A few economic issues popped into mind tonight: 1) outsourcing, 2) music and software “piracy,” and 3) price discrimination by places like Amazon. In all of these, I’m wondering whether people are just too focused on individual cases and not focused enough on the broader picture. About outsourcing, for instance: it seems reasonable to claim that outsourcing actually helps the American consumer, by forcing down product prices and forcing down the price of inputs to other products: we buy cheaper steel from abroad, which helps us sell more cars, which is where our real comparative advantage comes in. If American companies could make more money from producing steel domestically, or if car companies could earn more buying domestic steel, they would already be doing so.
There are arguments, of course, against outsourcing. One is that foreign companies have weaker environmental protections, less unionization and so forth. This isn’t really a level playing field, and the U.S. — with its relatively strong human-rights laws for workers — is at a disadvantage. Overcoming this objection requires some elaborate argumentation to explain how the market would somehow encourage democracy in developing nations. Thousands of “disappeared” Chileans are waiting anxiously on the phone for you to make this argument; I’ll be in the other room.
The point, though, is that it often seems as though people are ignoring the overall effect of a policy and focusing on individual cases; the story of the closed American factory is far more gripping than the story of lower product prices and a correspondingly lower cost of living.
Perhaps this shows up more clearly in the music-piracy debate. I’ve heard many people tell me that I support the downloading of free music in certain cases, or the use of open-source software, because I’m not making a living off either music or software. This is surely correct, but I’d like to think that I also have the broader picture in mind: requiring all software to be open-source creates benefits far down the line, including reduced costs of learning (imagine if every aspiring web designer could get a free copy of Photoshop), reduced costs of product development (imagine if the developers of Mozilla could borrow innovations from IE for free), reduced installation costs, etc. As for music piracy, imagine if every piano student could download every Thelonious Monk album for free. The economic effects of an economic policy percolate well beyond the people immediately harmed by the policy. Imagine if turn-of-the-century Americans focused only on lost horse-and-buggies when tallying up the economic effects of the automobile. For every flattened institution, there may be another on the rise. This is the discipline of the market.
Or take price discrimination, which seems outwardly indefensible. Under a price-discrimination plan, a service like Amazon would take a guess about the maximum amount of money you’d be willing to pay for a good or service, and would charge you that much for the product. In this way, different people would pay different amounts for the same book. It seems unjust, but a) it happens all the time (when you buy a car, it’s called dickering; when you buy an airline ticket, you pay different amounts for the same seat depending upon when you bought the ticket, and your inability to resell the ticket makes this price discrimination possible), and more importantly b) it’s probably economically efficient. The economically-efficient solution is the one that maximizes total economic wealth, and comes about when everyone is paying exactly the maximum that he or she would be willing to pay for a product. Without price discrimination, everyone pays the same amount — some people are paying less than they’d be willing to pay, while others might not buy the product at all because it’s too expensive. Those who don’t buy the product might then go and buy a substitute good that’s not as desirable as the one they really wanted, but which they can afford.
And yet I see a lot of resistance to price discrimination. It just seems ethically wrong to people. Part of this is, I think, a misunderstanding of how much price discrimination happens already. Part of it, though, is that the local effects (some people pay more for the same thing, which is bad) have a sign opposite to that of the global effects (total income is maximized, which is good). And it’s hard to step back from a policy and say, “While this might hurt me, it might also do some good for everyone around me.”
Maybe this is all part of the general problem of giving a policy’s local effects the same sign as its global effects — in other words, making the local incentives match the global rewards.