American economist James Buchanan won the 1986 Nobel Prize in Economics. (Photo credit: Wikipedia)

One of our age’s most important thinkers passed away yesterday. The economist James M. Buchanan won the Nobel Prize in 1986 and was, among other things, a path-breaking intellectual entrepreneur and an inspiration for generations of scholars. He also helped develop a rigorous body of theory and evidence that helps us understand why pleasant political daydreams often create actual social nightmares. Specifically, Buchanan’s research agenda was one of “politics without romance,” as discussed by Donald J. Boudreaux in today’s Wall Street Journal.

In short, Buchanan, along with coauthors like Gordon Tullock, Geoffrey Brennan, Richard Wagner, and others, helped develop a branch of inquiry that helps us understand politics and markets by considering people as they actually are rather than as we can imagine them to be in our visions of a perfect world. He was an exemplar of what the economist Thomas Sowell called “the constrained vision.” Human nature was given, not something to be changed. Political actors exhibited this same human nature, and any discussion of political institutions had to take seriously our moral and cognitive limitations as well as the fact that people respond to incentives.

The implications for government are clear. As Boudreaux notes in his Wall Street Journal appreciation, Buchanan saw the fundamental problems of social cooperation as problems of identifying and implementing constraints that would channel self-interest toward socially beneficial results rather than parts of a project of remaking human nature. As I recall the economist Michael Munger saying at a seminar several years ago (and I paraphrase), the question we should ask about a policy is not “what would ideal, perfectly public-spirited leaders  do” but “what would actual politicians who actually get elected do?” These questions are parts of Buchanan’s formidable intellectual legacy.

Buchanan was extremely prolific, and the interested reader can peruse his works online courtesy of the Library of Economics and Liberty. In spite of his many book-length treatments of fundamental questions in political economy, my favorite piece of the Buchanan canon is his exceptional and exceptionally short essay “Order Defined in the Process of Its Emergence.” In it, Buchanan explains how social order emerges from the process of voluntary trade. He demolishes the method of many analysts who evaluate social outcomes with reference to what a benevolent planner might do if he or she had all of the relevant information:

 I want to argue that the “order” of the market emerges only from the process of voluntary exchange among the participating individuals. The “order” is, itself, defined as the outcome of the process that generates it. The “it,” the allocation-distribution result, does not, and cannot, exist independently of the trading process. Absent this process, there is and can be no “order.”

…

Individuals do not act so as to maximize utilities described in independently existing functions. They confront genuine choices, and the sequence of decisions taken may be conceptualized, ex post(after the choices), in terms of “as if” functions that are maximized. But these “as if” functions are, themselves, generated in the choosing process, not separately from such process. If viewed in this perspective, there is no means by which even the most idealized omniscient designer could duplicate the results of voluntary interchange. The potential participants do not know until they enter the process what their own choices will be. From this it follows that it is logically impossible for an omniscient designer to know, unless, of course, we are to preclude individual freedom of will.

As Buchanan notes, economists and others err when they view the market process as one among many possible routes to efficient social ends. He teaches a powerful lesson: we literally don’t know what we are doing when we use force to restrict others’ options.

Buchanan’s ideas have been relatively well-received: he had a Nobel Prize, after all. However, his ideas are still well outside the intellectual mainstream. Buchanan, though, was the model of a patient and enlightened scholar. He wrote for the ages, and I’ve heard that he would ask young scholars questions like “what are you working on that people will be reading in 100 years?” I’ve taken to asking questions like these of the students I encounter, and I try to ask it of myself on a regular basis to make sure I don’t lose sight of what really matters. Buchanan succeeded: scholars will still be reading his work a century from now. And they will do so in a much better world than would have existed had Buchanan not been here.

I apply some of Buchanan’s insights in my article “Barbecue Defined in the Process of Its Emergence.” The internet is filling with appreciations and remembrances of Buchanan. Here’s a great introduction to his work and contributions by Mike Hammock, an economist at Buchanan’s undergraduate alma mater (Middle Tennessee State). Here is Mario Rizzo. Alex Tabarrok collects several at Marginal Revolution.

What can we say about price gouging? In open defiance of what everyone learns in an introductory economics class about the laws of supply and demand, politicians in New York and New Jersey (and elsewhere, no doubt) are vigorously enforcing their laws against “price gouging” and implementing alternative rationing mechanisms like even-odd distribution.

To help explain this, I turned to Brian Wallace from Nowsourcing, Inc. and asked him to put together an infographic on price gouging. You’ve seen some of Brian’s work in this space before. Enjoy (Updated 11/19/2012)!

And economics students, note well: there’s one minor quibble here: rising prices don’t reduce demand. They reduce quantity demanded. But just about the only time you will ever need to know the distinction is in an economics class.

One of the firms for which Mr. Wallace does some work (bestcriminaljustice.com) was kind enough to sponsor the infographic above.

What was the most important outcome of yesterday’s election? Surprisingly, it probably wasn’t Barack Obama’s reelection. The most important things happened in Colorado and Washington. Voters in both states dramatically scaled back marijuana prohibition. While they did not embrace wholesale legalization for production and sale of any amount of marijuana, voters in these states nonetheless chose to make it legal to possess and grow marijuana. This was a critical blow to the already-crumbling foundations of drug prohibition.

As I have written before, drug prohibition is (literally) “a textbook example of a policy with negative unintended consequences” most visible in the extensive criminal underground and widespread violence associated with prohibition. What can we expect from legalization, and what could we expect from further liberalization of drug laws?

1. Less Crime. Moving drug cultivation and commerce out of the shadows and into the legitimate marketplace will mean that participants in the market can resolve their disputes without resorting to violence. This will also deal a blow to international drug gangs by raising the supply of marijuana from competitors and by lowering its price. Since the demand curve for drugs is fairly inelastic—and I see no reason to think marijuana is an exception—this will reduce drug dealer revenue.
2. Lower Demand for Hard Drugs Like Crack and Crystal Meth. At the margin, marijuana is a substitute for drugs like crack and meth. With lower prices and a much lower probability of prosecution associated with its use, I expect some drug users will switch to marijuana. Over the long run, I expect marijuana legalization to reduce the demand for harder drugs.
3. A “Peace Dividend” From Scaling Back the Drug War. Scaling back the drug war frees up resources for more productive pursuits. Instead of busting pot smokers, Colorado and Washington cops can spend their time and energy fighting violent crime and fraud. Washington and Colorado residents who otherwise would have rotted in jail for a few years can go about their productive lives. Resources invested in avoiding detection can be redeployed toward more productive pursuits. You might finally be able to use the towel under your door for its intended purpose. The ball is in President Obama’s court on this one: I hope he respects the wishes of Colorado and Washington voters.

Yesterday’s results are historic because, as a Facebook friend pointed out, the results in Colorado and Washington show that ending prohibition can win at the ballot box, and this might encourage politicians to embrace prohibition repeal. If we’re lucky, our children will inherit a world in which the disastrous effects of drug prohibition are nothing but a sad chapter in a history book.

Some of the facts in this article were gathered from NORML.org.

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How much time and energy have you devoted to the Presidential election? Has this been time and energy well spent? Will it make a difference? Most importantly, what can you do to ensure that you actually make a difference going forward? The problem isn’t that voters aren’t “informed.” The problem is that voters are badly informed and poorly equipped to use the information at their disposal. How can we better equip ourselves to make better decisions both in the voting booth and in public policy? Reading more tweets and Facebook posts from the campaigns is probably a poor use of your time, and the outcome of the 2012 election at this point is probably not something you can influence. In this light, I humbly suggest that you add the following books to your reading list for before the next election:

1. Jason Brennan, The Ethics of Voting. Published in 2011, this is one of the most provocative books I’ve read in the last few years. Brennan develops a theory of what it means to vote ethically given that the consequences of bad governance are so dire. He argues that you have to vote based on having justified beliefs about what will actually advance the common good. This requires a familiarity with basic economics, for example, and it is a familiarity that most elected representatives sorely lack. Brennan echoes a theme from the economist Bryan Caplan’s 2007 book The Myth of the Rational Voter: we do not get bad public policy because the system is corrupt. We get bad public policy because people vote for it, enthusiastically.

2. Christopher J. Coyne, After War: The Political Economy of Exporting Democracy. For good or ill, governments make war. It behooves us to understand the consequences of foreign adventures. While no one would seriously object to peace and freedom in the Middle East, for example, it is a serious mistake to equate worthy objectives with good policy ideas. A goal is not an outcome: wanting peace and prosperity in the Middle East doesn’t mean that we can get there by fighting wars. In After War, Christopher Coyne describes the track record of American interventions abroad. It isn’t good. Another excellent read along these lines is Ralph Raico’s Great Wars and Great Leaders: A Libertarian Rebuttal. PDF and ePub versions are available from Mises.org for $0. Here’s the PDF.

3. Steven Landsburg, The Armchair Economist. Fortunately, the world is not hurting for excellent summaries of economics aimed at a general readership, and The Armchair Economist is one of the best. Faustino Ballve’s Essentials of Economics is also excellent (and short, at about 100 pages); once again, Mises.org offers PDF and ePub versions for $0.

4. Just about anything Thomas Sowell has ever written about economics. I disagree strongly with Sowell on immigration and foreign policy, but he is still a first-rate thinker on economic issues (and a first-rate master of the English language). His Basic Economics and Applied Economics are excellent introductions to the economic way of thinking. His Economic Facts and Fallacies is more issue-specific, and his The Housing Boom and Bust is the best book on the causes and consequences of the housing crisis that I’ve read (here’s my review). His A Conflict of Visions is also stellar; in it, Sowell makes sense of the contrasting worldviews that are responsible for the fact that we so often talk and write past one another.

Do you have a duty to be an “informed voter?” Of course: however, there are much better ways to become “informed” than to listen to candidates and partisansBecom repeat vacuous (or economically illiterate) platitudes for the umpteenth time. Turn off the TV. Get off Facebook. Grab a couple of the books I’ve recommended, and let them change your worldview. You—and the world—will be much better for it.

Cars wait in line for fuel at a Gulf gas station on November 1, 2012 in Fort Lee, New Jersey. (Image credit: AFP/Getty Images via @daylife)

The refrain is the same after every natural disaster: market conditions have changed dramatically, and evil, possibly sub-human “price gougers” are taking advantage of storm victims in their time of need. Politicians threaten those who raise prices after storms with vigorous prosecution. The general public howls with outrage. A lot of people think laws against “price gouging” are necessary to keep people from being exploited after natural disasters. Sadly, these people are wrong. I got to make these points on Thursday’s episode of Stossel.

Laws against price gouging create shortages. In the aftermath of a disaster like Hurricane Sandy, people want a lot more gasoline, flashlights, bread, and water at any given price. For sellers, costs have risen. It may come as a surprise to some commentators, but gas station owners and other sellers of disaster relief supplies probably have their own shattered lives to attend to. A high price offers them an inducement to go into the market and provide disaster relief supplies instead of closing up shop. Higher prices are also like signal flares that attract entry from suppliers outside the affected market.

Higher prices also transmit valuable information to consumers who aren’t affected by the disaster. Birmingham, Alabama (where I live) wasn’t directly affected by the storm, but if prices were allowed to fluctuate freely, I would see gas prices in Birmingham rise. Why? Higher prices in New Jersey would attract gas supplies to New Jersey, and the higher price in Birmingham would tell me I need to consume gas more carefully than I normally would.

Laws against price gouging change how people pay, but they don’t really change what people pay (here’s an excellent explanation from Mike Munger). To say that price gouging laws “keep prices low” is misleading. Price gouging laws keep money prices low, but there are lots of other ways to pay for gas. Indeed, you’ve probably seen stories about people paying for gas through non-monetary means: they “pay” by waiting in line. Here’s an example that’s similar to Munger’s: if the price of gas would be $14 per gallon after a disaster but is controlled at $4 per gallon by government fiat, someone who values his or her time at $10 per hour would be willing to wait in line for an hour to get a gallon of gas. What he or she pays doesn’t really change. How he or she pays does change.

As textbook authors Tyler Cowen and Alex Tabarrok point out, this is pure social waste. When people can pay with money, both buyers and sellers benefit. When people pay by waiting in line, a very valuable resource–the time and energy of those who are waiting in hours-long lines–is simply wasted.

One of the most basic lessons in an introductory economics course is that price ceilings create shortages. Storms can break windows, but they can’t break economic laws. Politicians ignore this not to their peril but to ours. Political leaders see themselves as the compassionate friends of helpless storm victims, but the victims are positively harmed by policies like laws against price gouging that create shortages and delay recovery. People suffer during and after natural disasters, and politicians’ meddling only makes it worse. With friends like that, who needs enemies?

Inspired by this entry by fellow Forbes contributor Panos Mourdoukatas.

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