Gasoline: Too High and Too Low

We often hear that the internet has created a brave new world of globalization. But the truth is that the internet had very little to do with it. The net has allowed certain jobs to be outsourced, like help lines moved from your home town to India, where nobody can give you any help. But globalization preceded the internet, and depends on two other things. Namely, the shipping container and cheap oil. Prior to the shipping container, goods had to be manhandled onto a truck at the factory, manhandled off the truck and onto the ship at the port, and off the ship and onto a truck at the next port. All this manhandling made shipping costs too high for low-valued goods, such as lead-painted toys from China. But now the toys, lead and all, can simply be loaded into a container in a remote area of China and never touched again until they reach a Walmart warehouse in a remote area of the United States. This means that the lowest paid workers in the most remote parts of the world can compete with the working man down the street. And all of this is made possible by cheap energy.

The shipping container is here to stay, but not so cheap energy. That long ride from Sichuan to Beijing, that long voyage from Beijing to Los Angeles, that long trip from LA to Arkansas is becoming prohibitively expensive. The net effect should be to make American-made goods cheaper relative to foreign goods. And that's good for America. So, is the run-up in oil prices good or bad for America overall? The truth about any price is that it should not be high or low, but that it should be right. What is the right price for any commodity? It is the price that adequately compensates all the labor used up in its production, (including the “stored-up” labor known as “capital”), and that it account for all the “externalities” of the commodity. Now, the production costs of oil are very low. It costs the Arabs about $9 to raise a barrel of oil to the surface. Even adding in the handling and shipping costs, one can still make a nice profit at $120. So it would seem that the price is too high. On the other hand, the externalities of oil are very high. Obviously, there are the costs of pollution, but there are also other external costs: the cost of armies stationed abroad and wars to protect remote supply lines; the cost of highways, the least efficient form of transportation. Cheap energy has made possible the automobile, which has changed the shape of cities, or rather made cities somewhat shapeless and sprawling. This has imposed tremendous infrastructure costs on cities, costs which they have difficulty recovering. And many more things could be added to this list of externalities.

The answer is, then, that from the standpoint of economic rent, the price is too high, and from the standpoint of economic externalities, the price is too low. So what policies should be followed in a “too high/too low” situation? One answer is given by those who want to follow the European model, by which gas is already taxed to the point of being twice the cost it is here in America. This model has some success, in that the Europeans drive smaller cars and drive them less because they live closer to work and shopping. Even naïve libertarians like Charles Krauthammer have endorsed this solution. But I believe this European/Libertarian solution to be too crude and too government-oriented to be what we need now.

Hillary Clinton and John McCain are taking the opposite tack, at least in the short-run; they want to lower the taxes on gasoline. McCain's proposal really means that he wants to borrow more money to buy votes; Clinton at least wants to finance the cut with a tax on the oil companies, who can well afford it. And everybody has their own private palette of long-term solutions, some good, some dubious: more conservation, more drilling, more nukes, more carbon-taxes, more mileage standards, more ethanol, more ANWR. These solutions are indeed long-term, and will do little in the short-run. But since this is a game anyone can play, allow me to offer my own menu of solutions, solutions which address both the “too high” and the “too low” aspects of the problem.

Gas is Too High (Economic Rent)

It is beyond question that the high profit margins of the oil giants represents an economic rent, and such rents, or at least some portion of them, can always be recovered through the tax system without negatively affecting the economy. See (Taxes: Advice from Adam Smith). Some will argue that taxing the excess profits will reduce incentives. However, this argument ignores the fact that incentives, like every other economic quantity, are marginalized; that is, they are subject to the law of diminishing returns, one of the most basic of all economic laws. At some point, an additional dollar in incentives will not lead to an additional dollar invested in drilling, and the next dollar in incentives will actually lead to fewer dollars invested. Excess profits, when they truly are excess, when they truly constitute an economic rent, can safely be taxed. Further, it is far more efficient to collect the gas tax at the producer level than at the retail level. Hence, we can transfer the tax at the gas pump to an excess profits tax, and get the same money (or more) at a lower collection cost, and less aggravation to nearly everybody, except for a few oil company executives.

Some will argue that this will only increase the incentives to drive more and waste more, and they would be right, if it is not coupled with measures to address the externalities.

Gas is too Low (Externalities)

The most important thing is to end the system of subsidies known as the “freeways.” Roads should be funded by tolls, as I have argued previously (see Free Markets, Free-ways, and Falling Bridges.) This places the cost of remote living on those who wish to live remotely. More power to them, but don't ask the rest of us for a subsidy. The toll makes the gas tax unnecessary, to the extent that the tax is used to fund roads.

Mileage Standards are needed, but not as a set of bureaucratic diktats enforced by ever-growing bureaucracies. They can more easily be enforced by a system of consumption taxes and subsidies paid at the time of the purchase of a car. For example, suppose that the government sets a target of 35 MPG. A car that is judged to meet the standard would neither be taxed nor subsidized. But one that got only 25 MPG would pay a steep luxury tax, and one that got 40MPG would get a rebate. Those who insist on buying the biggest Hummer they can get will be taxed to support the more frugal driver. Think of it as a cap-and-trade system of carbon taxes for the common man. As it is, the cap-and-trade advocates only like it when it can be used by corporations. But if it is good enough for Dow Chemical, it is good enough for all of us.

The same principle can be used for anything that consumes large amounts of energy: furnaces, hot water heaters, appliances of all sorts, etc. Suddenly, there will be real economic incentives to buy the most efficient products, and disincentives to waste energy. And the same thing can be done for home energy costs: end all the taxes on energy bills, but place high luxury taxes on high users. Those who want to cool their homes to 60 degrees in the summer and warm it to 80 in the winter will pay a high premium to do so, while those who combine modest heating with warm clothing will see a reduction in their bills. Note that all of these taxes are avoidable to the extent that high energy usage is avoidable. Those who are responsible are rewarded, and rewarded without extensive bureaucracies. Those who want to live large will pay much, and more power to them. But in both cases, people are free to make a choice, even if we use public means to influence the choice.

I believe these principles will completely change the energy markets as we know them, and make the whole system more economically efficient. Nor do they require great social changes and high investments for them to be immediately effective. However, they will encourage great social changes in a relatively short period of time, changes that will be of great social and economic import.

The sages at Lehman's are predicting $200/barrel oil, and T. Boone Pickens has picked $150 as his target. Now, I am in no position to quarrel with these worthies, but I suspect that oil will actually drop 10% or 20% before it rises. But even if it drops, it will still be expensive, and that is not something that is likely to change in the current state of things. High oil prices can actually be good for the economy; they can actually increase our domestic production, while making alternatives cost-effective. And they can fund all sorts of new industries. It is not the price of oil that is the problem, but how we respond to it, or fail to respond.

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Happy Gilbert's Day 2008

Once again, we've come to another anniversary of the birth of the mighty G. K. Chesterton, co-founder of Distributism.

Our opponents enslaved in Socialism, Communism, many branches of Anarchism and Illuminism celebrate May 1st as their day, still believing in the lying global utopia of Marx, Engels, Lenin, Shaw and others of their ilk.

But if we Distributists have a day at all, it is at least May29th, Chesterton's birthday. Belloc's birthday is another.

On this day, please pray for the repose of Gilbert's soul, as well as his wife Frances. And let us recommit ourselves to working and praying for the dawn of a Distributist Earth...and nothing less.

To all our readers all over the world from us at the Review...HAPPY GILBERT'S DAY!!!

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Come, Let Us Reason Together

We sometimes think of authors as as persons working in lonely isolation to produce a manuscript, but in fact no work worthy of note is produced this way. A book—a good book—is actually a conversation. First of all, it is a conversation with other authors in the same field. Presumably, the author is familiar with their works; he draws on some and critiques others in presenting his own ideas. But a book is also a conversation with its audience. The author has some idea of who they are and of how to address them. Until recently, the conversation with colleagues took place both before and after publication, but the conversation with the audience could take place only after publication. The internet changes that. A work can be circulated while it is still in progress, and comment and critiques can be gathered from both colleagues and the general public alike, and the text revised before publication, rather than merely excused or defended afterwards.

I think this is a better way to write a book. Publishers may be leery of this method, since the wide availability prior to publication may mean lower sales. I suspect the opposite is true. Those who contribute to the work will be more likely to buy the final product, not less so. Or at least, that is my hope. I am beginning a new book. I think it is a book that is needed right now. Its working title is The Political Economy o f Distributism. I believe the need for this book arises from a very sad fact: Distributists, of all those who seek reform of the current system, are the one's least likely to be conversant with economic theory. And it has been this way almost from the beginning. Neither Chesterton nor Belloc had any great interest in economic theory for its own sake; they were interested in restoring the lost rights of the working man and the lost position of the family. Belloc did write a text, Economics for Helen, but even the title indicated his general disinterest in the topic. “Helen” was taken to be a curious student, and all that she, or anyone else, needed to know of economics could be taught in a very short space. And while that is true in a certain sense, it is also inadequate; a serious theory needs serious work. Too often, we have left the hard work to our opponents. This is not to deny that some great economists have contributed to Distributist theory, but it is to admit that there are fewer than we would like, and we have often ignored even their great works.

Distributists need to be equipped with a good grasp of economic theory so that they can engage their critics on their own terms. Alas, we have a tendency, I think, to merely reject their questions out of hand, without giving them an adequate answer, one that the critic can grasp. This is especially unfortunate, since I believe that Distributism is a superior economic theory, able to stand against the best critiques that the neoclassicals, the Austrians, the Keynesians, the Socialists, and anybody else can offer. A further problem is that the lack of economic sophistication is that it leaves us ill-equipped to talk with others in allied movements, movements like Mutualism, Georgism, agrarianism, Schumacher's theories, etc. Indeed, it seems to me that we have difficulty telling our friends from our enemies, and have often (for example) swallowed the worst parts of Austrian theories while rejecting the best.

This subject deserves a vast tome. I will not be writing that tome; I will leave that task to better minds than mine. What I would like to write is a relatively short book (150-175 pages) to give the non-specialist a solid grasp of some basic principles. The very simple “meta-message” of this book will be that without an account of Distributive Justice, no description or an economy can be complete; there will be gaps in the science and hence flaws in the prescriptions. These are precisely the gaps that Distributism is meant to fill, and the flaws that it is meant to correct.

I am going to post the book a chapter at a time, as a write it, and as I hear from our loyal readers, I will re-write it. But the first think to get right in a book is to get the scope right. That is, it ought to cover the right subjects. So I start with the table of contents, here offered for your critical examination. It will be noticed right off that there is a lot left out. That is, of course, by design. There is nothing on money and monetary theory, a subject requiring tomes of its own. There is nothing on development, trade, outsourcing, etc., topics that certainly need to be addressed today. And if the consensus is that at least some of these topics need to be included, I will include even at the risk of making the book longer than I would like. But in any case, I would greatly appreciate your comments, pro or con, good or bad. I would like to know where the text is clear, and where it is obscure; where the theory hangs together, and where it seems to fall apart. Mostly, I would like us to use our collective talents to reason together and produce a useful text. I thank, in advance, all who will advance this project.

1. Introduction

   1. Economics and Political Economy

   2. The Failure of the Distributists

2. Does Capitalism Work?

   1. What is Capitalism?

   2. Something is Working, But is it Capitalism?

   3. The Keynesian Divide

   4. Hayek's Super-highway

   5. The Law of Unintended Consequences

   6. Why Capitalism Fails

3. Economics as a Science

   1. The “Normative-Positive” Debate

   2. The Physical and Humane Sciences

   3. Science and the Moral Law

4. The Purpose of an Economy

   1. What it Must do.

   2. What it ought to do

   3. What is Must not do

   4. The Economic Questions

   5. Economic Equilibrium

5. Equilibrium

   1. Definition

   2. Supply and Demand

   3. Economic Equilibrium

   4. Non-economic Equilibrium

   5. The Just Wage and Economic Equilibrium

6. Justice: Distributive and Corrective

   1. Aristotle's Justice

   2. The Enlightenment's search for Economic Laws

   3. The Elimination of Distributive Justice

   4. Equity and Equilibrium

7. Power, Property, and Equity

   1. J. B. Clark and Marginal Productivity

   2. A Smithian Critique of Clark

   3. Property and Power

8. Economic Efficiency

   1. Prices and Value-Theory

   2. Externalities

   3. Economic Rent

9. Taxation

   1. “Flat” and “Fair”?

   2. Adam Smith's Principles of Taxation

   3. The Common Good and the Commonwealth

   4. What Should we Tax?

   5. Taxes and User Fees

   6. The Role of Government

   7. Can the Federal Budget be Cut?

10. Government Regulation

    1. Aristotle's Principle of Regulation

    2. Information and Regulation

11. The Triumphs of Distrbutism

    1. The “Land to the Tiller” Program (Taiwan)

    2. Mondragon (Spain)

    3. The Cooperative Economy of Emila-Romagna (Italty)

    4. ESOPs (United States)

    5. Micro-credit (Bangladesh, World-wide)

12. The Way Forward

    1. The Political Problem

    2. The Cultural Problem

    3. The Current Opportunities

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Non Angeli sed Angli

It is likely no secret that most people, having completed their high school history requirement, resolve never again to touch the subject. And why should they want to? The accumulation of names and dates, states and battlefields was made as dull as possible by books that were as “scientific” as possible, that is, by books with the story taken out and only a dull hiss left over. But history is a narrative, and without understanding this narrative, this adventure, one might say, or even this romance, one cannot understand even oneself, much less one's time in history and one's place in the story. Even the humane sciences these days aspire to become more “scientific” by becoming less historical. No where is this more true than in economics, where the study of history was dropped from the University of Chicago graduate program in 1972, with all the other major universities following suit soon after. I mention economics because it demonstrates just how silly is the notion of having a humane science apart from a human history. No science is more dependent on history than is economics, where all the data is historical, and all the ideas formed in the cauldron of history.

These reflections came to me while reading a very remarkable history, G. K. Chesterton's A Short History of England. Perhaps it should not be called a “history” at all, since in its brief 87 pages, there is little space for the recitation of names and dates, but it certainly is a story. It is the story of a people that Pope Gregory the Great took for angels. Walking in the marketplace, he saw some slaves for sale whose beauty impressed him, and asked who they were. “Angli,” (English) came the reply. “Non Angli sed angeli” said Gregory, “Not English but angels.” Well, the English are not angels, but they might be something that is actually more interesting; they might be Englishmen. They might be a race with a story to tell and a struggle to finish. The end of the angels' struggle we already know; our own story, and that of the English, is yet to be known. We are always in the middle of a story but we can never know whether it is a tragedy or a comedy; we can only know that it is a struggle, and try to come to grips with our part in the story. We always find ourselves, as we do when reading Homer, in media res in our own epic.

If Chesterton's Short History is not a history in the conventional sense, it is certainly a story in the epic sense. He conveys to the reader a sense of the narrative line of English history, and without a narrative it is impossible to understand history. Our “science” of history has deprived it of meaning. Or rather, such a science is really is really dishonest; it attempts to place its own narrative beyond critique by calling it “scientific.” Chesterton offers us a narrative interpretation of history, and an interpretation is always subject to critique; the historical scientist also offers a particular narrative, he calls that interpretation “science,” and who would dare criticize science?

Chesterton has a particular target in this extended essay. Or rather two. The first concerns the use of history itself, because Chesterton already knows what the post-modernists have only recently discovered, namely that history is used to justify a particular state of affairs. Our author makes this concern explicit:

I have a very simple motive and excuse for telling the little I know of this true tale. I have met in my wanderings a man brought up in the lower quarters of a great house, fed mainly on its leavings and burdened mostly with its labours. I know that his complaints are stilled, and his status justified, by a story that is told to him. It is about how his grandfather was a chimpanzee and his father a wild man of the woods, caught by hunters and tamed into something like intelligence. In the light of this, he may well be thankful for the almost human life that he enjoys; and may be content of leaving behind him a yet more evolved animal. Strangely enough, the calling of this story by the sacred name of Progress ceased to satisfy me when I began to suspect (and to discover) that it is not true. I know by now enough at least of his origin to know that he was not evolved, but simply disinherited.

Chesterton tells this story in behalf of his disinherited countrymen, so that they may regain their inheritance. Now, those who are familiar with post-modernism will instantly recognize in this all the post-modernist themes, namely history as narrative, power as knowledge, and text as context. The Enlightenment preached that knowledge was power, and that science (understood as naturalism) trumped narrative (man's “myths.”) However, this science was itself merely a narrative, one that refused to submit itself to any criticism, but rather demanded the right to be the sole arbiter of every other narrative. But in arbitrating all other disputes, it is not a just judge. Although the Liberalism of the Enlightenment believed that knowledge gave us the freedom to manipulate the world to our will, what it really did was take away all freedom. The man “below stairs” is kept in his place because power forms what he can know of his place, and hence the grounds on which he can object to his place and seek a better one. Power controls what he knows; it even dictates what is knowable, and by marginalizing all other forms of knowledge, it marginalizes all other (and truer) forms of freedom. The man in the inferior place cannot seek to regain his inheritance until he knows that he has been disinherited, and this is the knowledge that power seeks to deny him.

For these reasons, Chesterton is the first and finest of the postmoderns (see G. K. Chesterton—Postmodernist). To be a true postmodern, one must first be a pre-modern, but a pre-modern who insists on applying the classic wisdom to the current situation. And this is where postmodernism has its biggest problems. Lacking a pre-modern foundation, its critiques of the Enlightenment have nowhere to go. They end up being excessively modern and insufficiently post. And they end up being obscure. The ideas that Lyotard, Derrida, and Foucault place in incomprehensible French, Chesterton states in clear and elegant English. (See Is the Devil from Paris?)

Chesterton has a second concern with is connected to the first: the rise of what he sees as “Prussianism.” He writes this essay in 1917, in the midst of the darkest days of World War I. Chesterton was a supporter of that war, a war which cost him his brother's life, Cecil. And Cecil's death was a loss to Distributism as well, since Cecil was its practical and organizational genius, as much as Gilbert was its literary genius. Gilbert's support of the war strikes us as problematic, and at odds with his opposition to most imperial adventures, such as the Boer War. But Chesterton saw in Prussianism the modern man par excellence. For him, it was the Prussian spirit, rather than the French Revolution, which really heralded the downful of Christian Europe. The ideals of the French Revolution, liberté, égalité, fraternité, were, after all, just ancient Christian ideals stripped of their sacred roots, and whithering on the vine. The French Revolution could be re-Christianized; Chesterton did not think this was possible for the Prussian evolution. Prussia was the last place in Europe to be converted to Christianity, and the first to leave it; they had barely become Catholic when they were asked to become Protestant. And perhaps “asked” isn't the right word.

Chesterton's essay is also a lesson in good historiography, namely that it is written with humility and charity. Chesterton always tries to see the world from the viewpoint of the people and times he is describing, and without this act of humility, real history—history that is not merely ideological special pleading—is impossible. Chesterton is always quick to praise the virtues of his enemies, nor does he hesitate to chide the vices of his friends. And always, there is his quick wit, his apt turn of phrase. In this brief book, I gained a deeper understanding of the English nation, and their semi-angelic struggle.

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Charity for the Rich

Every year I get the same call, and every year I explain to the nice lady on the other end why I cannot donate. I shouldn't bother with that, since she is not interested, and I am wasting her time. I should just say “no thank-you” and hang-up. And since she is paid by how much she raises, I am cutting into not just her time, but her income. Nevertheless, I assume that someone who calls me on a topic wants to discuss that topic. What is the topic? It is a donation to the local hospital.

This hospital, once a struggling service for a small town, is now part of the Baylor Healthcare Behemoth, Inc. It does no charity work. If you show up without cash or insurance, they will ship you off to the county hospital, where your care will be on the 5-5-5 plan: a five-hour wait to see a doctor for five minutes at a charge of five dollars. The nice lady will tell me that they need a new MRI device or mammography machine, or whatever. I explain to her that as a commercial operation (despite their 501c designation) the hospital can easily finance that purchase, and whether I buy them a new machine or not, they will still charge fully commercial rates for its use. My donation will have no point, other than to subtract from the amount that I can give to other charities that are actually charities, and not commercial behemoths. You can almost hear the quizzical look on the other end of the line, a look someone might have after having a conversation with a dinosaur, which is, of course, exactly what has happened.

There was a time when the hospital ball was the town's major charity event, an occasion for the ladies of the village to display their finery and their furs, the latter being a rather silly garment for the North Texas climate, but which, nevertheless, makes the ladies feel better, and more power to them. All this made some sense when the hospital was a necessary but struggling institution in a small town. But now the town is a thriving metropolis, and the hospital a part of a well-funded, even over-funded, healthcare-industrial complex. It is, in fact, a place where relatively rich men go to make their living. I have no objection to that, but if there is a shortage in the accounts—which there isn't—they are more than capable of making up the shortfall from their own resources.

This reflection was prompted by this morning's announcement of the ticket prices for the new Dallas Cowboys' Stadium in Arlington. The $1.1 Billion stadium is being built with public money from the taxpayers of Arlington. This is justified under the rubric of “development,” a term which almost always means using the police powers of the state to uproot stable neighborhoods at bargain prices at public expense for the benefit of some rich man. Somehow, we are all supposed to feel better when the rich feel better, and they always feel better after receiving public money that they don't need. After all, we have a president whose singular accomplishment in business (aside from a string of bankruptcies) was to get a similar subsidy for the Texas Rangers, a subsidy that allowed him to make a large fortune on his small stake in a second-rate team (question: “What do Michael Jackson and the Texas Rangers have in common?” Answer: “They both wear a glove on one hand for no apparent reason.”) Anyway, it is somehow appropriate that this country's conservative-in-chief should be a welfare queen.

Going to the football game used to be a working-class entertainment, a chance for fathers and sons to bond while escaping from the women in the house. No more. Now that the game is subsidized, it is priced out of the reach of the working class. The new prices are 18% above the old prices, and they were high. A spokesman for the Cowboys called it “a small increase.” Humph! May he get such a small increase in his taxes. The cheapest seat will be $59, for a few seats so high up, you will need to carry your own oxygen; the seat will give a clear, if distant, view of the end-zone. It will be like watching ants play football. The next cheapest seat is $79, still in the end-zone, but at least below the tree-line. But you can't just buy that seat. You will need first to purchase a seat-option, and they go for anywhere from $2,000 to $150,000. So much for the working class. Let 'em watch TV.

This is a country that exhibits a lot of solicitude for its rich. The smaller and wealthier the group, the larger the subsidy. For example, as the family farm disappears, the subsidies to the corporate farmers skyrockets. They can't get along, it seems, without $300 Billion from the federal treasury. The president is right to veto this bill; one only wonders why he didn't veto all of the other farm subsidy bills that were passed by the Republican congress. That's a problem, I suppose of having a purely partisan backbone. But hey! What's $300 Billion among fellow welfare-queens?

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Capitalist Ink

Capitalists like to justify their control of the economy on the grounds of “efficiency,” which they define as the increased output for the same or reduced inputs; this, indeed, is the aspect of Capitalism which most impressed Karl Marx. But there are at least two problems with this claim: One, it is the wrong definition of economic efficiency, and; Two, it isn't true in any case, or at least not in all cases. Concerning the first point, the question of outputs over inputs is an engineering question, and the engineers need no help from the economists on this score. “Efficiency” in economic terms means eliminating economic rent and accounting for externalities, questions which the economists often try to avoid, since raising these issues calls the whole subject of price theory into question. “Economic rent” is an amount charged for an item over and above what is necessary to fairly compensate the labor and capital involved in producing and distributing the item. For example, let's say that some widget can be sold for $10, a price which gives decent returns to capital and a fair wage to labor. But, suppose that the producer can sell it for $20, perhaps because of government control (patents, for example) or monopoly power. The extra $10 is an economic rent, a cost to the economy that adds nothing to the economy except an excess profit.

The search for profits is quite often an exercise in rent-seeking. For most small businesses, such rent-seeking is made impossible by the force of competition; they must take whatever price th e market offers, and do their best to make a living at that price. However, as companies become large enough to control significant segments of the market, they can become price-makers rather than price-takers,and impose significant economic rents on the economy. Two examples serve to illustrate the process: oil and ink. Most of us see the price of oil in the price of gasoline for our cars, a price that is set by supply and demand. However, the supply is controlled by a small group of suppliers, no more than five. These suppliers have not made any significant expansions to refining capacity in more than a generation. Thus, they can control the supply. They like to blame this on the government and the environmental rules governing new refineries. However, this claim doesn't pass the smell test. In the first place, many chemical industries are operate under the same or even more stringent rules, yet have managed to expand capacity to keep up with demand. Further, the large producers actually bought up small refiners and shut them down, thereby giving them greater control and pricing power. Since the cost of gasoline is a part of everything, this spreads economics rent (inefficiency) throughout the whole economy. If Clinton, McCain, and Obama really want a solution to gasoline prices, I suggest they break up the oil Oligarchy which controls those prices.

Another interesting case is ink and toner for printers. Ink is manufactured for pennies on the pound and sold for dollars on the ounce. Therefore, there is an awful lot of economic rent. Moreover, there is a huge premium for color ink and toner, even though there is no difference in manufacturing cost. How are the producers able to get away with this? Of course, the simple solution is to simply fill your own cartridges. If you purchase the ink yourself, it is a third or less of the cost of buying it from the manufacturer. And it should be an easy process. But it isn't. The manufacturers do everything they can to make the process difficult or impossible. They do not, of course, supply a fill port as a convenience to their customers. The customer is an enemy who must be looted at every opportunity; his convenience is not an issue. But beyond the design of the cartridges, the suppliers use sophisticated electronic locks to freeze out re-filled cartridges. Like all things electronic, there is usually a way around these locks, if it can be found. But the information is a closely-guarded secret. (By the way, does anybody know how to break the code for a Ricoh Aficio SP 410?)

Since all businesses depend to some extent on printers, a tremendous amount of inefficiency (economic rent) is introduced into the economy. It adds nothing to production, and steals a bit of each man's profit; it benefits a few at the expense of the many. But what is really criminal is how little attention economic rent and its measurement gets in the economic literature. The profession that should be at least reporting the truth is looking the other way.

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The Romance of Cost Accounting

When we think of persons associated with the phrase “social justice,” any number of images might spring to mind. Some might think of Dorothy Day and the Catholic Workers Movement. Others might conjure up an image of revolutionaries seeking to overturn the capitalist system, or of reformers trying to change it. And some might simply regard the term as a fixation of fuzzy-headed liberals, with little connection to the real world of business and economics. But one person we rarely think of is precisely the person whose role might just be the most critical, and that is the cost accountant.

Now, we rarely associate accountants with either romance or revolution, much less with fuzzy-headed liberalism. Nevertheless, if we take the notion of justice seriously, then surely it must involve the notion that costs are fairly allocated to the persons who cause them. That is to say, one person is not making an involuntary contribution to the success of another, that one person's poverty is not subsidizing another person's wealth. We assume that when we purchase something, the price covers all of the costs; we would be surprised to learn that some portion of the cost was not included in the price, that someone else was helping us to pay for what we consume. And yet, this is something that happens all the time; the price we pay for products does not cover the cost of producing and disposing of them. This is a phenomenon known to economists as externalized costs, that is, costs of a transaction that are not borne by the parties to the transaction, but are passed off to someone else, someone not involved in the transaction and who derives no benefit from it. The most obvious examples of externalities are pollution and subsidies. When a company can get the government to bear some portion of its expenses, its costs are passed on to the general public, while the profits are kept by the company; its expenses are socialized, its profits remain private. When a production process devastates the environment, then real costs are incurred—in the form of higher health care and ruined land—but not included in the price.

To the extent that prices do not cover costs, then basic justice is denied. When we rely on exploitation, subsidy, and pollution to provide us with all the goods that we purchase, then basic justice is denied. We may think that we are getting a bargain, when what is really happening is that someone else is getting shafted. Now, it is the job of the cost accountant to pore over columns of figures in ways that would not be interesting to you or me. Indeed, the accountant performs a function which would be tedious to the reformer, but without which reform has no real function. To the extent that justice can be reduced to a proper accounting of costs, than the cost accountant is the real revolutionary, the genuine reformer. And one way to judge the justness of an economic system is to measure the amount and extent of the externalities.

But the job explaining externalities is a difficult one, and the task of spotting them is a tedious one. At least it always has been for me. But comes now Annie Leonard who has made a light-hearted animated film, The Story of Stuff, that explains the topic and examines the extent of the problem. And it turns out that the economy is rife with externalities, with costs that are sifted freely from one group to another, creating an economy of winners and losers that has nothing with “market forces” but rather with the application of force to the market. Here is the trailer:

The film is 20 minutes long, and can be purchased for $10 or downloaded for free. I highly recommend this movie for anyone who wants to understand the real economy, and not the fantasy economy described in so much popular literature and political rhetoric.

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