Does the World Need More People?

Posner
To answer my own question: I am dubious.
It is true that a country can get into economic trouble if the number of elderly people,
who invariably impose heavy costs on a country’s health care system, becomes very
large relative to the number of persons of working age, because then the financial
burden on the working population can become extremely heavy. The reverse, however,
is also true: too high a ratio of young to old can be destabilizing. The experience of
many of the poor nations of the world has been that a large youth population creates
severe unemployment problems and can lead to violent unrest, as in a number of
Middle Eastern countries in the last few years—the naively heralded “Arab Spring”
having quickly become a nightmare of violence, political disorder, and regional
instability.
It’s amazing that a poor, largely arid country like Egypt should have a population of 84
million. That cannot be a good thing. Much of Egypt’s current problems stem from
inability to grow enough food to feed its population, and insufficient productivity to
buy abroad all the food its huge population needs.
A growing population implies a growing number of children—not just persons of
working age—and children impose heavy opportunity costs on parents (unless child
labor is permitted, which however is likely to prevent children from becoming
educated) and are costly to educate. A fast-rising population can not only create heavy
youth unemployment but also strain public services (such as public educational
institutions). And all this is in addition to the environmental impact of increased
population, for example on global warming, species extinctions, and traffic congestion.
If children were a “superior” good in the economist’s sense—that is, a good that is
purchased in greater quantity when people’s incomes rise—one would expect the
birthrate in wealthy countries to be high and rising, but the opposite in most such
countries is true. Maybe children are actually an “inferior” good, valued most by poor
people either because the children of the poor work to augment family income or
because the family lacks the resources for such child substitutes as expensive cars,
clothes, homes, entertainment, and travel. Increasingly in the wealthy countries both
spouses work, increasing the opportunity costs to both parents of raising children.
A better and certainly cheaper answer to the problem of declining population in
countries like Germany and Japan—wealthy countries (though not all countries with
declining populations are wealthy—Russia is not, for example)—is immigration. There
are some two and a half billion people in China, India, and South Korea alone. Their
average IQ seems similar to (maybe even higher than) that of the inhabitants of the
United States and the other wealthy countries, including those wealthy countries
whose populations are declining (a category that excludes the United States). This
implies a very large number of East Asians with IQs well above 100. (Assuming that IQ is
normally distributed, an average IQ of 100 means that 2.5 percent of the population
has an IQ of at least 130—and 2.5 percent of 2.5 billion is 62.5 million.) Obviously not
all want to emigrate, but many are quite open to the possibility. The problem is that
few wealthy countries, other than the United States and the other English-speaking
countries, are welcoming to immigrants. They have immigrants—Germany for example
has many citizens of Turkish origin; Japan has many Koreans. But these countries tend
to be insular, ethnocentric, downright hostile to immigrants, and their immigrant
populations—not just the first generation, either—have difficulty assimilating, unlike
immigrants to the United States, which still really is a melting pot. If those countries
can’t solve the assimilation problem, thereby making themselves more attractive to
high-quality immigrants, their populations will continue to decline, because the
countries probably can’t afford the subsidies necessary to halt the decline.
There is no necessary connection between population and economic growth. The sharp
decline of Europe’s population because of the Black Death is thought to have increased
per capita incomes significantly by reducing the ratio of people to arable land, resulting
in improved nutrition. A larger population can, as Becker points out, increase the rate
of technological progress by increasing the number of geniuses and other very creative
people. But so can assortative mating, which has become much more common in the
advanced countries as a result of falling discrimination and Internet dating search. At
some point there may be diminishing returns to the increasing number of computer
engineers.
Paying people to have children sounds odd though it can be defended on economic
grounds if the additional children yield a net economic benefit. (So for that matter
could paying elderly people to forgo end of life medical expenses likewise be defended
on economic grounds, depending on how large the subsidy would have to be and how
it would be financed.) I am skeptical that such a defense can be established. Too little is
known about the economic effects of continued growth of a world population that has
now surpassed seven billion.
Technological Change and Natural Resource Prices-Becker
Natural resource prices increased rapidly during the first decade of this century, mainly
propelled by rapid increases in world GDP, especially of the US, China, Brazil, and other
fast developing countries. These prices then stabilized and many declined due to the
world recession brought on by the financial crisis in 2008.
Some examples illustrate the magnitude of the price movements. Nominal copper
prices quadrupled from 2001, despite a sharp fall in 2008, peaked around 2010, and
declined by about 25% since that peak. Oil prices increased from $20 a barrel in 2002
to more than $140 a barrel in 2008, and have been in the range $100-$120 since then.
Natural gas prices in most of the world increased several fold since 2000, and have
been flat for the past couple of years. At the same time, natural gas prices in the US
have fallen by more than 2/3 since their peak a few years ago.
These higher prices encouraged companies and consumers to economize on resource
use. In the short run, however, both the demand and supply of oil and many other
natural resources are only mildly responsive to higher or lower prices.
The long run picture is very different, for then opportunities to substitute away from
the resources rising most in price are much greater because users have more time to
adjust. For example, more permanent higher prices of gasoline induce consumers
eventually to shift toward smaller more fuel-efficient cars, and drive less with the cars
they have. They carpool more, make greater use of public transportation, or even take
jobs nearer their homes. Cars are smaller and more efficient in Europe and Japan than
in the US in good part because gasoline prices have been much lower in US.
Longer run adjustments on the supply side are also much larger, and some of them are
game-changers. Although the world stocks of natural resources in the ground cannot
be augmented since they were created by millions of years of evolution on the earth,
the cost of getting these stocks out of the ground vary enormously: from the cheap and
easily accessible oil just below the surface in Saudi Arabia to the difficult to access
resources very far below ocean surfaces. Higher prices of a natural resource encourage
extraction of more costly deposits, which increases the supply of that resource.
High prices also encourage investments in technologies to lower the costs of accessing
various deposits that make them worthwhile to develop commercially. The most
important example in recent years is the improvement in fracking methods used to
extract oil and natural gas hidden in shale rocks. Wildcatters in the United States, like
the recently deceased George Mitchell, spent years and much money, sometimes
assisted by government support, in developing fracking to the point where it became
commercially viable at the oil and gas prices prevailing during recent decades.
The success of fracking has resulted in a huge increase in American oil and especially
natural gas production that greatly increased the American supply of these fossil fuels
to produce gasoline, substitute for coal in electric power plants, and for many other
purposes. Due to this revolutionary technology, American oil imports are at their
lowest level in more than a decade, and natural gas prices in the US are now a fraction
of what they are in Europe, Japan, and other gas importing countries.
The price of oil in the US remains close to the world price since oil continues to be
imported. American oil commands the world price because it competes against
imported oil at that price. Natural gas prices differ greatly among regions of the world
because these prices depend on whether pipelines and liquefied gas facilities allow gas
to be imported or exported. As I mentioned earlier, the widespread use of fracking
techniques in the US has produced a huge fall in the domestic price of gas in this
country.
Of course, companies that extract natural gas from shale would like to export some of
their production to other countries to take advantage of higher prices there. Since such
exports would raise gas prices in the US and lower them in the recipient countries,
domestic users of cheap natural gas have organized to oppose its export elsewhere.
Restrictions on gas exports would be unwise because the value received from the
higher prices in other countries would exceed the value created by the artificially
induced increase in American industrial output. It is poor policy to encourage domestic
American industry through costly and inefficient methods like export restrictions.

Meritocracies and Intergeneration Mobility-Becker

Countries differ greatly in the influence of family background on the achievements of
children. Family influence is measured through the degree of intergenerational
mobility, or the relation between the achievements of parents and children.
Intergenerational mobility is said to be stronger when the achievements of children are
more weakly related to the achievements of their parents.
Intergenerational mobility in a country is often used as a measure of the importance of
merit rather than prejudice, political influence, and other similar considerations in
determining success and failure in that country. Although intergenerational mobility is
related to the importance of merit in determining success, the connection is more
complex than one might think.
Economists usually measure intergeneration mobility by the relation between the
earnings (or education) of parents and children. If children’s (lifetime) earnings tend on
average to increase by 4% when parents (lifetime) earnings increase by 10%, the
degree of intergenerational mobility would be 60% (=(100-40)/100), while if children’s
earnings tend to increase on average by only 1% when parental earnings increase by
10%, intergenerational mobility would be 90%. This measure of mobility ranges among
countries from about 90% to less than 20%. The degree of mobility for the United
States equals about 50%, while it seems to be over 80% for several Scandinavian
countries, and only about 30% for Brazil.
Success in a meritocracy depends mainly on a person’s abilities and skills. The relation
between intergenerational mobility and such a meritocracy is complex. Consider, for
example, cognitive abilities, as measured say by IQ score. Genes are a major
determinant of IQ, although early environmental experiences and the covariance
between genes and environment are also important. The significant role of genes in IQ
means that children of parents with high IQs also tend to have higher than average IQs
in part because children inherit their genes from parents. If earnings depended to a
large extent on IQs because the economy heavily rewarded this measure of “merit”,
parents with high IQs would tend to have high earnings, and their children would also
have relatively high earnings because the children would also have high IQs.
Therefore, to the extent that earnings depend on cognitive abilities, such a
“meritocracy” would have a strong correlation between the earnings of parents and
children. In other words, intergenerational mobility would be relatively low in such a
merit-based economy. To be sure, intergeneration mobility would also be low if family
position were automatically passed on from parents to children, independently of the
abilities of children (or parents). Therefore, intergeneration mobility would be low at
these two extreme models of the role of merit in determining earnings. By contrast, if
earnings were basically randomly determined in each generation without regard to
merit or any other considerations, there would be complete intergeneration mobility
even though merit had no role in determining earnings.
The relation between intergeneration mobility and meritocracy becomes still more
complex after we recognize that earnings in a meritocracy would depend not only on
cognitive abilities, such as IQ. For it depends also on investments in education and
other human capital, on getting to work on time, on being able to take criticism, and on
many other psychological characteristics. Families that are more educated and have
high earnings tend to invest a lot in their children’s human capital, and in various non-
cognitive traits. In a merit-based economy where earnings depend on the totality of
abilities and skills, children of high earning parents would also tend to be high earners
because their parents would pass on both cognitive skills and investments in various
forms of human capital.
Even after including parental investments in education, non-cognitive traits, and other
human capital of children, an economy where success and failure are determined by
merit would still have low intergeneration mobility. To be sure, investments in
education and many other types of human capital are not only determined by parents,
but also by government policies and by philanthropists. To the extent that
governments and philanthropists invest more in the human capital of children with less
successful parents (as appears to be the case for governments in Scandinavian
countries), a merit-based economy could have relatively high intergenerational
mobility since children from poorer and less educated families might have high levels of
human capital investments.
Nevertheless, a big jump is still required to make inferences from the intergeneration
mobility in a country to the role of merit in determining success and failure in that
country. In particular, although the United States has considerably lower
intergeneration mobility than many Western European countries, this does not imply
that merit is a less important determinant of success in the American economy than in
these other economies.
Merit-based economies use the human capital of individuals more efficiently than
other economies, but a country might be willing to trade off less efficiency for greater
intergeneration mobility. Good policies would recognize that there is such a tradeoff,
and that policies that lead to much greater mobility across generations may make the
allocation of human resources considerably less efficient.

The Professional versus the Business Model in Law and Medicine--Posner

The central focus of economic analysis of markets is the activity of profit-maximizing
business firms in unregulated competitive markets; and such firms are indeed the
central players on the supply side of markets in a free-market economy. Analysis of
profit maximization is complicated by the fact that large business firms are complex
organizations, and persons who compose such a firm, ranging from shareholders to
rank and file workers, have conflicting incentives which can blunt profit maximization
to an extent. Competition is itself a complex activity, and firms often find it more
profitable to collude in price and concentrate on product competition instead. There
are also nonprofit enterprises and government producers to complicate the picture.
An important though it seems a diminishing example of a service provider that deviates
from the standard model of a profit-maximizing competitive firm is a professional
organization such as a law firm or a medical practice. Professionals include besides
lawyers and doctors architects, nurses, teachers, engineers, clergy, and military officers
(the list is not example), and they constitute an important segment of the economy;
there are, for example, a million lawyers and more than 700,000 doctors.
Law and medicine are the oldest professions (other than clergy), the most prestigious
and highly remunerated, the most influential, and the most discussed, praised, and
criticized. They are also changing at a rapid rate—and in fact changing from professions
to businesses, although the change may be reversed in the case of medicine. (I can’t
see that happening in law.)
The traditional concept of the profession (the concept that is undergoing change)
provides an interesting contrast to the concept of the profit-maximizing business firm.
In the business model, the goal is profit maximization in a competitive environment
that operates in a basically Darwinian fashion (survival of the fittest); risk is pervasive
and both extraordinary profits and devastating losses are real possibilities.
Employment and leadership in such an environment attract many and repel many. The
people it attracts tend to be aggressive and daring. The ones it repel tend to be
cautious and thoughtful.
In the traditional professional model, risk both upside and downside is trimmed by a
combination of regulation and ethics both aimed at muting competition. With muted
competition the lawyer or doctor can realistically aspire to a safe upper-middle-class
income, but he is unlikely to become wealthy. The result, in combination with requiring
postgraduate education and qualifying exams for entry into the profession and
subjecting members of it to professional discipline, is to attract a type of person quite
different from the entrepreneurial type—the latter a type exemplified by such
extraordinarily successful college drop-outs as Bill Gates, Steve Jobs, and Mark
Zuckerberg. The professional model attracts a more studious, intellectual, risk-averse
type of person.
Why does society value such persons and create a comfortable niche for them? The
answer is that some goods and services involve a degree of complexity that makes it
very difficult for consumers to evaluate the quality of the goods and services. Legal
services and medical treatment are important examples. Both involve considerable
uncertainty (even the best lawyer loses some cases, even the best doctor fails to cure
some patients). When a consumer is unable to determine the quality of a product or
service, the provider has to be regulated, either directly as in the case of the regulation
of the drug industry by the Food and Drug Administration or indirectly as in the
professional model, in which the conditions for becoming a member of a profession
encourage self-selection by persons likely to be trustworthy, responsible, and ethical
because less inclined to cut corners in order to make a killing.
The professional model in law began to wane in the 1970s, with the beginning of the
deregulation movement, which loosened restrictions on competition in legal services.
The trend continued in subsequent decades, and was marked by an increased spread in
earnings within law firms, an increased dispersion in the size of law firms, and
increased turnover—in particular, the tendency of successful lawyers to move from
firm to firm (taking their clients with them) in quest of higher incomes. Today, law firms
closely resemble business firms. I am speaking mainly of law firms that handle
corporate business, not of criminal or tort lawyers, who tend to practice by themselves
or in small firms.
Corporate lawyers today don’t want just a comfortable upper-middle-class income;
they want to be rich; and one reason is the increased risk they face. Few law firms
(remember that I’m talking only about corporate-law firms) any more practice
“lockstep” compensation, in which all partners of the same vintage in a firm are paid
the same—a risk-minimizing method of compensation that used to be the norm in
large law firms. Today a lawyer faces the risk, if his productivity declines, of seeing his
income decline, or indeed of being pushed out of the firm altogether; and to cushion
that risk, naturally he wants to earn as much as he can while he can.
Once the legal and ethical limits on lawyer competition are relaxed, the underlying
riskiness of law firm practice is unchained. That riskiness lies in the fact that, like banks
though less dramatically, law firms’ capital is short term but their assets are long term.
The principal capital is human capital—the most successful partners and their clients—
and that capital is short term; a partner can leave the firm, clients in tow, with little or
no notice. This can cause a run on the firm, as happened in the collapse of the
previously very successful Dewey LeBoeuf firm, because its assets, including its
accounts receivable and future clients (corresponding to a bank’s loans), cannot be
liquidated at a moment’s notice to match the firm’s assets to its shrinking capital and
its fixed debt.
The market response to the transition of the legal services industry from a profession
to a business has been increased vigilance by corporate house counsel, who are expert
monitors of legal services, and a related trend toward business firms’ bringing legal
business in house, where direct supervision of the lawyers handling it is feasible. Are
these adequate substitutes for the ethical and regulatory restraints that define a
profession? And if not are the costs offset by increased competitiveness? I don’t know
the answer to the first question, but I am skeptical with regard to the second. Even if
the business model is more efficient, it is unclear that efficiency in corporate law is a
public good. The reason is the adversary nature of corporate law, not only in litigation
but also in negotiation of deals, structuring of transactions, and coping with regulation.
If there are good lawyers on both sides of a case, the aggregate costs of litigation are
higher, and the benefits to judge and jury of a more vigorous and informed adversary
process generally quite modest. If private lawyers with a regulatory practice are abler,
the regulatory agency needs to hire abler lawyers, and so the cost of regulation
increases, though there may be a net gain in the quality of regulation. And do abler
lawyer on both sides of a deal negotiate a better deal in a social sense, or simply
increase the costs of negotiation?
Turning briefly to medicine, about which I know less: When I was growing up in the
1950s, doctors constituted a highly respected profession, though their capabilities were
distinctly inferior to what they are today, after more than half a a century of
remarkable progress in medical technology. Like lawyers, doctors in the old could
realistically aspire to a comfortable income but not to become wealthy.
Opportunities for wealth developed, not because of significant changes in regulation,
as far as I’m aware, but because of the rise of costly though effective specialized
treatments and because of the increased availability and generosity of private and
governmental health insurance. Most doctors in the old days were general
practitioners, or at the higher end specialists in internal medicine, but really they were
generalists too; like general practitioners they both diagnosed and treated. With
increased specialization, treatment for the rare, complex, debilitating, or lethal
diseases gravitated from general practitioners to specialists in particular fields of
medicine. These specialists were understood to “deserve” higher incomes because of
their more protracted medical education. Moreover, health insurers are more
comfortable reimbursing procedures than visits to a general practitioner, because the
optimal length of such a visit is impossible to gauge.
As a result specialists now outnumber general practitioners and some specialists, if able
through automation or staff to treat a large number of patients in a short span of time,
have extremely high incomes. And yet, since medicine more than law has as a career a
powerful appeal to a relatively large number of able people, including many foreigners
who would be eager to relocate to the United States (in fact a significant fraction of our
doctors are foreign-trained), one can imagine a medical system in which doctors were
paid somewhat less than they are today yet would be content. This would be some
form of “socialized medicine,” such as found in much of the developed world, and it
may prove to be the direction of reform of our much-criticized health-care system.
In sum, the professional model is giving way in corporate law to a business model,
whether for good or ill, though quite possibly the latter. The professional model is
endangered in medicine as well, but there it may actually be on the verge of renewed
vitality.

The Optimal Size of Countries--Posner

I agree with Becker that a major factor in the growing number of countries as a result
of the splitting up of countries like the Soviet Union and Yugoslavia is the reduction in
international trade barriers, which reduces the value of economic self-sufficiency.
Another factor, however, is the reduction in threat of conquest, partly as a result of the
dissolution of the Soviet Union and partly as a result of the (related) emergence of the
United States as the world’s hegemonic power committed to maintenance (for the
most part) of the international status quo. Iraq was unable to hold on to its conquest of
tiny, defenseless Kuwait in 1990-1991 only because the United States organized and
led a coalition of nations to intervene and defeat Iraq.
The fundamental question is the optimal size of a nation, a question similar to that of
the optimal size of a corporation or other organization. Fear of conquest and height of
trade barriers are only two factors to be taken into account in answering the question.
The other factors bearing on the question tend to be either weak or ambiguous in
direction. For example, it might seem obvious that ethnic and religious heterogeneity
would be a fissiparous factor because of hostility among different ethnic and religious
groups. But in many countries that has not been a problem—the United States (since
the Civil War) and Switzerland are examples. India and Canada are examples of
countries where it is a problem but not a serious enough one to lead to serious thought
of a breakup.
Another type of tension is regional economic tension, as in Spain (discussed by Becker)
and Italy, where the north is far more prosperous than the south and resents
redistributive tax and fiscal policies because they send wealth out of the region, rather
than redistributing it (say to the poor) within the region. If wealthy people are
concentrated in one part of the country, it naturally occurs to them that they might be
better off if their region were a separate nation, for their average wealth would
increase. But the main significance of agitation for separation in such cases is as a
negotiating tool. The poor region doesn’t want to lose the rich, so if it thinks the risk of
secession is substantial it will reduce the amount of redistribution that it imposes on
the rich region.
A nation’s government might encounter diseconomies of scale; that would be another
reason for considering a breakup, but again I think not a decisive one. Government can
be decentralized in order to overcome its diseconomies of scale, and in fact large
countries, like the United States, do have federal (that is, decentralized) systems of
government, even, as in the case of Canada and Australia, when they are not very
populous. Our federal government is criticized a lot, but does not seem to be less
efficient than that of other countries, large or small. So I think diseconomies of scale of
government are not a significance cause of breakup.
An underappreciated advantage of being a large country with a large and varied
economy is diversification of risk. Suppose a tiny country has one big export industry,
and its export earnings finance most of its citizens’ consumption, which is of imported
goods. If that one big industry falls on hard times, the adverse economic impact on the
country could be very great. That is unlikely to be a serious danger in a large country.
I noted earlier that most of the growth in the number of the world’s countries is
attributable to decolonization. I’m now going to argue that all of it is, provided that
“decolonization” is broadly understood to mean the separation of communities that
had been forcibly united. The United States began as a collection of separate colonies,
but they all voluntarily joined to form a national government. In contrast, Yugoslavia
was created out of bits of the Austro-Hungarian Empire plus Serbia by the great powers
after World War I, and the constituents were separate communities with no affection
for each other. (The breakup of the Austro-Hungarian Empire is a notable example of
decolonization.) The Soviet Union was a product of conquest, not of the voluntary
uniting of formerly separate states. The United Kingdom too, and it may be coming
apart; and likewise Italy.
If fundamental cultural or religious differences, submerged by forcible integration, are
not present in a large country, I doubt that there are net benefits from disintegration.
There are scale advantages to being a large country, the risk diversification that I
mentioned, and a measure of additional security, and I think they outweigh the
efficiencies of being small. It may well be that the reduction in global barriers to trade
and in threat of conquest has reduced the cost of being a small country, but I don’t
think it’s increased the benefits, and the benefits are large only where the country is
composed of groups that simply cannot get along with each other, so that if force is
withdrawn the country breaks up.

Does the Earth Have Room for 10 Billion People? Posner

On May 3, the United Nations issued its 2010 Revision of World Population Projections,
which, according to the media, predicts that the world’s population, expected to reach
7 billion by the end of this year, will be 10.1 billion by the end of the century. But the
media reports have tended to be imprecise. The UN report offers three predictions—a
high, medium, and low—depending on different assumptions. The high is almost 16
billion and the low 6.2 billion (which is actually lower than the current world
population), and a cautious appraisal of the report is that it provides a plausible basis
for thinking that the world population will probably be between 6 and 16 billion 89
years from now. Of course much could happen between now and then to push the
world population far outside the range, such as an asteroid collision that wiped out the
entire human population.
World population depends on fertility (the birth rate) and mortality (the death rate). In
predicting the former, the UN divides countries into those with birth rates below the
replacement level of 2.1 births per woman (42 percent of the world’s population lives
in such countries), countries with birth rates slightly above replacement level (40
percent), and countries with very high birth rates (the remaining 18 percent). The
death rates in reach group of countries is calculated, and then the expected population
growth within each group is estimated using the current rate of population increase
(birth rate minus death rate) as the baseline for each. (For the world as a whole, the UN
report expects life expectancy at birth to increase from 68 today to 86 in 2100.)
The fall in population in countries with birth rates below replacement levels is expected
to level off, which seems plausible, but what mainly drives the 10.1 billion 16 billion
predictions of total population at the end of the century is the assumption that birth
rates will continue to be very high in the countries (mostly in Africa, Asia, and South
America) that currently have high birth rates. How realistic is such an expectation?
Much depends on changes in the status of women. If employment and wage rates of
women rise, thus increasing the opportunity costs of children, birth rates will decline.
These changes are likely to be correlated with increased wealth, which in turn will
accelerate the fall of death rates in these countries. But the decline in death rates is
likely to be less than the decline in birth rates (notice how the UN report predicts a 26
percent increase in longevity [(86 – 68)/68], versus a 44 percent [(10.1 – 7)/7] increase
in population (the midrange forecast), and if so the rate of population increase will
slow in the high-fertility countries.
Really no one knows what the world population will be in 2100. The history of
population projections is not promising. An example is how the Bureau of the Census,
failing to anticipate the post-World War II “baby boom,” underpredicted U.S. fertility
rates, then overpredicted them by failing to predict the end of the baby boom. And
techniques of predicting fertility and mortality don’t seem to have improved much,
judging by results. And the longer-range the forecast, the larger the forecasting error.
But suppose world population will reach 10.1 billion by the end of this century. Would
that be a good or a bad thing? Arguably a good thing, on several grounds. One is that it
would enable greater specialization, which reduces costs. Second is that it would
increase the returns to innovation by increasing the size of markets, though an offset is
that innovation can produce immensely destructive as well as constructive technology.
Third, the more people there will be, the more high-IQ people there will be, and hence
the faster the growth of knowledge will be; though a possible offset is that the more
evil geniuses and other monsters there also will be; persons of great potential for evil,
such as Hitler, Stalin, and Mao, presumably are rare. Fourth, if the total subjective
welfare of the 10.1 billion exceeds that of a smaller population, or (depending on one’s
version of utilitarianism) the average welfare of the greater population is greater than
that of the smaller one, the world will be a happier place in a utilitarian sense (the
excess of pleasure over pain will be greater).
The downside of population growth is the pressure it places on the environment and
natural resources, especially the former, since the price system provides efficient
rationing of resource use. Rapid population growth will increase the problem of global
warming and the rate of extinctions and other biodiversity decline, as well as create
congestion externalities, though these concerns have diminishing significance the
longer the time span of concern. Continued population growth could combine with an
acceleration of global warming to precipitate a global catastrophe (perhaps a
catastrophic water shortage) within the next few decades, but 89 years from now the
march of technology may enable such problems to be solved. Think of the
technological advances of the last 89 years (that is, since 1922), and imagine a
comparable rate of technological advance applied to the current level of technology,
which is so much higher than that of 1922.
But the beneficent effects of population growth, like the estimates of that growth, are
highly uncertain. The risk averse among us might prefer a lower rate of population
growth in order to reduce the downside risks of that growth, even though the upside
potential would be reduced as well.

Yes, the Earth Will Have Ample Resources for 10 Billion People-Becker

World population grew by almost 300% during the twentieth century; over the same
time period, world per capita incomes grew by about 400%. This association of sizable
increases in world population with large increases in per capita incomes should
continue to the end of this century.

Forecasts of the world’s population only a few years in the future are generally quite
accurate because the number of births and deaths during the next few years are largely
determined by the existing distribution of the number of people at different ages. At
the same time, forecasts of the population 50 or more years into the future are
notoriously inaccurate because of difficulties in predicting changes over a long time
period in birth rates, and to a much lesser extent, also in death rates.

In particular, one cannot take seriously the UN’s median forecast of 10 billion persons
by the end of the century. For this forecast assumes that birth rates in high fertility
countries will not decline during the next half-century. Since it is highly likely that these
countries will raise significantly their per capita incomes and education of their women,
their fertility rates will fall, probably drastically. If so, world population in 2100 would
be well below 10 billion people.
However, for the sake of this discussion, I assume that the UN forecast is approximately
correct, so that about 10 billion people will inhabit the earth by the end of this century.
Posner mentions various likely benefits of a much larger population, such as greater
demand for and supply of innovations in the medical and other sectors, and greater
world specialization by skill.

Few countries have experienced sustained declines in their populations since the
beginning of the 19th century. The substantial world growth in per capita incomes
during the past 150 years has been associated with growing world populations. I
believe that declining populations are bad for long run economic welfare. If I am
correct, countries such as Russia, Japan, and Germany, with fertility rates that are far
below replacement levels are likely to face an unattractive economic future unless
either they take in enough immigrants to make up for their low fertility levels, or they
have large increases in fertility rates.

Given the sharp rise in food prices during this first decade of the 21 st century, it would
appear difficult to feed adequately a much larger and richer world population. Yet,
unlike say the production of copper, no natural limits sharply curtail the amounts of
food that can be produced. Food output will expand with a growth in the amount of
land devoted to food production-currently agriculture takes a small fraction of the
world’s arable land. Also, the world can invest much more in fertilizers and in
improving food technology, so that greater output can be squeezed out of each acre
used to grow corn, wheat, soy, dairy, meats, and other foods.

Greater demand for water due to larger populations and greater wealth would make
clean water scarcer. This could produce a water shortage unless countries began to
price more efficiently the water used in agriculture and industry, by far the largest
water users. With sensible prices, the available water should be sufficient to satisfy all
essential water needs of a much larger world population.

An increase from 7 to 10 billion people on the planet will significantly raise population
density in many parts of the world, and thereby increase the potential for severe
outbreaks of communicable diseases. However, cities like Hong Kong show that it is
possible even with current knowledge to control the spread of disease in densely
populated communities. As knowledge of how to track and combat diseases greatly
improves over time, the medical challenges created by densely populated areas should
be reduced even further.

A larger population combined with growing per capita incomes would increase global
warming and worldwide pollution. Although the severity of the global warming
problem by the end of this century is not fully established by climate science, the world
should be prepared to meet various worst-case climate scenarios. This would require
the development of mitigation techniques that can be rather quickly ramped up in case
global warming turns out to be a severe problem (see the analysis in Becker, Murphy,
and Topel, “On the Economics of Climate Policy”, The B.E. Journal of Economic Analysis
and Policy, Volume 10, number 2). Such technologies are certainly achievable by the
end of the century with substantial private and public investments in developing new
methods to capture and store various harmful gases emitted by fossil fuels.

If world population grew to 10 billion by the end of the century-an unlikely outcome-
that would present considerable challenges. However, greater population would add
real benefits as well, and I am inclined toward the view that the benefits will exceed
the harm.

Should Central Banks Be Politically Independent? Posner

The case for central bank independence from the political branches of the government
is simple. Central banks control the amount of money in the economy. For example, by
selling short-term government securities for cash, they reduce the amount of money in
the economy and this drives up short-term interest rates, while by buying such
securities for cash they increase the amount of money in the economy and that drives
down short-term interest rates. (Long-term interest rates are also affected, and in the
same direction.) Politicians like the money supply to increase before elections, because
a reduction in interest rates stimulates economic activity; consumers borrow more to
consume, and businesses borrow more to invest in production. In principle, consumers
and businesses should anticipate inflation (if the money supply is increasing faster than
the output of goods and services), resulting in higher long-term interest rates and
various distortions in economic activity, and take preventive measures that will reduce
the stimulative effect of the central’s bank low-interest-rate policy. But we know from
the reaction of consumers and producers to the very low interest rates of the early
2000s that the effect of very low rates on consumption and production are not fully
and immediately offset by anticipation of future consequences.

Thus if a nation’s central bank is controlled by politicians, it can be expected to reduce

short-term interest rates at particular phases in the electoral cycle, and this tendency,
because unrelated to any economic reasons for low interest rates, can be expected to
have an inflationary effect. Moreover, inflation can easily get out of hand. When
inflation is anticipated, the amount of money in circulation increases; people hold
smaller cash balances because inflation erodes the value of cash. The more rapidly
money circulates, the higher the ratio of money to output and therefore the higher the
rate of inflation. (Money that does not circulate—money that people keep under their
mattresses, for example—are not really part of the money supply because they are not
exchanged for goods or services.)

As inflation mounts, the cure—a sharp reduction in the money supply and concomitant
increase in interest rates—becomes more painful. When Paul Volcker, the chairman of
the Federal Reserve, pushed short-term interest rates to 20 percent in August 1981 to
break an inflation rate that had reached 15 percent, he precipitated a very sharp
recession. President Reagan was furious but Volcker stuck to his guns. A politically
dependent Federal Reserve probably would not have done so.

In fact the Federal Reserve is not completely independent from politics. Unlike the
Supreme Court, its independence is not dictated by the Constitution. The United
States did not have a central bank when the Constitution was promulgated, and the
Constitution didn’t require the creation of one. The Federal Reserve dates only from
1911, and before then experiments with central banking in the United States had been
sporadic. The Federal Reserve’s independence—which is a function of the long terms of
the members of the Federal Reserve Board (14 years, though the chairman’s term is
only four years, albeit renewable), the fact that they cannot be removed before the
expiration of their terms, the fact that the Federal Reserve is self-financed rather than
financed by annual congressional appropriations, and the fact that the members of the
Open Market Committee (the organ of the Federal Reserve that controls the money
supply) include presidents of the local federal reserve banks, who are chosen by private
banks rather than by the President—is a gift of Congress; and what Congress has given,
Congress can take back. Hence Federal Reserve chairmen and members can’t just
thumb their nose at Congress.
Particularly not in an economic crisis, such as hit the country and the world in
September 2008. Essentially the Federal Reserve recapitalized the banking industry by
buying its mortgage-backed securities (and other bank debt as well), thus pouring cash
into the banking system. (As did the Treasury Department.) By greatly expanding the
money supply, the Fed sowed the seeds of a future inflation—but in times of economic
desperation the attitude is: let the future take care of itself.

The Supreme Court is the best example of a government institution that is outside
political control. The Justices can as a practical matter be removed from office only if
they commit crimes, and their decisions on matters of constitutional law can be
nullified only by the very cumbersome process of amending the Constitution. Also,
there is widespread public respect for the Supreme Court, and for courts and judges in
general. The Federal Reserve has neither constitutional standing nor the enthusiastic
support of the people. Its close links to the banking industry are noted and very few
people have even the slightest understanding of the Fed’s role and responsibilities. It
performed ineptly in the run up to the financial crisis and in refusing to bail out Lehman
Brothers. Bernanke’s reappointment drew sharp opposition in the Senate, and there is
some indication that Senate Majority Leader Reid extracted from Bernanke during the
confirmation process a quasi-promise not to raise short-term interest rates too soon,
lest by doing so the Fed choke of an economic recovery.

So the Fed is best described as quasi-independent rather than independent. A

constitutionally independent Fed—an institution parallel to the Supreme Court—would
create something close to a dictatorship over the business cycle, and this is too much
power for a democratic society (perhaps any society) to cede to a bevy of economists
and financiers. But the quasi-independence of the Fed, by giving it a great deal of
discretion over monetary policy (even if the discretion is not complete), worries some
economists, who think the Fed apt to misuse it, whether because of unsound economic
theories or in an effort to mollify the political branches. But occasional proposals, as by
Milton Friedman, to tie the Fed to a precise formula for increasing or decreasing short-
term interest rates seem too rigid, because a formula cannot prescribe the correct
response to unpredictable shocks to the economy, as we experienced in the financial
collapse of 2008.
Are e-Readers the Beginning of the End for Books? Becker
In January, Steve Jobs unveiled Apple’s iPad tablet that, among other things, digitally
accesses and stores many books that can be read on a 9.7-inch screen. The iPad follows
the great success of Amazon’s e-reader, the Kindle, which can hold up to 1500 books.
This has led to speculation that these and subsequent e-readers mark the turning point
in the market for hard copy books. I do believe that e-readers foretell an enormous
change in the book publishing industry.
I do not expect the market for hard copy books to decline rapidly at first, but decline it
will, as e-books substitute increasingly for hard copy books. The competition offered by
e-books will increase as the prices of Kindles, iPads, and other e-readers fall from their
present levels of over $250 for Kindles, and $499 and up for iPad tablets (these tablets
are far more than just e-readers). Within a few years, the most basic e-reader models
will sell for considerably under $100, and they will become much easier to use.
Mysteries, beach-reading books, biographies, and other books with a general appeal
that are read while traveling or on holidays are most suitable for e-readers. Why pay
more to buy hard copies of such books when it is far more convenient to carry many
books around in a digital form? Less attractive for e-readers are more technical books,
such as books on economic theory or mathematics, where it is frequently necessary to
go back and forth between earlier and later discussions. These books are much less
likely to be popular in e-book form than the less technical and quick-read books.
A good comparison is with the devastating effects of the Internet on the markets for
newspapers and recorded music. The Internet has permanently changed these
industries. Readers can more efficiently and quickly obtain updated news about sports,
weather, movies, advertising, stock market performance, and political developments
from the Internet rather than from hard copy newspapers and magazines. Hardly any
young people any longer read newspapers, certainly not general-purpose newspapers
like the New York Times, Washington Post, or even The Daily News.
Owners of the major papers are still searching for ways to make a profit with their
online editions. The New York Times first gave away their content online, then tried to
charge for some of it, and then went back to giving all of it away-the present state. The
Times recently announced that in a few months it would again start charging for some
of its online content. The Wall Street Journal has continued to charge for some online
articles and opinion pieces, but it is unclear whether their online business is profitable.
The music recording business has been even more affected by the Internet than
newspapers since unauthorized copying of online songs in the early days of the
Internet greatly reduced sales of new albums. Album sales were finally killed after
Apple’s launch of the iPod in 2001 that allowed individuals to download single songs
cheaply. Total music recordings are down considerably due to the competition from
digital sales. Yet the great success of the iPod preserved a considerable demand for
music, even though much of the revenue now goes to Apple rather than to either
recording studios or musicians.
Cheap and efficient e-readers will have comparably huge effects on the book publishing
industry. The cost to publishers of selling e-books is much less than selling hard copy
books since publishers save paper, printing, and shipping costs by selling books in
digital form. Amazon originally set the price of most books it sells for the Kindle at the
same cheap level of $9.99, although it recently agreed with MacMillan to allow
publishers greater say in pricing books sold for the Kindle. Apple announced that it
would allow publishers considerable discretion in setting prices of books sold for iPads.
Digital copying of e-books will become a problem for the e-book and hard copy book
markets, as it has been for the music market. Already available software will make
copying easier, and hence more threatening to the entire market of published books.
Handbooks of essays on particular topics, and other collections, including articles by
the same author, will be less popular on e-readers than they have been in hard copy
form since individuals can use their e-readers to easily buy and store the particular
articles that interest them. The market for books may follow the film industry where
publishers have an initial limited run of hard copy books, and then follow that rather
quickly by making new books available for e-readers, where most of the sales will
occur.
I have no doubt that e-readers will eventually enormously affect the types of books
published, and the form they are published in. That does not mean quick and sharp
declines in the book publishing industry, but it does mean that the industry will
eventually be radically transformed.

Will Food Prices Begin Increasing Again? Posner's Comment

Becker is right to point out the difference in supply conditions between oil (and other
minerals, but I will limit my discussion to oil) and agricultural products: it is cheaper to
expand output of the latter than of the former. Hence as demand for oil and for food
rise as a function of population growth (an important qualification, as I'll explain--
population growth is not the only driver of increased demand for food), oil prices will
rise faster than food prices. This is fortunate because while there are substitutes for oil,
there are no substitutes for food. A continued increase in world population will
increase the demand for both oil and food, and historical experience suggests, as
Becker explains, that the increased demand for food can be met at only modestly
increased cost even if the world's population expands greatly, though this depends in
part on how rapid the expansion is--the more rapid it is and hence the steeper the
increase in the demand for food, the higher the cost of meeting that demand will be, as
it is easier to increase production in the long run than in the short run. Moreover, a
sizable expansion in population would raise the price of farmland by increasing its
opportunity cost. As the world grows wealthier, the rate of expansion of population
should, if historical experience is a guide, slow. But even if population stopped growing
altogether, the demand for food would continue to rise because more people (perhaps
billions more) would be able to afford the rich diet that people in wealthy countries
consume. Supplying that rich diet is very costly in agricultural resources, for one of the
major components of the diet is meat and the production of meat requires more
agricultural output than the production of cereals and vegetables, since the animals
that people eat are big consumers of food. Technological innovations may hold down
increases in the price of food that are due to the increased demand for a rich diet as
multiplied by increase in population. But those innovations may create substantial
externalities even if they do not push up prices (indeed, the less the increase in prices,
the greater the output of agricultural commodities and hence the greater the
externalities). As more and more countries adopt the most efficient methods of
agricultural production, and thus for example converge on the optimally genetically
modified variants of crops, genetic diversity will decline, which will increase the
potential damage from blights. (It is not only stock portfolios that benefit from
diversification.) Agriculture is a heavy user of water, moreover, and global warming
appears to be reducing the supply of water usable for irrigation by reducing the size of
glaciers. The run off from the seasonal melting of glaciers provides a more usable
supply of water than rainfall, because the water from a melting glacier is channeled,
while rain that falls outside a river or other body of water is difficult to store for use in
irrigation. I am one of those timid souls who worry about the downside of technological
advance and economic growth. I find the prospect of continued increases in population
and income, and of the technological innovations necessary to cope with those trends,
unsettling.
Legislation on Clean Energy-Becker
In late June the House of Representatives approved The American Clean Energy and
Security Act. If the Senate approves a similar version, this would constitute the most
important American legislation on overall control of carbon-emitting gases. The main
provision of the bill is a cap and trade system, to begin in 2012, which would provide
allowances for emissions of carbon dioxide and other greenhouse gases. The goal of
the bill is to reduce the carbon emitted by American industries to 17 % below 2005
levels by the year 2020, and to reach more than 83% below 2005 levels by 2050. Some
environmentalists have criticized the 2020 energy-reduction goal as too little and too
late. However, I believe that the optimal greenhouse gas policy is to go slow initially
until greater evidence on the severity of global warming becomes more apparent. The
main threat to the world from global warming is an as yet unknown probability of quite
severe warming that would cause considerable harm-the world could adjust at
relatively little cost to a moderate degree of global warming. The additional evidence
accrued during the next decade will provide more information about the likelihood of
the severe warming that would merit more drastic steps. If such steps become
warranted, then the rate of carbon reduction and carbon storage should be speeded up
beyond that envisioned in the House bill. On the other hand, if milder versions look
likely, the 2050 goal of a more than 80% reduction in carbon emissions could be
relaxed. Another reason for going slowly at first is to determine how much will be done
on global warming not by EuropThese and other developing countries, along with the
US, will be the major contributors to greenhouse gas emissions during the next decade.
If the BRICs cannot be bribed or threatened into taking steps to reduce their carbon
emissions, the US might rethink how much it wants to do. Rethinking American policy
would be especially urgent if the more the US did, the greater the migration of
industries from America to developing countries. While accumulating information
during the coming decade on the severity of the global warming problem, the US
should greatly invest in trying to achieve breakthrough technologies in advanced
carbon control and storage. The aim would be to acquire technological knowledge that
could be quickly implemented without enormous cost if the evidence warranted
imposing major carbon controls and storage in a short period of time. The House bill
allocates about $1 billion annually to the Carbon Storage Research Corp for further
research. This is probably not enough, given the possible need to act quickly and
decisively to combat global warming. Under the House bill during the first decade or so,
almost all carbon allowances will be given away, mainly to companies, rather than sold
to the highest bidders. Over time the fraction sold would continue to increase until the
vast majority of allowances would be sold. Many economists have criticized this giving
away of allowances during the next couple of decades as a missed opportunity to raise
revenue for the federal government through the sale of allowances. In light of the
pending massive federal deficits during the next several years, auctions might seem the
best approach. However, the political reality is that significant cap and trade legislation
might not gain enough political support if the government sold energy emission
allowances rather than giving the majority to the industries most affected. For energy-
intensive industries are well organized politically, and they would strongly oppose a
carbon tax-which is what an auction of emission allowances amounts to- since such a
tax would reduce profits in these industries. On the other hand, energy-intensive
industries might support, or only weakly oppose, a cap and trade system where most
allowances were given to them since that system could increase their profits, or only
reduce them by a little. Economists typically assume that when a new tax, like a carbon
tax, is introduced, government spending is held fixed, so that other taxes can be
reduced. That assumption is often useful for analysis, but may not be realistic
politically. The revenue from a new tax may be mainly used to increase government
spending rather than to reduce other taxes. The case for selling emissions through
auctions rather than giving them away is a lot weaker if the government wasted much
of the additional revenue, or if the additional spending itself distorts behavior by
households and firms. Empirically, the most common response to "new" tax sources,
like a carbon tax, is a combination of reduced other taxes and greater government
spending (see Becker, Gary S., and Casey B. Mulligan, "Deadweight Costs and the Size
of Government." Journal of Law and Economics, October 2003). This typical response
makes the case for selling cap and trade allowances considerably weaker than if
government spending were held fixed after new tax revenues were collected.

Has the Market Economy Failed? Posner

I agree with Becker that the effect of the financial crisis on capitalism will depend on
the severity of the crisis. Very few people are committed in an emotional sense to a
free-market ideology; if the free market seems not to be working, the population and
its political representatives will cast about for an alternative. In this longish comment, I
respond briefly to some of the readers’ comments on my last week’s post, bring
up to date my discussion of the financial crisis, and in closing return to the question
whether capitalism has "failed." 1. Several comments note that there were a number of
other prophets of doom besides Nouriel Roubini. Here is one: "When the downturn in
house prices occurs, many homeowners will have mortgages that exceed the value of
their homes, a situation that is virtually certain to send default rates soaring. This will
put lenders that hold large amounts of mortgage debt at risk, and possibly jeopardize
the solvency of Fannie Mae and Freddie Mac, since they guarantee much of this debt. If
these mortgage giants faced collapse, a government bailout (similar to the S&L bailout),
involving hundreds of billions of dollars, would be virtually inevitable." Dean Baker,
"The Menace of an Unchecked Housing Bubble," The Economists' Voice, vol. 3, issue 4,
article 1. Given the multitude of warnings from respectable sources, it is puzzle why the
warnings did not stimulate a serious effort to evaluate the health of the financial
services industry and the adequacy of regulation. Part of the answer may lie in a
perceptive comment by reader Jamison Davies. He reminds us that "Important to
[Roberta] Wohlstetter's argument [about why the Japanese attack on Pearl Harbor
achieved surprise] is the concept of the 'signal-to-noise' ratio, i.e. the amount of useful
information being taken in compared to the information that is false, misleading, or
irrelevant. It turns out that earlier concerns about inflationary spikes may have just
turned out to be background 'noise'…as well as other economic issues, but ex ante it
is extremely difficult to tell what data will be predictively useful and what is just noise."
Davies adds that "the difficulty in early warning, among other things, is that if you give
correct warning and act in response to that warning, the attack will likely not
materialize (i.e. if the US knew Japan was about to attack Pearl Harbor our defensive
preparations would prevent Japan from following through). This means that successful
warnings are undercounted because the catastrophe never emerges. This tends to
weaken early warning systems as they are perceived to be ineffective even though they
may have averted serious problems." Davies points out that "the economic analogy is
regulation. Regulations were seen as unnecessary and dismantled because there had
been no crises, but policymakers failed to consider that there may have been no crises
precisely because of the regulation." Another comment quotes economist Thomas
Sowell as saying: "Failure is an important part of the success of the capitalistic
system.”"The commenter adds that in "the free market system, companies that are
seriously mismanaged in one way or another will fail, and these failures make room for
the ones that are well managed." All true, but in the current crisis many seriously
mismanaged firms will be saved by the government, and many firms that are not
mismanaged will fail because of the effect of the mismanagement of other firms on
consumer demand and the credit market. 2. In earlier posts Becker and I have
discussed whether the financial crisis is a liquidity crisis, a solvency crisis, or both. At
this writing it seems that it is more a solvency crisis than a liquidity crisis. The initial
bailout plan--to buy the sick assets of banks, such as their mortgage-backed securities--
was premised on the assumption that the crisis was one of inadequate liquidity:
uncertainty or perhaps even unreasoning fear was preventing the sale of bank assets at
prices that reflected their "true" value. If this was incorrect--if the problem was not
that the banks' sick assets were frozen but that the banks were undercapitalized--the
plan would be unsound: either the government would pay the actual, low value of the
assets, in which event the banks would have no more capital than before, or it would
overpay and thus be giving the banks a gift at taxpayers’ expense. The plan was
quickly altered (the U.S. embarrassedly taking its cues from the prime minister of
England) from a purchase of assets to a contribution of capital in which the
government would receive interest-bearing preferred stock in exchange. A disturbing
note is Secretary of the Treasury Paulson's plea to the banks who have received the
capital contribution to lend it out rather than hoard it. What is disturbing is that since
banks are in the business of lending and do not receive a return on money that they
hoard, they don't need prodding to make loans unless the risks are too great. The risks
remain too great unless the capital infusion ($250 billion split among nine banks) is
large enough to make the banks adequately capitalized. With the recession/depression
spreading and deepening, the risks of lending are growing and so the banks need a
bigger capital cushion than when the economy was booming. It will not be prudent for
them to lend unless either they have that cushion or the government guarantees the
repayment of the loans they make. 3. The severity of the recession/depression
precipitated by the financial crisis cannot yet be gauged accurately. One reader
amusingly cites the prediction of "Scholars of Astrology" that the economy will recover
in seven months. If so, the crisis will not provoke a serious rethinking of the nation's
commitment to a market economy. But if the recovery takes substantially longer--if, as
seems possible, we are in the midst of the most serious depression since the Great
Contraction of 1929 to 1933 (and why has the word "depression" become
unmentionable? Why does everyone except me prefer the anodyne euphemism
"recession?)--then that commitment will come under fire. Should it? There are three
basic types of economy (with many intermediate possibilities, of course): a pure free-
market economy; a regulated market economy; and socialism. In the first, all economic
ordering is left to private action: money is private, contracts are enforced not by legal
means but by concern with reputation and threats of retaliation, caveat
emptor prevails, and the role of government is limited to providing internal and
external security against violence. In such a world there are, for example, no restaurant
inspectors, and if you get ill eating in a restaurant you have no legal recourse; but
restaurants might form voluntary associations that would conduct inspections, and
careful consumers would patronize only the members of reputable such associations.
Very few economists support so lean a system of government. Virtually all support a
regulated market system in which, for example, victims of food poisoning have tort
remedies but systems of restaurant inspection are also instituted, to back up those
remedies in recognition that most incidents of food poisoning are not serious enough
to warrant the expense of bringing a lawsuit and that many restaurants operate on a
shoestring budget and could not pay a substantial tort judgment. An alternative to
inspectors might be requiring anyone entering the restaurant business to post a
substantial bond and allowing the successful plaintiff in a tort suit against a restaurant
to recover his attorneys’ fees. But these are simply alternative methods of
regulation rather than a recursion to a pure free-market economy. Given the history of
economic failure under socialism, we should exhaust the possibilities for adopting more
effective regulations of the financial-services industry before jettisoning our regulated
market system in favor of a socialist one. That is so obvious as not to require argument.
What is less obvious is why so many people think that the financial crisis is proof that a
market economy does not work and thus we need fundamental change rather than
merely incremental regulatory reform. The answer lies in what conservative
economists used to call the "Nirvana fallacy." This is the idea that any failure of the
economy to attain optimality is a "market failure" that warrants government
intervention. Conservative economists pointed out that the proper comparison is never
between the operations of the actual market and an unattainable theoretical
perfection, but between market-directed and government-directed or -regulated
allocations of resources in particular economic settings. Market failures are ubiquitous,
as the current crisis demonstrates. The crisis is not primarily a result of government
actions. The quasi-governmental status of Fannie Mae and Freddie Mac and the
pressures exerted on them by Congress to facilitate home ownership by insuring risky
mortgages were contributing factors to the crisis, but the basic causes were
misassessment by the industry of the risks associated with extremely high levels of
borrowing, misunderstanding of risk by home buyers encouraged by real estate
brokers, mortgage brokers, and banks, conflicts of interest by rating agencies,
corporate compensation policies that truncated downside but not upside risk, and the
private costs of disinvesting in an industry undergoing a bubble (the housing industry)
before the bubble bursts, since until that moment the profits from riding with the
bubble will be increasing. An additional factor was government inaction, but the failure
of government to intervene in a market that is failing obviously presupposes rather
than illustrates market failure. In contrast, gratuitous government intervention when
there is no market failure is a genuine example of government failure. So a confluence
of market failures has created an economic crisis, and the challenge is to develop
regulatory responses that reduce the cost (net of the direct and indirect costs of the
regulations themselves) of such failures. Complacency on the part of some economists
and politicians about the efficiency of the market system, and specifically an
exaggerated belief in the robustness of financial markets, have created the impression
that the current crisis is a crisis of capitalism rather than just another demonstration of
the radical imperfection of human institutions--including the market.

Food Prices and Malthusian Economics--Posner's Comment

Becker is right of course that a growing demand for food, resulting from world
population growth, relative to supply cannot explain the very steep food-price
increases that have occurred since 2006; world food prices are 75 percent higher than
they were that year and obviously world population has not grown by that percentage,
But I do not take this to be a refutation of Malthus, whose insights have relevance to
the modern world. Malthus argued that if a population is living at the subsistence level,
if population increases geometrically (for example, a couple has three children, each of
the three children eventually marries and produces three children, and so on) but food
production only arithmetically, there will be more people than can be fed, and so
population will decline through starvation, disease, or war until a new equilibrium is
reached. (Because the population is assumed to be living at the subsistence level, the
equilibrium cannot be achieved through higher food prices.) Malthus did not foresee
the technological advances that have resulted in a faster rate of increase in the food
supply than in the population, or increases in wealth that enable food prices to rise to
prevent shortages should demand outrun supply. Nor did he foresee modern
contraception technology, or China’s one-child policy. But given his assumptions, his
analysis is sound and it gave Darwin the clue he needed to develop the theory of
natural selection. In Malthus's model people kill each other to avoid starvation, and
those who do best in the desperate struggle survive--hence survival of the fittest as
determined by a competitive process. As Becker points out, Paul Ehrlich and others
predicted in the 1970s (beginning with the first "Earth Day," in 1970) mass starvation as
a result of continuing population growth. They were wrong, in part by failing to predict
the Green Revolution, which greatly reduced the cost of food production. The situation
today is different. The demand for agricultural products has grown, though not as a
result of population growth; instead as a result of increased demand for ethanol and
other biofuels, and for food that requires more agricultural acreage to produce. Today,
besides people and pigs eating corn, our motor vehicles "eat" corn that has been
converted into ethanol. And in China and India, which together contain a third of the
world's population, increased wealth has led to an increased demand for meat, in
China for beef. Cattle eat corn and other crops and are in turn eaten, but the amount of
crops consumed in this process is several times greater than the amount that would be
consumed if people ate the crops directly, rather than indirectly by eating vegetarian
farm animals. China's consumption of beef, which has been growing rapidly for a
number of years, is expected to grow 4 percent this year--yet it will still be only about
15 percent of U.S. beef consumption per capita. Increased demand for agricultural
products should lead to increased supply, but the supply response is limited because of
the higher price of gasoline, an important input into food production, and because of
scarcity of good agricultural land (in part a result of population growth), which implies
an upward-sloping supply curve for food.. The fact that increased demand for
agricultural products, and resulting high prices, are due to factors other than growth of
population does not make a demand-supply imbalance any the less serious. We may be
seeing the beginnings of an attenuated Malthusian response in Egypt, where there
have been riots recently over food prices. Egypt is a poor country, and to avoid violence
the government has had to increase its food subsidies--making the country poorer and
hence more vulnerable to political instability, which could result in an Islamic
insurrection. In poor countries today, as in ancient Rome, keeping the urban population
happy is the foremost political imperative, because urban riots, especially in a nation's
capital, can bring the government down. Urban residents are not farmers, so rising
food prices only hurt, and do not help, them. But urban food subsidies immiserate the
rural population, and limits on food exports, designed to control domestic food prices,
disrupt the international agriculture market. Our ethanol subsidies, and equivalent
policies, such as the European Union's rejection of genetically modified foods, and the
wealthy nations' (including the United States') tariffs on agricultural imports, could in
principle be abandoned in order to increase the supply of food. But domestic interest-
group pressures (which in the United States include the disproportionate influence that
Iowa exerts in presidential politics) make reform unlikely.

Bill Gates on Corporate Philanthropy--Posner

I became acquainted with Bill Gates when some years ago I mediated (unsuccessfully)
the Justice Department's antitrust suit against Microsoft. I was reassured to discover
that the world's wealthiest person is extremely intelligent and surprisingly
unpretentious. But I am disappointed by the recent speech on "creative capitalism"
that he gave at the World Economic Forum in Davos last month. Almost half the
world's population is extremely poor, subsisting on less than $2 a day; a billion are
thought to subsist on less than $1 a day. Most of the very poor live in sub-Saharan
Africa and in southern Asia. Gates argues that the key to alleviating their poverty is
"creative capitalism," whereby private firms in the United States and other wealthy
countries seek both profits and "recognition" (praise) in serving the needs of the poor,
for example by developing technologies designed specifically for their benefit. C. K.
Prahalad, a business school professor admired by Gates, notes that Microsoft is
"experimenting in India with a program called FlexGo, where you prepay for a fully
loaded PC. When the payment runs out, the PC shuts down, and you prepay again to
restart it. It's a pay-as-you-go model for people with volatile wages who need, in effect,
to finance the purchase." If there are good business opportunities in poor countries,
however, it does not require Gates's urging for businesses to seek to exploit them. So
the only meat in his concept of creative capitalism is his proposal that businesses
accept subnormal monetary returns in exchange for getting a good reputation as do
gooders. But if a reputation for good works has cash value, then, once again, there is
no need for Gates to urge businesses to serve the poor; self-interest will be an
adequate motivator. If it is true as he says in his speech that "recognition enhances a
company's reputation and appeals to customers; above all, it attracts good people to
the organization," then creative capitalism pays because it enables a firm to charge
higher prices to its customers and pay lower quality-adjusted wages to its employees.
Whether this is true of a given firm's customers and employees is something that the
firm is better able to gauge than an outsider, even so distinguished a one as Bill Gates.
If on the other hand reputation does not have cash value, or enough cash value to
offset the reduction in financial returns that would result from conducting one's
business in such a manner as to obtain a reputation for altruism, then the motivation
for creative capitalism would have to be businessmen’s feeling good about helping
the disadvantaged. But which businessmen--corporate managers or investors? Do
shareholders--the corporation's owners--feel good when corporate management picks
objects of charity, unless the charitable giving feeds the bottom line (as when a firm
makes charitable donations to activities and institutions in the places in which it has its
plants or offices)? Unless shareholders are eager to see their corporations give massive
amounts to charities that are chosen not by the shareholders but by management and
that do not contribute to corporate profits, it is hard to see how urging businesses to
be disinterestedly charitable can have a significant effect. A business that fails to
maximize profits places itself at a competitive disadvantage relative to businesses that
do maximize profits. Only if charity contributes to profits is it a plausible investment for
an investor-owned firm. There is a hint in Gates's speech that profit maximization is the
real goal, and the question for "recognition" a veneer. When he talks up "business
models that can make computing more accessible and more affordable," it sounds as if
he may be trying to develop new markets for Microsoft. That is also the implication in
Prahalad's statement that I quoted. Gates talks about "markets that are already there,"
that is, in poor countries, "but are untapped." In other words, there are business
opportunities in poor countries, and business opportunities require imagination rather
than altruism to exploit. A curious omission in Gates's speech is a theory of why so
many people are desperately poor. When he says that "diseases like malaria that kill
over a million people a year get far less attention than drugs to help with baldness," he
does not pause to inquire why that is so. It is so, first of all, because people in wealthy
countries do not suffer from malaria, and, second, because cheap but highly effective
methods of combating malaria, such as mosquito netting and indoor spraying of DDT
(which would have few negative environmental effects, unlike outdoor spraying), are
somehow not provided, but for reasons political and cultural rather than financial. We
know that a nation doesn't have to be rich in natural resources to be prosperous. The
essential ingredient of economic growth is human capital, and it depends primarily on
the existence of a political system that prevents violence, enforces property rights,
provides a minimum level of public goods, and minimizes governmental interference in
the economy. Without such institutions, economic growth will be stunted; altruistic
capitalists will not cure their absence. Gates has discovered the Adam Smith of The
Theory of Moral Sentiments, where Smith argued that people are not purely self-
interested, but instead are actuated, to a degree anyway, by altruism. But modern
studies of altruism find it concentrated within the family and trace it back to the
"selfish gene"—helping someone who shares one's genes may increase the spread of
those genes in subsequent generations, and if so there will be natural selection for a
degree of altruism. And so as the relationship between people attenuates because of
distance, race, and other factors, the degree of altruism declines. That is one reason
that Gates's argument that "recognition enhances a company's reputation and appeals
to customers; above all, it attracts good people to the organization" falls short. Few
customers will pay more, and few skilled workers will accept lower wages, to benefit
poor people in distant lands. Finally, I take issue with Gates's assumption that
alleviating world poverty is an unalloyed social good. He calls himself an optimist, but
some might describe him as a Pangloss, when he says that "the world is getting better"
and will be better still if there are no more poor people. If Gates said that prosperity,
longevity, and other good things have increased in most of the world, he would be
right. But there is no basis for predicting that these trends will continue, given such
threats to peace and prosperity as international terrorism, political instability, nuclear
proliferation, and global warming. And if creative capitalism does succeed in lifting
billions of people out of poverty, the problem of global warming will become even
graver than it is because the world demand for fossil fuels will soar.
Rising Food Prices and What That Means-Becker
Malthus and the many neo-Malthusians of modern times assume that the threat from
world overpopulation would show up first in rising food prices. The biologist Paul
Ehrlich even predicted in 1968 in the book "The Population Bomb" that hundreds of
millions persons in the world would be starving by the mid-1970's because of food
shortages. Of course, that absurd forecast never materialized because during the past
40 years worldwide prices for grains and most other basic foods fell relative to non-
food consumer prices. This has reversed during the past couple of years, especially in
2007, as food price inflation has greatly exceeded the price increases of other
consumer prices. Are the Malthusian fears finally being realized, or is this rise in food
prices due to other forces? Little evidence supports the role of population growth as an
important factor behind the recent spurt in food prices since the growth in world
population has slowed in each subsequent decade during the past 30 years. A more
significant force behind the rise in food prices is the rapid growth in the per capita
incomes of developing countries, especially China and India, which has raised world
demand for proteins found in grains, dairy, and meat. Subsidies to corn and other crops
to produce biofuels have also reallocated substantial acreage away from food
production, and toward the production of substitutes for oil and other fossil fuels.
Ethanol production will consume almost 30 percent of corn production in the United
States next year, which mainly explains the rapid rise in world corn prices. In addition,
droughts and animal disease in major food producers like Australia and China
contributed also to recent food price increases. Many countries were panicked by the
sharp rise in food prices during the past couple of years into imposing price controls on
basic foods, export restrictions on food production, subsidies to food imports, and
various other measures. This is reminiscent of Richard Nixon's 1973 ban on the export
of soybeans from the United States because of rising soybean and other food prices.
Russia, faced with parliamentary elections in December, has imposed export duties on
some grains, while Putin pressured major food retailers to freeze prices on various
foods until the election. The Moroccan government forced bakers there to hold the
price of bread steady during the holy month of Ramadan. The European Union has
suspended, unfortunately not rescinded, its rules that prevent farmers from planting
cereals on a specified fraction of their land. Many other countries are also considering
controls, subsidies, and regulations to prevent food prices from rising so rapidly. Most
of these policies are counterproductive because they discourage rather than encourage
food production. This is especially true of price controls since farmers will grow less of
the foods that have artificially low price ceilings. For example, if price controls were
placed on wheat, farmers will shift some land from wheat to other products whose
prices are allowed to rise faster. Subsides to food production generally lead to greater
supplies of food, but at the expense of distorting the allocation of resources between
foods and other goods that consumers want. On the other hand, removing tariffs on
food imports, removing subsidies on food exports, and easing restrictions on how
farmers can allocate their land among different uses do contribute to greater efficiency
in worldwide food production and consumption. Food prices declined relative to other
prices during the past 40 years, and in fact for most of the 20th century, because of
remarkable advances in food production technologies. These include the development
of better fertilizers, new crop rotation methods, control of diseases to plants and
animals, better breeding techniques, genetic modifications of crops, and other
innovations. There is little reason to expect any slowdown in the rate of innovation
during the next several decades, especially if governments reduce their restrictions on
genetically modified crops, and if farmers are allowed to respond freely to market
prices and other signals. Rapid increases in the cost of foods hurt consumers in poorer
countries more than those in richer countries because households in poorer countries
spend a much bigger fraction of their incomes on food. Food accounts for about 10
percent of total consumer sending in the United States and other rich countries
compared to over 60 per cent in very poor countries like Afghanistan, Nigeria, and
Bangladesh. This means that say a thirty percent rise in food prices over a 5 year
period, with other prices and money incomes held fixed, would reduce the standard of
living in rich nations only by about 3 per cent, but it would lower living standards in
poor nations by 21 per cent. The nutrition of Afghanis and consumers in other poor
countries who are already close to the minimal subsistence margin would be severely
affected. Similarly, poorer consumers within a country spend larger fractions of their
budgets on food than do rich consumers. Hence, the poor would be hurt more by rises
in prices of basic foods. This is a main reason why governments are so sensitive to price
increases of grains and other stables of the poor. If they forget, political leaders would
be reminded of the 1977 Egyptian riots after that government raised bread prices, or
the Mexican unrest at the beginning of this year when the price of the flat corn bread
used to make tortilla, a staple of the diets of poorer Mexican households, rose by
several hundred percent. My conclusion is that putting aside two major uncertainties,
the Malthusian fears about rising food prices will not materialize. Food production will
adapt to the growing demands from developing countries, and food prices in the future
should continue their downward trend of the past century. One uncertainty that could
upset this optimistic forecast relates to global warming, for food prices might rise
steeply if global warming had sizable negative effects on the worldwide productivity of
agricultural land. The second concerns biofuels, since food prices would also increase if
sizable amounts of additional acreage continue to be diverted to production of ethanol
and other biofuels in the attempt to cut down the use of fossil fuels.

How to Control China's "Export" of Air Pollution--Posner

Two weeks ago the New York Times published an article on pollution in China: "As
China Roars, Pollution Reaches Deadly Extremes," Aug. 26, 2007, section 1, page 1. The
point of interest is this: "Sulfur dioxide and nitrogen oxides spewed by China's coal-
fired power plants fall as acid rain on Seoul, South Korea, and Tokyo. Much of the
particulate pollution over Los Angeles originates in China" (p. 6). These effects are
separate from China's growing contribution to global warming: it is possible that by the
end of this year China will surpass the United States as the leading emitter of carbon
dioxide into the atmosphere. Although China is making some efforts to curb pollution,
its efforts are more likely to reduce the rate of growth of pollution than to reduce it
from its current level, because of the continued rapid expansion of the Chinese
economy, which includes a rapid growth in the number of vehicles using China's roads.
Global warming affects the entire earth, though unequally, but Chinese air pollution is
"exported" mainly to a few nations, mainly Korea, Japan, and the western United
States. Other differences between the carbon-emission and conventional air-pollution
phenomena are that there is far more uncertainty about the magnitude of the threat
posed by global warming, and far greater costs to arresting global warming, than in the
case of China's external air pollution, and this enables one to see the problem of
international control of air pollution in rather clearer terms than that of controlling
carbon emissions. It is a problem of externalities. The costs of Chinese air pollution to
Koreans, Japanese, and Americans are not costs to China, and the benefits of abating
this external pollution would not be benefits to China. But this description of the
problem ignores the Coase theorem, one version of which is that if transaction costs
are low, the market itself will internalize externalities and thus solve the externalities
problem. We might think of the present legal regime as one in which China has a
property right in the activities that give rise to pollution, or stated more precisely that
its ownership of coal-fired power plants, gasoline-powered vehicles, and so forth
carries with it a right to pollute. If so, then Korea, Japan, and the United States
(assuming they are the only countries seriously affected by Chinese pollution) could
persuade China to reduce its pollution by paying China an amount of money just
slightly above what it would cost China to reduce its pollution "exports" to these
countries to the level desired by the "victim" nations. This assumes that the cost of the
negotiations, both among the victim nations and with China, would not be so great as
to prevent a deal that made all the parties involved better off; but it is not clear why
those costs should be particularly high. Nor is there a serious danger that China would
increase its polluting activities in order to extort more money from the other nations,
since pollution hurts the people of China far more than it hurts any other population
(the pollution described in the Timesarticle is grotesque in its magnitude and lethality).
The transaction would be efficient, but it would also bring about a transfer of wealth
from what I am calling the victim nations to China. But this is a common kind of market
event. A real estate developer who wanted to create a residential community on land
adjacent to a funeral home, and feared that the funeral home's presence would
depress house values by giving the occupants of the houses an unwelcome reminder of
their mortality, could pay the funeral home to relocate. And if buying off a polluter
seems crass--"Greens" would denounce it for conveying the message that pollution is a
legitimate byproduct of economic activity (a "commodity" for the victims of air
pollution to buy from the polluter)--there are other means of inducing China to reduce
air pollution. There are things that China wants from Korea, Japan, and the United
States, and these countries can give China some of those things in barter for China's
strengthening its enforcement of its existing pollution controls or adopting and
enforcing newer, more stringent ones. An alternative would be to negotiate an
international agreement by which China and all other nations surrendered control over
their pollution to an international environmental protection agency. But the
transaction costs would be prohibitive, in part because of extreme uncertainty about
the policies that the agency would adopt. Nations do not surrender their sovereignty
lightly.

China's Air Pollution-Becker

It is more or less inevitable that China's economy will spew out a lot of pollution, given
its extraordinary rate of growth for over 20 years, and the abundant supplies of coal
that fuel its power generation. The important question raised by Posner is what, if
anything, will induce China to cut its pollution, including the pollution that spreads
internationally to its eastward Asian neighbors and countries in the western
hemisphere, especially Canada and the United States. Posner emphasizes the potential
for international collaboration because the harm to these affected countries will tend
to exceed the cost to China from cutting its pollution. China is imposing a burden on
these other nations that it does not fully incorporate into its decisions about which
fuels to use, how to invest in scrubbing and sequestering technologies and equipment
that reduce the amount of pollutants that its plants use, its taxation of gasoline that
discourage driving and more efficient cars, and the many other ways to reduce
pollution. Since greater pollution-reduction efforts would lower the growth rate of its
output, the harm to other nations would not enter into its policy calculations unless
forced to by threats of economic retaliation, or induced to do so by various forms of
intercountry compensation and cooperation. The New York Times article referred to by
Posner indicates that opposition to pollution is also growing rapidly in China itself for
reasons that have little to do with protests of other countries. When countries start
developing rapidly, their first concern is greater resources for consumption and
investment, for they do not believe they can afford to take extensive measures to
control air pollution if that slows down their growth out of poverty. As they get richer,
however, concerns about the level and growth of various types of pollutants get
magnified. As economies continue to develop, their citizens exert greater pressure on
governments to improve air and water quality. Governments generally respond by
regulating and taxing more extensively the omission of pollutants. The result typically is
that air, water, and other kinds of pollution at first rise sharply with economic
development, and then fall about equally sharply as development proceeds still
further. This inverted U-shaped relation between a country's level of pollution and its
level of GDP per capita is called the "Environmental Kuznets Curve" after the Nobel
prize-winning economist, Simon Kuznets. He had established such an inverted U-
shaped relation between income inequality within a country and its level of per capita
GDP, and researchers discovered about 20 years ago that the same type of inverted U
relation holds for environmental damage, such as particulates in the air. In fact, the
two Kuznets relations are not independent since one way to reduce inequality in
measures of full income that include environmental damage is to reduce the degree of
pollution. Prior to the discovery of this U-shaped environmental relation, the general
opinion was that environments were inevitably damaged more as industrialization
increased and economies developed. That is still a common view among those
unfamiliar with the evidence. To be sure, the full evidence indicates that no single
relation between environmental effects and economic development fits all pollutants
in all countries. For example, theory predicts that domestic opposition would make
governments more responsive to local pollutants of air and water, and less responsive
to global pollution, such as emission of greenhouse gases. In fact, the U-shaped relation
does seem to hold better for local pollutants. These Kuznets-type relations are
beginning to take hold in China, as judged from the growing complaints about various
types of pollution, and discussions by scientists and government officials about steps to
take to respond positively to these complaints. This reaction to internal complaints may
not be sufficient to satisfy its neighbors in Asia and in the Western hemisphere since as
I mentioned, different types of pollution operate within and between countries.
Moreover, China's richer neighbors would be more sensitive to pollution than the
poorer Chinese are. However, as China continues to develop, the complaints due to
"internal" externalities will begin to interact more with the complaints due to the
"external" externalities imposed on other countries. The combination of internal and
external complaints should push China even faster along reductions in environmental
damage than has been typical in the past when countries responded mainly only to
internal complaints about pollution levels.

Intelligence and Leadership--Posner

IHere is a puzzle: effectiveness in senior leadership positions in government does not
seem to be well correlated with intelligence. Washington was a better President than
Jefferson, though less able intellectually. Franklin Roosevelt, Harry Truman, Dwight
Eisenhower, and Ronald Reagan were not as bright as Herbert Hoover, Richard Nixon,
Jimmy Carter, or Bill Clinton. Lincoln, a brilliant lawyer, is an exception; Theodore
Roosevelt perhaps another exception; and doubtless there are others. But overall the
correlation between intelligence and effectiveness in the Presidency may actually be
negative. Even more striking are the failures of Kennedy and Johnson's national
security team in Vietnam and George W. Bush's national security team in Iraq.
McNamara and his whiz kids (such as Daniel Ellsberg, Harold Brown, and Alan
Enthoven), the Bundies, Walt Rostow, George Ball—these were extremely able people,
many of them (like McNamara and McGeorge Bundy) truly brilliant. And Bush
assembled an outstanding national security team--Cheney, Rumsfeld, Powell,
Wolfowitz, Rice, Tenet (appointed by Clinton but held over by Bush). Two members of
the team--Cheney and Rumsfeld--were former secretaries of defense! And Powell was
a former chairman of the joint chiefs of staff. It could just be bad luck, but I think not.
Economists distinguish between general and specific human capital, the first created by
IQ and education and the second by training and experience in a particular job. A
person who has a large amount of general human capital is likely to find a job in which
that capital, augmented by on the job training and experience, is highly productive. The
resulting success will make him an attractive candidate for a high-level government job.
The high-level jobs are filled generally by lateral entries from quite different jobs,
rather than by civil servants. Some of these high-level jobs are technical; an example is
the chairmanship of the Federal Reserve Board. Such jobs are relatively easy to fill with
persons who can be predicted with reasonable confidence to do a good job. But there
is a tendency to exaggerate the versatility of the combined general-specific human
capital that a lateral entrant brings to a high-level government job of a managerial or
advisory rather than technical character. There are several characteristics of such a job
that actually militate against the prospects for the success of an extremely intelligent
person. First, these are "ensemble" jobs in the sense that many different skills or
aptitudes are necessary to successful performance; if one of these, such as intelligence,
is very highly developed, a person may neglect the others. Second, it may not be
possible to use step-by-step, logical reasoning to solve the problems laid at the feet of
the occupant of a job like secretary of defense or secretary of state or national security
adviser. Such questions as what to do in Vietnam or what to do in Iraq do not lend
themselves to rigorous analysis because there is not enough information to analyze.
Intelligence is not designed for coping with situations that are not complex, but rather
are profoundly uncertain. Having great information-processing skills is not worth a lot if
you have no reliable information. Third, leaders or managers should be more intelligent
than their followers or subordinates, but not too much more intelligent. If they are too
much more intelligent, they will have difficulty assessing the capacities and limitations
of their underlings and they will be tempted to substitute their intelligence for their
underlings' knowledge. Analysis and knowledge are, to an extent, substitutes. You can
multiply two numbers rapidly if you have good computational skills or if, though your
computational skills are mediocre, you have memorized the multiplication table.
Knowledge in government resides in civil servants, and they tend on average to be less
intelligent (also of course less powerful) than brilliant laterals. So the latter are
tempted to think that they can make decisions with minimal assistance from the civil
servants. The temptation is reinforced by a failure to distinguish between intuition and
step-by-step reasoning. Cognitive psychologists explain that the human unconscious
contains more information than we can access at a conscious level. As Herbert Simon
(an economist and psychologist) explained, conscious attention is a severely limited
faculty and must be carefully rationed. Through intuition, however, we can access the
larger repository of unconscious information. Hence we speak of a person as having
"experience" or "good judgment" or "common sense," as distinguished from being
brilliant in the sense of being quick or having a good (conscious) memory. So now
imagine a confrontation between a brilliant person who has no knowledge about
Vietnam or Iraq, and a career State Department officer who has spent his whole career
working on conditions in one of those countries, who knows the language, has lived
there, and is steeped in the country's history, culture, and politics. Suppose he offers
some advice to the brilliant senior official, and the latter asks him to explain and justify
the advice. He may be unable to do so because he may be drawing on a repository of
information below the conscious level. The brilliant official may be irritated at his
inability to extract much more than a conclusion from the expert. What is required at
the top levels of government is not brilliance, but managerial skill, which is a different
thing, and includes knowing when to defer to the superior knowledge of a more
experienced but less mentally agile subordinate. Moreover, so specialized is
management as a job that success in managing a business may not translate at all into
success in managing a government agency. The firm-specific human capital that a
person acquired in a career of management in a business firm may have no value for
the management of a government agency, or for that matter a university, a private
foundation, or an international organization. Indeed, an experienced manager of a firm
may falter and have to be fired if a change in the firm's environment requires a
different type of management skill. A striking example of the specialized character of
leadership human capital is Larry Summers. A truly brilliant person and successful
secretary of the treasury, he failed as president of Harvard University though he
seemed to many people (myself included) to be an outstanding choice. I have the
highest personal and professional regard for Summers and blame the failure of his
presidency not on him but on the Harvard faculty of arts and sciences. But the fact is
that he failed, because he was not able to port his very considerable suite of
intellectual and managerial assets to the management of an organization critically
different from the Treasury Department.

Intelligence and Leadership-BECKER

Economists have been emphasizing in recent years that that while cognitive abilities of
individuals certainly raise their education and earnings, many non-cognitive skills are
often more significant. These skills include simple factors like finishing one's work on
time, to more complicated ones like good judgments in making decision, or
effectiveness at using talents of subordinates. Posner argues convincingly that non-
cognitive talents may be of greater importance in determining success at top-level
government leadership positions than analytical brilliance and other cognitive skills. He
provides several explanations for the mixed success of cognitively able persons at
important government positions, including limited extensive governmental experience-
although not applicable, for example, to either Donald Rumsfeld or Richard Cheney-
their reluctance to rely on the experience and knowledge of underlings, and the
difficulty of using systematic analysis to evaluate the uncertainties in major
government decisions. The limited role of top analytical skills might explain why voters,
as opposed to intellectuals, typically do not weight heavily the "IQ" of presidential
candidates in choosing whom to vote for. The modest value of exceptional analytical
skills should also imply that presidents would not place major emphasis on these skills
when choosing their top cabinet officers and other high level appointees. Although as
Posner indicates, some presidents have appointed brilliant men who failed at major
positions, on the whole brilliance is not the most important characteristic that
presidents use in choosing their top appointees. Of course, government leadership
positions are not unique in requiring a much more varied set of talents than cognitive
analysis. Success at top business and academic administrative positions also depend on
omplicated mixtures of different talents. Cognitive brilliance is often not essential, and
sometimes is even a handicap, in determining success at these positions as well. Many
of the most successful business leaders have not been brilliant at systematic analysis,
and some cognitively highly able persons failed miserably. Posner mentions Lawrence
Summers, who was highly successful both as an academic teacher and researcher, and
as a U. S. Treasury official, but had major troubles as president of Harvard. Another
example from the academy is George M. Beadle, a Nobel Prize winning biologist who
was a rather mediocre president of the University of Chicago. To be sure, that many
persons with exceptional analytical abilities fail at top leadership positions in large
organizations may largely reflect the fact that failure, or at least mediocrity, is more
common than success among heads of large organizations, whether it be government,
business, or academic institutions. I am confident of that claim with respect to
universities, the organizations I know best, where inspired leadership has not been
common. A major reason for this must surely be the great difficulty in predicting how
men or women would perform when they get promoted within an organization, or
when they move in a lateral way from one organization to another. The skills, for
example, to succeed as provost of a university involves an ability to deal effectively
with professors, to evaluate recommendations for professorial promotions and outside
appointments, and to handle related faculty matters. Many provosts use success at
that position to become candidates for presidents of universities, but the talents
required to succeed as president are quite different. Presidents have to raise money,
deal with businessmen, foundations, and legislatures, appoint deans, and make other
basic administrative and organizational decisions. How well someone performed as
provost gives some but limited insight into how well they would perform at the
different tasks required of a president. This is even truer when they become president
at a university different from the ones where they were provost.
How to Conserve Water Efficiently-BECKER
The sharp rise in world population and income during the past five decades has
stimulated greatly increased demand for clean water, and concern about whether the
supply of water would be adequate to meet these needs. Demand for usable water in
the future will surely continue to grow at a significant pace unless steps are taken to
reduce demand, while the supply of water could grow more slowly, especially if global
warming reduced rainfall and increased evaporation of water. The best way to bring
demand into balance with supply is to introduce much more sensible pricing of water
consumption than is common in most countries. Many discussions of water
conservation create the impression that households are large and inefficient users of
clean water for drinking, eating, bathing, and toilet flushing. That is a myth. About 40
per cent of all the freshwater use in the United States is for irrigating land for
agriculture, another 40 percent is used to produce power, and only 8 percent is used
for domestic use; these percentages are similar in other countries. Moreover, about a
third of all the water used by households in rich countries goes to water lawns and for
other out door purposes, so probably no more than about 5 per cent of the total
demand for water is for personal use. Water used is usually a poor measure of the net
amount of water consumed since much water is returned either immediately, or after
evaporation and condensation, to the source pool, where it can be used again.
Thermoelectric plants use a lot of water for cooling purposes, but typically have a very
high reutilization rate (about 98 percent). Household use is also efficient, with a
reutilization rate of about 75 percent. As a result, neither power producers nor
households are big net consumers of water. Irrigation of farmland absorbs much water
since most irrigation systems have low reutilization rates. In California, the biggest
water using state, irrigation systems have a reutilization rate of only about 40 percent.
Governments usually try to close the gap between the supply and demand of usable
water by command and control policies that regulate water use, usually starting with
households. Many local governments have introduced requirements for low flow toilet
flushes, bans on lawn watering except during certain hours or days, requirements for
more efficient household outdoor watering systems, and other water conserving
regulations. None of these regulations do anything to economize on the water used by
farmers and industry, the main demanders of water. Water is wasted in many ways by
all sectors, and regulations do nothing to affect the main source of wasteful use of
water: the inefficient pricing of water. Most irrigation systems in the world price water
through annual flat fees, and not through charges that rise with the water consumed.
Often domestic water use is not priced at all, and when priced, flat fees are far more
common than fees that depend on use. As with any other scarce good, water is wasted
when the cost of using more is negligible. The obvious solution is to implement fees
that rise with the amount of water demanded. Such fees are especially important in
the agricultural sector since farming is a heavy consumer of water. Consumption ideally
would be defined as net use after reutilization is accounted for. With this measure, the
fee per gallon of water used would be low to power plants since they recover almost all
the water they use. Farmers would tend to pay a lot both because they typically use
much water, and also because most agriculture irrigation systems do a poor job of
recovering the water used. Fees that rise with consumption would reduce the demand
for water partly by cutting demand. For example, households would water their lawns
less frequently, and sometimes would replace natural grass with artificial grass, or with
rock gardens and trees, Farmers would cut their demand for water by switching away
from crops that require much water, such as rice, toward crops that need less, such as
wheat. They would also switch to more efficient irrigation systems, such as spraying
and dripping rather than flooding (which is the cheapest), if the price of water took
account of reutilization rates. With proper water pricing, California and other regions
that need expensive irrigation system to grow rice and other water-intensive crops
would switch to other crops, or to other uses of their land, so that water-intensive
crops would become more concentrated in areas with abundant water supplies. More
generally, with sensible water pricing in different countries, arid parts of the world
would not grow food that absorbs much water, and would shift to other crops and
activities that they would exchange for these foods. Some opponents of effective
metering of water demand claim that it would not reduce the use of water because of
the mistaken belief that most of the water used goes to households for drinking and
personal hygiene. The demand for water for personal use may not be very responsive
to price, but households in developed countries use lots of water for lawns and
swimming pools that would be sensitive to the price of water. Also public and private
golf courses and some other recreational facilities require much water, and these uses
too would respond to higher water costs. Clearly, the use of water in agriculture and
industry would be sensitive to its price. Effective water pricing is even more important
to poor countries since they cannot afford expensive methods of increasing the supply
of usable water, such as desalinization, and since a large fraction of their water is used
in agriculture with inefficient irrigation systems. Yet most poor countries make little
effort to price water sensibly. Implementation of significant fees is not easy politically
since households and farmers believe they have a right to as much water as they can
get. In particular, farmers in richer countries are well organized politically, and often
resist efforts to raise the cost of water they use to irrigate their land. Perhaps their
opposition could be weakened if they received generous reductions in their water fees
when they introduce irrigation systems with high reutilization rates.
The Science and Economics of Water Shortage--Posner
The shorter the supply of a natural resource, the more important it is to have an
institutional structure for allocating it efficiently among demanders, both present and
future. In this respect usable fresh water is not fundamentally different from other
scarce resources, such as oil and gas. The qualification in "usable" is important. Global
warming does not diminish the world's supply of fresh water, but it reduces the supply
of usable fresh water. Spring snowmelt is an important source of fresh water in many
parts of the world, including California. That source will diminish as rising global
temperatures cause more precipitation to take the form of rain rather than snow--and
rain is much harder to collect and distribute than the spring runoff from melting snow.
Higher global temperatures also increase the demand for water, as does an increasing,
and increasingly prosperous, global population. Of course, in principle, an increase in
the demand for a good relative to its supply is not a problem. Price quickly rises,
reducing demand and thus reestablishing equilibrium; so no more shortage. In the
slightly longer run, moreover, the higher price leads to increased supply; in the case of
water, one can anticipate greater use of desalination, that is, converting sea water into
fresh water. Between water conservation by consumers trying to reduce their water
bill, and increased supply of fresh water by the water industry, there should be no
shortage, in the sense of an imbalance between demand and supply resulting in
queuing, black markets, degraded quality, technological stagnation, politicking (Becker
mentions discrimination in water pricing in favor of households and farmers), and
corruption. The problem is that the market in fresh water is inefficient. Becker focuses
on the inefficient pricing of publicly owned water supplies--for example, charging a flat
rate regardless of the quantity consumed, or failing to take account of reutilization
(that is, the consumption of return flow). But a deeper problem is the institutional
structure. One aspect is public ownership of water systems. There is no reason why a
city should own the water company any more than it should own the cable television
company. It is true that these are both networked services and therefore have aspects
of natural monopoly; it would be wasteful to have multiple grids of water pipes in the
same city. But through the contractual process a city can exploit "competition for the
market"--that is, it can award a contract for the sale of water to whatever provider
offers the best deal for the city's residents. A still deeper institutional problem is the
inefficient system (or systems) of property rights in water. In the western United
States, where water is scarce, users obtain a property right by "appropriation," that is,
by actually using water from a lake or stream. The amount they take is recorded and
that is their property right. Any return flow can be appropriated by a downstream user.
Now suppose an upstream user wants to sell his appropriation. He cannot do so
without getting the consent of any downstream user who may be adversely affected by
the sale because he had appropriated a portion of the upstream user's return flow.
There may be many of those users, thus greatly increasing the transaction costs of
reallocating water to a higher-valued use. In addition, because ownership of water
rights is based on use, there is no incentive to hold water off the market, for future use;
if one doesn't use the water one has appropriated, one loses one's property right. The
basic problem is that the same resource is jointly rather than singly owned, so that
before it can be sold there must be a transaction among the owners, and the more
owners, the higher that initial transaction cost. The problem is greatly exacerbated
when an interbasin transfer is being contemplated, that is, a transfer of water from one
watershed to another. For then all the users of return flow in the originating watershed
will be deprived of their water. Such problems are not unique to water, and are not
insoluble. A parallel problem in oil is solved by unitization. Very often a number of
separate oil companies will be drilling into the same underground oil field, and each
has an incentive to take as much as it can as fast as it can (for example by drilling more
wells), for what it leaves in the ground will be taken by other companies. The oil-
producing U.S. states authorize "compulsory unitization," whereby if two-thirds of the
owners of the land above a common oil field vote to conduct their operations under
common management, the rest are bound. (Requiring unanimity would created serious
hold-out problems.) A similar regime might be feasible for the users of a lake or stream.
This would eliminate the inefficiency of a possession- or use-based system of property
along with the inefficiencies associated with joint ownership. In short, the solution to
water shortages is likely to be privatization and intelligently designed property rights,
using the institutional framework of natural resources such as oil, gas, coal, and other
mineral resources as a model. This solution seems, moreover, as apt to African nations
facing acute water shortages as it is to the milder problems of U.S. water supply.

Discounting Greenhouse Gas Effects in the Distant Future-BECKER

Under present scientific calculations, environmental damage from global warming at
current rates of CO2 emissions will be large, especially during the latter half of this
century and throughout the next few centuries. With such long delayed effects,
uncertainty about magnitudes of the damages is enormous. And it is obvious that the
size of the rate at which future effects are discounted, if they are discounted at all, will
make an enormous difference to estimates of the total value of the damages. The main
concern expressed about discounting of future utilities in evaluating public policies is
that it would give the welfare of future generations much less weight than the welfare
of present generations. Even with the "small" discount rate typically used in policy
analysis of 3 percent, the effects of global warming on the utility of generations fifty
years from now will be weighted only a bit more than ¼ as much as the effects on the
utility of the present generation. Generations 100 years in the future would be
weighted a mere 1/16th as much as the present generation. With a 3 percent rate, the
weights are cut in half every 24 years, or approximately every generation. Is this fair to
future generations? The well-publicized Stern Review on the Economics of Climate
Change for the British government thinks not, which is why the calculations in the
Report generally use a social discount rate close to zero. William Nordhaus of Yale
University who has done substantial research on evaluating the costs of greenhouse
warming uses about a 3 percent social discount rate. He shows that one should use a
significant discount rate to match the discount rate to evidence on the long-term
return on capital, the growth of consumption, and savings rates. Suppose the utility
damages from global warming to generations 50 years from now are equivalent to
about $2 trillion of their welfare. At a 3 percent discount rate, this major damage
would be valued today at about $500 billion, while any spending today that reduces
the harm to future generations would be valued dollar for dollar. Then with a 3 percent
discount rate it would not pay to eliminate these very harmful effects on future
generations if the cost were $800 billion (or more generally at least $500 billion) to
largely eliminate the future harm from greenhouse gas emissions through steep taxes
on emission, carbon sequestration, and other methods. To be sure, benefits would
exceed the present value of costs of greenhouse warming if damages were discounted
only at 0 percent, 1 percent, or as high as almost 2 percent discount rate. When
analyzing effects much further into the future, such as 150 years into the future, the
discount rate used is even more crucial. The overwhelming reason why the Stern
Review gets so much larger estimates of damages than work by Nordhaus and other is
the use of a negligible discount rate in the Review. To illustrate the advantage of using
a discount rate that reflects the return on capital, assume that the long-term return on
investments in physical capital is 3 percent. If instead of spending $800 billion on
eliminating greenhouse gases, suppose it were invested by the present generation in
physical capital, and that all the income yielded by the investment were also invested
with a 3 percent return. Then the value of this amount saved to generations 50 years
from now would be $800 billion (1.03)50 , or more than $3 trillion. Hence future
generations would be better off if instead of the present generation investing the $800
billion in greenhouse gas-reducing technologies, they invested the same amount in
capital that would be available to future generations. One criticism of this argument is
that if the resources were not invested in greenhouse gases, they would not be
invested in other capital that would accrue to future generations. Perhaps not, but
during the past 150 years, later generations in the United States and other developed
and developing nations have been much better off than earlier generations when
measured by income, health, education, and virtually all other important criteria. This
rising standard of living across generations has been achieved mainly through advances
in technology and generous savings and investments for children and grandchildren by
parents and their elected representatives. Why should this fundamental aspect of
family and public behavior be changed as a result of the accumulation of very harmful
greenhouse gases in the atmosphere? Put differently, later generations have benefited
from large and continuing advances in technologies of all kinds during the past 150
years, including those related to the environment. The rate of technological advance
has not slowed down, and may even have speeded up, during the past 20 years.
Parents and governments have chosen not to offset the benefits to later generations of
advances in technology by leaving descendants less education or capital than they
have. Of course, just the opposite has occurred. Parental behavior toward their
children and grandchildren illustrates the importance of discounting future benefits
and costs. Many parents like their children at least as much as they like themselves,
and would be devastated if any serious harm came to their descendants. Yet in
evaluating how much they want to give to their children in the form of education,
bequests, or education, they recognize that savings and education have positive rates
of return. If they invest say $40,000 in their children's education, the benefits to
children would be much greater because of the high return on education-say it would
be $80,000. By recognizing this, however, parents are in effect discounting the benefits
they provide children since they would be costing the $80,000 benefit to children at
$40,000. Using a social discount rate of say 3 percent does not sweep away the
greenhouse gas problem. The latest climate report cited by Posner strongly suggests
that the problem is quite serious, perhaps even starting 50 or fewer years from now.
However, it does imply that low weight be given to effects on the utility of generations
150 years from now, and even more so 400 years from now. Common sense also
dictates that one recognizes that technologies will be much improved in the future,
including technologies related to improving health, income, and the environment. A
positive and non-negligible discount rate is the formal way to recognize the importance
of these and related considerations.
Libertarian Paternalism: A Critique--BECKER
Libertarians believe that individuals should be allowed to pursue their own interests,
unless their behavior impacts the interests of others, especially if it negatively impacts
others. So individuals should be allowed, according to this view, to buy the food they
want, whereas drunk drivers should be constrained because they harm others, and
chemical producers should be prevented from polluting as much as they would choose
because their pollution hurts children and adults. Modern research argues that
sometimes individuals may not have enough information to effectively pursue their
interests. In these cases, it may be suggested that government regulations and rules
help guide individuals to the better pursuit of interests they would have if they had
additional information. A few weeks ago Posner and I debated the role of information
in interpreting New York City's recently enacted ban on the use of trans fats in
restaurants. A libertarian paternalist is happy to accept information arguments for
government regulation of behavior, but typically stresses other considerations. One of
the best statements of this view argues that "Equipped with an understanding of
behavioral findings of bounded rationality and bounded self-control, libertarian
paternalists should attempt to steer people's choices in welfare-promoting directions
without eliminating freedom of choice. It is also possible to show how a libertarian
paternalist might select among the possible options and to assess how much choice to
offer." Cass Sunstein and Richard Thaler, “Libertarian Paternalism is Not an
Oxymoron”, University of Chicago Law Review, 70(4), Fall, 2003; for a strong
response, see Daniel Klein, “Status Quo Bias”, Econ Journal Watch, August 2004. If
not literally an oxymoron, the term "libertarian paternalism" is, I believe, awfully close
to it. Before trying to show why, let me illustrate what this expression might reasonably
mean--Sunstein and Thaler give some innocuous examples like the placement of
desserts in cafeterias that raise no significant issues. Suppose a person smokes, but has
an internal conflict between his stronger "self" who wants to quit, and his weaker "self"
who continues to smoke whenever he feels under pressure, or in social situations. In
effect, the weaker self does not stop smoking because he has limited self-control. The
goal of paternalism in this case is to help the more dispassionate self obtain greater
control over the choices made by the conflicted individual because of his dual selves.
Such paternalism may take the form of high cigarette taxes, so that even weaker selves
would not want to smoke so much, or of ordinances to limit smoking in restaurants,
bars, and other social situations to prevent weak selves from being tempted to smoke.
The argument is that individuals would be "happier" if they were given a helping hand
to exercise self-control. One study even claims to find that smokers are happier in
states of the United States that heavily tax cigarettes than in seemingly comparable
states that tax cigarettes more lightly because higher taxes help control the urge to
smoke. If this evidence were valid, groups of smokers should lobby for higher cigarette
taxes, yet to my knowledge there is not a single instance where this has happened.
Indeed, if anything, they lobby for lower taxes, but perhaps one can claim--most
anything goes in such a world-- that they do not even know they have this conflict
among their different selves! Classical arguments for libertarianism do not assume that
adults never make mistakes, always know their interests, or even are able always to act
on their interests when they know them. Rather, it assumes that adults very typically
know their own interests better than government officials, professors, or anyone else--I
will come back to this. In addition, the classical libertarian case partly rests on a
presumption that being able to make mistakes through having the right to make one's
own choices leads in the long run to more self-reliant, competent, and independent
individuals. It has been observed, for example, that prisoners often lose the ability to
make choices for themselves after spending many years in prison where life is rigidly
regulated. In effect, the libertarian claim is that the "process" of making choices leads
to individuals who are more capable of making good choices. Strangely perhaps,
libertarian paternalists emphasize process when claiming conflict among multiple
selves within a person, but ignore the classical emphasis on decision-making process
that helps individuals make better choices. Two other serious limitations of the
libertarian paternalist approach further weaken its appeal. First, it is virtually
impossible to distinguish such paternalism from plain unadulterated paternalism. How
does one decide with objective criteria where "bounded rationality and bounded self-
control" are important, and areas of choice where they are not? For example, models
of rational addiction appear to do as well if not better than models of bounded self-
control when applied empirically to smoking behavior. Why adopt models of bounded
self-control in this case? Or to take another illustration, is the weight gain of teenagers
and adults since 1980 in much of the developed world, particularly the United States,
due to bounds on rationality and control? If so, why did it not happen earlier, or why is
the gain in weight so much greater in the United States than in most other countries?
Are Americans less able than say the Japanese or Germans to exercise self-control?
Often libertarian paternalism simply involves substituting an intellectual's or
bureaucrat's or politician’s beliefs about should be done with other peoples' time
and money for the judgment of those choosing what to do with their own incomes and
time. It is in good part because libertarians recognize the temptation in all of us to
control choices made by others that they end up in favor of allowing people to make
their own choices, absent clear negative (or positive) effects on others. A serious
problem arises if libertarian paternalism is not just considered an intellectual exercise,
but is supposed to be implemented in policies that control choices, such as how many
calories people are allowed to consume, whether adults are allowed to use marijuana
or smoke, or how much they can save. Even best-intentioned government officials
should be considered subject to the same bounds on rationality, limits on self-control,
myopia in looking forward, and the other cognitive defects that are supposed to affect
choices by us ordinary individuals. Can one have the slightest degree of confidence that
these officials will promote the interests of individuals better than these individuals do
themselves? This is why classical libertarianism relies not on the assumption that
individuals always make the right decisions, but rather that in the vast majority of
situations they do better for themselves than government officials could do for them.
One does not have to be a classical libertarian--I differ on some issues from their
position--to recognize that the case for classical libertarianism is not weakened by the
literature motivating libertarian paternalism. Indeed, when similar considerations are
applied to government officials and intellectuals as well as to the rest of us, the case for
classical libertarianism may even be strengthened!

Libertarian Paternalism--Posner's Comment

The term is indeed an oxymoron. Libertarianism, as expounded in John Stuart Mill's On
Liberty, is the doctrine that government should confine its interventions in the private
sector to what Mill called "other-regarding" acts, which is to say acts that cause harm
to nonconsenting strangers, as distinct from "self-regarding" acts, which are acts that
harm only oneself or people with whom one has consensual relations authorizing acts
that may result in harm. So, for example, if you are hurt in a boxing match, that is a
"self-regarding" event with which the government has no proper business, provided
the boxer who hurt you was in compliance with rules--to which you had consented--
governing the match, and provided you were of sound mind and so could give
meaningful consent. Paternalism is the opposite. It is the idea that someone else knows
better than you do what is good for you, and therefore he should be free to interfere
with your self-regarding acts. Paternalism makes perfectly good sense when the
"pater" is indeed a father or other parent and the individual whose self-regarding acts
are in issue is a child. In its more common sense, "paternalism" refers to governmental
interference with the self-regarding acts of mentally competent adults, and so
understood it is indeed the opposite of libertarianism. The yoking of the two in the
oxymoron "libertarian paternalism" is an effort to soften the negative connotation of
paternalism with the positive connotation of libertarianism. I would further limit the
term "paternalism" to situations in which the government wishes to override the
informed preferences of competent adults. The dangers of smoking are well known;
indeed, they tend to be exaggerated--including by smokers. (The increased risk of lung
cancer from smoking is smaller than most people believe.) Interventions designed to
prevent smoking, unless motivated by concern with the effect of smoking on
nonsmokers (ambient smoke, which is not much of a health hazard but is an annoyance
to nonsmokers), are paternalistic in the sense in which I am using the term. Thus I was
not defending paternalism when I defended the ban on trans fats in New York City
restaurants. If people are aware of the dangers of trans fats but wish to consume them
anyway, the only nonpaternalistic ground for intervention, which I would be inclined to
think insufficient by itself, is that they may be shifting some of the costs of their
medical treatment for heart disease to taxpayers who forgo consumption of trans fats.
If, however, people don't know the dangers of trans fats and it would not be feasible
for them to learn those dangers (prohibitive transaction costs), and if as I believe the
dangers clearly exceed any benefits from trans fats compared to substitute ingredients,
then the ban can be defended on nonpaternalistic grounds, as I attempted to do.
Another way to put this is that it is not paternalistic to delegate a certain amount of
decision making to the government. There are some goods that government can
produce at lower cost than the private sector, and among these is the banning of trans
fats from food served in restaurants. It might seem that the good could be produced
just by competition-impelled advertising by restaurants that do not use trans fats. But
such a suggestion ignores the difference between disseminating and absorbing
information. If you have a peanut allergy, and the label on a package of cake mix says
that the mix contains peanut oil, you know not to buy it; the cost of absorbing the
information on the label is trivial. But if you are told that a restaurant does not use
trans fats in its meals, determining the significance of that information to you would
require you to undertake a substantial research project. You would have to learn about
trans fats, somehow estimate the total amount of trans fats that you consume every
year, estimate the amount of trans fats in the restaurant meals you consume relative
to your total consumption of trans fats, and assess the significance of that consumption
in relation to other risk factors that you have or don’t have for heart disease. Few
people have the time for such research, or the background knowledge that would
enable them to conduct it competently. Given that trans fats have close substitutes in
both taste and cost, it is not unrealistic to suppose that the vast majority of people
would if consulted delegate to government the decision whether to ban trans fats. One
of the great weaknesses of "libertarian paternalism" is failure to weigh adequately the
significance of the operation of the cognitive and psychological quirks emphasized by
libertarian paternalists on government officials. The quirks are not a function of low IQ
or a poor education; they are universal, although there is a tendency for the people
least afflicted by them to enter those fields, such as gambling, speculation, arbitrage,
and insurance, in which the quirks have the greatest negative effect on rational
decision making. As Edward Glaeser has pointed out, the cost of these quirks to
officials--who are not selected for immunity to them--is lower than the cost to
consumers, because the officials are making decisions for other people rather than for
themselves.

Sustainable Growth--Posner's Response to Comments

A few brief responses (Becker and I are planning to discuss population issues further
next week) to a characteristically interesting set of comments. The most frequent
comment is that I am worrying too much about population growth because the vast
population growth that the world has experienced in past centuries has not resulted in
a net diminution of human welfare. But we do not live in history; we live in the present
and the future. To suppose that an established trend is bound to continue is to be
guilty of naïve extrapolation. I do wish to emphasize, however, in light of one of the
comments, that I have never suggested and do not believe that the world is going to
run out of food any more than it is going to run out of energy sources. Refusal to
recognize developments that may make the future differ from the past is illustrated by
a comment which states that only the United States has the technology necessary to
create devastatingly effective bioweaponry. That is a dangerous error. Several years
ago, Australian plant scientists, by injecting mousepox virus with commercially
available genetic material, increased the lethality of the virus and at the same time
made it immune to the mousepox vaccine. Mousepox is biologically similar to smallpox.
Those same scientists could if they wanted to, and if they could get hold of smallpox
virus, make the virus immune to existing vaccines and even more lethal than it is in
nature, where the death rate is 30 percent. Because smallpox is highly contagious even
before symptoms appear, and its initial symptoms are ambiguous, hundreds of millions
of people could be infected before the epidemic was even discovered, and there would
no vaccinated health workers or security personnel to enforce a quarantine. Although
all smallpox virus is supposed to be under lock and key in two laboratories, one in the
United States and one in Russia, this is not certain and in any event it is expected that
the smallpox virus will be synthesized within five years; the polio virus has already been
synthesized. That is our future. One comment accuses me of putting environmental
welfare ahead of human welfare and even of "deifying" the environment. That is not a
correct characterization of my view. I am not a Green. Environmental and human
welfare are interrelated; otherwise there would be no antipollution policies. Global
warming is a profound danger to human welfare. Granted, there is still some scientific
debate over global warming, but increasingly it resembles the scientific debate over the
health consequences of cigarette smoking. There is never complete certainty in
scientific matters, but the efforts of a minority of scientists to debunk global warming
are beginning to resemble the efforts of a minority of scientists to debunk evolution.
For further discussion of the matters touched on in this response, see my
book Catastrophe: Risk and Response (Oxford University Press, 2004).

On Sustainable Development-BECKER
The very large increase in oil and natural gas prices in the past couple of years has led
to renewed concern about whether world economic development is "sustainable". This
term is typically not defined carefully, but sustainability requires that improvements in
the living standards of the present generation should also be attainable by future
generations. The concern is usually that because fossil fuels and other non-renewable
resources are used to produce current economic development, future generations will
have much greater difficulty in achieving equally high living standards. A related
concern is that environmental damage due to global warming and other types of
pollution will create major economic and some health problems for future generations.
In a simple arithmetical sense, the use of some non-renewable resources in current
production clearly reduces the stock remaining for future generations. But the relevant
concept for development purposes is not the physical supply of fossil fuels and other
non-renewable resources, but the economic cost of gaining access to them. Over most
of the past 100 years, fossil fuel prices relative to other prices declined rather than
increased, even though significant amounts of these fuels were used to help develop
many nations. The reason for the decline in relative prices is that new discoveries and
better methods of getting at known sources of oil, gas, and coal led to growing rather
than falling stocks of economically accessible reserves. Exactly 140 years ago a great
British economist, W. Stanley Jevons, argued (see The Coal Question, 1865) that the
world was running out of coal, which he claimed in a few decades would make further
economic progress impossible for England and other nations. The book is a high quality
statistical study, but even Jevons failed to anticipate the use of oil, natural gas, and
nuclear power, the discovery of additional sources of coal, and the extent of
improvements in methods of extracting coal and other fuels from the ground. Of
course, what happened in the past is no certain guide to the future. But a 2005 study
by Cambridge Economic Research Associates, a prestigious consulting company in the
energy field, estimates that known reserves of liquid fuels (oil and gas) will continue to
increase at least in the near term future, especially if the high prices of these fuels
during the past year continue. Their report discusses the growing importance of drilling
for oil in deep rather than shallow water, and other technological advances in
extracting more cheaply the world’s stock of oil and natural gas both under land and
under water. Even if one discounts this and other studies, and believes that the
relevant reserves of fossil fuels will decline in the future, the supply of energy sources
would greatly increase if nuclear power were more extensively used. That power too is
based on a limited resource, uranium, but the supply of uranium is vast relative to its
use in generating nuclear power. Nuclear power cannot only generate electricity, but it
can also be used instead of oil or gas to produce the hydrogen used in hydrogen fuel
cells. Although it is too early to tell, hydrogen cells could replace the internal
combustion engine in cars, trucks, and busses sometime in the next few decades.
Nuclear power would also help reduce greenhouse gases, such as CO2, and other types
of pollution since it is a "clean" fuel (see the May 2005 discussion of nuclear power in
our blog). However, I believe that the most serious deficiency in the usually discussions
of "sustainability" is that it should refer to total wellbeing, not simply to what is
measured by national income statistics. Even if fossil fuels become increasingly scarce
and expensive, and even with further declines in the environment, improvements in
health will continue to advance overall measures of wellbeing. Life expectancy has
grown enormously during the past half century in virtually all countries, including the
poorest ones. Indeed, the typical length of life has generally grown faster in poorer
than richer countries as they benefited from medical and other advances in health
knowledge produced by the rich nations. The Aids epidemic has set back several
African nations, but the increase in life expectancy has been impressive even in most of
Africa. A recent study (see Becker, Philipson, and Soares, "The Quantity and Quality of
Life and the Evolution of World Inequality”" American Economic Review, March
2005) shows how to combine improvement in life expectancy with traditional
measures of the growth in GDP to measure what we call the growth in "full" income.
We demonstrate that the growth in full income since 1965 has been much faster than
the growth in material income in essentially all countries, but especially in less
developed nations. A better measure of full income that adjusts not only for the
growth in life expectancy, but also for changes in the environment, and for the great
advance in the mental and physical health of those living, especially of the elderly,
almost surely grew at an even faster rate. It is highly unlikely that the pace of medical
progress will slow down in the coming decades. Indeed, I believe just the opposite is
true, that medical progress is likely to accelerate. My belief is based on the magnificent
advances in knowledge of the genetic structure of humans and other mammals, and
the development of biomarkers, such as the PSA test for prostate cancer, and the blood
test for BRAC 1 and BRAC2 gene mutations that greatly raise the risk of breast cancer.
Experts on mortality are predicting huge increases during the next 50 years in the
number of people who live beyond seventy, eighty, and even ninety in reasonably good
health. Slowing down and reversing global warming may require reductions in the
world's use of fossil fuels, and economically relevant reserves of non-renewable
resources could decline in the future rather than increase. These forces combined
might lower GDP per capita in many countries-although I doubt it- but progress in
medical knowledge will produce substantial advances in the world's full income. So just
as the per capita wellbeing of present generations is much higher than that of our
parents and grandparents, so the wellbeing of the generations of our children and
grandchildren are very likely to be much higher than ours (setting aside the damage
from possible highly destructive wars and terrorism). This is why I believe that while
the sustainable development literature asks important questions, the analysis has been
inadequate and overly alarmist. Most of the discussion takes a mechanical view of
changes in the stock of the stock of non-renewable resources, pays insufficient
attention to technological advances in the economy, and gives much too little weight
to the enormous advances in health that are highly likely to continue in the future, and
possibly even accelerate.