Browsed by
Tag: price

The Fallacy of “Buy Land — They’re Not Making Any More” – Article by Peter St. Onge

The Fallacy of “Buy Land — They’re Not Making Any More” – Article by Peter St. Onge

The New Renaissance Hat
Peter St. Onge
September 21, 2015
******************************

“Buy land — they’re not making any more!” is an old investing chestnut, and a common sense one to boot. Economically, it’s also completely false.

As counterintuitive as it may seem, we make land all the time. It just doesn’t look like land.

Why? Because land’s value doesn’t come from its ability to cover up the naked earth. Land’s value comes from its economic usefulness. From the value of things that can be done using that land (Rothbard’s “marginal revenue product” of the land). And that value is, indeed, changing all the time. Economically, from a price perspective, then, we make land all the time.

Step back a moment and ask why land has value anyway. Why do people want land? Well, obviously, because you can put stuff there — including yourself — plus buildings, swimming pools, and factories.

Now, anybody who’s visited West Texas knows there is plenty of building space in the world. You could drive for hours and meet nobody. There’s lots of space for that factory of yours. But it’s not really space itself that makes land valuable. It’s location. As in, there’s only so much room in Manhattan. Or Central London.

Once again, though, it’s not the actual space that matters. It’s the access. Put a strip mall on Manhattan surrounded by crocodile-filled moats and snipers and it will have low value. The value is in access. So Manhattan is valuable because it’s easy to get to other parts of Manhattan. And it’s easy for other people to get to you. Customers, partners, and friends can all easily visit you if your apartment or office is in Manhattan, moatless and sniperless.

So if it’s the access that matters, are they making new access? Of course. They’re doing it all the time.

New highways, new exits, new streets, mass transit, pedestrian malls are being regularly constructed. These all effectively “make new land” because they offer access to existing space. They turn relatively “dead zones” into “useful zones,” or new land.

What are some of the meta-trends on land as investment, then?

First: roads. This was a bigger value-driver a generation ago in the US, as new roads made the suburbs more accessible, helping to drain many cities even as US population grew. Outside the US (Mexico, Thailand, Russia), new roads are still a big deal, and even in the US, new highways can reshape values — draining old neighborhoods and building value in new ones. The decline of cities like Baltimore or Detroit are partly thanks to those beautiful roads that redistribute access to the suburbs.

Second: population. In the US “rust belt” of declining manufacturing, many regions have dropped in price simply because people are leaving. Detroit homes for $100 is emblematic, although of course there are also political reasons some cities are so cheap — in particular, taxes and crime.

And that brings us to politics. Real estate can be cheapened shockingly quickly by taxes and crime, and those traditional drivers have been joined in recent decades by environmental politics.

Environmentalists, by taking land off the market, effectively squeeze the remaining accessible locations, driving up the price. Regions like Seattle or San Francisco are poster children of this environmental squeeze, with modest homes even in remote suburbs costing upward of a million dollars. On the other extreme, cities like Dallas or Houston have kept prices down despite exploding populations by allowing farmland to be converted to residential, commercial, or industrial use.

Beyond the access and political angles, land is also vulnerable to “network effects.” In other words, the neighbors matter. Gentrification or urban decay can be hard to predict. Even in a compact city with rising population like Washington, DC, it can be hard to predict where the middle class or rich want to colonize, and where they want to flee.

There are clues, of course — in large US cities, gays moving into a neighborhood, new coffee shops or art galleries are some leading indicators that property prices might swing up. But gentrification has it’s own mind; even in a booming city it might go into some other neighborhood. New York’s Harlem or Silicon Valley’s East Palo Alto are two very accessible locations with low prices because of perceptions of the neighbors.

So, while they’re not “making” land, they are constantly making things that affect land price: access, regulations, changing neighbors. These are the kinds of factors that make land valuable, not it’s ability to cover the earth.

And so land comes back to earth, joining boring old commodities like wheat or copper. Just as vulnerable to changing supply and demand factors.

And if you are looking for something they’re not “making more of?” Well, gold does come close – hence its appeal. They do mine new gold all the time, but the costs are high enough that gold is a very “inelastic” commodity. It comes close to “they’re not making more.”

Beyond that? Develop your ultimate resource: yourself.

Peter St. Onge is an assistant professor at Taiwan’s Fengjia University College of Business. He blogs at Profits of Chaos.
***
This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.
All Food Is Genetically Modified. Now We’re Just Better at It. – Article by Chelsea Follett

All Food Is Genetically Modified. Now We’re Just Better at It. – Article by Chelsea Follett

The New Renaissance Hat
Chelsea Follett
September 11, 2015
******************************
There is huge potential for progress in biotech.

A recent article in Business Insider showing what the ancestors of modern fruits and vegetables looked like painted a bleak picture. A carrot was indistinguishable from any skinny brown root yanked up from the earth at random. Corn looked nearly as thin and insubstantial as a blade of grass. Peaches were once tiny berries with more pit than flesh. Bananas were the least recognizable of all, lacking the best features associated with their modern counterparts: the convenient peel and the seedless interior. How did these barely edible plants transform into the appetizing fruits and vegetables we know today? The answer is human ingenuity and millennia of genetic modification.

Carrot_Comparison(Photo Credit: Genetic Literacy Project and Shutterstock via Business Insider).

Humanity is continuously innovating to produce more food with less land, less water, and fewer emissions. As a result, food is not only more plentiful, but it is also coming down in price.

Tech_Food_Cheaper

The pace of technological advancement can be, if you will pardon the pun, difficult to digest. Lab-grown meat created without the need to kill an animal is already a reality. The first lab-grown burger debuted in 2013, costing over $300,000, but the price of a lab-grown burger patty has since plummeted, and the innovation’s creator “expects to be able to produce the patties on a large enough scale to sell them for under $10 a piece in a matter of five years.”

People who eschew meat are a growing demographic, and lab-grown meat is great news for those who avoid meat solely for ethical reasons. It currently takes more land, energy, and water to produce a pound of beef than it does to produce equivalent calories in the form of chickens, but also grains. So, cultured meat could also lead to huge gains in food production efficiency.

Another beautiful example of human progress in the realm of food is golden rice. The World Health Organization estimates that between 250,000 and 500,000 children become blind every year as a result of vitamin A deficiency, and about half of them die within a year of losing their sight. Golden rice, largely a brainchild of the private Rockefeller Foundation, is genetically engineered to produce beta carotene, which the human body can convert into vitamin A. Golden rice holds the potential to protect hundreds of thousands of children in the developing world from vitamin A deficiency, preserving their sight and, in many cases, saving their lives.

Humans have been modifying food for millennia, and today we’re modifying it in many exciting ways, from cultured meat to golden rice. Sadly, it has become fashionable to fear modern genetically-modified organisms (GMOs), even though scientists overwhelmingly agree that GMOs are safe.

Anti-GMO hysteria motivated the popular restaurant chain Chipotle to proclaim itself “GMO-free” earlier this year (a dubious claim), prompted a political movement calling for the labeling of GM foods (a needless regulation implying to consumers that GMOs are hazardous), and even fueled opposition to golden rice. HumanProgress.org advisory board member Matt Ridley summarized the problem in his recent Wall Street Journal op-ed:

After 20 years and billions of meals, there is still no evidence that [GMOs] harm human health, and ample evidence of their environmental and humanitarian benefits. Vitamin-enhanced GM “golden rice” has been ready to save lives for years, but opposed at every step by Greenpeace. Bangladeshi eggplant growers spray their crops with insecticides up to 140 times in a season, risking their own health, because the insect-resistant GMO version of the plant is fiercely opposed by environmentalists. Opposition to GMOs has certainly cost lives.

Besides, what did GMOs replace? Before transgenic crop improvement was invented, the main way to breed new varieties was “mutation breeding”: to scramble a plant’s DNA randomly, using gamma rays or chemical mutagens, in the hope that some of the monsters thus produced would have better yields or novel characteristics. Golden Promise barley, for example, a favorite of organic brewers, was produced this way. This method still faces no special regulation, whereas precise transfer of single well known genes, which could not possibly be less safe, does.

Fortunately, while regulations motivated by anti-GMO sentiment may slow down progress, they probably cannot do so indefinitely. For those who wish to avoid modern GM foods, the market will always provide more traditional alternatives, and for the rest of us, human ingenuity will likely continue to increase agricultural efficiency and improve food in ways we cannot even imagine. Learn more about the progress we have already made by visiting HumanProgress.org and selecting the “Food” category under “Browse Data.”

Chelsea Follett (Chelsea German) works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.
***
3 Stock-Market Tips from an Economist – Article by Robert P. Murphy

3 Stock-Market Tips from an Economist – Article by Robert P. Murphy

The New Renaissance Hat
Robert P. Murphy
September 11, 2015
******************************

Recent volatility has Americans talking about the stock market — and getting a lot of things wrong in the process. Let’s discuss some general principles to help clear things up.

(Let me say up front that I won’t be disclosing which stocks are going to go up next month. Even if I knew, it would ruin my advantage to tell everybody.)

1. Money doesn’t go “into” or “out of” the stock market in the way most people think.

On NPR’s Marketplace, after the recent big selloff, host Kai Ryssdal said, “That money has to go somewhere, right?”

This language is misleading. Let me illustrate with a simple example.

Suppose there are 100 people who each own 1,000 shares of ABC stock. Currently, ABC has a share price of $5. Thus, the community collectively owns $500,000 worth of ABC stock. Further, suppose that each person has $200 in a checking account at the local bank. Thus, the community owns $20,000 worth of checking account balances at the bank.

Now, Alice decides she wants to increase her holdings of cash and reduce her holdings of ABC stock. So she sells a single share to Bob, who buys it for $4. There is no other market action.

In this scenario, when the share price drops from $5 to $4, the community suddenly owns only $400,000 worth of ABC stock. And yet, there is no flow of $100,000 someplace else — certainly not into the local bank. It still has exactly $20,000 in various checking accounts. All that happened is Alice’s account went up by $4 while Bob’s went down by $4.

2. Simple strategies can’t be guaranteed to make money.

Suppose your brother-in-law says: “I’ve got a great stock tip! I found this company, Acme, that makes fireworks. Let’s wait until the end of June, and then load up on as many shares as we can. Once the company reports its sales for July, we’ll make a fortune because of the holiday numbers.”

Clearly, your brother-in-law would be speaking foolishness. Just about everybody knows that fireworks companies do a lot of business around July 4, and so the price of Acme stock in late June would already reflect that obvious information.

More generally, the different versions of the efficient market hypothesis (EMH) claim — with varying degrees of strength — that an investor can’t “beat the market” without access to private information. The reason is that any publicly available information is already incorporated into the current stock price.

Not all economists agree with the EMH, especially the stronger versions of it. If two investors have different theories of how the economy works, then to them, the same “information” regarding Federal Reserve intentions may imply different forecasts, leading one to feel bullish while the other is bearish. Yet, even this discussion shows that it can’t be obvious that a stock price will move in a certain direction. If it were, then the first traders to notice the mispricing would pounce, arbitraging the discrepancy into oblivion.

3. An investor’s “track record” can be misleading because of risk and luck.

Suppose hedge fund A earns 10 percent three years in a row, while hedge fund Bearns only 4 percent those same three years in a row. Can we conclude that fundA’s management is more competent?

No, not unless we get more information. It could be that fund A is highly leveraged (meaning that it borrowed money and used it to buy assets), while fund B invests only the owners’ equity. Even if A and B have the same portfolios, A will outperform so long as the portfolio has a positive return.

However, in this scenario, fund A has taken on more risk. If the assets in the portfolio happen to go down in market value, then fund A loses a bigger proportion of its capital than fund B.

More generally, a fund manager could have a great year simply because of (what we consider to be) dumb luck. For example, suppose there are 500 different fund managers, and each picks a single stock from the S&P 500 to exclude from their portfolio; they own appropriately weighted amounts of the remaining 499 stocks. Further, suppose that each manager picks his pariah company by throwing a dart at the stock listing taped to his conference room wall.

If the dart throws are random over the possible stocks, then we expect one manager to exclude the worst-performing stock, another to exclude the second worst-performing stock, and so on. In any event, we can be very confident that of the 500 fund managers, at least many dozens of them will beat the S&P 500 with their own truncated version of it, and the same number will underperform it.

Would we conclude that the managers with excess returns were more skilled at analyzing companies, or had better money-management protocols in place at their firms? Of course not. In this example, they just got lucky. What relevance our hypothetical scenario has for the real world of investments is not as clear, but the tale at least demonstrates that past performance alone does not necessarily indicate skill or predict future performance.

Studying economics won’t show you how to become rich, but it will spare you from making a fool of yourself at the next cocktail party.

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism, The Politically Incorrect Guide to The Great Depression and the New Deal, and  Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015).

This article was originally published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

Shut Out: How Land-Use Regulations Hurt the Poor – Article by Sanford Ikeda

The New Renaissance Hat
Sanford Ikeda
February 28, 2015
******************************

People sometimes support regulations, often with the best of intentions, but these wind up creating outcomes they don’t like. Land-use regulations are a prime example.

My colleague Emily Washington and I are reviewing the literature on how land-use regulations disproportionately raise the cost of real estate for the poor. I’d like to share a few of our findings with you.

Zoning

One kind of regulation that was actually intended to harm the poor, and especially poor minorities, was zoning. The ostensible reason for zoning was to address unhealthy conditions in cities by functionally separating land uses, which is called “exclusionary zoning.” But prior to passage of the Civil Rights Act of 1968, some municipalities had race-based exclusionary land-use regulations. Early in the 20th century, several California cities masked their racist intent by specifically excluding laundry businesses, predominantly Chinese owned, from certain areas of the cities.

Today, of course, explicitly race-based, exclusionary zoning policies are illegal. But some zoning regulations nevertheless price certain demographics out of particular neighborhoods by forbidding multifamily dwellings, which are more affordable to low- or middle-income individuals. When the government artificially separates land uses and forbids building certain kinds of residences in entire districts, it restricts the supply of housing and increases the cost of the land, and the price of housing reflects those restrictions.

Moreover, when cities implement zoning rules that make it difficult to secure permits to build new housing, land that is already developed becomes more valuable because you no longer need a permit. The demand for such developed land is therefore artificially higher, and that again raises its price.

Minimum lot sizes

Other things equal, the larger the lot, the more you’ll pay for it. Regulations that specify minimum lot sizes — that say you can’t build on land smaller than that minimum — increase prices. Regulations that forbid building more units on a given-size lot have the same effect: they restrict supply and make housing more expensive.

People who already live there may only want to preserve their lifestyle. But whether they intend to or not (and many certainly do so intend) the effect of these regulations is to exclude lower-income families. Where do they go? Where they aren’t excluded — usually poorer neighborhoods. But that increases the demand for housing in poorer neighborhoods, where prices will tend to be higher than they would have been.

And it’s not just middle-class families that do this. Very wealthy residents of exclusive neighborhoods and districts also have an incentive to support limits on construction in order to maintain their preferred lifestyle and to keep out the upper-middle-class hoi polloi. Again, the latter then go elsewhere, very often to lower-income neighborhoods — Williamsburg in Brooklyn is a recent example — where they buy more-affordable housing and drive up prices. Those who complain about well-off people moving into poor neighborhoods — a phenomenon known as “gentrification” — may very well have minimum-lot-size and maximum-density regulations to thank.

When government has the authority to restrict building and development, established residents of all income levels will use that power to protect their wealth.

Parking requirements

Another land-use regulation that makes space more expensive is municipal requirements that establish a minimum number of parking spaces per housing unit.

According Donald Shoup’s analysis, parking requirements add significantly to the cost of housing, particularly in areas with high land values. For example, in Los Angeles, parking requirements can add $104,000 to the cost of each apartment. Parking requirements limit consumers’ choices and increase the cost of housing even for those who prefer not to pay for parking.

Developers typically build only the minimum amount of parking required by law, which indicates that those requirements are binding. That is, in a less-regulated environment, developers would devote less land to parking and more land to living space. A greater supply of living space will, other things equal, lower the cost of housing.

Smart-growth regulations

In the 1970s, municipalities enacted new rules that were designed to protect farmland and to preserve green space surrounding rapidly growing cities by forbidding private development in those areas. By the late 1990s, this practice evolved into a land-use strategy called “smart growth.” (Here’s a video I did about smart growth.)  While some of these initiatives may have preserved green space that can be seen, what is harder to see is the resulting supply restriction and higher cost of housing.

Again, the lower the supply of housing, other things equal, the higher real-estate prices will be. Those who now can’t afford to buy will often rent smaller apartments in less-desirable areas, which typically have less influence on the political process. Locally elected officials tend to be more responsive to the interests of current residents who own property, vote, and pay taxes, and less responsive to renters, who are more likely to be transients and nonvoters. That, in turn, makes it easier to implement policies that use regulation to discriminate against people living on low incomes.

Conclusion

Zoning, minimum lot sizes, minimum parking requirements, and smart-growth regulations demonstrably and significantly increase the cost of housing for everyone by raising construction costs and restricting the supply of housing.

The average household in the United States today, rich or poor, spends about a third of its income on housing. But higher home prices hit lower-income households disproportionately hard because a dollar increase in housing expenditure represents a larger percentage of a poorer household’s budget. Indeed, the bottom 20 percent of households spends around 40 percent of income on housing.

In other words, these land-use regulations are unfairly regressive. Relaxing or even removing them would be a step toward achieving greater equity.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
Cryptocurrencies as a Single Pool of Wealth – Video by G. Stolyarov II

Cryptocurrencies as a Single Pool of Wealth – Video by G. Stolyarov II

Mr. Stolyarov offers economic thoughts as to the purchasing power of decentralized electronic currencies, such as Bitcoin, Litecoin, and Dogecoin.

When considering the real purchasing power of the new cryptocurrencies, we should be looking not at Bitcoin in isolation, but at the combined pool of all cryptocurrencies in existence. In a world of many cryptocurrencies and the possibility of the creation of new cryptocurrencies, a single Bitcoin will purchase less than it could have purchased in a world where Bitcoin was the only possible cryptocurrency.

References

– “Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money” – Essay by G. Stolyarov II

– Donations to Mr. Stolyarov via The Rational Argumentator:
Bitcoin – 1J2W6fK4oSgd6s1jYr2qv5WL8rtXpGRXfP
Dogecoin – DCgcDZnTAhoPPkTtNGNrWwwxZ9t5etZqUs

– “2013: Year Of The Bitcoin” – Kitco News – Forbes Magazine – December 10, 2013
– “Bitcoin” – Wikipedia
– “Litecoin” – Wikipedia
– “Namecoin” – Wikipedia
– “Peercoin” – Wikipedia
– “Dogecoin” – Wikipedia
– “Tulip mania” – Wikipedia
– “Moore’s Law” – Wikipedia

The Theory of Money and Credit (1912) – Ludwig von Mises

Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money – Article by G. Stolyarov II

Cryptocurrencies as a Single Pool of Wealth: Thoughts on the Purchasing Power of Decentralized Electronic Money – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
January 12, 2014
******************************

The recent meteoric rise in the dollar price of Bitcoin – from around $12 at the beginning of 2013 to several peaks above $1000 at the end – has brought widespread attention to the prospects for and future of cryptocurrencies. I have no material stake in Bitcoin (although I do accept donations), and this article will not attempt to predict whether the current price of Bitcoin signifies mostly lasting value or a bubble akin to the Dutch tulip mania of the 1630s. Instead of speculation about any particular price level, I hope here to establish a principle pertaining to the purchasing power of cryptocurrencies in general, since Bitcoin is no longer the only one.

Although Bitcoin, developed in 2009 by the pseudonymous Satoshi Namakoto, has the distinction and advantage of having been the first cryptocurrency to gain widespread adoption, others, such as Litecoin (2011), Namecoin (2011), Peercoin (2012), and even Dogecoin (2013) – the first cryptocurrency based on an Internet meme – have followed suit. Many of these cryptocurrencies’ fundamental elements are similar. Litecoin’s algorithm is nearly identical to Bitcoin (with the major difference being the fourfold increase in the rate of block processing and transaction confirmation), and the Dogecoin algorithm is the same as that of Litecoin. The premise behind each cryptocurrency is a built-in deflation; the rate of production slows with time, and only 21 million Bitcoins could ever be “mined” electronically. The limit for the total pool of Litecoins is 84 million, whereas the total Dogecoins in circulation will approach an asymptote of 100 billion.

Bitcoin-coins Namecoin_Coin Dogecoin_logoLitecoin_Logo

The deflationary mechanism of each cryptocurrency is admirable; it is an attempt to preserve real purchasing power. With fiat paper money printed by an out-of-control central bank, an increase in the number and denomination of papers (or their electronic equivalents) circulating in the economy will not increase material prosperity or the abundance of real goods; it will only raise the prices of goods in terms of fiat-money quantities. Ludwig von Mises, in his 1912 Theory of Money and Credit, outlined the redistributive effects  of inflation; those who get the new money first (typically politically connected cronies and the institutions they control) will gain in real purchasing power, while those to whom the new money spreads last will lose. Cryptocurrencies are independent of any central issuer (although different organizations administer the technical protocols of each cryptocurrency) and so are not vulnerable to such redistributive inflationary pressures induced by political considerations. This is the principal advantage of cryptocurrencies over any fiat currency issued by a governmental or quasi-governmental central bank. Moreover, the real expenditure of resources (computer hardware and electricity) for mining cryptocurrencies provides a built-in scarcity that further restricts the possibility of inflation.

Yet there is another element to consider. Virtually any major cryptocurrency can be exchanged freely for any other (with some inevitable but minor transaction costs and spreads) as well as for national fiat currencies (with higher transaction costs in both time and money). For instance, on January 12, 2014, one Bitcoin could trade for approximately $850, while one Litecoin could trade for approximately $25, implying an exchange rate of 34 Litecoins per Bitcoin. Due to the similarity in the technical specifications of each cryptocurrency (similar algorithms, similar built-in scarcity, ability to be mined by the same computer hardware, and similar decentralized, distributed generation), any cryptocurrency could theoretically serve an identical function to any other. (The one caveat to this principle is that any future cryptocurrency algorithm that offers increased security from theft could crowd out the others if enough market participants come to recognize it as offering more reliable protection against hackers and fraudsters than the current Bitcoin algorithm and Bitcoin-oriented services do.)  Moreover, any individual or organization with sufficient resources and determination could initiate a new cryptocurrency, much as Billy Markus initiated Dogecoin in part with the intent to provide an amusing reaction to the Bitcoin price crash in early December 2013.

This free entry into the cryptocurrency-creation market, combined with the essential similarity of all cryptocurrencies to date and the ability to readily exchange any one for any other, suggests that we should not be considering the purchasing power of Bitcoin in isolation. Rather, we should view all cryptocurrencies combined as a single pool of wealth. The total purchasing power of this pool of cryptocurrencies in general would depend on a multitude of real factors, including the demand among the general public for an alternative to governmental fiat currencies and the ease with which cryptocurrencies facilitate otherwise cumbersome or infeasible financial transactions. In other words, the properties of cryptocurrencies as stores of value and media of exchange would ultimately determine how much they could purchase, and the activities of arbitrageurs among the cryptocurrencies would tend to produce exchange rates that mirror the relative volumes of each cryptocurrency in existence. For instance, if we make the simplifying assumption that the functional properties of Bitcoin and Litecoin are identical for the practical purposes of users, then the exchange rate between Bitcoins and Litecoins should asymptotically approach 1 Bitcoin to 4 Litecoins, since this will be the ultimate ratio of the number of units of these cryptocurrencies. Of course, at any given time, the true ratio will vary, because each cryptocurrency was initiated at a different time, each has a different amount of computer hardware devoted to mining it, and none has come close to approaching its asymptotic volume.

 What implication does this insight have for the purchasing power of Bitcoin? In a world of many cryptocurrencies and the possibility of the creation of new cryptocurrencies, a single Bitcoin will purchase less than it could have purchased in a world where Bitcoin was the only possible cryptocurrency.  The degree of this effect depends on how many cryptocurrencies are in existence. This, in turn, depends on how many new cryptocurrency models or creative tweaks to existing cryptocurrency models are originated – since it is reasonable to posit that users will have little motive to switch from a more established cryptocurrency to a completely identical but less established cryptocurrency, all other things being equal. If new cryptocurrencies are originated with greater rapidity than the increase in the real purchasing power of cryptocurrencies in total, inflation may become a problem in the cryptocurrency world. The real bulwark against cryptocurrency inflation, then, is not the theoretical upper limit on any particular cryptocurrency’s volume, but rather the practical limitations on the amount of hardware that can be devoted to mining all cryptocurrencies combined. Will the scarcity of mining effort, in spite of future exponential advances in computer processing power in accordance with Moore’s Law, sufficiently restrain the inflationary pressures arising from human creativity in the cryptocurrency arena? Only time will tell.

Why Are Jurors Expected to Work for Below-Market Wages? – Article by Gary Galles

Why Are Jurors Expected to Work for Below-Market Wages? – Article by Gary Galles

The New Renaissance Hat
Gary M. Galles
January 1, 2014
******************************

Jury duty garners complaints from those who have been drafted into service, but it seldom gets media attention. Other than when there is a celebrity involved (e.g., when Oprah Winfrey was chosen for a murder trial), juries seem to enter public discourse only when there is a sensational case, such as the upcoming trial for Aurora theater shooting suspect James Holmes.

Even when juries get noticed, it is not the inefficiencies and the waste of juror time that get the attention, yet the large number of jurors to be called for sensational cases (6,000 for the Holmes trial) often makes those problems more obvious than usual.

Serious inquiry highlights the single most effective reform available: ensuring a sufficient number of qualified jurors by paying them what their time is really worth. Because jury system problems primarily arise from treating jurors as if their time has little or no value, paying jurors instead of drafting them would produce real advantages over our current system, not just in lower costs to society, but in better dispensing dependable justice.

The greatest inefficiency of current jury service is its huge waste of juror time (e.g., 165,000 of 6 million Californians who performed jury duty actually served on a case last year). But with juror services essentially costless to judges and lawyers, they have little reason to reduce the waste. If jurors were paid something that reflected the true value of their time, they would be utilized far more effectively.

Another problem is uncomfortable and unpleasant jury facilities. With drafted jurors, there is little incentive to accommodate their preferences. If they had to be recruited voluntarily, like other employees, they would be willing to work for less under more pleasant conditions, and courts would provide for more juror comfort and convenience to cut the cost of wages.

No-shows are another major problem which increases both costs and administrative difficulties. Courts have to guess how many draftees will actually appear, wasting many jurors’ time on many days, and wasting court resources when there are too few jurors. Jurors paid a market rate for their time would show up like other employees whose jobs depend on it, reducing such waste.

Underpriced jurors cause other problems. Facing below-market costs for juror time, some courts limit jurors’ ability to take written notes, leading to delays, mistakes and avoidable jury room disputes over what was actually said. Similarly, jurors are often restricted in submitting questions to clarify their understanding, or to discuss the trial during breaks, causing confusion and wasted juror and court time. If jurors had to be paid a competitive wage, such time-wasting practices would be trimmed.

If jurors were paid, attorneys would be pushed to use plain language rather than legalese to facilitate more efficient communication. Tighter time constraints would be imposed to force attorneys to make their points more quickly and clearly, and to avoid repetitive questions (a pet peeve of jurors). Paid jurors would also spur other efficiencies, such as speeding up jury selection (e.g., by limiting peremptory challenges).

Paying jurors would also induce jurors to become more educated on the law, evidence, and procedure, reducing the chance of mistrials and the resources now devoted to ensuring jurors understand and follow the rules.

Offering sufficient inducement to attract “professional” jurors would also make justice more reliable as professional jurors would seek to cultivate a reputation as reliable and unbiased.

Currently, the primary incentive of many drafted jurors is to finish their involuntary servitude faster. That offers little assurance of attentive jurors or evenhanded rulings (not to mention creating big payoffs to jury consultants for finding “leaners” who can change the outcome in their direction). In contrast, paid jurors’ incentives would be more like those of current mediators, which litigants increasingly find preferable to court trials.

Mediators must be thorough and evenhanded if they want to continue in that role, because they must remain acceptable to both sides involved. Obvious bias or sloppiness would end their careers. Those wanting to continue to serve as paid jurors would similarly want to be fair and balanced, to preserve that possibility. Since, as according to California’s courts assert, “the duties of a juror are as important as the duties of a judge,” these incentives are crucial.

Jurors are the only resource our justice system treats as essentially costless, though, as with a military draft, the very real costs are really “paid” by the draftees. Our current system is made slower, more wasteful and more inequitable because the costs imposed on jurors, which all too often are a serious financial and personal hardship for many, are essentially ignored.

Americans’ right to a jury trial does not imply that drafting jurors is the best way to provide that right. A paid volunteer juror system would be an important positive reform, bringing us closer to providing the “liberty and justice for all” that is the goal.

Gary M. Galles is a professor of economics at Pepperdine University. He is the author of The Apostle of Peace: The Radical Mind of Leonard Read. Send him mail. See Gary Galles’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Revolutionary France’s Road to Hyperinflation – Article by Frank Hollenbeck

Revolutionary France’s Road to Hyperinflation – Article by Frank Hollenbeck

The New Renaissance Hat
Frank Hollenbeck
December 15, 2013
******************************

Today, anyone who talks about hyperinflation is treated like the shepherd boy who cried wolf. When the wolf actually does show up, though, belated warnings will do little to keep the flock safe.

The current Federal Reserve strategy is apparently to wait for significant price inflation to show up in the consumer price index before tapering. Yet history tells us that you treat inflation like a sunburn. You don’t wait for your skin to turn red to take action. You protect yourself before leaving home. Once inflation really picks up steam, it becomes almost impossible to control as the politics and economics of the situation combine to make the urge to print irresistible.

The hyperinflation of 1790s France illustrates one way in which inflationary monetary policy becomes unmanageable in an environment of economic stagnation and debt, and in the face of special interests who benefit from, and demand, easy money.

In 1789, France found itself in a situation of heavy debt and serious deficits. At the time, France had the strongest and shrewdest financial minds of the time. They were keenly aware of the risks of printing fiat currency since they had experienced just decades earlier the disastrous Mississippi Bubble under the guidance of John Law.

France had learned how easy it is to issue paper money and nearly impossible to keep it in check. Thus, the debate over the first issuance of the paper money, known as assignats, in April 1790 was heated, and only passed because the new currency (paying 3 percent interest to the holder) was collateralized by the land stolen from the church and fugitive aristocracy. This land constituted almost a third of France and was located in the best places.

Once the assignats were issued, business activity picked up, but within five months the French government was again in financial trouble. The first issuance was considered a rousing success, just like the first issuance of paper money under John Law. However, the debate over the second issuance during the month of September 1790 was even more chaotic since many remembered the slippery slope to hyperinflation. Additional constraints were added to satisfy the naysayers. For example, once land was purchased by French citizens, the payment in currency was to be destroyed to take the new paper currency out of circulation.

The second issuance caused an even greater depreciation of the currency but new complaints arose that not enough money was circulating to conduct transactions. Also, the overflowing government coffers resulting from all this new paper money led to demands for a slew of new government programs, wise or foolish, for the “good of the people.” The promise to take paper money out of circulation was quickly abandoned, and different districts in France independently started to issue their own assignats.

Prices started to rise and cries for more circulating medium became deafening. Although the first two issuances almost failed, additional issuances became easier and easier.

Many Frenchmen soon became eternal optimists claiming that inflation was prosperity, like the drunk forgetting the inevitable hangover. Although every new issuance initially boosted economic activity, the improved business conditions became shorter and shorter after each new issuance. Commercial activity soon became spasmodic: one manufacturer after another closed shop. Money was losing its store-of-value function, making business decisions extremely difficult in an environment of uncertainty. Foreigners were blamed and heavy taxes were levied against foreign goods. The great manufacturing centers of Normandy closed down and the rest of France speedily followed, throwing vast numbers of workers into bread lines. The collapse of manufacturing and commerce was quick, and occurred only a few months after the second issuance of assignats and followed the same path as Austria, Russia, America, and all other countries that had previously tried to gain prosperity on a mountain of paper.

Social norms also changed dramatically with the French turning to speculation and gambling. Vast fortunes were built speculating and gambling on borrowed money. A vast debtor class emerged located mostly in the largest cities.

To purchase government land, only a small down payment was necessary with the rest to be paid in fixed installments. These debtors quickly saw the benefit of a depreciating currency. Inflation erodes the real value of any fixed payment. Why work for a living and take the risk of building a business when speculating on stocks or land can bring wealth instantaneously and with almost no effort? This growing segment of nouveau riche quickly used its newfound wealth to gain political power to ensure that the printing presses never stopped. They soon took control and corruption became rampant.

Of course, blame for the ensuing inflation was assigned to everything but the real cause. Shopkeepers and merchants were blamed for higher prices. In 1793, 200 stores in Paris were looted and one French politician proclaimed “shopkeepers were only giving back to the people what they had hitherto robbed them of.” Price controls (the “law of the maximum”) were ultimately imposed, and shortages soon abounded everywhere. Ration tickets were issued on necessities such as bread, sugar, soap, wood, or coal. Shopkeepers risked their heads if they hinted at a price higher than the official price. The daily ledger of those executed with the guillotine included many small business owners who violated the law of the maximum. To detect goods concealed by farmers and shopkeepers, a spy system was established with the informant receiving 1/3 of the goods recovered. A farmer could see his crop seized if he did not bring it to market, and was lucky to escape with his life.

Everything was enormously inflated in price except the wages for labor. As manufacturers closed, wages collapsed. Those who did not have the means, foresight, or skill to transfer their worthless paper into real assets were driven into poverty. By 1797, most of the currency was in the hands of the working class and the poor. The entire episode was a massive transfer of real wealth from the poor to the rich, similar to what we are experiencing in Western societies today.

The French government tried to issue a new currency called the mandat, but by May 1797 both currencies were virtually worthless. Once the dike was broken, the money poured through and the currency was swollen beyond control. As Voltaire once said, “Paper money eventually returns to its intrinsic value — zero.” In France, it took nearly 40 years to bring capital, industry, commerce, and credit back up to the level attained in 1789.

Frank Hollenbeck, PhD, teaches at the International University of Geneva. See Frank Hollenbeck’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Chained CPI Chains Taxpayers – Article by Ron Paul

Chained CPI Chains Taxpayers – Article by Ron Paul

The New Renaissance Hat
Ron Paul
November 11, 2013
******************************

One of the least discussed, but potentially most significant, provisions in President Obama’s budget is the use of the “chained consumer price index” (chained CPI), to measure the effect of inflation on people’s standard of living. Chained CPI is an effort to alter the perceived impact of inflation via the gimmick of “full substitution.” This is the assumption that when the price of one consumer product increases, consumers will simply substitute a similar, lower-cost product with no adverse effect. Thus, the federal government decides your standard of living is not affected if you can no longer afford to eat steak, as long as you can afford to eat hamburger.

The problem with “full substitution” should be obvious to anyone not on the federal payroll. Since consumers did not choose to buy lower-priced beef before inflation raised the price of steak, they obviously preferred steak. So if the Federal Reserve’s policies create inflation that forces you to purchase hamburger instead of steak, your standard of living is lowered. CPI already uses this sort of substitution to mask the costs of inflation, but chained CPI uses those substitutions more frequently, thereby lowering the reported rate of inflation.

Supporters of chained CPI also argue that the federal government should take into account technology and other advances that enhance the quality of the products we buy. By this theory, increasing prices signal an increase in our standard of living! While it is certainly true that advances in technology improve our standard of living, it is also true that, left undisturbed, market processes tend to lowerthe prices of goods. Remember the mobile phones from the 1980s? They had limited service, constantly needed charging, and were extremely expensive. Today, almost all Americans can easily afford a mobile device to make and receive calls, texts, and e-mails, as well as use the Internet, watch movies, read books, and more.

The same process occurred with personal computers, cars, and numerous other products. If left alone, the operations of the market place will deliver higher quality and lower prices. It is only when the federal government interferes with the operation of the market, especially via fiat money, that consumers must contend with constant price increases.

The goal of chained CPI is to decrease the federal government’s obligation to meet its promise to keep up with the cost of living in programs like Social Security. But it does not prevent individuals who have a nominal increase in income from being pushed into a higher income bracket. Both are achieved without a vote of Congress.

Noted financial analyst Peter Schiff correctly calls chained CPI a measurement of the cost of survival. Instead of using inflation statistics as a political ploy to raise taxes and artificially cut spending, the President and Congress should use a measurement that actually captures the eroding standard of living caused by the Federal Reserve’s inflationary policies. Changing federal statistics to exploit the decline in the American way of life and benefit big-spending politicians and their cronies in the big banks does nothing but harm the American people.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

The FDA: A Pain From the Neck to the Big Toe – Article by Mark Thornton

The FDA: A Pain From the Neck to the Big Toe – Article by Mark Thornton

The New Renaissance Hat
Mark Thornton
October 25, 2013
******************************

I recently experienced severe pain in my feet, particularly in the big toes. In my imagination it felt like my feet had been run over by a truck and that several of my toes had been broken. But I knew that was not the case, and that the pain came on slowly at first, and then spread to other parts of my feet until I could barely walk.

My first approach was to take some ibuprofen to relieve the pain and swelling. When this did not resolve the matter, I thought perhaps a new pair of soft shoes might work. That idea also failed, and with a little internet research I realized I had a classic case of the gout. I was soon off to see my doctor to determine what the problem was and to get it solved with the powers of modern medicine.

The doctor confirmed that I had the gout. I was not pleased to find out, that in my case, the gout was probably brought on by another drug that I had been taking daily, against my better judgment. However, I was pleased to learn that I would no longer have to take it, that as part of my treatment I was being prescribed an ancient and natural drug, and that I would only have to take this drug “as needed.”

I was off to get my prescription filled at the pharmacy when a thought came to mind: if this drug was as natural and ancient as advised by my doctor, why did I need a prescription in the first place? Upon inspection the prescription was for Colcrys, the brand name of the drug colchicine. Furthermore, when I picked up my prescription the price was much higher than I anticipated given that it was a natural drug. When questioned, the pharmacy technician replied that the actual price was much higher and that my insurance paid for more than three-quarters of the bill. The cash price (without insurance) was $198.99 which is $6.63 per pill if taken daily, or nearly $20 per dose if used to treat flare-ups.

An extremely high price for an ancient natural drug? I knew I had a new case to solve and that the solution was probably the same old answer.

After conducting some research on Wikipedia, I learned the following: Colchicine can be used to treat gout, Behcet’s disease, pericarditis, and the Mediterranean fever. It has been in use as a medicine for over 3,000 years. After serving as ambassador to France, Benjamin Franklin brought colchicum plants back to America in order to treat his own gout. Modern science has further refined the drug for better medicinal use.

Colcrys has been used to treat gout for a very long time, although the Food and Drug Administration (FDA) had not approved Colcrys specifically for the treatment of gout prior to 2009. Alternative drugs, such as Allopurinal, are also used to treat gout and related ailments. Until recently, you could treat your own gout using one of these medicines for pennies a day.

In the summer of 2009, the Food and Drug Administration approved Colcrys as a treatment for gout flare-ups and the Mediterranean fever. The FDA gave pharmaceutical company URL Pharma an exclusive marketing agreement for selling Colcrys in exchange for completing studies on Colcrys and paying the FDA a $45 million application fee.

This deal effectively created a patented drug with no generic alternative. Therefore it gave the company a monopoly for the duration of the agreement. URL Pharma immediately raised the price from less than a dime to nearly $5 dollars per pill. Comprehensive medical insurance does substantially reduce the price to consumers, but it does not reduce the cost. Insurance only spreads the cost-burden across policy holders.

At the same time, doctors are encouraged by pharmaceutical companies to employ more expensive and profitable treatments. As a result the overall cost burden increases. Evidence suggests that doctors are prescribing Colcrys in large volumes to treat gout flare-ups and as a long-term preventative measure.

Once again the federal government has taken something that was both cheap and beneficial and turned it into a monopoly that hurts the general public and drives up the cost of medical care to the benefit of Big Pharma.

Note: Just because it is natural and produced in a pharmaceutical environment, does not mean that Colcrys is harmless. It can be considered toxic in large amounts, has a long list of possible side effects, and is not recommended for people with certain conditions.

Mark Thornton is a senior resident fellow at the Ludwig von Mises Institute in Auburn, Alabama, and is the book review editor for the Quarterly Journal of Austrian Economics. He is the author of The Economics of Prohibition, coauthor of Tariffs, Blockades, and Inflation: The Economics of the Civil War, and the editor of The Quotable Mises, The Bastiat Collection, and An Essay on Economic Theory. Send him mail. See Mark Thornton’s article archives.

You can subscribe to future articles by Mark Thornton via this RSS feed.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.