The total expenditure on a product equals the number of units sold times the selling price. Other things equal, a lower selling price increases the number of units sold. Reduced expenditures on a product can be caused either by a lower price accompanied by a smaller percentage increase in quantity sold or by a lower quantity sold accompanied by a smaller percentage increase in price.

Which of the two scenarios applies to illegal drug usage? Illegal drugs, like the dreaded cigarette, can be habit-forming. Hence the amount people purchase probably does not respond strongly to changes in price. Thus the former scenario, in which total expenditure on illegal drugs falls because the unit price falls more than the quantity consumed rises, is correct. Consequently and contrary to what the drug czar wanted us to believe, the decrease in drug expenditure suggests that drug usage has increased.

If the drug czar can estimate the expenditure on drugs (no one willingly reports these transactions), he can certainly estimate drug usage. And if he can calculate drug consumption, then he could use the consumption data to directly report a decrease in drug usage (if one has actually occurred) rather than indirectly (and probably incorrectly) inferring a decrease in drug consumption using the expenditure estimate. (As an aside, McCaffrey suggested that the $57 billion spent on drugs could be used to send one million people to college; some would suggest that this might increase drug usage.)

In fairness it should be noted that other things may not be equal. It is possible that some external factor such as an advertising campaign has reduced the quantity of drugs demanded at each price, thereby reducing both the selling price and the number of units sold. Again, while this may be true, the expenditure data do not imply this conclusion. The drug czar’s evidence would be much more persuasive if he cited actual consumption data rather than expenditure data.

May Lessen Crime

Although the decrease in spending on illegal drugs suggests drug usage has increased, there was a bright spot in the drug czar’s expenditure numbers. Since the spending decline suggests that the price of drugs has decreased even if drug usage is up, the lower price of drugs reduces addicts’ need for drug money and as a result may lessen the crime committed to finance drug habits. Paradoxically, an increase in drug usage may be accompanied by lower crime.

This is not what the drug czar had in mind when he trumpeted the reduction in drug expenditure as good news. However, more than anything about the success of White House drug policy, what he revealed is a poor grasp of elementary economics. Perhaps even more depressing, the media reported the drug czar’s expenditure numbers without an iota of critical thought and, in the process, displayed its own woeful lack of economic knowledge.

If you are George Mason University economics professor Peter Leeson, you write a book on the economics of piracy. That book, The Invisible Hook, is a rollicking good read—more fun than any person should be allowed to have without a parrot, a hook, and an eye patch. Leeson’s goal, however, is more than merely collecting entertaining pirate anecdotes.

Instead, he argues that the “rational choice [framework of economics] is the only way to truly understand flamboyant, bizarre, and downright shocking pirate practices.” Accordingly, as indicated by the subtitle, this book is part of Leeson’s larger and impressive research agenda on privately created law and order. That pirates are a suitable part of such an agenda becomes apparent, Leeson explains, once one realizes that pirates were stateless (and often violent) people who nonetheless organized crews of 80 or more for plundering expeditions.

Leeson presents his argument in six main chapters sandwiched between introductory and concluding chapters cleverly framed as a management course taught by Professor Blackbeard. Chapter two explains that pirate ships’ leaders were democratically elected and were constrained by a system of checks and balances. Lest one think rogues and sea dogs were principled Madisonians, Leeson explains that the organization of ships arose out of pirates’ prior experience on merchant ships. Such ships had autocratic, often predatory, captains to protect the investment of the vessels’ absentee owners from crew shirking or theft. By contrast, stolen pirate ships had no concern about absentee owners and were therefore free to create an organizational structure that minimized captains’ abusiveness.

Chapter three explores pirate codes, the constitutional framework underlying pirate societies. These codes, which had to be agreed to by all pirates on a ship, aligned incentives among pirates and their leaders by having egalitarian pay structures; sought to minimize conflict on ships by proscribing activities such as gambling, bringing women aboard, or drinking below decks after 8 p.m.; and specified penalties for transgressions. Remarkably, pirates established puritanical rules to increase crew cohesion in the pursuit of profit, albeit ill-gotten.

Leeson next applies the economics of signaling to explain pirates’ use of the “Jolly Roger” flag. Although pirates were willing and capable fighters, conflict risked bodily harm, damage to their ships, or destruction of the pirates’ booty. Hence skull-and-bones flags, which distinguished pirate ships from less fearsome state-sponsored vessels flying national flags, and signaled to potential prey that resistance would be met with death. The flag thereby served as a cost-minimizing device by inducing merchant crews to surrender rather than fight.

Signaling and reputation-building also help explain the practice of torture. Beyond scaring merchant ships into surrendering, pirates also sought the cooperation of their officers and crew, rather than passive resistance such as hiding valuable lucre. They carefully cultivated reputations for barbarous treatment, which terrified crews into making pirates’ profit-seeking easier. Besides using torture to weaken the passive resistance of captives (and occasional acts of arbitrary sadism), pirates also tortured would-be captors sent by the government and abusive merchant captains.

In chapter six Leeson turns his attention to pirate crews, arguing that pirates relied much less on conscription than popular portrayal would have us believe. Conscription, after all, would threaten the cohesiveness that pirates sought. It was also unnecessary: The combination of captain cruelty on legitimate ships and high remuneration on pirate ships produced a steady stream of would-be swashbucklers. The reason for the misinterpretation, Leeson suggests, is that pirates deliberately sought to make their voluntary participation appear to be conscription in order to minimize the legal consequences (likely hanging) should they be captured. As part of this ruse pirates even staged shows intended to fool onlookers into thinking that captives who were willingly joining them were instead being impressed.

Leeson also describes another surprising feature of pirate ships: Though slavery remained common and discrimination the norm, pirate crews contained a substantial contingent of black sailors. Not that they were paragons of tolerance—some of the black sailors were slaves. Many, though, were free and equal members of pirate democracies. Leeson explains that slaves, like conscripts, endanger crew cohesion. The Public Choice logic of dispersed benefits and concentrated costs made racial tolerance preferable to slavery. While each pirate would have to divide any surplus generated by slaves with his crewmates, the costs—increased likelihood of capture and hanging if slaves hampered crew unity—were fully borne by each crew member.

Leeson’s book is magnificent. It also carries an important implication: If rogue pirates could organize themselves into relatively peaceful societies, then perhaps modern people should look less to coercive State solutions and more toward emergent order arising from voluntary human interactions.

Whereas The Choice explained the economics of international trade, largely in response to early-1990s hysteria over competition from Japan, and The Invisible Heart explored the morality of capitalism, Roberts’s primary interest in The Price of Everything is spontaneous order. That order can emerge without human design (indeed, that human design is antithetical to order) is a difficult concept, but Roberts’s exposition is first-rate. He offers schools of fish, flocks of birds, and language as readily observable examples of emergent order. And Freeman readers will delight in Roberts’s homage to Leonard Read’s “I, Pencil”: Ruth uses artifacts from a visit to a pencil factory as show-and-tell items while leading a class discussion of how manufacturing pencils illustrates emergent order.

Since planning is often useful in conducting our daily lives, it’s only natural for students such as Ramon to press Ruth for a deeper understanding of how order can emerge with an invisible hand instead of a central plan. Here Roberts explains the crucial role that prices play in conveying “the particular circumstances of time and place” and coordinating the disparate plans of individuals. (Just as Ricardo and Smith inspired Roberts’s two previous novels, Hayek underlies The Price of Everything.) An especially clever analogy between ant pheromones and prices as efficient mechanisms for disseminating information among beings that cannot possibly acquire or process all available knowledge helps Roberts illustrate this challenging idea.

Just as prices are fundamental to the market process, Ruth explains that the dynamism and entrepreneurial discovery embodied in emergent order are necessary for increasing human productivity and prosperity. On a micro level Ruth explains to Ramon that productivity enhancements such as gravity-fed food and watering systems have made it possible for the average worker on an egg farm to produce a staggering 120 million eggs per year. (As an aside, Ruth tells Ramon that if he’s uncomfortable with modern industrial agricultural techniques, the market also caters to his taste by offering free-range chickens.) On a macro level Ruth asks Ramon to think how favorably the standard of living of a typical person today compares to even the wealthiest people who lived a century ago. That even people of modest means now have running water, modern appliances, and vastly improved medical care relative to yesterday’s richest people testifies to the wealth-generating capability of the market process.

While explaining prices, emergent order, and prosperity, Roberts works several other economics topics into Ruth and Ramon’s conversations. Among them are so-called price gouging (when Ramon leads a protest against Big Box after the fictitious retailer doubles its prices in response to an earthquake), alleged exploitation of workers by Wal-Mart, and the fallacy that labor markets share the zero-sum nature of a game of musical chairs (the fixed-number-of-jobs fallacy). He also has Ruth address common caricatures that economists are “pro-business” and assume people care only about money. (Readers familiar with Roberts’s previous works will recognize his humane brand of economics.) It’s noble work, and Roberts does it admirably.

Although Roberts turns back caricatures of economists, one can also—at the risk of overanalyzing—detect criticism of the current state of economics instruction. Ramon has taken an introductory economics course. He recalls that supply and demand curves look like an “X” and is quick to suggest that government can improve on “market failure” arising from pollution. Nonetheless, Ramon’s semester of economics apparently has not exposed him to Hayek and the notion of emergent order, nor has it dispelled any of his misguided thinking about the market process. Fortunately, there is an easy way for instructors to rectify such deficiencies in their teaching—adopt The Price of Everything for their courses.

Tyler Cowen, Roberts’s colleague at George Mason, calls The Price of Everything “the best attempt to teach economics through fiction that the world has seen to date.” That’s high and well-deserved praise.

Pickens’s commercials no doubt cause Freeman readers apprehension. The word “plan” alone rightly pro­vokes worries of coercive schemes. And in concocting such a plan, Pickens reveals himself to be what Adam Smith called a “man of system [who] seems to imagine that he can arrange the different members of a great soci­ety with as much ease as the hand arranges the different pieces upon a chess-board.” The notion of being independent of energy or any other commodity from foreign countries goes against the teachings of Smith, Bastiat, and others who recognize the gains from specialization and division of labor. Nor will readers knowledgeable about rent-seeking, or political entrepreneurship, be surprised that media reports describe Pickens as “heavily invested in natural gas and wind power.” And when he states in his commercials that “this plan will work but it needs your help,” read­ers familiar with Public Choice economics rightly sus­pect that the sort of help Pickens has in mind is tax dollars.

Although all these cautions are appropriate, ignore for the moment any self-interested motives and take Pickens at face value when he proclaims,“I’m 80 years old and have $4 billion. I don’t need any more money.” Instead, focus on the stated objective of his plan—stop­ping the “the largest transfer of wealth in the history of mankind.” As with so many things, it just ain’t so!

Here’s why.  The $700 billion that Americans spend annually to purchase oil from other countries (according to Pickens) is a price not a transfer. A true transfer— unemployment benefits or a taxpayer subsidy to a failing company—is a payment made to someone who pro­vides no good or service in exchange. By nature transfers are zero-sum. One person “gives” through coercive taxation; the other person receives. (Of course, if one throws a few bureaucrats into the mix, the transfer recipients might receive less than the amount taken from the taxpay­ers.) Ironically, it is Pickens, not oil-exporting countries, who has received transfers in the form of taxpayer sub­sidies for so-called renewable electricity generation. And that bit about needing your help—Pickens wants the largess to continue.

By contrast, when one makes a purchase, the money one pays is the price of the good, one side of a mutually beneficial voluntary exchange. Each party to the transaction trades away something in return for some­thing else he or she values more highly. If I spend $2 for a cup of coffee, I’ve made a purchase not a transfer. I get the coffee, which I value more than anything else I could have bought for the $2, and the coffee shop gets the $2, which it values more than the coffee. Readers familiar with John Stossel’s television special about greed will recall him illustrating this point by purchasing a container of milk. Both he and the store clerk said,“Thank you.”

For the $700 billion we send to oil exporters, we get something in return—oil. Our receipt of millions of barrels of oil in exchange for that money is hardly a transfer. We receive a versatile commodity that can be used for everything from making plastics to fueling family vacations. The exporters receive the $700 billion that they can then use to purchase other goods and services.

It is true that when oil was $140 per barrel, we were paying more than we had paid just a few years ago. We certainly are glad that oil is less expensive now. But the case I’m making would hold even if the price went back up. Higher prices would mean that the purchasers of oil or oil derivatives would experience a smaller differnce between their subjective value and the price they pay. If I valued a gallon of gas at $5 (that is, if I were willing to pay up to $5 for it), my net gain from purchasing it would be greater when I paid $2 than when the price was $4. It’s also true that people would find some purchases they might have considered beneficial when oil was, say, $35 per barrel no longer beneficial at $140. Consequently, almost as if guided by an invisible hand, people would reduce their oil consumption by driving less, buying more fuel-efficient vehicles, taking alternative forms of transportation, and so on. Yet none of these truths makes the purchase of foreign oil a transfer.

It is true that much of our imported oil comes from countries with odious regimes. Indeed, it’s difficult to think of countries more antithetical to classical-liberal ideals than Venzuela or Saudi Arabia. It’s also true that exchange with nasty regimes benefits them as it does us. This does not, however, imply that we should boycott them. Since oil is traded on the world market, a boycott— at least if unilateral—would not harm the intended targets. Although it might be nice if our oiltrading partners were nice folks in countries with greater respect for individual rights (the Swiss perhaps), the fact that they are unpleasant still doesn’t make purchasing imported oil a transfer.

If the price of oil again skyrockets, it will present a significant challenge to consumers and producers. There is no need to make their task more difficult with muddled thinking that confuses mutually beneficial exchanges with wealth transfers. T. Boone Pickens has been a businessman all his adult life. He should know better. If he’s putting his quest for taxpayer subsidies ahead of the truth, he is doing the American people a grave disservice.

Yes, clothes hangers. Marie Sledge, co-owner of Rome (Georgia) Cleaners, states, “Hangers last year at this time were $28 a box, where now they are $56.” News reports indicate that cleaners in Springfield, Missouri; Birmingham, Alabama; and Harlem are also encountering doubling hanger prices. In response, many cleaners are posting signs in their shops encouraging customers to return used hangers.

Hangers can’t, even if combined with government subsidies, be converted into biofuels. So what is causing the rapid increase in hanger prices? Government, of course, though in this case it’s the trade bureaucrats at the Department of Commerce rather than the folks behind other debacles in the news these days.

In a March 19 news release the Department of Commerce “announced its affirmative preliminary determination in the antidumping duty investigation on imports of steel wire garment hangers from the People’s Republic of China.” Translation: The government will now impose tariffs on hangers imported from China. The tariffs vary by supplier, ranging from a lightly starched 33 percent to a truly stiff 221 percent. With hanger prices potentially tripling because of tariffs, it’s easy to understand the disruption facing dry cleaners.

Why would the Commerce Department impose such taxes on imported hangers? The key bit of bureaucratese is the press release’s “antidumping duty” clause. Prompted by a complaint from M&B Metal Products Company of Leeds, Alabama, the only domestic metal-hanger manufacturer, Commerce analyzed prices charged by Chinese hanger producers to determine if they were below “fair value.” Calling anything other than a price arrived at through voluntary exchange between the buyer and seller “fair value” is perverse. But the U.S. government, in its infinite wisdom, has defined “unfair value” as the price charged by foreign firms selling below their cost of production or below the price they charge in their domestic markets.

In any event, economist Russell Roberts, in The Choice, describes Commerce’s process as “arbitrary” (hardly surprising, given the slipperiness of “fair value”) and reports that between 1986 and 1992 Commerce found dumping in 97 percent of the 251 cases it investigated. In a 2002 paper, Cato Institute scholars Brink Lindsey and Dan Ikenson elaborated: “In a depressingly wide variety of circumstances, a foreign producer can charge prices in the United States that are identical to or even higher than its home-market prices and still be found guilty of dumping.” It therefore comes as no surprise that Commerce determined that Chinese producers have been dumping their hangers on the United States market.

The notion of dumping, even without arbitrariness by Commerce apparatchiks, is suspect. Since the raison d’être of firms is to make profits for their owners, there should be a strong presumption that firms will not sell below cost, regardless of the Commerce Department’s Byzantine calculations. And if, glory be, some foreign firm does choose to sell below its production cost, we should welcome the gift rather than ensnare the givers in a thicket of questionnaires, documents, and legal mumbo jumbo.

In the case at hand, it’s unlikely that the Chinese firms were selling below cost. M&B president Milton Magnus states, “The price [Chinese firms] pay for wire is about 30 percent less than what we pay, [and] [t]hey’re paying workers 83 cents per hour.” (M&B’s ire about competition from cheap foreign labor seems rather selective because, according to American Drycleaner, it operates a hanger-manufacturing plant in Piedras Negras, Mexico.) If true, the Chinese firms might well be able to charge a much lower price than M&B and still not be selling below their cost of production.

Although firms might rationally choose to sell an item at lower prices in foreign markets, there’s strong reason to doubt Chinese hanger manufacturers would do so. Transportation costs for weighty and bulky items like hangers are not trivial. Moreover, one might expect price-discriminating firms to charge lower prices in poor countries, but not in wealthier ones such as the United States (as is done with pharmaceuticals). But as I said about the Chinese selling at a loss, glory be if they are willing to price-discriminate to our benefit.

Of course, the fear is that the alleged dumping is a scheme to bankrupt domestic producers, shut them down, and leave U.S. consumers vulnerable to large price hikes that will recoup the losses incurred by selling below cost. Among the many conceptual problems with such a notion is that it would be easy for U.S. customers to find alternative international suppliers or for firms in the United States to restart their production when the predatory Chinese firms jacked up their prices. In the case of the Chinese hangers, the Department of Commerce indicates that there are more than a dozen Chinese hanger manufacturers, so it is hardly a given that, even if they desired to do so, they could sufficiently coordinate their activities to cartelize the international hanger market.

Overlooking the Unseen

The department defends antidumping duties as being necessary to protect American jobs. Indeed, news reports indicate that M&B has hired about 50 new workers and may double its workforce over the next two years. Alas, as is so often the case, such thinking ignores Henry Hazlitt’s admonition in Economics in One Lesson to “trac[e] the consequences of [a] policy not merely for one group but for all groups.” In the case of the great hanger crisis of 2008, other groups lose jobs in response to the protectionism that enriches M&B and its employees.

News reports indicate that higher hanger prices will cost cleaners $4,000 or more per year. Suppose that cleaners try to pass the increased cost of hangers along to their customers. Charging an extra, say, 10 cents per item will cause at least a few customers to reduce the number of items they send out for cleaning. If so, cleaners will need fewer employees, and M&B’s jobs will have come at the expense of cleaners’ employees. (Similar logic would apply if cleaners reduced their workers’ hours or wages in response to higher hanger prices.)

Even if customers grudgingly pay the extra dime without reducing their cleaning, they will have less to spend elsewhere. Although that may seem like a trivial amount, the cumulative impact of many consumers having perhaps a dollar per week less to spend on other goods and services may reduce employment in those occupations.

Another possible result of the hanger tariff is that cleaners will earn less profit rather than raise their prices or reduce workers’ hours or wages. Again, there would be unseen job losses since it is now the cleaners’ owners who would have less income available to spend on other goods and services. Of course, if the dry cleaners in an area do not pass along the higher costs, any marginally profitable firms will close, eliminating jobs for all their employees.

The Costs of Intervention

Brandon Fuller, writing May 21 on the Aplia Econ blog (http://tinyurl.com/6dk67x), provides a back-of-the-envelope calculation of the cost of the antidumping hanger tariff. Multiplying the $4,000 per-firm cost by the 30,000 dry-cleaning firms in the country yields a cost of $120 million. To put the $120 million figure in perspective, the tariff is expected to cost some $212,765 for each of the 564 jobs saved.

The lesson is that the misguided attempt to save jobs for domestic hanger manufacturers comes at the expense of other domestic employment. Failure to base policy on Hazlitt’s wisdom has led to the substitution of political competition and bureaucratic fiat for the market process. Not only has M&B enriched itself by using the political process to stifle competition from foreign firms, it has also taken advantage of the reduced competition by raising its price by more than 10 percent. (See Stan Diel, “Hanger Costs Belt Dry Cleaners,” Times-Picayune, April 15, 2008, http://tinyurl.com/63nhbs.)

Talk about being taken to the cleaners.

With the student’s comment still fresh on my mind, I was pleased to see Russell Roberts’s new book, The Invisible Heart. For in this lively novel, Roberts offers up a debate about the morality of capitalism via the romantic sparring of protagonist, Sam Gordon, and his love interest, Laura Silver. Sam is a free-market economics teacher at Washington’s elite Edwards School. In contrast, Laura, who teaches English, takes a more favorable view of government regulation than of markets. Roberts uses Sam and Laura’s repartee to debunk common caricatures of free-market economics and economists.

Among the shibboleths slain are that economists are concerned only with money, that markets favor firms over consumers, and that market advocates are heartless individuals with no compassion for others. From a pedagogical perspective, Sam and Laura prove to be a successful vehicle for debating the virtues of markets and government regulation. Though it will come as no surprise to readers of his columns in this magazine that Roberts is more sympathetic to Sam’s promarket viewpoint, Laura is no shrinking violet. She suggests, for example, that “capitalism created the poverty we’re trying to fix” and she proclaims that the failure of private charity is “why the government had to get involved during the Great Depression.”

Although Roberts’s primary purpose is illuminating the invisible heart of capitalism, he presents, as Milton Friedman blurbs, “an impressive amount of good economics.” Included are excellent discussions of cartels, “underpayment” of teachers, and the importance of property rights. Perhaps most memorable is Sam’s analogy of so-called exhaustible resources such as oil to a room full of pistachio nuts in which people stop looking for nuts before all nuts are found because it gets too time-consuming to locate nuts among discarded shells. Of course, many readers of this magazine will recognize the similarity between Sam’s discussion of how “a thousand unseen people” help prepare Laura’s bagels and Leonard Read’s essay “I, Pencil.”

As for the obligatory quibbles, I have two minor ones. First, The Invisible Heart is billed as an “economic romance.” I think that is only half-right since it reads more like a mystery. Will Sam, the free-market economist, successfully woo Laura, the English teacher, with warm views of government regulation? Why is Sam’s teaching job in jeopardy and will he use some incriminating documents to blackmail his persecutor into allowing him to keep a job that he likes? What about the subplot involving a dishonest CEO and the Orwellian Office of Corporate Responsibility? I’ll obey the rules of reviewing etiquette and leave the answers to these questions for the reader.

My second quibble concerns Friedman’s blurb. I have nothing against impressive amounts of good economics, something this society is definitely lacking. My quibble however arises from a pedagogical perspective. Since the topics included are wide ranging but necessarily selective, The Invisible Heart is somewhat difficult to integrate into a course. This is a challenge shared by other pedagogical novels, but one that is easily outweighed by the rewarding payoff from Roberts’s superb book.

If you are a reader seeking an enjoyable dose of market-friendly economics or an instructor looking for a way to enliven your classes and break away from turgid textbooks, you must have The Invisible Heart.

One frequently hears economists use the phrase “other things equal.” For instance, other things equal, an increase in the price of gas will reduce the quantity of gas demanded. While this approach is often a useful framework for analyzing the effects of economic events, sometimes one cannot reasonably claim that other things are equal.

Consider the calls for reducing class sizes in government schools. Proposals at both the state and federal levels have called for class-size reductions in an effort to boost student performance. Typically, such proposals have implicitly assumed that teacher quality will remain constant when hundreds or thousands of additional teachers are hired to lead the smaller classes. This assumption is mistaken.

Assume a school district currently has 1,000 students in 40 classes of 25 students each. Suppose the school district reduces the classes to 20 students each by hiring ten additional teachers. Proponents of smaller classes rarely specify exactly how the reduction is supposed to improve student performance, but common sense suggests the benefit would come from the teachers’ devoting more time to students individually, or perhaps from the teachers’ ability to better control smaller-sized classes. But how much the 20 students benefit is unclear; if one assumes that a teacher spends half of each six-hour school day giving individual instruction, the amount of one-on-one time for each student rises from 7.2 to 9 minutes per day. While the extra attention should help students, the benefit of an extra two minutes per day is not likely to be large.

Lest we forget, there were initially five other students in each class. What happens to them? They get placed in classes with 15 other students and should also be able to receive more personal attention from their teachers. Therefore, at first glance, one would expect these students to benefit as well, though, as discussed, how much is unclear. Note, however, that these students will be taught by the teachers who were hired to reduce the student-teacher ratio. Why should this matter? Because, for reasons I discuss below, the ten newly hired teachers are likely to be less skilled than the 40 teachers employed before class size was reduced. Thus the students placed in classes with the new teachers may actually be harmed by the reduction in class sizes. And in the aggregate, there may be little effect on student performance; the students with the 40 experienced teachers may benefit marginally but the students with the ten new teachers may be worse off.

Why are the ten new teachers likely to be less skilled than the 40 teachers initially employed by the school system? Simply put, the school district has to hire teachers it would not have otherwise hired. In a typical year the school district may need to hire, say, five new teachers to replace those who retire or resign. Presumably the district does this by choosing the best five candidates based on transcripts, recommendation letters, and personal interviews.

The initiative to reduce class sizes, however, causes the school system to hire 15 new teachers, ten of whom would have been passed over in a “normal” hiring year for having weaker credentials. This reduction in teacher quality might be particularly noticeable in rural areas (where school systems probably have smaller pools of qualified applicants), in fields like science and math, which already have shortages of qualified teachers, and in rapidly growing areas that are already hiring a large number of new teachers to keep up with rising enrollments. (My state, Georgia, recently created a three-week teacher “boot camp” in part to generate additional teachers to satisfy a state initiative to reduce class sizes; South Carolina recently hired 19 teachers from Spain to help alleviate a teacher shortage.) And, by the way, that teacher licensing does not eliminate the possibility that quality will decrease; just because all teachers are licensed does not mean they are all equally skilled at teaching. (That Massachusetts lowered the passing grade on its teacher licensing exam a few years ago clearly illustrates this point.)

Relationship to Student Performance

Someone once said that an economist is someone who can take something that works and explain why it doesn’t. To avert this criticism, I now turn from discussing the effect of class size in the abstract to the relationship between class size and student performance. What do the studies of this issue tell us? Conveniently, a recent paper, “The Evidence on Class Size,” by Eric Hanushek of the Hoover Institution, surveys many of them. Hanushek located 277 econometric studies published in books or academic journals. They all controlled for students’ family characteristics, an important determinant of student performance. His results are reproduced in the table below. Only 15 percent of the studies found that reducing class size has a statistically significant positive effect on performance. Moreover, almost as many studies (13 percent) found that reducing class size has a statistically negative effect on student performance. The remaining 72 percent indicate that reducing class size has no statistically significant effect on performance. And, as indicated in the table, the results were similar in the 136 studies of elementary school class size. Only 13 percent of them found that reducing class size increases student performance, and 20 percent indicate that a reduction harms performance. Thus, in the words of Hanushek, “There is little reason to believe that smaller class sizes systematically yield higher student achievement.”

Just as proposals to reduce class size remind us of Hazlitt’s famous dictum, so too they remind us of Hayek’s warning against the pretense of knowledge. For not only do proposals to reduce class size erroneously assume that teacher quality will remain constant, but the politicians advancing such policies arrogantly presume to possess the knowledge of what is the optimum class size. Since no one is privy to such knowledge, the ideal class size (or sizes) can be determined only in a competitive marketplace in which parents can choose among schools offering classes of different sizes. Hence another rationale for ending the government education monopoly and enacting genuine school choice.

While the recent announcement of the mapping of the human genome was greeted with optimism about cures for dread diseases, it also led to predictable teeth-gnashing about possible genetic discrimination.

Genetic discrimination ostensibly occurs when economic decisions are based on genetic information about people’s susceptibility to disease. For example, medical or life insurers might use genetic information in deciding whether to cover an individual or what premium to charge. Likewise, employers seeking to minimize employee-benefit costs might use such information in deciding whom to hire.

Predictably, bills have been introduced in Congress to ban genetic discrimination by insurers and employers. (The 1996 Health Insurance Portability and Accountability Act already prohibits the use of genetic testing by group health insurers; this barrier has probably had little impact thus far since the genome has only recently been mapped and because genetic testing is still in its infancy.) Some 18 states and at least one locality (the well-meaning Montgomery County, Maryland) have enacted genetic-discrimination bans of one form or another, and the Equal Employment Opportunity Commission (EEOC), not waiting for additional federal legislation, claims that genetic discrimination is already illegal under laws prohibiting discrimination against the disabled. It is under this legal theory that the EEOC recently sued Burlington Northern Santa Fe Railroad seeking to prohibit its testing workers who submit carpal-tunnel-syndrome complaints for “a predisposition [for the syndrome] within the body chemistry of the individual” that “has nothing to do with work.”

Legal bans on the use of genetic information appeal to a perceived, though somewhat perverse, right of privacy. After all, people can keep their genetic information to themselves by not purchasing insurance. And people’s privacy could be protected by prohibiting insurance companies from disseminating information gleaned from genetic testing without the consent of the subject.

If, however, individuals wish to purchase insurance, they might be required to submit to testing as a condition of coverage. (Use of such background information is analogous to banks performing credit checks before making loans.) Such use of genetic testing would not be fundamentally different from the now-common use of blood and urine tests and the required submission of information on lifestyle factors such as diet and smoking habits.

Legislation prohibiting genetic testing as a condition of purchasing insurance could ultimately undermine the insurance market and make it difficult for people to be able to purchase insurance. Consider the life insurance market. Currently individuals and insurance companies enter into policies under a large cloud of uncertainty. While people have some inkling about their expected life spans from family history and lifestyle, they nonetheless know little because family history is not definitive and their parents often come from families with different histories. Of course, uncertainty about life span also exists because accidental death is possible.

Similarly, insurance companies can obtain some information about potential policyholders from blood and urine testing and lifestyle questionnaires, but they remain largely uncertain about the expected life spans of particular individuals. Insurers can, however, make reasonably accurate predictions of the mortality rate and life expectancy for the population as a whole, and they use that information to set premiums. Insurance is essentially risk-pooling, which works well when both insurer and insured have similar levels of uncertainty.

Delicate Balance Upset

Bans on genetic testing threaten to upset the delicate balance of mutual uncertainty in the life-insurance market by creating the possibility of asymmetric information. Asymmetric information exists when individuals and insurers have different information about life span. Outlawing genetic discrimination could create informational mismatches by prohibiting companies, but not individuals, from engaging in predictive genetic testing. Individuals could legally undergo tests to determine their life expectancies and could use the resulting information in buying insurance.

To consider how asymmetric information might undermine the life-insurance market, consider the following example. Imagine three people, Anne, Becky, and Cara, who because of genetic differences have life expectancies of 60, 70, and 80 years, respectively. Their life-insurance policies are with Big Global Insurance Company, Inc. Big Global knows that the average life expectancy of its policyholders is 70 years, and it sets its premiums accordingly. Of course, Big Global also knows that some of its policyholders will die before 70 and some will die after 70, but it cannot, based on blood and other tests, predict which customers will die young and which will die old.

Now suppose that a predictive genetic test is introduced. Individuals can get themselves tested, but insurers are legally prohibited from using the test in setting premiums or making coverage decisions. Anne, Becky, and Cara all avail themselves of the test and each learns her life expectancy based on genetic factors. Since Cara learns that she has a life expectancy of 80 years, barring accidents, and therefore has a very low probability of premature death, she judges that life insurance is not a good deal for her. Put differently, Cara is paying a premium that is too high because it is based on her dying at 70 rather than 80. The information gleaned from the test enables her to enhance her well-being by spending her money on things she values more than life insurance.

When Cara cancels her policy, Big Global has only two policyholders remaining. Their average life expectancy is 65 years, and Big Global now raises its premium accordingly. Becky, who was happy when her premium corresponded to her 70-year life expectancy, now finds life insurance to be too expensive and cancels her policy. As a result, Big Global has only one policyholder, Anne, left, and it adjusts its premium to match her 60-year life expectancy. (In practice, since Big Global is proscribed from performing genetic testing, it only learns of the change in the life expectancy of its policyholders over time as it notices its customers dying younger than before. Hence, it is probably more accurate to say Big Global raises its premiums over time and scares off future Beckys. For simplicity, we ignore this complication of timing, but it does not alter our conclusions.)

Consumers Harmed

Perversely, the result of the ban on genetic testing by insurance companies is harmful to two consumers, Becky and Cara, who would still like to purchase actuarially fair life insurance because of the uncertainty arising from accidental death. They are unable to do so, however, because the insurance company is barred from using technology to learn, as Becky and Cara have, that they are genetically low-risk (they have high life expectancies) and then setting a correspondingly low premium.

Moreover, while genetic antidiscrimination laws are supposed to help people like Anne, who have short life expectancies because of “bad” genes, future Annes will nonetheless pay premiums that match their riskiness, because future Beckys and Caras will forgo insurance. So antidiscrimination laws harm the Beckys and the Caras of the world, while providing only temporary relief to the Annes.

In other words, the imbalance of information created by the ban on genetic discrimination results in an adverse selection process in which the genetically healthy choose to forgo life insurance because companies are unable to identify them as such. People who are genetically risky continue to purchase insurance because companies are not able to immediately adjust their premiums to fully account for these people’s higher risk. Over time the average level of riskiness in the pool of policyholders rises, causing firms to further increase their premiums and scaring off more potential customers. As a result, many people are unable to purchase insurance against the risks they do face and a lot of insurance companies go bankrupt.

Recognizing the possible harmful effects of asymmetric information on its insurance markets, the British government has explicitly allowed life-insurance companies to ask for genetic screening for Huntington’s disease and is considering granting approval to test for other diseases.

Though well-intentioned, laws banning predictive genetic testing by insurers are lemons that will, oddly enough, harm the very people they are intended to protect.

Walter Mosley, author of the Easy Rawlins mysteries, departs from the detective genre to offer us Workin’ on the Chain Gang: Shaking off the Dead Hand of History. This economic diatribe is part of Ballantine’s misnamed “Library of Contemporary Thought,” for there is nothing contemporary about Mosley’s economic thinking. As with a recycled whodunit, we’ve seen the plot of Chain Gang before: Mosley’s primal scream against the “voracious maw of capitalism” consists of little more than the class warfare of Marx and Engels.

Labeling Mosley’s thinking rehashed Marxism is not an exaggeration. “Production,” he posits, is “always the job of the lower to lowest classes of society” whereas “the middle and upper classes enjoy the fruits of production.” If anything, Mosley’s world is even grimmer than Marx’s; workers are not only exploited at work but also as consumers: “Today the worker is not only the engine of production but also the consumer. She sells her labor cheap and buys at full price.”

Mosley, however, is just warming up. It is in his chapter “Defining the Great Enemy: The Margin of Profit” that Mosley is yelling at the top of his Marxist lungs. Here he defines profit as “how much you make off the labor of others,” claims that “[t]he world of profit is a world of plunder,” and informs us that “[t]here’s a natural conflict between the Lilliputian population of workers and the humongous beast of production.” Marx and Engels should sue for a share of the royalties.

As with Marx, capitalist exploitation in the world of Walter Mosley extends beyond national borders. He excoriates us for the “economic havoc we have caused in the third world by paying slave wages to local workers to make the price attractive.” (Is the price attractive or full? Mosley cannot seem to make up his mind.) He further opines that the job security and low inflation of the postwar era “were the results of poverty in other countries, which couldn’t compete with our advanced industrialization.” And to think that Milton Friedman believes inflation, or the lack thereof, is “always and everywhere a monetary phenomenon.”

Of course, for any Marxist analysis to be complete, there must be an opiate to keep the exploited masses from rising up. Perhaps in an attempt to avoid lifting the entire story directly from Marx, Mosley does not finger religion. (Maybe this is the contemporary part.) Instead, he tells us that “[t]elevision is our opium, our nightly bowl of hazy, unfocused dreaming” that brings “spectacle and illusion” to the lower classes because “[t]he best way to keep a worker working is to bedazzle her or him” and “[s]ublimation is the best remedy for rebellion.”

That Mosley sees a world of class conflict is bewildering given his background growing up in the Watts area of Los Angeles. Appearing on C-SPAN’s “Booknotes,” Mosley told host Brian Lamb that his parents “had simple jobs” but “they slowly climbed up into the middle class.” Mosley continued: “[M]y father remained being a janitor, became a maintenance supervisor, a building supervisor. My mother just worked up [as a school clerk]. My father started buying apartment buildings . . . . [H]e said, ‘If the buildings pay their own rent, then we’ll always be secure.’ But they actually ended up doing much more than that.”

That’s right—Mosley’s own family was upwardly mobile because his parents worked hard in menial jobs and invested their savings in rental properties. His father was even—gasp—a capitalist! This results in Chain Gang’s only true mystery, namely, why Mosley discards his own life experiences in favor of his chattering-class communism.

So what would Mosley prescribe to get us out of capitalism’s vicious jungle? While one expects that he will settle for nothing less than the overthrow of the capitalist system, the tepid policies he envisions as “impossible and ridiculous” amount to little more than what one might get from Al Gore or even George W. Bush. Mosley believes “we should assure the education of our children and the welfare of our aged” and “everyone has a right to a living wage, a right to competent medical care, and a share in the natural resources that the nation either owns or creates.” Third Wayers of the world unite!

In the end, Mosley’s manifesto is unable to shake off the dead hand of Marxism; Chain Gang is an anti-capitalist rant that ends with a whimper.

Let me begin by stating that people who run stoplights endanger the safety of others. And let me add that, at least in my town, red-light running seems to be an increasingly common action that has occasionally led to severe automobile accidents.

How then can I think that the government’s unwillingness to install stoplight cameras is good news? It has nothing to do with my strong desire not to pay higher taxes, though I am overtaxed already. Even with a large number of stoplights, my share of the cost of cameras would be rather small and would certainly be dwarfed by my existing tax burden. Moreover, I do not delude myself into thinking that the need to raise taxes to fund the cameras amounts to a serious constraint on government expansion.

Instead, my happiness at the lack of cameras derives from my perception that the factor constraining the government’s willingness to install cameras is the public’s uneasiness with the specter of “Big Brother.” Admittedly, this small instance of Big Brother might save some lives and would be a relatively minor encroachment on our freedom. Nor would the installation of stoplight cameras be significantly different in principle from having a police officer monitor the intersection. However, in this era of bipartisan support for the nanny-statism espoused in Hillary Rodham Clinton’s It Takes a Village, it is heartening to see at least one example of people’s desire for liberty outweighing their demand for safety.

Unfortunately, such instances of freedom taking precedence over safety are too rare. The same society that rejects stoplight cameras readily embraces government oversight of banking and other financial dealings, government-mandated searches before boarding airplanes, the war on drugs and tobacco, and the levying of taxes to fund a myriad of redistributionist schemes.

One can only hope that the public revulsion against Big Brother hiding in every stoplight spreads to other parts of our lives. For, as Benjamin Franklin said, “they that can give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety.”