cover all costs caused by these kinds of drivers, a common political “solution” is to create a “high-risk” pool of drivers unable to get insurance through regular channels. Insurance companies share then forced to share these high-risk drivers among themselves and rates, in general, are then set at elves which will enable the insurers to cover the losses created by all their drivers, including those in the high-risk pools. 

What this means is that other drivers are subsidizing high-risk drivers. Looking beyond stage one, what this also means is that more pedestrians and motorists are likely to suffer injuries or death because more high-risk drivers can afford to be on the roads and highways than could do so if auto insurance rates were allowed to rise to the very high rates required to compensate for the damage done by reckless drivers. Among the other consequences is that, as rates continue to be held down by government regulators, even in the face of rising costs, a large and larger percentage of drivers will be unable to obtain insurance through regular changes and therefore end up in the high-risk pool.  

This is not to say that there is never a useful role for government to play when it comes to insurance. Two main problems affect insurance companies in a free market: one problem already discussed earlier is that people who are insured may engage in more risky behavior as a result. This is called a “moral hazard.” Another is that when some people choose to be insured for some things and others choose not to be insured, those at the greatest risk are more likely to choose to be insured, so those general statistics on the risks to the population at large are misled as to the risk of those who choose to buy insurance. That is called “adverse selection.”

The Economics of Risk

Safety might seem to be something that you annoy get too much of. Yet everything we do in our everyday lives belies that conclusion. Reducing risks has costs – some of which we are willing to pay and some of which we are not. The only meaningful question, in all these cases, is the degree of risk, compared to alternatives, and the costs of reducing those risks by given amounts. 

Not all costs are more money costs. For many people, the cost of reducing risks would be giving up the enjoyment they get from skiing, boating, rock climbing, skateboarding, and other risky activities. Ultimately there are only risky activities since nothing is 100% safe. Yet no one suggests that we retire into passive inactivity – which has its risks, and which would also have to be away from sunlight if we were consistent, since sunlight increases the risk of skin cancer. In other words, there are risks we are willing to take and risks we are not willing to take, varying somewhat from person to person, but involving a weighing of benefits and costs in any event. 

However much we may agree with sweeping rhetoric about safety, or even vote for those who use such rhetoric, nevertheless when faced with a copse in our lives we weigh incremental safety against incremental costs. Even those who talk about safety in categorial terms – “if it saves just one life, it is worth whatever it cost” – actually behave in their own lives as if safety is an incremental decision, based on weighing costs against benefits, not a categorial decision. 

One of the hot e costs of any given kind of safety may be an increase in other kinds of dangers. It is always possible to make subways safer by having trains go more slowly, increasing the distance between trains, and having fewer cars per train, to reduce the train’s weight and hence reduce the distance required to bring the train to a stop. However, all these things reduce the number of passengers who can be carried during rush hours – and since people have to get to work somehow – this forces those passengers to try other means of transportation, most of which involve a greater risk of death than subway trains do. In short, you can always reduce the risks in subways by policies that increase the risk elsewhere. 

Here we come to a crucial distinction in decision-making processes – the distinction between individuals making decisions for themselves and third parties making decisions for others. Subway passengers always have the option of using other means of getting to work, but they are very unlikely to hold subways to a standard of 100% safety and go elsewhere if this standard is not met. But what of those who are making decisions for others? If there has recently been a traffic and highly publicized subway accident with several fatalities, political outcries for more subway safety may well cause the authorities to order the trains slowed down, fewer cars to be attached to each train, and getting greater distances maintained between trains. 

Moreover, after the passage of time shows that these policies have reduced accidents and injuries in the subways, officials who instituted such policies are unlikely to be shy about claiming credit. Nor are most voters likely to inquire about the total number of injuries and piles of the earth during rush hour on all modes of transportation put together. That would require thinking beyond stage one. In short, third-party decision-making, based on categorial reasoning and one-stage thinking, often succeeds in the political arena, even though individual decision-making for oneself is more likely to involve an incremental weighing of benefits against costs. Those skilled in rhetoric can easily ignore hidden costs that those faced with decisions for themselves are more likely to take into account. 

In reality, wealth is one of the biggest life-saving factors, so sacrificing wealth costs lives, whether that sacrifice takes the form of money spent for safety devices or a reduction in economic efficiency for the sake of risk reduction. Whether any given policy makes sense depends on how much risk reduction takes place for how much sacrifice of wealth. Forbidding trucks from driving 100 miles an hour on the highway probably saves more lives than it costs in lost efficiency, but forcing cars to drive under 15 miles an hour may not. In short, the decisions about policies designed to produce net savings of lives involve incremental trade-offs, not categorical pronouncements, however attractive those pronouncements may sound. 

“Social Insurance”

Everything that is called insurance is not in fact insurance. In the countries of the European Union, government retirement programs account for 90% of all retirement income, often under the name “social insurance.” But real insurance is very different from these government pension plans. Real insurance is based on careful mathematical and statistical calculations of risks and the premiums required to cover those risks. These are known as actuarial calculations and only when the assets of insurance companies cover their liabilities are they said to be actuarially sound. Their assets include both the premiums they have received and their additional earnings from having invested those premiums. 

Government-run social insurance programs seldom have enough assets to cover their liabilities but rely instead on making current payments out of current receipts. These are called pay-as-you-go programs – and sometimes they are also called pyramid schemes. 

The Economics of Discrimination

It is painfully obvious that discrimination inflicts economic and other costs on those being discriminated against. What is not so obvious, but is an important causal factor nonetheless, is that discrimination also has a cost to those who do the discriminating. Moreover, the cost of discriminating varies with the circumstances. For an American owner of a professional basketball team to refuse to hire blacks would be to commit financial sufficient. But, for the conductor of a symphony orchestra to pass over the relatively few black violinists available would cost practically nothing, in the absence of anti-discrimination laws, since there are far more white violinists available to take their places. 

In countries around the world, employment has tended to be greatest in the hiring of government employees and employees in government-regulated utilities. 

Before getting into the economics behind such things, it is first necessary to be clear as to just what is and is not defined as discrimination, so that we can avoid talking past each other, as happens so often in discussions of discrimination. 

Prejudice, Bias, and Discrimination

Prejudice, bias, and discrimination are too often consumed by one another. Each requires careful definition before discussing substantive issues.


Prejudice means pre-judgment. Yet the term has been widely used more loosely to refer to adverse opinions in general about particular racial and ethnic groups. Unless we are prepared to accept as dogma that there cannot possibly be anything about the skills, behavior, or performance of any group, anywhere in the world, which reduces their productivity as workers or their desirability as neighbors, we cannot automatically equate adverse opinions or actions with prejudgments. For example, rates of crime, disease, and other adverse conditions have varied widely among various groups in countries around the world. 

Adverse was it only coincidental that cholera was virtually unknown in American cities before the large-scale arrival of immigrants from Ireland in the 19th century – and that cholera epidemics swept primarily through Irish neighborhoods in Boston and Philadelphia? Were the organized crime activities of the Chinese tongs in various countries in Southeast Asia mere “perceptions”? Is it just racial prejudice that causes black taxi drivers in New York to avoid picking up black male passengers at night?

Adverse judgments and actions cannot be automatically attributed to prejudgment. Often those with the most direct knowledge have the most adverse judgments, while those observing from afar – or not observing at all – attribute these adverse judgments and actions to prejudice. By the same token, particular minority groups may have sought out particular attributes judged favorably, without this being a matter of prejudgment. During the great era of skyscraper-building in the United States, for example, Mohawk Indians were often sought out to work high up the steel frameworks while the skyscrapers were being built, because of their demonstrated ability to perform their work undistracted by the dangers.  

In short, whether judgments or actions toward particular groups are favorable or unfavorable, these actions cannot be automatically equated with prejudgments. Indeed, it is a sweeping prejudgment to do so, especially when those who attribute prejudice to others often have less direct knowledge of the groups in question, at the times in question, than those who made favorable or unfavorable judgments. 

Even when favorable or unfavorable judgments about groups are based on knowledge, judgments of particular individuals from within these groups may be made based on prejudice. 


Biases differ from prejudice and there are at least two kinds of bias that also differ from each other.

The first kind of bias is what might be allied cognitive bias. The person making judgments or taking action may not begin with any specific adverse beliefs about a particular group, nor any hostility toward them, but his mode of judgment may cause individuals to have equal ability to be ranked differently when they come from one group rather than another. For example, someone who places great weight on how an applicant for a job or college admissions dresses may pass up many highly qualified members of groups that do not put much emphasis on the dress or who have different patterns of dressing from those of the evaluator or of the other groups being evaluated. 

Even in the absence of any adverse prejudgments or negative feelings toward the group in question, an evaluator may thus systematically undervalue the achievements or potential of individuals from some groups. 

Another and very different kind of bias is based on favoritism for one’s group, which may exist independently of any belief, presumption, or bias about inferior abilities in other groups. Indeed, this kind of bias can co-exist with a belief that some other group is not merely equal or superior. This is a phenomenon found in various countries around the world. For example, an advocate of affirmative action programs for Malays in Malaysia declared: “Whatever the Malays could do, the Chinese could do better and more cheaply.” In Nigeria, preferential hiring of people from the northern part of the country was advocated on grounds that otherwise “the less educated people of the north will be swamped by the thrusting people of the south.” The same has been true of leaders of Sinhalese in Sri Lanka, Turks in Cyprus, Fijians in Fiji, Lulu in Zaire, and Assamese in India’s state of Assam.

A political movement organized to ban Japanese immigration to the United States, early in the 20th century, south to do so precisely because here immigrants were of high ability and formidable competitors. 

The bias of those seeking favoritism for themselves is wholly independent of any claim that others are inferior and is often insisted upon most fervently when others are considered to have superior performance. 


Both bias and prejudice are attitudes. The practical question is how and to what extent such attitudes are translated into acts of discrimination. But before addressing that question, we must first be clear as to what we mean by the word “discrimination.”

Policies of treating members of particular groups less favorably than similar members of other groups are usually called “discrimination” when practiced by the group with dominant political power and “reverse discrimination” or “affirmative action” when practiced against members of the group with dominant political power. Discrimination may also be practiced by private employers, landlords, or institutions. However, if words are to have any fixed meaning, the term cannot be extended to all situations in which some groups turn out to have less favorable outcomes than others. 

While biases and prejudices are conditions in people’s minds, discrimination is an overt act taking place outside their minds in the real world. Nor is there necessarily a one-to-one correlation between the two, as so often assumed by those who make the fight against “racism” their number one priority or by those who claim that opponents of affirmative action must be assuming that prejudice and bias have been eradicated. 

The degree to which subjective attitudes are translated into overt acts of discrimination depends on the costs of doing so. Where those costs are very high, even very prejudiced or biased people may engage in little or no discrimination. The first black football player signed by the Washington Redskins in the 1960s was hired by a man reputed among sports writers who knew him to be deeply racist. Yet he broke a long tradition of all-white football teams in Washington by hiring a top running back who was black, at a time when most of the leading running backs in the league were black – and when the Redskin’s running game was very ineffective. 

 There is no inherent contradiction in a fact breaking the color line to hire blacks – or in someone who is not a racist failing to do so. The cost they face when making their decision must be taken into account, along with their predispositions, in any causal analysis. 

Variations in Costs

Where the costs of discrimination are low or non-existent for those making hiring and promotions decisions, then discrimination can become extensive, not only in terms of decisions not to hire or promote members of particular groups but also in terms of extending such discrimination to a wider range of groups. 

While many discussions of discrimination ignore the cost of discrimination to those doing the discrimination, on the most elementary economic principle that more is demanded at a lower price than at a higher price, we should expect to see the severity of discrimination vary with the cost to the discriminator. 

In Poland between the two world wars, for example, an absolute majority of all the physicians in the country were from the Jewish minority, which was only 6% of the population. Yet the Polish government did not hire Jewish physicians, though many other poles became patients of Jewish physicians in the private sector, or else so many Jewish doctors could not have made a living. What was the difference between the public sector and the private sector in general? 

In both sectors, there were both financial and medical costs to refusing to use Jewish physicians. To staff a government hospital with all-gentile physicians, in a country where such physicians were in the minority in that profession, meant either having to pay more to attract a disproportionate share of the available gentile physicians or accepting lesser-qualified physicians than some of those available from the Jewish community. In either case, financial or medical costs were entailed, if not both. However, in the case of those who made decisions within the Polish government, there was no cost at all to be paid to them. Financial costs were paid by the taxpayers and the human costs were paid by patients in government hospitals, subject to lower-quality medical treatment than was available in society at the time. Neither of these costs was a deterrent to discrimination by government officials. 

In the private escorts, both kinds of costs were paid by sick people. Concern for one’s health, especially in an emergency or when confronted with a potentially crippling or fatal disease, could easily overcome whatever anti-Jewish attitudes one might have. Given the respective incentives in the government and private sectors, the different levels of discrimination against Jews are very much what one might expect, based on the most elementary economic principle. 

Poland provides examples of another phenomenon – more discrimination where there was less hostility and less discrimination where there was more hostility. Anti-Jewish feelings tended to be stronger in Easter Poland than in western Poland. Yet Jewish artisans were more prevalent in Easter Poland, just as black artisans once had better job opportunities in the American south, where racism was not rampant. In both cases, Ora’s need for labor affected the cost of discrimination. 

Guilds were stronger in western Poland than in Easter Poland and meridian labor unions were stronger in the north than in the south. To the extent that organized labor succeeds in raising pay levels above where they would be under supply and demand in a free market, they provide incentives for employers to hire fewer workers because labor is now more costly, both absolutely and relative to the cost of capital that may be substituted for it. At the same time, wage rates raised above the level that would prevail under supply and demand attracts more workers who apply for jobs that have higher pay. The net effect is that organized labor tends to create a surplus of job applicants. Given that surplus, the cost to the simpler of turning away qualified applicants from the “wrong” group is less than it would be if he had to be concerned about finding enough similarly qualified replacements for those who have been arbitrarily rejected. 

Even in the absence of discrimination by guilds or unions themselves, it would still be cheaper for employers to discriminate on their own. 

Not only labor unions but also government regulations can reduce the cost of discrimination. Where a public utility with a monopoly has its prices set by a government regulatory agency based on its costs, it has little or no incentive to keep those costs down to a level that would be necessary for its survival in a competitive market. Costs of discrimination, like other cots, can simply be passed on to the customer of a regulated monopoly. 

The one-to-one correspondence between racism and discrimination that is often assumed cannot explain such differences between sectors of the same economy at the same time. Even less can it explain the persistence of such differences over time, when there’s a complete turnover of decision-makers throughout the economy? Even after a given set of decision-makers and their predispositions have passed from the scene, the persistence of the same set of incentives tends to reproduce the same results and switch a new set of decision-makers in the same respective industries, whatever the individual predispositions of these new decision-makers. 

Given the influence of the cost of discrimination on the amount of actual discrimination, it is also possible to understand another otherwise puzzling phenomenon – the especially strong reversal of racial policies in sectors of the economy least subject to the pressures of the competitive marketplace. These include the government itself, government-regulated public utilities, and non-profit organizations, such as academic institutions, hospitals, and foundations. 

In short, the costs of discrimination are not only a fact of life, they are a potent force in actual decision-making, even in countries with strong racial, ethnic, or religious predispositions. How much of a fore depends on the economic incentives and constraints in particular sectors. What this means is that not only is the assumed one-to-one correlation between racism and discrimination false but also that those who wish to reduce discrimination need to pay attention to the economic conditions which make it more expensive or less expensive for decision-makers to discriminate. Too often, those opposed to discrimination are also opposed to free competitive markets that make discrimination more costly. They do not think beyond stage one. 

The crucial factors in the cost of discrimination have been the presence or absence of competition and whether those making the decision have been spending their own money or someone else’s money. When one’s own money is at stake, groups hostile to each other may not only fail to discriminate, they may seek each other out. 

Empirical Evidence

Those who equate discrimination with differences in life chances cofound highly disparate reasons for differences in outcomes among groups. Even if one regards differences in life chances as more important than discrimination, any serious attempt to deal with either social phenomenon must distinguish them from one another. 

Life Chances

Do we mean by life chances mere statistical probabilities in general or do we mean the likelihood that a given attempt, with a given effort, will succeed? What if very few black boys want to become ballet dancers or are prepared to endure peer disapproval if they persist in their efforts in this direction? In short, even the simple issue of determining life chances raises complicated questions as to the source of the differences in probabilities and outcomes among groups. Whether that source is internal or external becomes even more of a complication when seeking to determine the existence and magnitude of discrimination. 

Where discrimination is distinguished from differences in life chances, the spiral question is whether individuals of similar qualifications have similar prospects of employment, college admissions, and other benefits when they come from different groups.

Where there are substantial differences in qualifying characteristics among groups, as there often are, the question then becomes: what of those particular initials who have the same qualified characteristics as members of other groups? Do they have the same prospects or results?


Gross comparisons between groups may tell a radically different story than comparisons of comparable individuals. For example, black income has never been as high as white income in the United States and, in years past, the disparities were even greater than they are today. Yet, as far back as 1969, young black males who came from homes where there were newspapers, magazines, and library cards earned the same incomes as young white males with the same things in their homes and with the same education. As of 1989, black, white, and Hispanic Americans of the same age (2) and with the same IQ (100) all average between $25,000 and $26,000 in income when they worked year around. 

American women who never married earn substantially higher incomes than me who never married, as early as 1972, women in their thirties who had never married and who had worked continuously since high school earned slightly higher incomes than men of the same description. In Canada, women who never married have earned more than 99% of the income of men who never married. Among college faculty members, American women who had never married earned substantially higher incomes than men who had never married, as far back as 1969. 

None of this says anything about life chances, however relevant it may be to question employer discrimination. The percentage of black males who came from the kinds of homes described was very different from the percentage of white males who came from such homes. IQ scores are likewise distributed very differently among American blacks, whites, and Hispanics. It is not uncommon, both in the United States and in other countries, for one racial or ethnic group to differ in age from another by a decade or more – and age makes a large difference in income. So does marriage. While married men tend to earn more than single men and married men with children still more, the exact opposite is the case for women. Nor are the reasons particularly obscure, since marriage and parenthood create very different incentives and constraints for women than for men. 

 Questions about the existence or magnitude of employer discrimination are questions about whether individuals who show up at the workplace with the same developed capabilities and liabilities are treated the same there. It is not a question about whether life has been fair to them before they reached the employer, however important that question might be when dealing with other issues. Yet, incredibly, laws and policies have defined as employer discrimination a failure to pay the extra costs associated with those workers who are pregnant, suffering from mental illness, or are more of a risk because of a prison record or the health problems associated with old age. When hiring, employers have incentives to think beyond stage one, even if those who make or advocate laws and government policies do not. 

Whatever the merits or demerits of having such additional costs paid b the employer or by the government or by others, a failure to do so is not the same thing as treating equally valuable workers differently because they happen to come from different groups. When workers whose net value to the enterprise is different are hired, paid, and promoted according to those differences, that is not employer discrimination, whatever else it might be. This is not even a question about desirably social policy. It is a question about using words that have some specific meaning, rather than mere sounds to evoke particular emotions. Only when terms have specific meanings, understood by those on both sides of an issue, can we at least engage in rational discussion of our differences of options about what is or is not desirable social policy. 

While isolated data can demonstrate graphically the distinction between different life chances, on the one hand, and discrimination on the other, the more general phenomenon that exists in particular situations requires more complex and often uncertain methods. For example, it is common to “control” statistically for certain facts and then see if individuals from different groups have similar results when those factors have been taken into consideration. Yet this is much easier to accept in principle than to apply in practice. 

Nothing is easier than to imagine that one has taken all relevant factors into account, when in reality there may be other factors that have influence, even if no data have been collected on them or they are not quantified. Where they are very significant differences in known factors between one group and another, it would be reckless to assume that all remaining unknown factors are the same. Yet that is done again and again in the discussions of discrimination. 

None of this disproved the existence of discrimination or minimizes its magnitude. It simply asks that those who assert its existence demonstrate its existence – by some evidence that will stand up to scrutiny. 

Anti-discrimination Laws

Both discrimination and affirmative actions involve costs. It could hardly be otherwise, since they are both essentially preferential policies, though the preferences are for different groups. Whatever the rationales or goals of these policies, the economic question is: what are the actual consequences of such policies – not just in stage one? In principle, anti-discrimination laws are a third policy, designed to preclude preferential treatment of either a majority or minority. But this policy was well cannot be defined by its intentions, goals, or rationales. The real question is: what are its specific characteristics and their consequences – and, again, not just in stage one?

The likely consequences of laws and policies against discrimination depend on how discrimination is defined and determined by those with the power to enforce such laws and policies. The incentives and constraints created by those definitions and methods of determining whether or not discrimination exists provide more clues as to what to expect than the goals or rationales. What is the decision is the spiral evidence as to what happens? 

Economic Consequences

The most obvious and most immediate consequence is that those employers who were discriminating against minorities now had the incentive to stop doing so, to avoid the costs arising from legal action under anti-discrimination laws. However, the empirical evidence suggests that the extent of discrimination in the sense of treating equally capable individuals differently because of race may have been considerably less than that assumed by those who equate discrimination with different outcomes for different groups. Nevertheless, whether the amount of discrimination is large or small, the immediate, stage-on effect of anti-discrimination laws is to reduce it. 

What about other consequences unfolding over time? The ease with which private parties or government agencies can make a charge of discrimination against an employer who is not discriminating, but whose workforce does not reflect the local population profile, now makes locating near concentrations of minority populations legally more risky. Those employers in these risky locations may not be able to do much in the short run. However, as time goes on, new businesses that arise have a choice of where to locate, and even old businesses with branches in more than one location can shift their operations away from minority population centers, to reduce their legal risks. Eventually, even the employer with only one plant or office can find an opportunity to move elsewhere. 

Whether minority workers gain more jobs through the effect of anti-discrimination laws reducing discrimination or lose more jobs through the incentives that such laws provide for employers to relocate is an empirical question. But it is a question that is seldom asked. 

For employers, one way of avoiding charges of discrimination by minors employees or job applicants may be to hire in such a way as to have a racially representative sample of the local population. However, this can risk charges of “reverse discrimination” by white job applicants who were not hired, or white employees who were passed over for promotion. Since racial or ethnic groups tend to differ in their particular skills and experiences, it is unlikely that the qualifications of members of different groups in a given location will be the same – the only way to have both non-discriminatory hiring and a demographically representative workforce at the same time. 

One way out of this dilemma for many employers is to hire in such as way as to create a demographic representation, and at the same time escape charges of “reserved discrimination,” is to justify preferential hiring on grounds of affirmative action based on a need for “diversity.” 


Much discussion of discrimination fails to allow people with opposing views to confront their substantive differences because so many of these words used have ambiguous and shifting meanings. In particular, these discussions abound in terms that confuse differences in internal personal qualities – such as skills, education, and experiences – with externally imposed barriers to employment, college admission, and other desired goals. Thus those who fail to qualify for parkour all benefits are often said to be denied “access” or “opportunity,” when in fact they may have had as much access or opportunity as anyone else, but simply did not have the developed capabilities required. The facts may of course vary from individual to individual or from group to group, but we do not even know what facts to look for when considering issues revolving around discrimination if our terms make no such distinctions. Similarly, a mental test may be characterized as “culturally biased” if one group scores higher than another, as if different groups can’t have differed their interest, experience, upbringing, education, or other factors that would lead to real differences being registered, rather than a mere biased assessment being made. 

None of this says anything about how much discrimination there is. What it says is that a vocabulary has come into being that makes it virtually impossible to determine how much discrimination there is, since the results of both discrimination and numerous other factors are lumped together under the same words. Those who do not think beyond stage one may assume that, whatever the level of discrimination, anti-discrimination laws reduced it. Yet the incentives and constraints created by such laws can either increase or reduce the employment or other opportunities of minority groups, on net balance. 

The Economic Development of Nations

All over the world, national economies have generally advanced in recent centuries, producing more output per capita and thereby raising people’s standards of living. This advance in technology and wealth has been greater in some regions of the world than in others, and greater during some periods of history than in others. However, there have also been periods of stagnation and periods of retrogression, sometimes brought on by the disruptions and destructions of war, sometimes by plagues or other natural disasters, and sometimes by ill-conceived economic policies. 

Sharps changes in countries’ relative positions have taken place in much shorter periods than a century. As of 1991, India and China had very similar output per capita. But, a decade later, china’s output per capita was doubled that of India. China had begun the process of moving away from a government-run economy to more of a market economy. When India began making the same kinds of changes in the 1990s, its economic development became more rapid as well. 

While economic development has been more or less taken for granted in much of the western world since the industrial revolution of the 18th century and 19th century, this had not been so in all places and all times – and it was not so in the west for many centuries before then. In some other parts of the world, even in the 20th century, farmers continued to farm and fishermen continued to fish in much the same way as their ancestors had centuries earlier, leading to standards of living not very different from what they had been in ancient times. 

In short, economic development has never been automatic. Why it has been greater in some places than in others, and at some times rather than others, is a question of great practical importance for the economic fate of billions of human beings today, though it is a question for which nos single answer is likely to explain everything. Technology has had much to do with it, though not everything. Similarly for geography, natural resources, and other factors, including the human man factor. As in other areas of economics, attempts to understand certain basic relativizes are made more difficult by the distraction of popular myths and misconceptions. 

Differences in Development 

The striking and even choking differences in economic development seen in many parts of the contemporary world have led many to develop or be drawn to, sweeping and often melodramatic theories that claim to explain such economic contrasts. Yet such economic contrasts have been common throughout history. Ancient china was so far in advance of Europe that, while there was a great demand among Europeans for silk, chinaware, and other exotic products, the Europeans produced nothing comparable to trade and so had to pay in gold for what they bought from china. Within Europe, the contrast has been equally great. When the ancient Greeks had a monumental architecture that is still imitated today and landmark intellectual figures like Plato and Aristotle, illiteracy was common across much of northern Europe and there was not a single building in all of Britain when the Romans invaded in the second century A.D. nor had a single Britons name yet entered the pages of history. The contrast today between the wealth of western countries and the poverty of the third world is nothing new. 

While differences in economic development have long been common, the particular advantages of one society over another during a particular have not been permanent. Europe eventually overtook china, after many centuries. So did Japan. More importantly, the advances achieved in one society have often diffused outward to their societies. What was perhaps the greatest economic advance in the history of the human race – agriculture – began in the Middle East and spread outward, as cultivars of the soil began to displace hunters and gatherers wherever the two competed for the same territory. Agriculture would support far more people on a given amount of land, leading to larger societies whit more fighting men than in the societies of people who lived by hunting and gathering the spontaneous produce of the earth, and who were necessarily spread more thinly over the land, for everyone to have enough to eat. 

One society is not always more advanced in all things, so different advances came from different places, even at a given time. For example, the numbering system in use around the world today originated centuries ago among the Hindus of India and is placed Roman numerals in the west, as well as every other numbering system that it competed with every other country. 

Innumerable borrowing from one culture to another has taken place continuously over thousands of years. However, the pace of these borrowings and the opportunity to borrow have varied greatly in different parts of the world and over different periods. People living in remote mountain valleys or on an isolated island in the middle of a vast sea have usually not been able to keep up with the advances of technology and other developments in other societies. When the Spaniards discovered the Canary Islands in the 1t5 century, they found people of a Caucasian race living at a Stone Age level. So were the Australian aborigines when the British discovered them. In both cases, isolation meant deprivation of the advances of the human race around the world. 

While such things as the colony and natural resources are obvious factors in economic development, less obvious factors may be of equal or greater importance. The role of government can be crucial. After the Roman empire collapsed in the 15h century A.D., the institutions it had maintained collapsed with it .what had once been an inter-connected economy and legal system, stretching from Britain to North America, was now fragmented into many independent local jurisdictions, often separated by areas of varying sizes that were not effectively controlled by any government and were unsafe for travel or trade. 

As trade declined and the advantages of specialization disappeared for lack of markets, cities also declined, roads fell into disrepair, education institutions declined or disappeared, and law and order broke down. It has been estimated that it was a thousand years after the collapse of the Roman Empire before the standard of living in Europe rose again to where it had been in Roman times. The presence or absence of effective government can be a major factor in economic development or retrogression.

Establishing law and order over a wide area not only enables producers to find large markets, and therefore take advantage of economies of scale in production, but it also encourages people as well as products to move to where they are most in demand. 

Another function of government that affects economic development is its role in providing property rights or failing to provide property rights. Many third-world countries suffer from the fact that, while property rights may exist, they are not realistically available to vast numbers of people. In some of these contrives, the majority of the economic activity takes place “off the books” in the underground en money. For example, most of the housing in Egypt and Peru has been built illegally, whether because of numerous restrictions and red tape that impede building housing legally or because of costly legal processes which poor people are unable to afford. 

In these circumstances, much of a country’s total wealth may not be covered by property rights. In Peru, the value of the real estate that is outside the legal system – that is not covered by property rights – has been estimated to be more than a dozen times larger in value than all the foreign investment that has ever been put into the country throughout its entire history. For the third world as a whole and the former communist countries as well, the estimated value of all the real estate that is not legally owned is more than 90 times the value of all the foreign aid to all third world countries over three decades.

What this means economically is that these vast, but legally unrecognized, assets cannot be used the way property is used in industrially advanced countries to promote further economic expansion. Many Americans have created their businesses – some of which later grew into giant corporations – by borrowing money to get started, using their homes, farms, or another real estate as collateral to get the initial capital required. But in third-world countries, this can’t be done since the banks can’t use this property as collateral in case of default. 

Real estate is just one of the many economic assets lacking property rights in third-world countries. In many of those countries, unauthorized buses and taxis proved most of the public transport and, unauthorized vendors supply most of the food sold in the market and on the streets. 

Those who do not think beyond stage one often think of property rights as simply benefits to those fortunate enough to own property. This ignores the role of property rights as a key link in a chain of events that enables people without property to generate earth for themselves and the whole society. 

One implication of this is that some third-world countries could gain the use of more capital by making property rights more accessible I eh ting their borders than by a ten-fold inverse in the amount of foreign aid they receive. Moreover, the increased capital would be in hands of millions of ordinary people, while foreign aid goes into the hands of the political elite. In short, although property rights are often thought of as things that are important primarily to the affluent, these legal recognitions of existing assets may be especially needed by poor individuals in poor countries, if they do not wish to continue to be poor. 

Put differently, what property rights provide, in countries where these rights are readily accessible, is the ability of people to convert physical sets into financial assets, which in turn enables them to create additional wealth, whether individually or in combination with others. Property rights enable strategies to cope part in economic ventures, some of which are beyond the means of any particular individual and must be undertaken by corporations that can mobilize the wealth of thousands or even millions of people, who cannot possibly all know each other. 

Moreover, property rights provide incentives to monitor their economic activities more closely than government officials can – and protects them from over-reaching caprices or corruption of such officials. In short, property rights are an integral part of a price-coordinated economy, without which that economy cannot function as efficiently. 


While the influence of the geographical settings in which peoples evolve has been widely recognized to one degree or another, the nature of that influence can vary greatly. It is relatively easy to understand the economic implications of the vast deposits of petroleum in the Middle East, the iron ore deposits of Western Europe, the tin in Malaysia, and the gold in South America. What may not be so obvious, but of equal or greater importance, is the cruel role of navigable waterways for transporting these and other natural resources, and the products resulting from the, to different regions of the earth – creating wider cultural interactions in the process. 

It is not simply that some people may be economically more fortunate because of the geographical setting in which they happen to live at a given time. More fundamentally, they can become enduringly different people, partly as a result of their broader cultural contacts and the expanded universe of human experience on which they can draw. 

The British were able to cross the Atlantic only by using trigonometry invented by Egypt, the compass invented in China, utilizing knowledge of astronomy developed in the Middle East, making calculations with numbers created in India, and drawing on other knowledge written in letters created by the Romans. Once ashore, the births had the advance of weapons using gunpowder, which originated in Asia, and horse hose military uses had been developed in Central Asia and the Middle East. 


All numerous interacting factos behind economic development make it virtually impossible that different parts of the world would all have equal development, and therefore equal standards of living, at any given time. Yet the puzzlement, unease and dissatisfaction caused by seeing large economic disparities between societies have created demands for explanations – usually without creating an equal demand for years of study of the historical, geographical, and economic factos behind those disparities. Instead, there has bee na demand for simply and emotionally satisfying explanations, especially melodramatic explanations with ideological overtones, such as “exploitation” theories. “Overpopulation” is also a simple explanation that lends itself to melodrama and to solutions favored by those inclined toward controlling other people’s lives. 

Exploitation theories explain the wealth of some by the poverty of others, whether comparing nations or classes within nations. Sadly, many of those who are said to exploited have had very little to exploit and many of those described as “dispossessed” have never posed very much in the first place. Moreover, the actual behavior of those described as exploiters often shows them shunning those that they are said to exploit, in favor of dealing with more prosperous people, from whom they expect to ear more money. 

At particular times and places in history, conquerors have indeed extracted wealth form the conquered peoples, but the real question is: how much of today’s economic differences between antisonora and peoples does that explain? Spain, for example extracted vast amounts of gold and silver form its conquered lands and peels in Western Hemisphere, at great economic and human cost to those who were subjugated. But much of this wealth was quickly spent, buying imported goods form other countries, rather than developing Spain itself, which has remained one of the poorer nations in Western Europe. Meanwhile Germany – lacking colonies of any serious economic consequence for the German economy, for most of its history – becase one of the most prosperous nations in Europe. Switzerland and the Scandinavian countries have had no colonies at all and yet have been among the most prosperous countries in Europe and the world. 

Exploitation theories are sometimes based on assumption of ignorance and naïveté on the part of some groups, such as third world peoples, as well as wily and unscrupulous outsiders who are able to make high profits form paying the indigenous people less than their goods are really worth in the world market. But the question is: how long can such situation last? More specially, can it last long enough to explain international differences in income and wealth? 

No given a factor can account for the large disparities in economic development among the countries of the world. Nor is the relative influyen of any particular factor likely to remain the same over time. Although various geographic factors have played a major role in the economic opportunities available to various peoples, economic development also affects the influence of geography. The invention of railroads and trucks as made available low-cost transport for the first time in regions lacking in navigable waterways and draft animals, such as much of west Africa. Production and sales of cocoa, cotton, and tin began flourish on a large scale in parts of the world after railroads replaced the costly used of human porters, who were very limited in the size of the loads they could carry. Even mountain became less formidable barriers after techniques of tunneling and blasting thought them developed, while airplanes have flown over these mountains and shrunk the role of distance in general. In short, economic development has reduced the role of geographic factos, which made economic development possible in the first place. 

My rating:

This book in 3 key points

  1. When deciding what kind of economic policy to enforce, it is best think of the incentives and restraints it causes, not the goals one hopes it achieves.
  2. It is impossible to achieve uniform solutions in economic policy, that’s why it’s best to leave the market and people to their own devices.
  3. Economics is a multi-stage multi-factor application. One must think what unintended consequences it will bring. 

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