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General These Terms of Service constitute the entire agreement between you and Milaap and govern your use of the Services, superseding any prior agreements between you and Milaap with respect to the Services. User disputes At Milaap, we respect the privacy of our users. Basque: In my experience, I have to agree with Mr. It varies across the country, depending on the case and the circumstances. It does vary across the country. There is no standardization for sentencing for offences of a sexual nature. Senator Baker: We have to keep in mind that each case depends on its facts, the evidence and the decisions made by the Crown.

The one thing I want to ask about was sparked by a reference by Superintendent Bilinski and also Detective Inspector Naylor. It involves investigative techniques. You say you need more up-to-date investigative techniques as they relate to modern technology. The one question that comes to my mind, whenever I hear that, is that we have all the search investigative provisions in the Criminal Code. Section has the oldest ones, under warrants; section Then in the mids, as a committee, we passed legislation that allowed for the police to do something, and let me quote it for you.

It is section I see it in use in drug cases, fraud cases and so on. I imagine you use that provision extensively because we gave the police authority to have an authorization. Perhaps this is unfair; I do not know if you have ever sworn an authorization. The sergeant is nodding her head. Senator Baker: Excellent, then you know what I speak about.

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You can do something you cannot do under any other act of Parliament — unlimited activity, for any period of time you wish, anytime, day or night, and you can obtain that authorization 24 hours a day, via telewarrant, telephone, fax, or Internet. There are judges available, by law, 24 hours a day, seven days a week. Why would you need anything further than that provision, which we gave you back ?

Do you use the general warrant provisions? Basque: I have been doing child pornography investigations since , and I have not had to use the general warrant per se unless we had to do the forensics on a computer we seized that was turned in voluntarily to the police because there is an expectation of privacy if it is a jointly owned computer or a familial computer.

For example, if a spouse finds child pornography on the computer that belongs to the other spouse also and it is turned into the police voluntarily, we need a general warrant to do the forensics on that computer because there is an expectation of privacy by the other owner. Other court orders that we use when it comes to child pornography investigations are production orders and search warrants. The production orders are used to obtain the customer name and address, or the basic subscriber information of the IP addresses. You have to understand that when the child pornography investigations come in to be reported, all we have is an IP address, a user name or email account.

We do not have anything else. It is rare that we know who the offender is or have a possible suspect. We do not usually have a name because everybody uses the anonymity of the Internet. We have to get a production order, depending on the Internet service provider, to obtain that information.

Not all service providers cooperate across Canada, and they deal with it differently. The section search warrants are used to execute a search warrant to the residential home or business where the computer is sitting or the offender that we know. We seize any material that is related to the investigation.

Senator Baker: I am asking you, though, a specific question. We were confronted with this years ago, in , to be exact. I wonder why the section Perhaps you can provide an answer in writing if you do not want to get into that, for security reasons. Basque: In my experience, in child pornography investigations we have not had to use a general warrant to conduct our investigations per se.

We have techniques that we can use that do not require a warrant. The general warrant, in my experience, unless Inspector Naylor can add to it, was used only in the event that a computer was turned over voluntarily to the police. Basque: There is no other provision in the Criminal Code to allow the police to search that computer; therefore, a general warrant gives the authority to the police with reasonable grounds to believe an offence has been committed to do that search.

Naylor: In coming from a search warrant background, it is preferred to refer to a specific section in the code for search warrant as opposed to the general warrant. The general warrant is, as you have said, for intangibles. It is for non-specifics. We quite frequently use general warrants. I will give you an example of how legislation has not caught up with technology. In child pornography investigations you launch your investigation; you write your search warrant to obtain the computer from the house where you have reasonable and probable grounds.

It then becomes problematic because your search warrant was to attend a certain place to seize a certain thing, but now we have to get into the information in that computer. For the information in that computer, it is very difficult for a law enforcement officer to establish reasonable and probable grounds as to what is in that computer. We are looking for a specific thing, but you cannot go to that specific area of a computer to look for specific things. Specifically, if you are looking for child pornography and you find other offences committed within that computer, that becomes problematic.

Basically, you need two search warrants. You need a search warrant to get into the house and seize, and then you need a search warrant depending on how you have acquired the evidence to get in to search the rest of the computer. For search warrants on computers, the Criminal Code, in my opinion, is not up to date where we need to be for the complexity of what actually is within the computer. The Chair: Thank you. I think we have covered that issue.

I remind honourable senators that the next panel is scheduled for I have a lengthy list of senators who wish to ask questions. Senator Angus: Clearly, everyone is focused on the main goal, which is to prevent child sexual exploitation and sexual abuse. Listening to your evidence, I am getting the sense that it is all about the Internet, all about computers. I wonder if I am missing something here. Let us go back to the advent of the Internet. I think another witness or maybe one of you said that we did not have as much sexual abuse before the Internet.

Is that true or is that a false impression I have? Naylor: I would say the proliferation of child pornography is a result of Internet. It is freely traded on a daily basis now, whereas prior to the Internet a lot of effort had to be expended in order to trade child pornography. Bilinski: To add to Inspector Naylor's comments, I believe that the Internet has become a facilitator and has also given I guess the luxury of being anonymous. You may have a number of like-minded people interested in the same topic that are trading images but do not know their identities. That gives them a certain sense of comfort, which makes it more attractive for them to use that particular tool to be able to trade images.

Senator Angus: I got the sense of the magnitude of the problem when you identified in a fairly narrow time frame 9, incidents of distribution of pornographic material in Ontario. Is that correct? Senator Angus: You are only able to focus in on some small number, which ultimately led to 58 or 60 arrests. Are we talking here only about the distribution of pornographic materials for the purposes of luring, or are we talking generally about sexual exploitation and sexual abuse of children?

Basque: There are different facets of child pornography investigations. There is luring online, where an offender will go online and portray themselves as a young child or as an adult and try to lure the children in, or talk to a like- minded individual of their age and trade in child pornography images, or even make attempts to meet, if they have access to a child, to make those meets so they can have sexual relations with the child. There is distributing material, people who just go online and distribute the child pornography and download it.

There are people who make it. Anyone who has access to children with digital cameras today with the technology that we have can take images of the children and load them up online so they can be distributed and accessed. Some are commercialized; some people make them to get paid. There are sites you can go to and use your credit card to access child pornography, so it is a commodity.

Children online are a commodity when it comes to child pornography investigations. There are different facets of child pornography. It is not just the sharing and distribution. When those images are shared, the children are being re-victimized every time. It is hard to remove those images from the Internet. Those images will follow the children for the rest of their lives. They will always have in the back of their head while they are growing up, will my picture surface?

It is sad for the victim as a whole. Senator Angus: I understand the focus on the Internet because the bill we are reviewing has created the new luring and the sentencing issues. I want to be sure. There are all kinds of other sexual abuse of children that has nothing to do with the Internet; am I not correct? Since all of you are focused and the ICE units and these organizations are set up and dedicated to preventing or stopping at least heinous crimes, there are lots of them that have nothing at all to do with the Internet.

Matas: I was involved in, as I indicated in my opening statement, the issue of the constitutionality of the child pornography laws in the Criminal Code. We argued for the constitutionality. The British Columbia Supreme Court said they were unconstitutional. The Supreme Court of Canada upheld them. One of the reasons it upheld them was the linkage between pornography and child sexual abuse of other forms, the non-pornographic forms of child sexual abuse. I do not think you can divide the two. The Internet pornography is linked to all the non-Internet child sexual abuse.

Senator Angus: With your green eyeshade you are reading my mind. That is exactly where I was coming from. I do not see how you can de-link them. Senator Cowan: Superintendent Bilinski, in your statement you did not mention Bill C, the bill we are dealing with here. I assume that you endorse the views presented by Inspector Naylor with respect to this bill.

You support the bill? Bilinski: I support anything that will help us do our work more effectively. My job at the centre is to try to use the resources that we have to support police forces in enforcing the laws of Canada, whether they be human resources, technological or financial. As I mentioned, anything that will help us do our work I am in support of. Senator Cowan: With respect to the resources and the changes in the law, Inspector Naylor, I think you said that the creation of two new offences was another arrow in your quiver and would have assisted you in making more arrests as a result of the investigations that you conducted recently in Ontario.

However, I also detect that there is an underlying need for more resources. You mentioned the large number of individuals you had identified that you simply did not have the time and also the financial and human resources to investigate more. There is a need for more human resources, more financial resources in addition to changes of the law that you are supporting today; is that correct?

Senator Cowan: The third question had to do with some suggestions Mr. Matas made. He talked about the linkage, and I think you did as well on page 13 of your brief, and you talked about the fear of getting caught as a result of the publicity of the investigation and the arrests, a decrease in the incidence immediately after the publicity, and so the fear of getting caught clearly had an impact on the incidence of child sexual abuse, over the Internet at least.

Matas suggested that in addition to sentencing there were other ways in which we might in the future consider dealing with this issue. Matas made to us this morning? Naylor: What I can comment on is what I said in my opening statement about the incidence severely decreasing. That means that these like-minded people are paying attention. Therefore, whenever they are paying attention, however we can get their attention to make them stop I think is a very important way for us to do proactive either education or law enforcement here. Bilinski: I can just elaborate on Inspector Naylor's statement.

On the other side of the coin, we have intelligence, as an example, that shortly after the earthquake happened in Haiti there was a spike in trading, and we feel that is because individuals that are interested in that type of material are opportunistic as well. They realize that because of the lack of infrastructure the police would be busy elsewhere and they would be able to use those events and use those opportunities to their advantage.

Senator Cowan: That reinforces the point that we need to put more resources into this so there will be an increased likelihood of apprehension and identification, and that is a major factor in what we are dealing with here. Bilinski: Not only police resources but resources elsewhere as well. At the centre, we realize that the volume is great and we spend a lot of time analyzing the risk, and we try to identify those investigations with the greater risk — as an example, hands-on offenders.

I am not saying that we are not interested in those that are simply trading, because that is an offence as well, but those investigations that we are able to identify with an immediate risk to a child or that the individual that we are looking at has access to children, they go to the top of the pile. Senator Boisvenu: Thank you to everyone for being here this morning. You have presented an accurate portrait of the reality of cybercrime. The picture you have painted for us this morning gives us just a glimpse at the people involved in this type of crime, which is just the tip of the iceberg.

Even so, if you read some of Quebec's newspapers or listen to certain so-called experts on crime, you will note two separate opinions. Quebeckers are saying that we should crack down on that type of crime, whereas the so-called experts are saying that we should take a more gradual approach. You and the volunteers deal with families nearly every week, and I commend you on that. What expectations do families have when it comes to that type of crime? Chalifoux: Since the movement was created, 35 years ago, we have fortunately not had any cases where sexual predators brought children to the homes, since our safe houses are secure residences that have been subjected to investigations.

So, there has been no harm in that regard. The only thing people are concerned about is always safety. Today, with the availability of current events, the Internet and so on, information travels very fast, and people really know what is going on. Therefore, the volunteers worry about ensuring the victims' full protection. Information and training may enable them to provide that protection. However, it is of the utmost importance to ensure that the people who come to us for help are safe.

I think that is the priority. Senator Boisvenu: And that is achieved through more severe sentences, especially for reoffenders? Chalifoux: Yes, among other things. However, I think that support is also required. I completely agree with longer sentences. But support must also be provided because we cannot redirect everyone.

With support comes monitoring. I think that extending sentences will help victims recover. It will also help keep reoffenders off the streets for a while, so that victims can recover properly and feel safe. Senator Boisvenu: Mr. Naylor, you mentioned a rather alarming statistic, which indicates that 30 per cent of people arrested were reoffenders. In other words, they had committed similar crimes in the past.

You also say that minors are involved in the network and in cybercrime. You say that cybercriminals get an early start. People do not decide to start phishing 14 to 15 year olds at age People under 18 become involved in that type of crime. Naylor: That is correct, and with the proliferation and the advances of the Internet, it is my experience and from the research we have done that the ages of people collecting and trading child pornography are getting younger and younger and younger. To answer a question from this morning, we are not talking about what I refer to as age-appropriate. It is not a year-old that is trading or online with a year-old; we are talking about year-olds who are trying to lure very young children.

Senator Boisvenu: You said that the knowledge that their name will be published makes predators more reluctant to reoffend. When it comes to 16 to year-old cybercriminals who reoffend, should the names of those minors also be made public to protect victims? Naylor: That is another issue. I am not quite sure that it is most appropriate to do because I do not think that publishing the names of young offenders in this case will prove any point.

With the anonymity of the Internet where people can shroud themselves behind masked identification, it is not going to protect anyone on the other side. I am not sure, in this specific case, if that would be most appropriate. Senator Jaffer: I am the chair of the Human Rights Committee, and we just released a report on sexual exploitation. The statistics we found were that 61 per cent of all sexual assault victims are children, and 86 per cent of assaults are perpetuated by individuals known to the victim.

Every year there are 9, reported sexual assaults against children in Canada, and over 80 per cent of these child victims are girls. We looked at all different kinds, from child pornography to Internet luring. We stated that it is a violation of a child's inherent human dignity for the sexual gratification of adults. The worst, of course, is in the Aboriginal community; our population is 5 per cent Aboriginal, but at least half of those who were abused were from the Aboriginal community. The reason I put those statistics to you is that they are under-reported.

We know there are more cases. One of the very clear things that came out is that many of these sexual assaults are within the community, committed within close circles. The fear is that if you have minimum mandatory sentencing there will be even more under-reporting. Matas, I was very interested in clarifying what you said about the Convention on the Rights of the Child. I would like you to expand on what you said on child abuse, that the convention expects us to do more. Bilinski: As a result of my discussions with Cybertip, which specializes in education and prevention, it is a fact that under-reporting is a problem.

One of their challenges is continual, and that is to convince young people to streetproof themselves, to be aware, but also to report any instances of abuse or anything inappropriate.

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I think that is something we need to continually work at and look at. With respect to any particular communities that are singled out, I do not have any statistics or experience in that area. Basque: I have to reiterate what Mr. Bilinski said. I do not have statistics on specific communities in Canada, whether under-reported or not, but I can reiterate that it is definitely under-reported.

However, with the education we are providing in the schools to children, I think they are growing up knowing they can tell someone that they trust what is going on with them, what is not right and what is wrong, where years ago you just did not report. I think that children today are educating themselves and they know they can report to someone they trust and that they will be looked after. Naylor: I watched with interest some of the other presenters on this topic alone, and I have to disagree with respect to Internet child sexual exploitation, not sexual exploitation.

That is a different ball game. Internet sexual exploitation, our research in Ontario does not support exploitation that is a higher percentage in Aboriginal and First Nations communities. Sexual abuse absolutely, but not Internet-based sexual abuse. Chalifoux: I increasingly believe in reporting abuse.

However, those who report must have a support network. Currently, the penalties are not harsh enough to motivate victims to report abuse. We must educate Canadians. We do a lot of work with seniors to encourage them to report abuse. We see that, since the abusers are often family members, seniors must be provided with support and resources to keep them safe enough to report abuse. Reporting is one thing, but we must also foresee its potential consequences and find ways to fully support those who report.

Matas: Of course that is a difficult question. How do you put the best interests of children first? There is not one way of doing it. I think it is kind of a principle you have to keep in mind in going about your daily work as parliamentarians. One thing that concerned me about this bill was that it was not only about children.

It is an omnibus bill. I appreciate that there are parliamentary reasons for doing that, which have nothing to do with the subjects we are addressing today. I would like to see, sometime in the future, legislation proposed that deals only and specifically with this problem, so that it is highlighted as a particular problem and given particular focus and attention.

The Chair: I believe the senator's second question was directed to you as well, Mr. Senator Jaffer: I was interested in what you said, that this bill does cover child abuse but does not go as far as the Convention on the Rights of the Child. Matas: I mentioned that in the context of sentencing guidelines. There are sentencing guidelines set out in the Criminal Code that talk about abuse of children but not about sexual abuse of children.

Of course, abuse of children can take non-sexual forms. However, the Convention on the Rights of the Child talks about abuse of children but also specifically about sexual abuse of children. My view is that there could be much more particularity in the sentencing guidelines generally, and in this area especially, so that the judiciary, in dealing with offences of the sexual abuse of children, would have guidelines that direct them to that issue.

Senator Frum: Mr. Matas, I want to ask you about a well-known case in Canada. The sentence just came down for one defendant last week, and this is the case of the rave in British Columbia where there was a gang rape and then there was also videotaping and photography. The photography and videotape ended up on the Internet. The judgment for the young person who took the videotape was one year probation and a 1,word essay.

I wanted to ask you what you thought about this judgment and whether, if Bill C were in place, the judge would have been be obliged to sentence differently. Matas: I would say the case is an example of a problem with sentencing. It is very difficult to go into a particular case, because whatever facts you marshal, there is always someone on the other side to marshal some other facts you have not mentioned.

Within our own organization we were dismayed by that sentence. One of the encouragements I got in coming here to make a submission was to say something about that case as an example. I was reluctant to say this is an example, because you then just get into the facts of case. I would say it is easy enough to pull up, whether it is this case or another, lots of examples where sentencing is inappropriate.

Would this bill have an impact? I hope so. It is impossible for me to say what will happen with the issue of minimum sentencing, because it is already under constitutional challenge, and who knows what will happen with that. The bill sends a message that these crimes have to be treated more seriously. Regardless of the constitutionality of minimum sentencing in individual offences, in individual cases, that message, I believe, will get across to the legal community and judiciary. The general notion that there is under-sentencing and that there needs to be higher sentencing in this area is a positive message that comes out of this bill.

Senator Frum: To those in law enforcement, this is becoming a more prevalent trend: not just violent gang rapes, but videotaping becomes part of the rape process. That is becoming sort of part and parcel of the assault and becoming a more common element, it seems. Could you comment on that?

To me, that is extreme. The transmission of child abuse on the Internet goes very widely. Basque: I cannot comment on the case specifics, but I am aware of the case you are talking about. Yes, technology has allowed individuals to photograph or videotape their abuse, what they are doing, and upload it to the Internet quite easily for it to be traded. It is a common trend that is increasing with the capabilities of the Internet, for sure.

It is something that the police and the victims are now dealing with. Before, the victim would just be dealing with the sexual abuse between them and whoever their abuser was, and now they have to worry about their future when it comes to their pictures and in terms of being re-victimized all the time for the world to see. It was between the victim and the abuser. Now it is exposed to the world, and that is something the victim has to deal with for the rest of their life. Bilinski: We consider every image the scene of a crime.

Without being aware of the specifics of that particular incident, once it is transmitted over the Internet, it gives us an additional tool to be able to work towards solving this crime, because we can perform forensics on the images, which may contain clues to help us investigate this incident. Keeping in mind that absolutely the victim is being re-victimized because of the existence of the images, on the other side of the coin, it is an additional tool to help us solve these things. Whether that will have an effect on anyone contemplating recording these things, I do not know.

Senator Chaput: Child sexual abuse is a topic that is close to all of our hearts. I feel there is no crime more serious than child sexual abuse. We are talking about protecting children and ensuring their safety. On the one hand, we must protect them and ensure their safety so that kind of crime never happens. On the other hand, we must protect them and ensure their safety when it does happen — and you mentioned various ways to do so.

In addition, victims must be encouraged to report their abusers. Naylor, in your presentation, you said that 88 per cent of sexual assault cases are not reported to the police. Those statistics are from Were you talking only about sexual abuse on the Internet? Senator Chaput: You then said that children, of course, are even less likely to report abuse, so the statistics must be higher.

My question is the following: how can Bill C encourage children to report their abusers? Does it do that? If so, how? If not, how can we do more to protect those children, encourage them to report their abusers and ensure their safety? Naylor: I am not sure that Bill C is the appropriate place to point to children to report sexual offences.

As part of the provincial strategy to protect children from exploitation and abuse on the Internet, part of our provincial strategy is multidisciplinary, through enforcement, education and prosecution. Every law enforcement officer and agency in Canada is strongly promoting child sexual exploitation awareness to young people right now, through our friends at Cybertip and the Canadian Centre for Child Protection as well. Chalifoux: As I was saying earlier, I think this is about education. If sentences were increased, I think that people would be more likely to report.

However, it is also a matter of education. It is not something that will happen overnight, but at least one element will have a positive impact. If it does not happen this year or in the immediate future, it will happen in the medium and long term. People will ask themselves if it is worth it. I think that the bill will actually help in that regard by increasing sentences, but that will happen in the medium and long term.

Senator Chaput: Statistics also show that 59 per cent of children who are victims of pornography know their abusers; in 43 per cent of cases, abusers were family members. How can we encourage children to report abuse when it is committed by family, by people they know very well? Do you have any suggestions on how to encourage children to report abuse that is already taking place? Naylor: That is a very good question. Part of our public education campaign is self-awareness of victimization. There are many children out there who are being victimized on a daily basis by close family associates or by family members who do not even know they are being victimized.

Through our public awareness and public education campaigns, we are providing young people with tools and techniques to teach them what is right and what is wrong, and what can be close contact and what cannot be close contact. Senator Chaput: So we are talking about partners. Bill C does not necessarily help in that area, but it is a tool that helps you work even more closely with other partners, right? Senator Lang: I want to begin with the mandatory minimum sentences.

Matas referred to the general concept of mandatory minimums as a message, I believe, and as guidelines. It seems to me that this type of legislation sets the moral standards or the moral compass for what society feels these offences should, at least at a minimum, bear from the point of view of the judiciary. I want to ask Mr.

Naylor the following: From your point of view, with these minimums going into effect and for those who would choose to commit these types of offences, it would seem to me that that would be a deterrent for those individuals — or at least one deterrent, a type of deterrent to them — to make them take a second look at whether they should be pursuing this type of activity, knowing that they will go to jail, as opposed to the present system, where for some of these offences there are conditional sentences and minimal consequences for their actions.

I find this abhorrent. In some cases we are talking about a one-year minimum sentence. I think in some cases it should be more. Do any of you feel this will act as one more tool in terms of a deterrent for this type of activity, once they know this is coming into effect, if it is passed? Naylor: As I stated in my remarks, these like-minded people are paying attention. I think that a one-year minimum mandatory sentence, for example, for online luring will get people's attention. It will certainly get their attention. Chalifoux: I also agree with that. It may provide the abuser with a bit more room to think or with some support, as I was saying earlier.

Currently, the sentences are minimal, and I do not think that discourages many people. I more or less agree with what Senator Boisvenu said earlier, regarding the possibility of publishing offenders' names. I think it is important for our organization to know whether someone is a predator or has committed sexual crimes. We investigate all family members. We may not necessarily be talking about parents, but maybe or year-old boys who are predators and commit crimes. I do not think the right approach is to place a lost child in a residence for protection when we have no information on the individuals living there.

We should have an accurate profile of each person living there. We should also know about anyone with a criminal record for sexual or violent crimes. Jordan ; foreword by William R. Description based on print version record and CIP data provided by publisher; resource not viewed. Identifiers: llcn print lccn ebook isbn Kindle isbn epub isbn pdf isbn hardcover : alk.

Classification: lcc hb Living is an important activity. And in a world of limitations—faced with scarcities of talent and character and iron ore—living is also difficult. Alternatives must be compared, analyses have to be conducted, decisions inevitably are required. And we often complicate our situation further with personal peculiarities and social arrangements which unduly increase the costs and dilute the rewards of our existence. Various sorts of observers and self-appointed counselors—theologians, poets, philosophers—have long worked to resolve some of the bittersweet mystery of life.

And now we are blessed with economists. Aristotle, over twenty-four centuries ago, was the most conspicuous of the meditators of antiquity to devote considerable attention to selected aspects of economic conditions and activity. Adam Smith, in the eighteenth century, is the acknowledged father figure in the early development of modern economics. Something resembling current theory began to take shape with the Marginalist Revolution of nearly years ago.

A veritable golden age waxed—and perhaps then waned in some respects—in the second half of the twentieth century. In this post—World War II era, there was a considerable band of innovative theorists and applicators of fruitful analytics. Few of these elite were as useful as Armen A. Useful economics relies conspicuously on a toolkit of formal analytic techniques. But tools must be manipulated by competent carpenters. And the carpenters follow building plans prepared by imaginative, inspired, broadly sophisticated architects.

Alchian was a master craftsman and contributed additional tools to the kit. And he has been a striking architect. Most rarely, he was anointed with feel for and sense of the nature of individuals and their societies and the mechanisms of the economy on which a community is founded. Further, like many other stalwarts of the economics fraternity, he was motivated to teach. A spectacular technical, bravura scholarly exhibition often will be of little Edition: current; Page: [ xxiv ] value to the general community.

A conspicuous Alchian characteristic has been to explain important matters in the most simple manner, and he was ingenious in solving questions with use of only the most basic conceptions and constructs. Mark Twain noted that his wife, living along the Mississippi River, learned all the swear words—but not how to carry the tune. In economic analysis, Alchian knew the words well and also splendidly hummed the tune. Useful economists have learned that elemental, even elementary, economic tools in the hands of an accomplished scholar, teacher, and practitioner can be highly productive.

Alain A. The requirements for success in this line of work are a thorough understanding of and, if you like, belief in the relevance of such concepts as marginal products and marginal costs, and an ability to discover the marginal products and costs in complex situations, combined with a good quantitative sense. The economic theory we are using is the theory most of us learned as sophomores. We have collaborated in several ventures, primarily in writing University Economics Wadsworth Publishing Co.

This is a new volume, although it bears family resemblance to its predecessors. Like Exchange and Production , it is essentially price-and-allocation analysis, along with consideration of inflation and various references to the applicability of microeconomics to the aggregate economy and international implications. Above all, it continues the effort of the earlier volumes to present an exposition of economic analysis with persistent emphasis on empirical validity and meaningfulness.

The original manuscript was prepared by Armen over the course of a decade, before deteriorating health ended further work, preventing a polished exposition. Now, belatedly, the draft has been completed, edited, and updated. It would not have been completed—if attempted, at all—without Jerry Jordan. Jerry was among a substantial flow of graduate students who were definitively influenced by Armen from the s through the s, and, like many of them, he has had a highly distinguished and conspicuous economics career.

Along with prodigious work directly on the manuscript, he has been Edition: current; Page: [ xxv ] the chief coordinator of the variety of activities by several people involved in producing such a large publication. Many scholars across the world, affiliated formally or informally with the UCLA Department of Economics in the Alchian era, have taken an interest in the publication and contributed to the project. Arline Alchian and Daniel Benjamin preserved the original manuscript and made it available to Jerry and me.

Michael Pistone aided greatly in preparing the diagrams and tables; Tsvetelin Tsonevski reformatted the entire manuscript. Armen Alchian—a colleague, mentor, coauthor, and virtual older brother of mine—left us, at age ninety-eight, in February Since the discouraging fiasco in the Garden of Eden, all the world has been a place conspicuous in its scarcity of resources, contributing heavily to an abundance of various sorrows and sins. People have had to adjust and adapt to limitations of what is available to satisfy unlimited desires.

Some individuals and societies have been much more successful than others in thus making do. The study of economics deals with this yoke of scarcity and the modes of behavior intended to minimize the pains and maximize the gains of getting along—behavior which is restricted and channeled, sometimes helpfully and efficiently but often hurtfully and wastefully, by the social ground rules and institutions we adopt and have had imposed upon us.

To survive much less to prosper a bit in this vale of tears has required enormous, unrelenting effort. The vast variety of economic activity—bidding and offering in the market, producing and consuming currently, and saving and investing for the future—typically entails coordinated decision making and labor.

But even seemingly simple operations of production and distribution can require contributions by many people, most of whom never meet or directly communicate with each other and are located in scattered corners of the world. Consider this book. Thousands of people—in addition to the authors—contributed to placing this book in your hands.

Some made paper; some made ink and glue; some edited the manuscript; some printed, warehoused, promoted, and distributed the product. No single person completely planned and supervised all that, and no one was a specialist in performing each of the myriad tasks. Yet, you have the book. The essence of the story is not different for those who have escaped the surly bounds of conventional books to enter the era of e-books, iPads, Kindles, and Nooks. The more technically advanced modes of providing reading material still require elaborate collaboration of many producers.

How are such complex, interrelated, varied activities by so many people in so many places organized? We will show how and why the modes of coordination in a basically private property, individualistic society have dominated all others in productivity, growth, and freedom. This book will help you grasp and gain a working familiarity with, and appreciation for, the most basic, universal concepts, principles, and techniques of Economics. With experience, you will build a sense of and feel for fruitful economic analysis and its worldly applications. Most of what you enjoy is acquired by your efforts, accompanied by strain, sweat, and anxiety.

However, no matter how successful are your efforts, you want even more. Two apparent devils restrict what you can have—the limited amounts of goods and services available, and the rest of us who also want them. Scarcity exists because of our boundless desires for limited goods of all kinds and types. Fresh chicken eggs are more plentiful than stale eggs.

But fresh eggs are scarce; stale eggs are not. Fresh eggs are economic goods—goods for which more is desired than is available. The classic case of a free good, to most of us most of the time, is air: we simply inhale, and there it is, without our sacrificing anything to obtain it. However, air is an economic good to the astronaut and the deep-sea diver, and so is fresh air to the city resident on a smoggy day. Charging a zero price does not convert an economic good into a free good.

That is incorrect. You often intentionally act in ways to benefit others. More important, economic analysis shows how our market actions benefit other people, even if we are not deliberately trying to help them. Both parties to an exchange must anticipate a gain; otherwise there would be no markets and voluntarily negotiated exchanges of private property. Though we act primarily with our own benefits in mind, others are benefited by market exchanges. Let Adam Smith, the eighteenth-century Scot, author of the first systematic and classic treatise on economics, An Inquiry into the Nature and Causes of the Wealth of Nations , explain the incentive and effect:.

Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and show them that it is for their own advantage to do for him what he requires of them. Give me that which I want, you shall have this which you want. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard of their own interest.

We address ourselves not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. Consider a few ways to compete. Violence is a commonly respected mode of competition. They were highly respected. To be sure, had Caesar merely roughed up a few Romans, he would have been crucified. Had Lenin been defeated, he would have been liquidated on the spot. If violence is attempted on a large enough e. A government will suppress violence by individuals—except in the realm of contact sports.

A wealthy nation is more likely to be attacked—unless potential aggressors know it is willing and able to impose severe losses on the aggressor. The Iraqi government in attempted to confiscate wealth from Kuwait via invasion, but was rebuffed by the cooperation of other nations. Some years earlier, the poorer North Koreans attacked the South Koreans, but they also were rebuffed by the aid of richer countries that had taken the precaution to have sufficient defensive armor.

In much earlier times, the Vikings, Mongols, and Tartars lived by raiding productive, but less defended, communities. Europeans invaded the South American and Southeastern Asiatic regions to expropriate wealth from the less-ably defended areas. Similar events have occurred throughout history.

Governments help maintain security of person and property from violence and theft. In a democracy, that power is directed by political leaders elected by voters who are competing for access to government power for their greater protection as well as to redistribute wealth. When we complain about high government taxes or expenditures, we are commonly complaining about our neighbors whose interests conflict with ours. Consider a college that has five thousand students and only two thousand parking spaces. On the assumption that most students desire a parking space, the college has a rationing problem: Who gets a parking space?

A method of discriminating—to decide who gets spaces—is inevitable. Somehow, some people will get a space, and some will not. There are alternative ways to discriminate. All competition and choice is discriminatory. Choice is merely another name for discrimination —to rank alternatives according to some attribute.

The parking spaces could be allocated on a first come, first served basis. Though the money price would be zero, a competitive cost would be incurred in getting to the campus before dawn in an effort to get a space. Costs need not be in money payments. A zero price does not make something free. Among the criteria may be: distance from campus, age, health, senior status, family size, major of student, grades, and so forth. But one question leads to another. For example, should those who are awarded rights to a parking space be allowed to sell the rights to others?

You may have heard competition promotes antisocial, jungle-like, irresponsible behavior. That depends on the kind of competition that is tolerated. The primary focus of economic analysis is on a competition in exchange of rights to services and goods and b coordinated cooperation in creating wealth. Competition by offers of exchange is a form of cooperation.

Any effective combination of cooperation and competition requires a control of the permissible types of competition so as to not obstruct social cohesion and cooperation. Differences in amounts of wealth held by the richer and the poorer are not Edition: current; Page: [ 8 ] all results of the rich being winners and the poor being losers in some contest for the distribution of a given total.

A source of the differences in wealth is difference in productivity and willingness to save for more wealth. But the resulting pattern of relative wealth can be so concentrated in a few that the distribution is deliberately altered to attempt to maintain greater social stability. We want your study of economics to be interesting and even enjoyable. You will begin to suspect that a vast majority of what people popularly believe about economic events is at least misleading and often wrong.

A few examples of such common errors are:. Fortunately, societies have progressed despite almost universal ignorance of economic principles. Without an abundance of sophisticated economic analysts, the US economy, over more than two centuries, has generally performed very well, yielding a growth and prosperity that is embarrassingly conspicuous in world history.

The collapse of the socialist Soviet Union and the rise of China and India in world markets was not the result of their sudden awareness of their ignorance of economic principles. Instead, their disappointing economic experiences—in sharp contrast to the economic performance of other nations—showed that the lack of understanding of basic economic principles ultimately creates weaknesses, and motivated their social and market changes accordingly. This text starts with the simplest principles and applies them to explain the meaning of the gains from trade and how these gains occur.

Also, the initial familiarization with graphs for applications of these principles will ease the later study of more complex events that are far less commonly understood. These results will often be surprising and counterintuitive. Chapters 14 through 29 introduce the principles of production, specialization, teams, and firms; decision making within organizations is viewed from the perspective of economic analysis. Market pricing tactics of different types of firms in alternative competitive situations are explored. Chapters 30 through 38 extend the Edition: current; Page: [ 10 ] exposition and application of financial capital value principles and adaptations to economic risk and wealth creation.

Chapters 39 through 41 address issues that arise in labor markets, including search costs in seeking highest-valued employment opportunities. Chapter 42 addresses issues of money, inflation, and their effects on prices. Economics really is easy—in a subtle sort of way. Rely on application of its analytic principles.

Sometimes they supersede dictates of physics. This is nonsense. Abundance has arrived! The United States can produce so much that the basic problems are to see that the potential production is realized and distributed fairly and equitably. You are not expected to be able to answer this now. But upon finishing this course, you should be able to show why the concluding sentences are wrong.

As for the first sentence, economic science has not trapped us—scarcity has. It is because people are reasonable and, therefore, act in accord with their own interest that there are economic problems and wars. Until you know what socially preferred means, you cannot answer this question.

We do not know what socially preferred means. Beware of any expression referring to the preference of a group. What do you think is meant by a fair share? Do you think other people will agree with your interpretation? It is often hard to know what people mean by equal. Studies have shown that students who get better grades tend to lead more prosperous lives; but it would be absurd to assert that mandating minimum grades would cause students to be more successful. Any one implies the other two. Furthermore, to think of a society without these is to be a romantic dreamer.

Choice of one thing versus another occurs because there is scarcity; competition and discrimination occur even in an imaginary world of no money, no prices, and no markets. As we will see, suppression of market-determined prices of goods and services gives rise to nonmoney forms of competition and discrimination. Name three honored statesmen who obtained their status by successfully competing in the ability to use violence and who, had they failed, would have been punished for treason or crimes against mankind. You can add scores of others. Hint: George Washington and every other leader of a successful revolution.

What kind of competition is permissible in seeking political office but is not permissible in private business? What kinds of competition are permissible in seeking admission to college but not permissible for grades in this course? What kinds of competition are approved for business but not for admission to fraternities? Will letters of recommendation help you get a better grade in this course? Does your past record influence the teacher of this course in making grades? Does wealth of parents? Employees can offer to work for a lower salary to get a job with a favored employer in a preferred town.

Will this work in fraternities? Until very recently, we know of no institution with the dominant power of coercive violence that is not the government in any country. Government is an institution for enforcing certain rules and procedures for resolving interpersonal conflicts of interest. The making and enforcement of laws and the judicial settlement of disputes are behaviors that support the propositions. Note that the second statement says government is an agency, not the only agency. For example, many social disputes are resolved by social ostracism and by agreement to use an arbitrator.

If you had the power to decide, what forms of competition would you declare illegal? What forms of competition are made illegal by laws establishing price ceilings, minimum wages, fair-employment practices, pure food and drug standards, private property rights, and by socialism? The only kind of competition made illegal by a price ceiling is that of offering more money than the legal limit as means of offsetting weaknesses in other attributes in competing for goods.

Fair-employment laws prohibiting Edition: current; Page: [ 13 ] choice of employees by race, color, creed, or age prohibit competition in terms of personal attributes. Pure food and drug laws prohibit offers of inferior food at lower prices or of new and possibly better but untested by government foods and drugs. Private property rights prohibit competition by violence and involuntary dispossession of goods deemed to be private property.

Socialism prohibits competition in terms of offers of types of services and goods that individuals privately prefer, without having to obtain authorization of government officials for propriety of producing the services. These are merely examples of types of competition that are ruled out—not a complete chronicle and certainly not an evaluation of the desirability of the various types.

Competition for admission to colleges uses mental ability, athletic ability, good looks, residence, willingness to pay, alumni status of parents, race, sex, and religious belief. Greater use of factors other than willingness to pay is enabled by the fact that most colleges are not privately owned. On the average, who do you think are most honest—politicians, businessmen, or teachers?

What is your evidence? Can you think of any reasons why dishonesty would be more surely detected and punished in one of these professions? If successful, would dishonesty be more rewarding in one rather than the others? A predisposition to tell the truth is essential to the long-run viability of a free and democratic society that relies on private property and market-determined prices to allocate scarce resources.

Since scarcity is present in socialism, as in capitalism, competition for control of resources is inescapable. In socialism more is in the form of political Edition: current; Page: [ 14 ] avenues of competition persuasion, favors, personal connections. Competition is the interpersonal striving for more of what is scarce and desired—for production, by purchase, by striving for political power, and so on. Cooperation is a joint activity with mutual striving for a common end. Food is grown, harvested, sorted, processed, packed, transported, assembled in appropriately small bundles, and offered to consumers every day by individuals pursuing personal interests.

No authority is responsible for seeing that these functions are performed and that the right amount of food is produced. Yet food is available every day. On the other hand, especially appointed authorities are responsible for seeing that such things as water, education, and electricity are made available. Is it not paradoxical that in the very areas where we consciously plan and control social output, we often find shortages and failure of service? References to classroom shortages and water shortages are rife; but who has heard of a shortage of restaurants, churches, furniture, beer, shoes, or paper?

Even further, is it not surprising that privately owned businesses, operating for the private gain of the owners, provide as good, if not better, service to patrons and customers as do the post office, schools, and other publicly owned enterprises? Yet the fact is that they are not. How do you explain these paradoxes? They will be explained in the course of study. The query is intended to whet your interest in what is coming. The United States is not the largest country in the world in either number of inhabitants or land area, but its enormous and complex economy produces more annual output than does the economy of any other country.

However, reciting a collection of various economic measurements is not analytically very useful, especially when the measurements persistently change over time. Neither would it be highly helpful to tell a first-time viewer of a football game only how many players are on a team, the size of the field, and the typical scores. Without knowing the rules and something about the competitive tactics and strategies, the viewer would be bored or totally confused.

You live in a largely private property society. Whether or not it is in any sense the best type of society is not our question here. We do know that it has evolved and dominated in competition against others. Though most economic resources in the United States are privately owned and managed, some, such as large acreages of land and sophisticated and massive military equipment, are held as government property. Also, while about 80 percent of national income is earned in the private sector, government purchases of goods and services for example, fire, police, defense, judiciary, education, roads, sanitation account for the critical other 20 percent.

The community at large will protect you from anyone who tries to interfere. If people saw someone trying to steal your car—violate your right to it—they would usually call the police or alert other bystanders to forestall that attempt. Your property right to the car rests on the willingness and ability of other people, not your ability alone, to protect your control over that resource—your property. In a pride of lions, the male by dint of Edition: current; Page: [ 16 ] sheer physical prowess takes first choice of feeding on prey. Instead, there is cowed tolerance of dominant lions.

How much does the government spend? In the National Income Accounts—which measure the total output or product of an economy—the US government accounts for about 20 percent of everything produced. That is, the Gross Domestic Product GDP includes purchases of goods and services by the government along with the consumption spending of households and investment spending of business. Such government spending includes ships for the navy and the salaries of all the employees of the government.

Interest payments on the trillions of dollars of government debt are an expense of government, but show up in the national income accounts as interest income earned by the bondholders. Government also makes transfer payments for Social Security, Medicare, Medicaid, food stamps, unemployment insurance, and housing vouchers. Such transfer payments do not directly contribute to the output of the economy, so are not included in the government component of GDP. Instead, the people and businesses that receive transfer payments from government will either spend or save—just as they would earned income from wages and dividends—so GDP components such as consumer spending and private investment are larger as a result of such transfers.

That does not mean the economy is larger or the people are richer because of such transfer payments. Those payments have to be financed either by taxes collected from households and businesses—thereby reducing private consumption and investment spending—or by the issuance of additional government debt—which also reduces household and business spending. The government expenditure concept that includes transfer payments rose to 30 percent of GDP over thirty years ago and then in the great recession of — shot up to over 35 percent of GDP. The result has been that a large and growing share of the spending by households for consumption and some of the spending by businesses for investment are paid for by transfers from taxpayers or by debt issuance by government.

In playing a game, the rules are the rights defining actions a player can choose. Comparing socialist and capitalistic nations without knowing the different rights people have to economic goods would suggest that the nature of people differs in the two societies. In their underlying natures, people are everywhere much the same, but in different societies they may act within very different contexts and restraints and incentives—the ground rules differ.

Private property rights contain three key features: 1 the right to make decisions about the physical 1 conditions and uses of specified goods, 2 the right to sell the rights of ownership to other people, and 3 the right to enjoy the resulting income and to bear the loss of the use decision. These are exclusive rights; they all belong to the same person. These three elements together constitute the essence of private property rights. If any of the three is missing, private property rights are not present. The physical attributes or yields of all resources owned by other persons must not be affected.

If you own private property rights to something, you, and only you, may choose its future use and physical condition, or transfer that right to a willing recipient.


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  • No other person has a right to alter its physical features or uses of the good to which you have the private property right. Private property rights are rights of people over uses of goods they own. Avoid another confusion. In economics, we are concerned about constitutionally protected rights. Such claims would amount to other people being forced to provide something that I want. No such constitutional rights exist.

    Private property rights protect your property from physical 2 effects caused by other people. But you are not protected from market-value effects caused by a reduced demand for your property. The distinction between physical effects and market-value effects seems clear—at first thought. But consider the following situation. From your land, you have a beautiful view over land owned by someone else who proposes to erect a building obstructing your sight.

    Would the physical attributes of your land be affected? Yes and no—depending on what is meant by the physical attributes of your land. Usually, but not always, they are excluded from your private property rights. Your neighbor can block your view without violating your private property rights. The moral is: When buying private property rights to something, first identify what the rights include and what is excluded.

    The less that is included, the lower the market value will be. And that makes you pay attention to potential market value of what you own. The way you use your Edition: current; Page: [ 19 ] car or house will affect their market values. This salability of rights to the resource is a fundamental difference between private property rights and all other forms of property rights over resources. In Switzerland, until a couple of decades ago, shares in many publicly traded corporations could not be sold to other people unless the buyer was approved by the corporate directors.

    Private property rights are transferable to any person willing to accept it or share in it. You bear that right until someone else is willing to accept it. Once you acquire a private property right to some good, you either must transfer it to some other willing recipient or bear it until death. At that inevitable time, without a willing designated recipient inheritor , the government takes the right. Because the administrators are thereby more insulated from changes in market values of the resources, they use those resources less in accord with their highest market-valued uses.

    This does not mean that private property rights are necessarily always better. Or, if you could have attracted my attention and asked for the right to use my dock, could I extract from you a promise to all your wealth to save your life? A more common example of a tort occurs when you berth your boat on my dock with or without my permission , but because of some proven negligence on my part your boat is damaged or you are injured.

    In such cases, courts may force me to compensate you. An important restriction on the scope of private property rights is contained in the Rule against Perpetuities. That rule restricts your control of the future uses of what you own now. You might in your will try to restrict the future uses of your enormous wealth, perhaps leaving a parcel of land to a foundation as a permanent refuge for deer. However, a reason for the ban on your unlimited future control is that it reduces the influence of future market values on the way that resource will then be used.

    The rule against perpetuities permits restrictions on use and salability of resources for only about twenty-one years after the death of persons who were alive at the time of the death of the donor. If that rule were not enforced, resources today would still be used in ways they were generations ago—a potentially unattractive result. A major difference between societies is not whether property rights do or do not exist, but is instead the extent to which they apply.

    Even in formerly communist Russia, private property rights were not totally absent. People owned and could buy and sell furniture and automobiles, as well as vegetables grown in their gardens. Explaining what those capitalized market values reflect, and how they influence our behavior and uses of resources, is one of the basic achievements of economic analysis. To incorporate anticipation into present values requires establishing and maintaining consistency of actions among the populace.

    That has to be done in an economy in which decisions and adjustments are independent in the sense that each person makes choices without requiring permission from someone else. Yet, the decisions are dependent in that they depend on what other people are expected to do. In a market economy—with restrictive private property rules of the game—individuals make risky decisions and bear the consequences of their decisions. We will start in the next chapter by looking at demand for various amounts and types of goods, assuming initially they already have been produced.

    Your private property rights to your land prevent me from encroaching to pitch a tent or dump garbage or hold a meeting without your permission. I would be violating your private property rights to your land. Similarly, if, without prior permission, I took your loudspeaker to talk to people, I would be violating your private property rights to the loudspeaker.

    I do have a right to free speech, but that does not mean I have a right to take your loudspeaker or land to communicate with others even if they would be willing listeners. It uses scarce resources. I must use my own, or rented, resources to communicate, and then only to willing persons. Someone sends unwanted email to your computer.

    Standing Senate Committee on Legal and Constitutional Affairs

    You are an un willing recipient. Both required conditions of free speech are violated. Your computer is being used without your permission, and you are not a willing recipient of the messages. More of a specified good requires reduced production of some other goods. The necessity of that trade-off is represented by the production possibility boundary PPB , as shown in figure 2.

    The curved boundary line indicates, vertically, the maximum amount of autos that can be produced, given that a specified amount of wheat, measured on the horizontal scale, is to be produced also. Every point on the PPB represents a combination of annual amounts of automobiles produced, measured on the vertical axis, and annual amounts of wheat, measured on the horizontal axis. All points below inside the curve represent wasteful, inefficient situations, because more of both autos and wheat could be produced. The end points at the vertical scale and at the horizontal scale are measures of the maximum amounts of a good when only that one good is produced.

    The negative downward slope of the boundary curve represents the fact that more of one good means less of other goods. Moving on the boundary line upward to the left means more of the vertically measured good is produced, but with a necessary reduction in the production of the other good. The boundary line represents all the efficient points—no waste—with the maximum amounts of one good along with minimum necessary reductions in production of other goods. Whether the saving in electricity is worth more than the increased cost of production of the refrigerator is the pertinent question, not the fact that less electricity is used.

    That would be maximum housing, with nothing else. Clearly, we want more than just one good. We want combinations of goods. But more of one means less of others, if we are efficient. With investment, such as new equipment, buildings, and production techniques, the PPB is expanded outward, in one or more dimensions, though only two are shown in figure 2. But the PPB reminds us that at any given moment the production potential is limited.

    People differ in their preferences and evaluations. You want cleaner air even at the cost of less driving. I want more driving even at the cost of less clean air. Both of us want efficiency with respect to our preferred mixtures. Does efficiency mean the least possible amount of energy is used—regardless of cost of other materials? Furthermore, the location higher or lower of the boundary curve depends on the reliability of laws and contracts, government policies, taxes, security of property, work ethic, entrepreneurship, education, access to markets, mobility of resources—a lot more than just the number of people and quantity of physical resources.

    Those other factors are major features that economic principles help us understand. We now prepare to learn economic principles and how to use them reliably to understand events in the economy. In fact, the economic principles that form economic theory are very powerful, proven, and reliable. In scientific analysis and interpretation of an event, theory means a set of principles, or propositions, which, when logically used, will guide us to state correctly what will be the consequences of some initial action—a set of concepts and relationships that enables us to deduce what action will lead to what result.

    The theory is reliable, even if the players are not reliable in their performance. It helps to understand or deduce consequences. Principles of chemistry explain what happens if you add iron filings into sulfuric acid, or if you toss a match into a pile of paper, but it does not tell whether you should add the filings or toss the match.

    Physics does not imply carbon is better than lithium, or that heavier elements are better than lighter. Economics does not tell us imply that governments should be smaller Edition: current; Page: [ 25 ] rather than larger, or that taxes should be lower or higher. Economics can foretell some of the consequences of a law or event, and you can then decide for yourself whether the prior action is desirable. Whether some event or consequence is good or bad is not implied, indicated, or deducible solely from economic theory.