Monthly Archive: March 2016

A recent death in the family has gotten me thinking about, amongst other things, free enterprise and economic liberty.  I know that that is a strange combination but it all stems from a fairly recent legal battle between an abbey of Benedictine monks and the Louisiana Board of Embalmers and Funeral Directors.  At the center of the conflict was whether or not the monks had a constitutional right to sell hand-crafted coffins as a way to raise money for the abbey.  As the dispute worked its way through the courts two things became clear.  First, the monks had a clear, constitutional right to engage in free enterprise and, second, that the state laws put in place to protect the funeral industry were a textbook example of how licensing and regulation often shields businesses from competition under the guise of protecting the public from harm.

The genesis (if you can forgive the biblical pun) of the showdown started just after Hurricane Katrina had devastated much of the gulf coast portion of Louisiana.  The Benedictine monks of St. Joseph Abbey near Covington had lost much of their timberland and looked for a new way to supplement their income.  For years, like other monastic orders, they had fashioned coffins for the burial needs of their departed brothers.  In 2007, the abbey established St Joseph’s Woodworks to sell their hand-made caskets to the public.

No sooner do they get started than the Funeral Directors slap a cease-and-desist letter in their direction citing a state law that only allows caskets to be sold to the public by a state-licensed funeral home. The letter threatened the monks with thousands of dollars in fines and prison sentences up to 180 days for noncompliance.

The monks didn’t take that lying down and, aided pro bono by the Institute for Justice, sued in Federal court to have the law overturned on the grounds that it was an unconstitutional statute designed to protect "cartel for the sale of caskets within Louisiana".

U.S. District Judge Stanwood Duval agreed with the monks and ruled the law unconstitutional. He noted in his ruling that the coffins sold by the monks were significantly less expensive than those sold at funeral homes and that

The Louisiana Board of Embalmers and Funeral Directors took their case to the 5^th Circuit Court of Appeals but to no avail.  The appeals court upheld Duval’s ruling noting in addition that regulation is aimed at restricting intrastate competition and that

The matter finally came to closure when the Supreme Court refused to hear the case, leaving the finding of the unconstitutional nature of the law in place.

For those unwilling to parse some of the legal wordsmithing in the previous two quotes a simple summary does just as well.  The courts found that the state law was not concerned with protecting the public from shoddy coffins.  Indeed, no coffin seems to be required in Louisiana – just dig a hole and plop the body in.  But the law was concerned with protecting funeral homes from in-state competition from a bunch of monastic hooligans.

Apparently coffin business is quite a market – I suppose because no one is particularly inclined to haggle when dealing with the death of a loved one.  I was curious how much caskets cost and one quick trip to internet brought me to Best Price Caskets.  Several interesting admonitions sit top and center on their website including

and

and this curious image

All the monks were trying to do was to engage their economic freedom and supply a demanded good in return for monetary compensation.  They were filling a need at a reasonable price and that competition was feared by the entrenched businesses that lobbied for the state law that protected them.

So the final question to ask ourselves is this: what other industries, through the mechanism and licensing and regulation, are pretending to protect us while really protecting themselves?  Look around, I think you’ll find more than you might, at first, expect.

There is a curious thing about the Eurozone that doesn’t get much notice but it really should.  On the surface, the Eurozone seems to be a similar economic model to the United States, but the lack of a common culture and free movement within the member countries results in barriers that can actually cause wealth transfer from poorer members to richer ones.

In the US, an individual can move freely between the states (although setting up residency is a bit harder).   Interstate purchases are open and easy, especially in the age of the internet.  Workers can move from states with declining economic prospects to those with an uptrend, resulting in the kind of demographic shifts such as the recent influx into Nebraska and Texas and corresponding exodus from California and New York.  In other words, things have a way of evening out since the barriers for trade between the states are very low (but not nonexistent – consider that many decisions made in California set standards across the other 49 states).  Very few products made in the US are distinctly branded by the state in which they were produced.  Most of us are aware that there are Florida Oranges and Idaho Potatoes but beyond that few of us know where a good is produced.

Take automobiles.  Once it was obvious which cars were produced in Detroit but now few people actually know, or care, in which state is located the manufacturing plant that birthed their car.  Likewise, few of us are conscious where most of the things we purchase originate.

The Eurozone, in contrast, is much more rigid.  The euro is the shared currency throughout the Eurozone but the mechanics of inter-zone trade works quite differently from the US experience with the dollar.  The major difference is that in the Eurozone goods, services and labor from one country are produced essentially independently from the other countries.  When one is in Germany, say in the city of Munich, one is clearly aware what products are imports (mostly clothes) and what products are German in origin (most everything else).  This is especially true in the realm of cars.  It makes no sense to talk about Pennsylvania cars as distinguished from Montana cars but it is quite natural to talk about German cars as compared to those from France, Sweden, or Italy.  In addition, French workers can’t just pick up and head for Germany any more than they could to Japan.  There are barriers – political, cultural (language in particular), legal, and bureaucratic – that really impede that kind of movement.

To see how these barriers provide a mechanism for wealth transfer, start with a simple model of international trade limited to just two countries.  Let country G stand for Germany and U for the United States.  Both countries have their own currency (gold coin denoted as D for G and greenbacks and silver denoted as U for U) and the exchange rate between the two is shown in the yellow box.  Time progresses from left to right.

Now suppose the good that is being traded is cars; G has cars it wants to sell to people in U.  At the initial time, the exchange rate favors G, as its currency is undervalued compared to U, and G promptly ships some number of cars to U.  Upon arrival in U, the cars make their way to a dealership where a citizen of U, call him C, purchases one.  C pays for the car with U currency and happily drives away completely unconcerned with how the money makes its way back to G; that isn’t C’s problem.  G’s agents in the U have to deal with that.  They do so by finding someone willing to buy Us for Ds.  Since the supply of Ds in the exchange market goes up, there is a upward pressure on the value of Us compared to Ds and soon the exchange rate reflects that by adjusting the buying power of G, compared with U, down to parity.  This floating currency exchange serves to naturally limit the number of cars that G can sell in U and an equilibrium results.

Next, expand the model so that G is part of a larger economic entity comprised of itself and H (H stand here for Greece – either because H comes after G or because Hellenic is an adjective used for ancient Greece; the reader is free to decide for himself).  Also suppose the H has no goods to trade with U at all.

Now suppose the same situation occurs in this new model as occurred in the old.  G has cars to sell and U has people wanting to purchase them.  H is a complete bystander in the first leg of the transaction, having no goods to ship to U.  However, H plays a pivotal role when the currency exchange occurs after the purchase.  Since there is a larger supply of U, as H has a supply in addition to G, there is less of a mismatch on the exchange market and less of an upward pressure on D (or downward on U).  Simply put there are now fewer Ds chasing Us in a relative sense.  It takes longer for an equilibrium to set and during this time, H’s purchasing power is remains low.

So although there is no direct exchange of either currency or products between them, H effectively transfers wealth to G in the form of better export conditions for G and poorer import conditions for H.  The poorer H is, the more pronounced is the drag it produces on the upward trend in D, the longer it takes to reach equilibrium and the more wealth is transferred.  If people could move freely between H and G, then a mechanism would exist to equilibrate faster and more citizens of H would share in G’s windfall.  In some real sense, it's like U is robbing H to pay G.

Although these models are highly simplified, they reasonably capture the essence of some of the tricky situations that result with import/exports and currency exchanges.  Several interesting articles exist (a nice one can be found here) on similar situations during the Nixon presidency that ushered in the end of the Bretton Woods System.  But that is a story for another day.

A while back I wrote on the Ultimatum Game, an experiment in the psychology of behavior in the marketplace which showed that people rarely act purely in their material self-interest.  More often, they balance the possibility of material gain against the other, less tangible or intangible factors, such as self-esteem and pride.

The premise of the game is that two people are put into the situation where they stand to both benefit materially by splitting a sum of money between them.  The catch is that the details of the split can’t be negotiated.  One person is granted the authority to propose a split (e.g. 50-50, 90-10, etc.) and the other is granted the authority to either accept or reject the proposal.  Acceptance nets both parties the agreed-upon sums.  Rejection makes both parties walk away empty-handed.  Classical economic theory predicts that the deal is accepted in all cases where the second party stands to receive something in the way of a split – that is to say when the split is anything other than 100-0.  Real experiments with real people suggest that splits far from equitable (i.e., 50-50) have little chance of succeeding despite the fact that the second person stands to walk away with a material gain.

One of the criticisms leveled against the outcome and analysis of the Ultimatum Game is that the stakes may be too low to really make a difference.  After all, the argument goes, most of the real world experiments are done with sums like $100, which is, relatively-speaking, chump-change.  Economists and psychologists have attempted to address this critique by normalizing the results by offering the same sums in different economic scenarios, like the third world, where $100 has significantly more buying power than in the US.  Nonetheless, the critique that the game hasn’t really been played for high stakes is a valid concern.  Perhaps there is a mind-bogglingly large sum for which even a 90-10 split will be always accepted.

Well, Shankar Vedantam, of NPR, ties the Ultimatum Game to one of the biggest stakes out there – the negotiations on climate change.  The report, entitled The Psychological Dimension Behind Climate Negotiations, aired on NPR the week of Nov. 24, 2015.  In it, Vedantam argues that the same psychology seen in the Ultimatum Game explains why countries with the most to lose by adverse climate change may actually walk away from a deal that benefits them.

To back up this claim, Vedantam called upon the expert testimony of David Victor, a professor in the School of Global Policy and Strategy at UC San Diego and the director of the UCSD Laboratory on International Law and Regulation.  Victor, who has published extensively on the politics of climate change, had this to say about the interplay of gain and fairness

In other words, despite the fact that each of these negotiators represents millions of people, and that they are, ostensibly, rational professionals, they are still human beings who value fairness over material rationality.  In fact, according to studies cited in the report, professionals may actually value fairness more, especially when negotiating with other professionals.

That may be true, but I suspect that the answer is closer to a point touched upon by Vedantam himself later in his report, although he muddled up the thinking.  Said he, when asked about the fairness component of the climate-change negotiations

A careful reading of the above quote can actually lead to a different interpretation.  Perhaps the ‘poor countries’ (developing countries) recognize a greater rational self-interest in continuing to industrialize than in limiting their growth in order to limit their carbon emissions. Unlike the Ultimatum Game, where the outcome is clear cut – walk away with some cash or no cash – the situation in climate negotiations is quite different. The developing countries must decide between two options, each with both a gain and a loss.  So it is entirely possible that they have a rational reason for refusing a deal that benefits them in one sphere but harms them in another.