by Alex Chafuen
Before jumps in inflation I used to see articles like this in Argentina. This piece by Steve Conover appearing in the AEI magazine argues that the “[l]ack of sufficient economic growth is behind most if not all of our fiscal and monetary problems,” and so printing money is not so bad. The current manipulation of money and credit is very dangerous. No doubt that an increase in the demand for cash holdings (what some call “velocity of circulation,” as if money would have an engine. . .) can off-set the printing of money, but there is a limit.
Related Articles – Sound Money Project
As I argued in my book Tomorrow 3.0, there is a lot of excess capacity in durable commodities in modern economies. We pay for everything twice, first to buy it and then to store it so that no one else can use it. Locked doors, parking lots, closets: it’s very inefficient. The alternative to having to lock stuff up is to reduce the transaction costs of sharing. The three categories of transaction costs, I argued, were triangulation (find each other, reach an agreement), transfer (agree on payment, and make delivery), and trust (ensure safety and honesty).
One of the most glaring examples is all those empty seats of cars and trucks sitting in huge traffic jams in our cities every morning and evening rush hour. Long ago, there was a system for using some of that excess capacity, on a kind of charity basis. It was called “hitchhiking,” beginning in the 1920s when cars were first beginning to travel long distances between cities. It works in transaction-costs terms, or rather in terms of the types of transaction costs I lay out in the book.
Triangulation: The passenger and the driver needed to find each other, to communicate where the passenger wanted to go, and where the driver was headed. They needed to arrange a time and location for the pick-up; that time and location had to be convenient for both (not far from the passenger, and on the route the driver was going to be traveling anyway). Hitchhikers used a simple but not very convenient system: find a road that goes (more or less) in the general direction of the desired destination, stand on the side of the road heading that direction, and then stand by the road and indicate the “demand” for a ride by holding out your hand with the fingers closed but the thumb sticking up.
Transfer: Both the driver and the passenger have to be able to go where they want to go, at the time they want to go. But this is hard to coordinate. Also, the driver might be more willing to pick someone up if the passenger could pay even a small amount. But arranging the payment, and the amount of the payment, and the process of making payment are not easy. Generally, hitchhiking was free, though the passenger might offer to make a token payment to share the cost of gas if the shared journey was long.
Trust: Trust, or the “creepiness” factor, is the central reason why hitchhiking is so rare in the US. Traditionally, the triangulation problem was solved by standing by the road with a thumb up, announcing the desire for a ride. And transfer was solved by having the rider stand on an entry ramp or by the side of the road in the direction of the desired destination. Those aren’t great solutions, but they worked well enough that hitchhiking was fairly common, reasonably efficient, and very cheap as a way of traveling.
As Steve Levitt put it, on the Freakanomics radio show:
Hitchhiking is a classic example of what an economist would call a matching market where there’s a person who wants a ride, and there’s a person who’s willing to give a ride, and typically no money changes hands, so somehow there are people getting a benefit on each side of the transaction. In the fifties, the sixties, and maybe even the seventies, there was some sort of equilibrium in which there was a set of people who wanted to hitchhike, and there was a set of people who were willing to pick them up. And somehow that equilibrium got destroyed. So the question is what happened to the equilibrium?
The answer is actually not clear. There was the “bad hitchhiker” in fiction, as in the movie Texas Chainsaw Massacre. There was the “rapist driver” in reality, as in the bizarre case of Colleen Stan, imprisoned and tortured from 1977 to 1984. In terms of objective probabilities, there is little evidence that hitchhiking became much more dangerous. But “trust,” or the lack of it, is likely one of the factors that clearly increased the perceived transaction costs of hitchhiking, which became much less frequent. Instead of trying to hitchhike, travelers used other systems. And instead of picking up hitchhikers, drivers rode alone.
In many countries, especially in Europe, there is an app designed to mitigate the high transaction costs of hitchhiking: BlaBlaCar. Unlike many other software platforms, BlaBlaCar offers pure sharing. The software provides key pieces of information: (1) the passenger’s location, (2) the passenger’s destination, (3) the time the passenger wants to leave, and (4) how much the passenger (and, ultimately, the matched driver) wants to talk.
Someone who has an extra seat in their car or truck and who is traveling that route at about that time is matched with the passenger. The passenger pays part of the cost of the trip that the driver is going to take anyway. The result is a pure efficiency gain with close to zero marginal cost to the system but benefits to both, or all, participants.
BlaBlaCar has more than 25 million users in 22 countries. At least 10 million trips are arranged per quarter, and of course each “trip” requires at least two members. In fact, the average car occupancy is 2.8 in a BlaBlaCar ride, compared to 1.6 to 1.8 (depending on the country) for car trips in general. BlaBlaCar estimates a reduction of CO2 emissions on the order of more than 1 million tons per year, but of course that estimate assumes that all riders would have taken their own trips solo, rather than take a train or simply not travel if the service were not available.
One of the interesting things about economics is that economists “in their studies” (to use the ambiguous phrase of A. C. Pigou, referring either to a published paper or the room in their own house where many economists do their “field” work) often miss the creative capacities of groups of people to build institutions that solve collective action problems. Elinor Ostrom was famous for discovering and telling the world about these kinds of institutions.
Another interesting thing is that these “market” institutions may not formally involve markets, in the sense that there is a payment and a good or service. Instead, cooperative private voluntary institutions can arise just around the existence of a shared interest. In this case, there is a shared interest in commodifying excess capacity, in the form of empty seats in cars and trucks. But there is an artificial sweetener, an important one, that makes cooperation much more valuable.
Like many artificial sweeteners, this one leaves a bad taste in many people’s mouths. It’s the legal right to use the HOV lane at rush hours. “HOV” means “high-occupancy vehicle,” of course, and is variously defined. The important thing is HOV lanes move faster, sometimes much faster, than the normal lanes of traffic. Access is partly the “honor system,” but you can get an expensive ticket if you use the HOV lane and get caught. Some people have tried to use mannequins, or inflatable dolls, as “passengers” to qualify for access to the faster HOV lanes. A hearse in Nevada did have a driver and a second person in the car, but the state trooper interpreted the law as requiring that second person to be alive to count.
Real legal access generally requires two, or in the case of the Washington, DC, area, three passengers, but motorcycles or alternative “green”-fuel vehicles can also qualify. Some people think that’s arbitrary, or unfair.
Other people, though, have found ways to reduce the transaction costs of cooperation. After all, hitchhiking would solve the problem. Instead of mannequins, a couple of real humans give a driver access to HOV and a much faster ride. And for the riders, the benefit is the ride itself. There are obvious gains to cooperation.
The problem, as is always the case, is transaction costs. The difficulties are the same as with hitchhiking, except that now you have to coordinate a driver and two riders. In the Washington, DC, area a convention has developed around a concept called “the slug line,” where slug is both a noun (the person seeking a ride) and a verb (“slugging” is offering yourself up as a ticket to use the HOV lane in exchange for getting a ride).
There have always been “ride billboards” at colleges, or military bases, for people who need to get home or somewhere. There may be an arrangement where the rider pays for some or all of the gas, but mostly the rider is looking for cheap transport. The HOV requirement adds a wrinkle, because having riders is actually valuable to the driver.
The “slug line” institution started up at least 45 years ago, in the mid-1970s, at least in DC. The creation of HOV lanes and the high price of gas meant that sharing a ride and (sometimes) kicking in a few dollars for gas benefitted all parties. There were a few designated (by convention: nothing was written) places where people who shared a destination would line up. Cars would pull up, call out their destination, and the next person in that destination line would get in. It was reliable enough that people used it to commute to work, which meant there was a high transaction density, where drivers could reliably find passengers and vice versa.
A car needing additional passengers to meet the required 3-person high occupancy vehicle (HOV) minimum pulls up to one of the known slug lines. The driver usually positions the car so that the slugs are on the passenger side. The driver either displays a sign with the destination or simply lowers the passenger window, to call out the destination, such as “Pentagon,” “L’Enfant Plaza,” or “14th & New York.” The slugs first in line for that particular destination then hop into the car, normally confirming the destination, and off they go.
No money is exchanged because of the mutual benefit: the car driver needs riders just as much as the slugs need a ride. Each party needs the other in order to survive. Normally, there is no conversation unless initiated by the driver; usually the only words exchanged are “Thank you,” as the driver drops off the slugs at the destination.
The difference now is that the system is much more organized, with morning slug lines, and afternoon slug lines, and detailed instructions about etiquette and rules, because there are so many people waiting and everyone is in a hurry.
If you pay attention, you’ll notice a lot of things that “economists in their studies” may not be able to imagine. But they exist. Because people are really good at finding ways to cooperate.
Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research. His degrees are from Davidson College, Washingon University in St. Louis, and Washington University.Munger is the author of Is Capitalism Sustainable? (AIER, 2019)
Related Articles – Economic Theory
Myths abound. This reality is unsurprising given that the number of ways to be wrong is immensely larger than the number of ways to be right. And because of the enormous complexity and dynamism of society and the economy, myths about society and the economy are especially abundant.
Most economic myths are (relatively) small. Trade deficits are evidence of domestic economic failure or of foreign government cheating – minimum-wage legislation is a boon for low-paid workers – government debt owed to ourselves isn’t a problem even if the size of this debt is massive – active supervision by antitrust authorities is necessary to keep the economy competitive – more immigration lowers the standard of living for many native-born workers – middle-class Americans have stagnated economically for more than 40 years – sound money can be supplied only by the state – economic growth depletes resources: these and a practically uncountable number of other such myths are, and for many years have been, current.
Although such myths will never be completely slain, their baneful impacts can be reduced by sound and unrelenting economic education and public commentary. (To this end, AIER is doing more than its share.) But even more destructive than are these (relatively) small myths are three Big Myths – foundational misconceptions of the nature of social and economic reality.
Big Myth #1
The most pernicious of all Big Myths is that the economy and society – or, at least, any economy that is productive, and any society that is good – are the conscious creation of the state. Classical-liberal scholars have fought for centuries against this social-creationist myth. In the 18th century Adam Smith celebrated the market’s invisible hand and warned against the “man of system” who arrogantly fancies that he (or she) can rearrange flesh-and-blood people in society as a chess player rearranges inert pawns and princes on a chess board.
In the 19th century Herbert Spencer observed that nearly all legislative schemes for uplifting society are doomed to fail because “[t]hey have their root in the error that society is a manufacture; whereas it is a growth.” In the 20th century F.A. Hayek repeatedly insisted on the vital importance of recognizing that while modern society and the economy are indeed the results of human action, they are not – and cannot possibly be – the results of human design.
In the 21st century this essential truth is emphasized and explained eloquently by a host of brilliant scholars, including, for example, Steve Davies, Richard Epstein, Deirdre McCloskey, Tom Palmer, Matt Ridley, and Mario Rizzo.
Yet this Big Myth seems only to spread and strengthen. Listening to politicians, and reading everything from popular punditry to much seemingly deep scholarship, makes clear that large numbers of people – I dare say most – conceive of social order, economic growth, and widespread prosperity as being unobtainable unless engineered into existence by the state.
Big Myth #2
An implication of this Big Myth is another Big Myth – namely, because all that is good in our social and economic relations is made possible by the state, each of us is deeply and forever in debt to the state. The state, dogmatically believed to be a secular creator, is therefore supposed to be owed by each of us everlasting thanks and offerings. (Oh, and owed also praise: singing the national anthem is not far removed from singing “Praise to the Lord” and other Christian hymns that I sang as a boy attending Catholic mass.)
“You didn’t build that!” was Barack Obama’s way of scolding everyone who denies that the state owns an open-ended claim on Americans’ incomes. According to this Big Myth, to complain about paying taxes – and, worse, to actively oppose tax increases – is selfishly to resist giving to the secular creator what is owed to it by each of us puny beneficiaries of the state’s beneficence, magnificence, and grace.
Big Myth #3
A third Big Myth is that government carries out the will of the people as long as its top officials are chosen by majority rule. At root, this naïve faith in majoritarian democracy is mistaken because there is, in fact, no will of the people. “The people” is not a sentient creature with a mind and preferences and fears and hopes. “The people” includes, of course, sentient individuals each with his or her own mind and preferences and fears and hopes. But this reality of each member of the group does not transform the group into a giant individual equivalent in all but size to each of the flesh-and-blood men, women, and children who comprise the group.
This ‘non-sentience’ of a group of individuals does not mean that two or more – or even millions of – individuals cannot agree upon goals to pursue collectively. Should we or should we not pool some of our resources to build a highway? Should we or should we not organize to provide community policing or national defense? And some form of democratic decision-making is the best means available for registering the preferences of each individual in a way that results in an acceptable collective decision.
But this reality does not mean that the results of the democratic decision-making process reveal that “the people” have a will that is in any way similar to the will that is possessed and exercised by each individual. All that even the best collective decision-making process does is to discover a compromise outcome that is acceptable to each member of the group.
Anthropomorphizing any group of individuals, and supposing that the results of majority rule express the will of this collective creature, creates the false and dangerous impression that if any individual objects to a majority-rule outcome, this individual is attempting to elevate his paltry self over a will not only as real as his own but also greater because it is that of many individuals. But, again, “the People” is not a being with a mind or a will. It follows that no method of collective decision-making, not even the most ideal form of democracy, reveals the People’s will. That which is unreal cannot be revealed.
Big Myths Be Gone!
If society would be rid of these three Big Myths, legitimate disagreement would still reign over the size and scope of government. Compromise for collective decisions would still be necessary, and democratic decision-making would remain the best means of achieving this compromise. But the risk of tyranny would be much reduced from what it is now because no one would anthropomorphize collections of people or deify the state.
Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.