Capitalists Have a Better Plan: Why Decentralized Planning Is Superior to Bureaucracy and Socialism by Robert P. Murphy

To early 20th-century intellectuals, capitalism looked like anarchy. Why, they wondered, would we trust deliberative, conscious guidance when building a house but not when building an economy?

It was fashionable among these socialist intellectuals to espouse “planning” as a much more rational way to organize economic activity. (F.A. Hayek wrote a famous essay on the phenomenon.) But this emphasis on central planning was utterly confused both conceptually and empirically.

Ludwig von Mises made the most obvious rejoinder, pointing out that there is “planning” in the market economy, too. The difference is that the planning isdecentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers. Thus, in the debate between socialism and capitalism, the question isn’t, “Should there be economic planning?” Rather, the question is, “Should we restrict the plan design to a few supposed experts put in place through the political process, or should we throw open the floodgates and receive input from millions of people who may know something vital?”

This second question came to be known as the “knowledge problem.” Hayek pointed out that in the real world, information is dispersed among myriad individuals. For example, a factory manager in Boise might know very particular facts about the machines on his assembly line, which socialist planners in DC could not possibly take into account when directing the nation’s productive resources. Hayek argued that the price system in a market economy could be viewed as a giant “system of telecommunications,” rapidly transmitting just the essential bits of knowledge from one localized node to the others. Such a “web” arrangement (my term) avoided a bureaucratic hierarchy in which every bit of information had to flow up through the chain of command, be processed by the expert leaders, and then flow back down to the subordinates.

Complementary to Hayek’s now-better-known problem of dispersed knowledge, Mises stressed the calculation problem of socialist planning. Even if we conceded for the sake of argument that the socialist planners had access to all of the latest technical information regarding the resources and engineering know-how at their disposal, they still couldn’t rationally “plan” their society’s economic activities. They would be “groping in the dark.”

By definition, under socialism, one group (the people running the state, if we are talking about a political manifestation) owns all of the important productive resources — the factories, forests, farmland, oil deposits, cargo ships, railroads, warehouses, utilities, and so on. Thus, there can be no truly competitive markets in the “means of production” (to use Karl Marx’s term), meaning that there are no genuine prices for these items.

Because of these unavoidable facts, Mises argued, no socialist ruler could evaluate the efficiency of his economic plan, even after the fact. He would have a list of the inputs into a certain process — so many tons of steel, rubber, wood, and man-hours of various types of labor. He could contrast the inputs with the outputs they produced — so many houses or cars or bottles of soda. But how would the socialist planner know if this transformation made sense? How would the socialist planner know if he should continue with this operation in the future, rather than expanding it or shrinking it? Would a different use of those same resources produce a better result? The simple answer is that he would have no idea. Without market prices, there is no nonarbitrary way of comparing the resources used up in a particular process with the goods or services produced.

In contrast, the profit-and-loss test provides critical feedback in the market economy. The entrepreneur can ask accountants to attach money prices to the resources used up, and the goods and services produced, by a particular process. Although not perfect, such a method at least provides guidance. Loosely speaking, a profitable enterprise is one that directs scarce resources into the channel that the consumers value the most, as demonstrated through their spending decisions.

In contrast, what does it mean if a particular business operation isunprofitable? It means that its customers are not willing to spend enough money on the output to recoup the monetary expenses (including interest) necessary to buy the inputs. But the reason those inputs had certain market prices attached to them is that other operations were bidding on them, too. Thus, in Mises’s interpretation, an unprofitable business enterprise is siphoning away resources from channels where consumers would prefer (indirectly and implicitly) that the resources be deployed.

We must never forget that the economic problem is not to ask, “Will devoting these scarce resources to project X make at least some people better off, compared to doing nothing with these resources?” Rather, the true economic problem is to ask, “Will devoting these scarce resources to project X make people better off compared to using the resources in some other project Y?”

To answer this question, we need a way of reducing heterogeneous inputs and outputs into a common denominator: money prices. This is why Mises stressed the primacy of private property and the use of sound money as pillars of rational resource allocation.

Robert P. Murphy
Robert P. Murphy

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal.

The Slow-Motion Financial Suicide of the Roman Empire by Lawrence W. Reed & Marc Hyden

More than 2,000 years before America’s bailouts and entitlement programs, the ancient Romans experimented with similar schemes. The Roman government rescued failing institutions, canceled personal debts, and spent huge sums on welfare programs. The result wasn’t pretty.

Roman politicians picked winners and losers, generally favoring the politically well connected — a practice that’s central to the welfare state of modern times, too. As numerous writers have noted, these expensive rob-Peter-to-pay-Paul efforts were major factors in bankrupting Roman society. They inevitably led to even more destructive interventions. Rome wasn’t built in a day, as the old saying goes — and it took a while to tear it down as well. Eventually, when the republic faded into an imperial autocracy, the emperors attempted to control the entire economy.

Debt forgiveness in ancient Rome was a contentious issue that was enacted multiple times. One of the earliest Roman populist reformers, the tribune Licinius Stolo, passed a bill that was essentially a moratorium on debt around 367 BC, a time of economic uncertainty. The legislation enabled debtors to subtract the interest paid from the principal owed if the remainder was paid off within a three-year window. By 352 BC, the financial situation in Rome was still bleak, and the state treasury paid many defaulted private debts owed to the unfortunate lenders. It was assumed that the debtors would eventually repay the state, but if you think they did, then you probably think Greece is a good credit risk today.

In 357 BC, the maximum permissible interest rate on loans was roughly 8 percent. Ten years later, this was considered insufficient, so Roman administrators lowered the cap to 4 percent. By 342, the successive reductions apparently failed to mollify the debtors or satisfactorily ease economic tensions, so interest on loans was abolished altogether. To no one’s surprise, creditors began to refuse to loan money. The law banning interest became completely ignored in time.

By 133 BC, the up-and-coming politician Tiberius Gracchus decided that Licinius’s measures were not enough. Tiberius passed a bill granting free tracts of state-owned farmland to the poor. Additionally, the government funded the erection of their new homes and the purchase of their faming tools. It’s been estimated that 75,000 families received free land because of this legislation. This was a government program that provided complimentary land, housing, and even a small business, all likely charged to the taxpayers or plundered from newly conquered nations. However, as soon as it was permissible, many settlers thanklessly sold their farms and returned to the city. Tiberius didn’t live to see these beneficiaries reject Roman generosity, because a group of senators murdered him in 133 BC, but his younger brother Gaius Gracchus took up his populist mantle and furthered his reforms.

Tiberius, incidentally, also passed Rome’s first subsidized food program, which provided discounted grain to many citizens. Initially, Romans dedicated to the ideal of self-reliance were shocked at the concept of mandated welfare, but before long, tens of thousands were receiving subsidized food, and not just the needy. Any Roman citizen who stood in the grain lines was entitled to assistance. One rich consul named Piso, who opposed the grain dole, was spotted waiting for the discounted food. He stated that if his wealth was going to be redistributed, then he intended on getting his share of grain.

By the third century AD, the food program had been amended multiple times. Discounted grain was replaced with entirely free grain, and at its peak, a third of Rome took advantage of the program. It became a hereditary privilege, passed down from parent to child. Other foodstuffs, including olive oil, pork, and salt, were regularly incorporated into the dole. The program ballooned until it was the second-largest expenditure in the imperial budget, behind the military.It failed to serve as a temporary safety net; like many government programs, it became perpetual assistance for a permanent constituency who felt entitled to its benefits.

In 88 BC, Rome was reeling from the Social War, a debilitating conflict with its former allies in the Italian peninsula. One victorious commander was a man named Sulla, who that year became consul (the top political position in the days of the republic) and later ruled as a dictator. To ease the economic catastrophe,Sulla canceled portions of citizens’ private debt, perhaps up to 10 percent,leaving lenders in a difficult position. He also revived and enforced a maximum interest rate on loans, likely similar to the law of 357 BC. The crisis continually worsened, and to address the situation in 86 BC, a measure was passed that reduced private debts by another 75 percent under the consulships of Cinna and Marius.

Less than two decades after Sulla, Catiline, the infamous populist radical and foe of Cicero, campaigned for the consulship on a platform of total debt forgiveness. Somehow, he was defeated, likely with bankers and Romans who actually repaid their debts opposing his candidacy. His life ended shortly thereafter in a failed coup attempt.

In 60 BC, the rising patrician Julius Caesar was elected consul, and he continued the policies of many of his populist predecessors with a few innovations of his own. Once again, Rome was in the midst of a crisis. In this period, private contractors called tax farmers collected taxes owed to the state. These tax collectors would bid on tax-farming contracts and were permitted to keep any surplus over the contract price as payment. In 59 BC, the tax-farmer industry was on the brink of collapse. Caesar forgave as much as one-third of their debt to the state. The bailout of the tax-farming market must have greatly affected Roman budgets and perhaps even taxpayers, but the catalyst for the relief measure was that Caesar and his crony Crassus had heavily invested in the struggling sector.

In 33 AD, half a century after the collapse of the republic, Emperor Tiberius faced a panic in the banking industry. He responded by providing a massive bailout of interest-free loans to bankers in an attempt to stabilize the market. Over 80 years later, Emperor Hadrian unilaterally forgave 225 million denarii in back taxes for many Romans, fostering resentment among others who had painstakingly paid their tax burdens in full.

Emperor Trajan conquered Dacia (modern Romania) early in the second century AD, flooding state coffers with booty. With this treasure trove, he funded a social program, the alimenta, which competed with private banking institutions by providing low-interest loans to landowners while the interest benefited underprivileged children. Trajan’s successors continued this program until the devaluation of the denarius, the Roman currency, rendered the alimenta defunct.

By 301 AD, while Emperor Diocletian was restructuring the government, the military, and the economy, he issued the famous Edict of Maximum Prices. Rome had become a totalitarian state that blamed many of its economic woes on supposed greedy profiteers. The edict defined the maximum prices and wages for goods and services. Failure to obey was punishable by death. Again, to no one’s surprise, many vendors refused to sell their goods at the set prices, and within a few years, Romans were ignoring the edict.

Enormous entitlement programs also became the norm in old Rome. At its height, the largest state expenditure was an army of 300,000–600,000 legionaries. The soldiers realized their role and necessity in Roman politics, and consequently their demands increased. They required exorbitant retirement packages in the form of free tracts of farmland or large bonuses of gold equal to more than a decade’s worth of their salary. They also expected enormous and periodic bonuses in order to prevent uprisings.

The Roman experience teaches important lessons. As the 20th-century economist Howard Kershner put it, “When a self-governing people confer upon their government the power to take from some and give to others, the process will not stop until the last bone of the last taxpayer is picked bare.” Putting one’s livelihood in the hands of vote-buying politicians compromises not just one’s personal independence, but the financial integrity of society as well. The welfare state, once begun, is difficult to reverse and never ends well.

Rome fell to invaders in 476 AD, but who the real barbarians were is an open question. The Roman people who supported the welfare state and the politicians who administered it so weakened society that the Western Roman Empire fell like a ripe plum that year. Maybe the real barbarians were those Romans who had effectively committed a slow-motion financial suicide.

Lawrence W. Reed

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

The Most Impossible Thing in “MI: Rogue Nation” by Jeffrey A. Tucker

There’s a scene in “Mission Impossible: Rogue Nation” that seems entirely plausible. The bad guy is transferring a huge amount of money, something like $1 billion. He has a hand-held device and clicks the button. We see a progress bar. The operation takes only a few seconds and then there is a ding. Done! Wow, impressive.

Surely, this is the way rich, powerful, well-connected people do it.

Actually, this is the most impossible thing that happens in the movie. It is more impossible than holding one’s breath for 3 minutes, more impossible than hanging onto the side of an airplane as it takes off and lands, and more impossible than riding a motorcycle at 120 miles an hour around curvy Moroccan roads and not crashing.

It can’t be done — not with any existing service. Viewers hardly question that it should be possible to move money that quickly. Sadly, it is not. Our money transmission technologies in real life are like the 1950s.

The only way to do what they did would be the use of a technology invented in 2009 but is still in extremely limited use, for now: cryptocurrency like Bitcoin operating on a distributed ledger. Otherwise, you are going to have to wait several weekdays, pay high fees, or have a trusted (credit-based) relationship with some third-party provider.

There is currently no way, using national money, to move a billion dollars from one person to another instantly. You can’t do it with a million dollars. There are better and worse ways to move thousands of dollars, but they all cost money, all require a trust relationship, and all take time. And there is no way to do this peer to peer using even $1 (except, of course, physically handing you a piece of paper in person).

National Currencies Limit Transfer Choice

Consider the most common way of moving money from me to you. It is ACH, which stands for Automated Clearing House. It moves a total of $40 trillion per year in 25 billion transactions, and is increasingly preferred over credit cards. It seems clean and, once you have verified accounts, works without a credit relationship.

However, it is slow. It takes at least one day and as much as four days, not including weekends. If you push on Thursday, the funds might not be there until Tuesday. It’s also expensive: 1-3%, which doesn’t sound like much until you realize you can get a nice car for how much it costs to move $1 million.

ACH is the most advanced, most common, most direct, most reliable method. And it is still terrible. It’s closely related to wiring money — an ancient method that uses Western Union (founded 1851!) or Moneygram (the new name for Travelers Express founded in 1940). These are very expensive services, though they are very fast.

PayPal is a mixed bag. If you have a balance or have it directly linked to your bank account, there are no fees, though there is a transaction limit of $10,000. If you are using a credit or debit card, the fees can be 3%. And the clearing time can be 3-4 business days, though if you have a balance in your account, the transfer is instant. This doesn’t really mean anything, though, because it takes 3-4 days to make the PayPal balance achieve liquidity outside of PayPal. If you are using it internationally, the fees go through the roof, regardless.

Other services improve on this record. Google Wallet is one of the best. It’s been known to be fast when it is linked up to your bank account. But you can’t know for sure. It could take several days. And there are strict limits to the amount to you can move. If you have more than $50,000 to send in a week, you are completely out of luck.

It is the same with Square Cash, except that this service absolutely requires a debit card hook up. It is mercifully free of fees, but you have to wait 30 days before your account is verified, and, until that time, you are limited to moving $1,000.

There is a fancy new application on Facebook that allows you to move limited amounts of money, and it is wonderful and exciting.

Except: it can take three to four days before your money movies via instant messaging. And Facebook doesn’t permit credit cards, debit cards, or other third-party payment systems.

SnapChat is experimenting with something similar.

There are many other services that are desperately trying to resolve the problem. Think of companies like Dwolla, which started in 2008 with such promise. But this company, just like PayPal and everyone else, bumped into a crazy system of regulations that forced compliance with every form of “know your customer” rules and navigating a highly regulated banking system with a money that is ultimately controlled by government and, therefore, moves digitally only according to its diktat.

Risks of Anachronistic Systems

Another big flaw is that any one of these trusted third parties can reverse, freeze, or seize the transaction funds and there’s nothing anyone can do to avoid this risk. For a billion dollar transfer, the risk of seizure, freezing, or reversal would be enormous and would last for months.

It’s not a surprise that innovation is difficult under these conditions. We can get ever fancier interfaces, ever more accessibility, ever friendlier ways of going about things. All of this is great.

But, in the end, transferring money from one person to the next bumps into the same problems: trust, fees, waiting times, dollar limits, and grave problems with international transfers. Each problem has a slightly different source. But they all add up to the weird reality that doing what would seem completely normal in 2015 — moving money instantly from here to there — is still exceedingly difficult.

How much further are we going to get into the digital age before our monetary and payment systems catch up? There is a crying need. Everyone knows it. This is why so many people are excited about Bitcoin.

Bitcoin blows up the current system through several critically new innovations. It combines a money and payment system into one single process, bypassing national monies altogether. It also bypasses the banking system completely through a ledger system that is open source and monitored through software. It also requires no trust, credit, or identity verification. If you have an Internet connection, and you hold some amounts of the currency, you can move that property from you to anyone else in the world without asking anyone’s permission.

The time for transaction processing is almost instant; the transaction clearing time can be several minutes. Compare that clearing time to 1-3 days for equity markets, 3-5 business days for a check or wire transfer, and 60-90 days for a credit card transaction.

The costs associated with moving cryptocurrency are negligible. For example, in December 2014, there was an $81 million transaction that cost just $0.40 to conduct. That compares to the $2.4 million or so this same transaction would cost using conventional payments systems and national monies.

This is a huge benefit of Bitcoin but only one feature of a larger innovation. Cryptocurrency completely rethinks the way we bundle, title, move, and verify all kinds of information. The potential applications for this technology are awesome to consider. It’s not just about money, though that would be significant enough. The spillovers affected titling, securities, and all forms of contracts.

The headlines over Bitcoin today are all about the fallout from the failure of one firm, Mt. Gox, an early mover in the space that mishandled its business. It’s just another in a long series of blows Bitcoin has endured in the 6 years of its existence. And yet, when you look at it today, you see an innovation that has been tested, survived, and thrived.

Bitcoin is Mission Impossible — an innovation that finally moves money into the 21st century — coming true.


Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World. Follow on Twitter and Like on Facebook.

Can We Afford ‘Affordable Care’? by D.W. MacKenzie

Does the Supreme Court decision upholding health insurance subsidies prove that Obamacare is here to stay?

With its legality settled, the longevity of the healthcare program is supposed to be politically inevitable. The millions of voters who receive subsidies from the Affordable Care Act will not tolerate the loss of this money. Insurance companies will no doubt also lobby to prevent any loss of ACA subsidies, as stockholders and employees are major beneficiaries of this program.

Political factors may well preserve the ACA in the short run. But the Court’s ruling came on the heels of a gloomy report from the Congressional Budget Office that may prove to be more decisive for the law than all of Chief Justice Roberts’ legal gymnastics.

The CBO forecasts anemic economic growth and rising public debt for decades to come. Projected revenues and projected spending indicate a growing imbalance in federal finances, driven by long-term unfunded liabilities in old entitlement programs — mainly Social Security and Medicare.

The Affordable Care Act was supposed to control health insurance costs — hence the name. Unfortunately, things are not working out that way, and insurance companies are pressing for significant rate increases.

Consumers might hope that government officials would resist pressure for rate increases, but such actions are unlikely: Stock prices for major health insurers rose sharply after the Supreme Court ruled in favor of the Obama administration. Clearly, investors expect the ACA to benefit health insurers. And in Oregon, state regulators actually raised premiums higher than insurers requested, just to keep companies in the market. Rising premiums will likely drive more subsidies, worsening the looming debt and entitlement crisis.

Politicians have ignored these issues for decades because they seemed like “long-term” problems, and political pressures from elections and lobbying force them to be shortsighted. The short-term financial situation is being shored up by the willingness of investors to buy federal debt at low rates.

The trouble is that the long term isn’t as far off as it used to be. The CBO indicates that the fiscal situation in the federal government worsened significantly over the past few years, even as the deficit was declining. Further deterioration in federal finances is expected over the next decade. How much longer will private investors continue to finance this soaring debt?

A large part of the problem with rising debt is that financing it requires steady economic growth, but large public debts can crush growth. Federal debt is a millstone on the economy, the burden of which could at some point lead to national bankruptcy. The ACA, with its enormous subsidies and regulatory compliance costs, will simply pile on an already unaffordable mass of federal spending programs.

The bottom line is that Supreme Court maintained the ACA subsidies legally,but the American people will not be able to maintain them financially.

The passage and continued defense of the Affordable Care Act is an example of the rank irrationality of public budgeting. The outcome of our political and legislative processes over the past few decades has been to create a myriad of wasteful and financially unsustainable federal programs. Meanwhile, the analytical office the legislative branch of government has been quietly raising the alarm about to the direction and sustainability of government finances. It would seem that delirium is winning out over reason.

There is, of course, nothing truly inevitable about the growth of federal spending. Federal spending developed into its present irrational state because many people pressed for this growth.

But spending can and will be curtailed. Citizens can push for real spending cuts through the electoral process. Otherwise, investors in financial markets will at some point put a sharp and sudden stop to government excesses.


D.W. MacKenzie

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

RELATED ARTICLE: Under Obamacare, Uninsured Rate Fell to Lowest Level in 50 Years. Why There’s More to That Number.

Will “Happy Birthday” Finally Be Liberated? by Jeffrey A. Tucker

The silliness and corruption of current copyright law in one story.

You have been there, at the restaurant, and it’s someone’s birthday. Here come the wait staff, and they start to sing the song. Except that it is not the song. It is some other song, often with the same lyrics but with a different tune. The new song can be creative and fun, to be sure. But the weird reality is that these waiters are not allowed to sing the song, unless the restaurant is willing to cough up a licensing fee to the owners of the song.

Of all songs that seem to be part of the common cultural experience of humankind, this one tops the list. So it is something of a shock to learn that one company, Warner Music Group, claims to own and control it, and thereby has a right to wet its beak with every performance. Warner rakes in millions every year. It has long enforced its copyright claim with its deep pockets, effectively intimidating everyone with the threat of government coercion.

Warner claims that its copyright dates to 1935. Then it was renewed, and it won’t expire in the United States until 2030, at which point it will be legal to sing it, free of charge. Unless you are in Europe. The copyright there expires at the end of 2016. There will be roughly a decade and a half during which time you can sing the song in a cafe in Paris but not at the Hotel Paris in Las Vegas.

What a lovely example of how rights created by statute differ so dramatically from authentic rights!

Now, to be sure, the whole basis of this claim is very shaky. In the music world, if you can find an edition of words and music on an edition published before 1923, the music in question is considered by the legislation to be part of the commons. This convention came about with the Sonny Bono Copyright Extension Act of 1998, or better known as the “Mickey Mouse Protection Act.” It was a blatant case of industrial protection, forcing copyright on all works for the lifetime of the claimant, plus 70 years.

Still, and thank goodness for it, there is still a strong role for the commons. Most of the music we think of as foundational to high culture is untethered by such absurdities. This is true for Bach, Beethoven, Brahms, Rossini, you name it. It’s also the same with folk music. “Old Dan Tucker” can be sung by anyone anytime.

Ownership to all this is shared by the whole of humanity. This does nothing to harm the commercial currency of the music: People still pay for marked editions, performances, recordings, and so on.

The lesson here is that you don’t need copyright to foster vibrant commerce in music. But you do need copyright if you are a company that wants to pillage people for innocently doing a peaceful thing like publicly singing a celebratory song in a restaurant.

For those who imagine that copyright is there to protect the property of creators, the case of “Happy Birthday” is an excellent case to the contrary. It’s been part of popular culture dating back to the 19th century. The melody is well documented as “Good Morning to All” and appeared in songbooks. What really happened is that a mega-big corporate monopoly pillaged the commons and took exclusive possession of a non-scarce good, solely to gain monopoly rents.

Well, perhaps they pushed too far. Finally, a consortium of performers and attorneys, fed up with the nonsense, is challenging the “Happy Birthday” monopoly. And the litigators have a smoking gun, and it is rather devastating. They found an edition of the song dated from 1922. It says it is published with special permission. But as regards copyright law, the point is that the in-print existence of this song from that period puts it squarely in the public domain.

Everyone in the industry has smelled a rat regarding Warner’s claims. This little document shines the spotlight on it. It seems like the jig is up, but we shall see.

The significance of the case goes far beyond revealing a conventional case of the abuse of the system. It is indeed abusive, but the problem is deeper: It is the system itself. Authentic property rights are not established by positive legislation, forever tweaked according to lobbying pressure and turning on tiny details of dates and intricacies of publishing history.

Authentic property rights extend from the physical nature of things: this is mine, this is yours, this is his and this is hers. Property is based on exclusive control. Such a thing is not possible as regards a tune. Once a tune is heard, it belongs also to the hearer.

For this reason, the reform of the system needs to go far beyond reducing the influence of predatory rent seekers. It must question the existence of supposed “rights” that only exist due to government intervention, “rights” that actually amount to a fundamental attack on free-market competition.

F.A. Hayek, who consistently opposed copyright as a government imposition, saw this clearly, writing in 1948 that:

The problem of the prevention of monopoly and the preservation of competition is raised much more acutely in certain other fields to which the concept of property has been extended only in recent times. I am thinking here of the extension of the concept of property to such rights and privileges as patents for inventions, copyright, trade-marks, and the like.

It seems to me beyond doubt that in these fields a slavish application of the concept of property as it has been developed for material things has done a great deal to foster the growth of monopoly and that here drastic reforms may be required if competition is to be made to work.

Commerce without IP 

But how can industry work in the absence of legislatively created monopolies? Here is where real-life experience outsmarts all the blinders of the intellectual classes. There are many goods over which copyright is not enforceable, and yet they work just fine.

The fashion industry exists without it. Every new design in every season can be copied by anyone. And it happens all the time. The expectation is baked into the sales model. Instead of government-protected monopoly, we get a highly competitive, fast-moving industry that serves all classes and tastes.

Another fascinating case is the perfume industry. Scents cannot be copyrighted and patented. They can all be reverse engineered and sold for a fraction as much as the cosmetic counter and Bloomingdale’s are trying to sell them. This happens every day. And yet, somehow and seemingly miraculously, the industry is gigantically profitable ($30 billion a year), and plenty of people still pay $70 per bottle — just for the guarantee of quality and the prestige that comes with using the original.

It’s been 16 years since Napster was taken down in the interest of protecting the music monopoly. The take down did nothing to stop file sharing and piracy. In fact, as a result of it, the industry has come around to see the commercial advantages of sharing. Most artists today put their music up at zero-cost on YouTube, and see commercial sales through advertising, digital purchases of albums and songs, plus performance contracts and swag that come with it.

At every stage of technological advance in the music industry, voices of doom warned of the coming apocalypse when new music would be no more. And yet, at every stage — records, radio, tapes, digital file sharing — the result has been the opposite. The industry as a whole is more profitable than ever. And there has never been a time in history when such a variety of music has been available to so many at such low prices.

Copyright was invented in the analog age, and its utility has been systematically undermined in the digital age of ubiquitous information sharing. Nearly every dance party and nightclub in the country (and nearly every individual, for that matter) stands in violation of the law, and everyone knows it. The industry uses the prevailing restrictions and privileges to selectively plunder people whenever they get the chance, sort of like agents from liquor control at the height of Prohibition.

Somehow, the comical scene of servers at restaurants trying to sing something, anything, to celebrate the birthday of customer underscores the absurdity of the entire racket. If the “Happy Birthday” monopoly falls, and it surely will, we’ll have taken a giant leap toward a future without government-created art cartels. Music can be free like speech without being free like beer.

Maybe by this time next year, your waiter will be permitted to sing you a song that celebrates your birthday. No one is hurt. As they say, anything peaceful.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World. Follow on Twitter and Like on Facebook.

Capitalists from Outer Space by B.K. Marcus

When the aliens stop trifling with crop circles, bumpkin abduction, and indelicate probes and finally introduce themselves to the rest of humanity, will they turn out to be partisans of central planning, interventionism, or unhampered markets?

This is not the question asked by the Search for Extraterrestrial Intelligence (SETI) Institute, but whether or not the institute’s scientists realize it, the answer is crucial to their search.

Signs of Intelligent Life

The SETI Institute was founded by Frank Drake and the late Carl Sagan. Its scientists do not believe we have been visited yet. UFO sightings and abduction stories don’t stand up under scientific scrutiny, they say. Nor are they waiting for flying saucers. Because the aliens’ signals will likely reach Earth before their spaceships do, SETI monitors the skies for transmissions from advanced civilizations orbiting distant stars.

The scientific search for evidence of advanced alien societies began in 1960, when Drake aimed a 25-meter dish at two nearby stars. The previous year, the journal Nature had published an article called “Searching for Interstellar Communications,” which suggested that distant civilizations might transmit greetings at the same wavelength as the radio emission of hydrogen (the universe’s most common element). Drake found no such signals, nor has SETI found any evidence of interstellar salutations since. But it’s not giving up.

The Truth Is Out There

Before we can ask after advanced alien political economy, we must confront the more basic question: Is there anybody out there? SETI has been searching for over half a century. That may seem like a long time, but there are, as Sagan underscored, “billions and billions of stars.” How many of them should we expect to monitor before finding one that’s transmitting?

In an attempt to address, if not answer, the question, Drake proposed an equation in 1961 to summarize the concepts scientists think are relevant to any educated guess.

Here is how Sagan explains the Drake equation in the book Cosmos:

N*, the number of stars in the Milky Way Galaxy;
fp, the fraction of stars that have planetary systems;
ne, the number of planets in a given system that are ecologically suitable for life;
fl, the fraction of otherwise suitable planets on which life actually arises;
fi, the fraction of inhabited planets on which an intelligent form of life evolves;
fc, the fraction of planets inhabited by intelligent beings on which a communicative technical civilization develops;
and fL, the fraction of a planetary lifetime graced by a technical civilization.

The End of the World as We Know It

Sagan expounds on all the terms in the equation, but it’s that last one that absorbs him: How long can an advanced civilization last before it destroys itself?

Perhaps civilizations arise repeatedly, inexorably, on innumerable planets in the Milky Way, but are generally unstable; so all but a tiny fraction are unable to survive their technology and succumb to greed and ignorance, pollution and nuclear war.

Sagan wrote Cosmos toward the end of the Cold War. He mentioned other threats — greed, ignorance, pollution — but the specter of mutual annihilation haunted him. When he imagined the end of an advanced society, he pictured something permanent.

“It is hardly out of the question,” he wrote, “that we might destroy ourselves tomorrow.” Perhaps, Sagan feared, the general pattern is for civilizations to “take billions of years of tortuous evolution to arise, and then snuff themselves out in an instant of unforgivable neglect.”

The Rise and Fall of Civilization

We cannot know if the civilizational survival rate on other planets is high or low, and so the final term in the Drake equation is guesswork, but some guesses are better than others.

“One of the great virtues of [Drake’s] equation,” Sagan wrote, “is that it involves subjects ranging from stellar and planetary astronomy to organic chemistry, evolutionary biology, history, politics and abnormal psychology.”

That’s quite an array of topics to inform an educated guess, but notice that he doesn’t mention economics.

Perhaps he thought politics covered it, but Sagan’s political focus was more on questions of war and peace than poverty and wealth. In particular, he considered the end of civilization to be an event from which it would take a planet billions of years to recover.

The history of our own species suggests that this view is too narrow. Yes, a nuclear war could wipe out humanity, but civilizations do destroy themselves in less permanent ways.

There have been two dark ages in Western history: the Mycenaean-Greek and the post-Roman. Both were marked by retrogression in technology, art, and literacy. Both saw a drop in overall population and in population density, as survivors left towns and cities for a more autarkic existence in the countryside. And both underwent a radical decline in foreign trade and the division of labor. Market societies deteriorated into disparate cultures of subsistence farming.

The ultimate causes of the Greek Dark Age are a mystery. As with the later fall of the Roman Empire, the Mycenaean demise was marked by “barbarian” invasions, but the hungry hoards weren’t new: successful invasions depend on weakened defenses and deteriorating infrastructure. What we know is that worsening poverty marked the fall, whether as cause, effect, or both.

The reasons for the fall of the Roman West are more evident, if still debated. Despite claims of lead poisoning, poor sanitation, too much religion, too little religion, and even, believe it or not, inadequate central planning, the empire’s decline resulted from bad economic policy.

To help us see this more clearly,Freeman writer Nicholas Davidson suggests in his magnificent 1987 article “The Ancient Suicide of the West” that we look to the signs of cultural and economic decline rather than to the changes, however drastic, in political leadership. While the Western empire did not fall to the barbarians until the fifth century AD, “The Roman economy [had] reached its peak toward the middle of the first century AD and thereafter began to decline.” As with the Mycenaean Greeks, the decay was evident in art and literature, science and technology. Civilization cannot advance in poverty. Wealth and civilization progress together.

How to Kill Progress

“The stagnation in all aspects of society,” Davidson writes, “was associated with a continuous extension of governmental functions. Social engineering was tried on the grand scale. The state relentlessly expanded into commerce, industry, and private life.”

As we look to our own future — or anticipate the politics of our alien brethren — we can draw on the experience of humanity’s past to help us appreciate the economics of progress and decline. Over and over, we see the same pattern: some group gains a temporary benefit from a world in flux. When further social and economic changes check those advantages, the old guard turn to the state to protect them from the dynamism of a healthy society. Adaptation is stymied. Nothing is allowed to evolve. The politically privileged — military and civilian, rich and poor — sacrifice their civilization in an doomed attempt to ward off change.

The Sustainable Society

Evolutionary science, economic theory, and cybernetics yield the same lessons: stability requires flexibility; complexity flourishes under spontaneous order; centralization leads to stagnation.

To those general lessons, economics adds insights specific to the context of scarcity: private property and voluntary exchange produce greater general wealth, longer time horizons, and ever more investment in the “luxuries” of scientific investigation, technological innovation, and a more active stewardship of the environment. Trade promotes peace, and a global division of labor unites the world’s cultures in mutual self-interest.

If, as Sagan contends, an advanced civilization would require political stability and sizable long-term investment in science and technology to survive an interstellar spacefaring phase, then we should expect any such civilization to embrace a planetwide system of free trade and free markets grounded in private property. For the civilization to last the centuries and millennia necessary to explore and colonize the stars, its governing institutions will have to be minimal and decentralized.

The aliens will, in short, embrace what Adam Smith called “the system of natural liberty.” Behind their transmissions, SETI should expect to find the invisible hand.

Scientists versus Freedom

When we do make contact, “the consequences for our own civilization will be stunning,” Sagan wrote. Humanity will gain “insights on alien science and technology, art, music, politics, ethics, philosophy and religion…. We will know what else is possible.”

What did Sagan himself believe possible? Had he survived to witness first contact, would he be surprised to learn of the capitalist political economy at the foundation of an advanced extraterrestrial civilization?

Neil deGrasse Tyson, who remade the Cosmos television series for the 21st century, recommends reading Adam Smith’s Wealth of Nations but only “to learn that capitalism is an economy of greed, a force of nature unto itself.”

We shouldn’t assume that Tyson represents Sagan’s economic views, but when Sagan did address questions of policy, he advocated a larger welfare state and greater government spending. When he talked about “us” and “our” responsibilities, he invariably meant governments, not private individuals.

Sagan wrote, “It may be that civilizations can be divided into two great categories: one in which the scientists are unable to convince nonscientists to authorize a search for extraplanetary intelligence … and another category in which the grand vision of contact with other civilizations is shared widely.”

Why would scientists have to persuade anyone else to authorize anything? Sagan could only imagine science funded by government. It was apparently beyond credibility that less widely shared visions can secure sufficient funding.

It’s a safe guess, then, that when he talks of civilizations that are “unable to survive their technology and succumb to greed,” Sagan is talking about the profit motive.

And yet, it is the profit motive that drives innovation, and it is the great wealth generated by profit seekers that allows later generations of innovators to pursue their visions with fewer financial inducements. Whether directly or indirectly, profits pay for progress.

Self-Interested Enlightenment

Why does it matter if astronomers misunderstand the market? Does SETI really need to appreciate the virtues of individual liberty to monitor the heavens for signs of intelligent life?

Scientists can and do excel in their fields without understanding how society works. But that doesn’t mean their ignorance of economics is harmless. The more admired they are as scientists — especially as popularizers of science — the more damage they can do when they speak authoritatively outside their fields. Their brilliance in one discipline can make them overconfident about their grasp of others. And increasingly, the questions facing the scientific community cross multiple specialties. It was the cross-disciplinary nature of Drake’s equation that Sagan saw as its great virtue.

The predictions of the astronomer looking for extraterrestrial socialists will be different from those of someone who expects the first signals of alien origin to come from a radically decentralized civilization — a society of private individuals who have discovered the sustainable harmony of self-interest and the general welfare.

After that first contact, after we’ve gained “insights on alien science and technology” and we get around to learning alien history, will we discover that their species has witnessed civilizations rise and fall? What was it that finally allowed them to break the cycle? How did they avoid stagnation, decline, and self-destruction?

How did they, as a culture, come to accept the economic way of thinking, embrace the philosophy of freedom, and develop a sustainable civilization capable of reaching out to us, the denizens of a less developed world?


B.K. Marcus

B.K. Marcus is managing editor of the Freeman.

Scandinavian Myths: High Taxes and Big Spending Are Popular by Nima Sanandaji

As I have explained in previous columns for CapX, there are a number of myths surrounding the Nordic countries that don’t stand up to scrutiny. These include the notion that long life span in Nordic nations arose as the public sector expanded, the idea that generous public programs alone explain low levels of Nordic poverty and the myth that Nordic countries are bumblebees that defy gravity by not being adversely affected by high taxes.

But surely the Nordic countries do show one leftist theory to be correct: that social democrat policies can be popular with the electorate.

Although the Social Democrats have recently lost much of their previous support, they did manage to dominate Nordic policies for long. Sweden was sometimes referred to as a one-party state, since the Social Democrats ruled it almost consecutively from 1932 till 2006 (interrupted by two short spells of centre-right rule during 1976-1982 and 1991-1994).

It is sometimes puzzling to the outsider why the Nordic public repeatedly have elected tax-raising governments to power. The obvious answer is ideological support for welfare state policies.

However, there is also another reason worth examining in greater detail: the general public has not been fully aware of the price tag, in terms of higher taxes, attached to expanding public sectors. Politicians have created a fiscal illusion which has resulted in higher levels of taxation that the population would otherwise have accepted as feasible had taxes been levied in a transparent way.

Before policies radicalised in the late 1960s, the tax levels in Nordic nations were around 30 percent  of GDP – quite typical of other developed nations. At the time, the tax burdens were quite visible. Most taxation occurred through direct taxes, which showed up on employees’ payslips.

Over time, an increasing share of taxation has been raised through indirect taxes. The latter are less visible to those paying them, since they are either levied before the wage is formally given to the employee or are included in the listed price of goods.

Finland is worth considering as an example. The country’s tax level was 30 percent of GDP in 1965. Indirect taxes in the form of VAT and mandatory social security contributions amounted to a quarter of total taxation. In 2013, the total tax take had increased to 44 percent of GDP, half of which was hidden taxes.

As shown below, Finnish governments have funded the expansion of the public sector by raising the hidden, but not the visible, tax burden. Denmark has followed a route wherein both hidden and visible taxes have been hiked.

Hidden and visible taxes in Finland (percentage of GDP)

Source: OECD tax database and own calculations.

Hidden and visible taxes in Denmark (percentage of GDP)

In Norway and Sweden, visible taxes are today lower than in the 1960s, although the true taxation is considerably higher. As can be seen below, it is clear that governments in both countries have followed a strategy based on replacing visible tax income with hidden tax incomes.

Thus, whilst the average worker has paid progressively more to the government, the payslips of the same worker have misleadingly shown a reduction in taxation.

Hidden and visible taxes in Norway (percentage of GDP)

Hidden and visible taxes in Sweden (percentage of GDP)

In other words, except in Denmark, the rise in taxation has occurred fully through an increase in hidden taxation.

This is in line with the predictions of fiscal illusion made by Italian economist Amilcare Puviani in 1903. Puviani explained that politicians would have incentives to hide the cost of government by levying indirect rather than direct taxes, so that the public would under-estimate the cost of policies.

The illusion can thus be created that an expanding state benefits individuals and families and yet costs less than it actually does. Nobel laureate James Buchanan and other researchers have expanded on the idea that it is easier for politicians to raise hidden, indirect taxes rather than visible ones.

Perhaps it comes as no surprise that those who believe in a higher tax rate in other parts of the world have followed a similar strategy as the Nordic nations. The American left-liberal think tank the Roosevelt Institute openly recommends “less-visible taxes that Americans are more likely to support.”

The Obamacare system launched in the US represents a form of indirect taxation – through an overly complex system – that is even more difficult to comprehend for the average taxpayer than in the Nordic systems.

I don’t doubt that less visible taxes in the US, the UK or other parts of the world would prove an easier route to raise the tax burden than visible taxes. This is indeed a lesson that the left can learn from the Nordics.

But the question remains if this is a good route to venture on. Shouldn’t politicians strive for systems where people are aware of how much they are paying for the government?


Nima Sanandaji

Dr. Nima Sanandaji is a research fellow at CPS, and the author of Scandinavian Unexceptionalism available from the Institute of Economic Affairs.

EDITORS NOTE: This article was originally published at CapX.

How Economic Control Threatens Political Liberty, Free Speech and the Rule of Law by Jon Guze

John Cochrane (aka “The Grumpy Economist”) has posted a long meditation entitled “Rule of Law and the Regulatory State,” in which he makes a very important point:

The United States’ regulatory bureaucracy has vast power. Regulators can ruin your life, and your business, very quickly, and you have very little recourse. That this power is damaging the economy is a commonplace complaint. Less recognized, but perhaps even more important, the burgeoning regulatory state poses a new threat to our political freedom.

What banker dares to speak out against the Fed, or trader against the SEC? What hospital or health insurer dares to speak out against HHS or Obamacare? What business needing environmental approval for a project dares to speak out against the EPA? What drug company dares to challenge the FDA?

Our problems are not just national. What real estate developer needing zoning approval dares to speak out against the local zoning board?

Readers who doubt that this is an urgent problem should read the whole thing, which includes numerous chilling descriptions of regulatory abuse, but here I want to focus on an issue he raises in passing: how best to refer to this urgent problem?

Cochrane says he hasn’t found “a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control.” He considers “socialism,” “regulatory capture,” and “cronyism,” but he rejects all three. Regarding the last two, he notes:

We’re headed for an economic system in which many industries have a handful of large, cartelized businesses — think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on.

Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build [a] factory in unprofitable place, they do it.

The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That’s neither capture nor cronyism.

The fact is, we’ve seen this system of political economy before — most notably in Mussolini’s Italy and in Hitler’s Germany — and there’s a commonly used term for it. It’s fascism. Maybe Cochrane thinks that term is too emotionally charged. However, I’d have thought a bit of emotional charge was warranted. As Cochrane says:

The power of the regulatory state…lacks many of the checks and balances that give us some “rule of law” in the legal system. …

The clear danger we face is the use of regulation for political control. Each industry gets carved up into a few compliant oligopolies. And the threat of severe penalties, with little of the standard rule-of-law recourse, keeps people and businesses in line and supporting the political organization or party that controls the agencies. …

A return to economic growth depends on reforming the regulatory state. But… preservation of our political freedom depends on it even more.

Read the rest here.

This post first appeared at the John Locke Foundation.

EDITORS NOTE: See Steve Horwitz’s “Why the Candidates Keep Giving Us Reasons to Use the “F” Word“; Jeff Tucker’s “Trumpism: The Ideology“; and Jason Kuznicki’s “The Banality of Donald Trump.”

Jon Guze

The Gig Economy Makes Karl Marx’s Dreams Come True And It’s All Capitalism’s Doing by Max Borders

When Joe Average steps out of his car after completing his shift for Lyft, he does so on his own terms. Nobody tells him when to start. Nobody tells him when to stop. The siren song that is prime time pricing might have coaxed him off the couch, but ultimately it was his call. And with the rest of his day, he’s going to go fishing. You see, Joe loves to fish — even more than he loves making money. After dinner, he might take some time to criticize the second season of True Detective.

Would ole Karl Marx have been happy with this result?

In The German Ideology, Marx wrote,

For as soon as the distribution of labour comes into being, each man has a particular, exclusive sphere of activity, which is forced upon him and from which he cannot escape. He is a hunter, a fisherman, a herdsman, or a critical critic, and must remain so if he does not want to lose his means of livelihood; while in communist society, where nobody has one exclusive sphere of activity but each can become accomplished in any branch he wishes, society regulates the general production and thus makes it possible for me to do one thing today and another tomorrow, to hunt in the morning, fish in the afternoon, rear cattle in the evening, criticise after dinner, just as I have a mind, without ever becoming hunter, fisherman, herdsman or critic.

Marx should be delighted — oh, except that it’s capitalism, not communism, that’s allowing Joe to be a fisherman and a critic on his own terms.

The sharing or “gig” economy is not only disrupting the way people live and work; it’s dividing the left considerably.

On the one hand, you have the nostalgic leftists who want Joe to work a nine-to-five job and skip the fishing. You know, like people did in the 1950s. As Freeman columnist Steve Horwitz writes, presidential candidate Hillary Clinton

longs for a time like the 1950s when workers had the structure of the corporate world and unions through which to lobby and negotiate for pay and benefits, rather than the so-called “gig” economy of so many modern freelance employees, such as Uber drivers. “This on-demand or so-called gig economy is creating exciting opportunities and unleashing innovation,” Clinton said, “but it’s also raising hard questions about workplace protection and what a good job will look like in the future.”

Joe already told us what a good job looks like. It’s one that lets him spend time fishing and criticizing.

More confusing (or confused, perhaps) is Paul Mason’s writing in the Guardian. He lauds “postcapitalism,” which has all the hallmarks of a society Clinton is worried about:

Postcapitalism is possible because of three major changes information technology has brought about in the past 25 years. First, it has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages.

Bingo. The gig economy. But does it make sense to give capitalism a different name? I suppose one could. After all, Marx coined the term. But Marx’s definition of capitalism is a system based on private ownership of the means of production. Has that dynamic fundamentally changed?

Far from it. The sharing economy is simply decentralizing power by allowing ordinary people to use their own small-scale means of production. By solving coordination problems and lowering transaction costs, technology is augmenting capitalism.

When Joe drives for Lyft, for example, his car is still his car. And now more of his time is his, too. Capitalism, even as Marx defined it, hasn’t fundamentally changed. But the use of technology to awaken sleeping private capital is allowing the system to evolve — and rather nicely if you’re Joe Average, or one of thousands of other workers like him.

Now, I’m not saying that there is nothing interesting going on in the electronic commons. Ideas are being configured and reconfigured in the networked economy. Many of those ideas are being taken out of the intellectual-property regime, thanks to open sourcing, and this can be a good thing. There are fierce debates about whether intellectual property (claims to property in ideas and in nonscarce goods) is justifiable. But passing over those debates, more and more open-source technologies are coming online for exploitation by everyone.

Do open sourcing and the creative commons take us to postcapitalism?

I don’t know. But fundamentally, as long as the process is voluntary and carried out peacefully by a community of cooperators, who cares what you call it? Should we be upset that the guy who founded Lyft is getting rich from the tech? Some people are, because they see the accumulation of wealth as taboo. But Joe’s life is better than it would have been in the absence of Lyft. The company allows him to live more of the life he wants to live.

As long as Joe Average is happier, who cares what Hillary Clinton thinks?


Max Borders

Max Borders is the editor of the Freeman and director of content for FEE. He is also cofounder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

Does ‘Fair Trade’ Help Poor Workers? by Alexander Tabarrok

Does “Fair Trade” help poor workers? Probably not says Don Boudreaux in this excellent, short video from the Everyday Economics series at Marginal Revolution University.

As is well known, however, Don is a rabid, free-market economist with ideological blinders who has been captured by corporate interests.

So let’s ignore what Don says and consider what William MacAskill, author of Doing Good Better (reviewed earlier this week) has to say. No one can fault MacAskill’s charitable bona-fides:

MacAskill’s own pledge is to donate everything he earns above about $35,000 per year, adjusted using standard economic measures for inflation and cost of living, to the organizations that he believes will do the most good. Since his bar is roughly at the UK median income—such that half the population earns more each year, and half the population earns less—he’s certainly not condemning himself to a life of hardship; rather, he is pre-committing to staying roughly in the middle of the national income distribution even as his earnings go up over time.

That said, his pledge means giving away 60 percent of his expected lifetime earnings.

When I ask him the inevitable questions about whether this isn’t rather a lot to sacrifice for one person, MacAskill shrugs modestly and smiles broadly. “Imagine you’re walking down the street and see a building on fire,” he says.

“You run in, kick the door down — smoke billowing — you run in and save a young child. That would be a pretty amazing day in your life: That’s a day that would stay with you forever. Who wouldn’t want to have that experience? But the most effective charities can save a life for $4,000, so many of us are lucky enough that we can save a life every year through our donations. When you’re able to achieve so much at such low cost to yourself…why wouldn’t you do that? The only reason not to is that you’re stuck in the status quo, where giving away so much of your income seems a little bit odd.”

So what are MacAskill’s views on Fair Trade? Why they are the same as Don’s!

When you buy fair-trade, you usually aren’t giving money to the poorest people in the world. Fairtrade standards are difficult to meet, which means that those in the poorest countries typically can’t afford to get Fairtrade certification.

For example, the majority of fair-trade coffee production comes from comparatively rich countries like Mexico and Costa Rica, which are ten times richer than the very poorest countries like Ethiopia. …

In buying Fairtrade products, you’re at best giving very small amounts of money to people in comparatively well-off countries. You’d do considerably more good by buying cheaper goods and donating the money you save to one of the most cost-effective charities.

This post first appeared at Marginal Revolution.

Alexander Tabarrok

Clinton’s Startup Tax Will Crush New Businesses by Dan Gelernter

Hillary Clinton has announced that she will, if elected, raise the capital-gains tax to a maximum that equals the highest income tax bracket. She hopes to promote long-term investments by penalizing short-term ones with a tax rate that gets lower the longer an investment is held, reaching the current 20% rate only after six years.

This, Ms. Clinton says, would allow a CEO to focus on the company’s true interests rather than just making the next quarter. It is, unfortunately, exactly the sort of plan you would expect from someone who has never started a company — and who doesn’t seem to know anyone who has.

The CEO of a startup is unlike the CEO of an established business. He is not the head of a chain of command: he is the spokesman or agent of a few colleagues, entrusted for the moment to represent them. The startup CEO has one primary job, which is raising money. It is the hardest thing a young company has to do — and it is an unending process.

Most germinal startups never raise any money at all. The ones that get seed funding are already breathing rarified air, and can afford perhaps a day of celebration before they start pursuing the next round.

The picture is especially tough for tech startups. A startup that builds software doesn’t have any machinery or physical supplies to auction off if the company fails. This means that banks won’t make the kind of secured business loans of the sort small companies traditionally get.

As a result, tech startups are wholly reliant on a relatively small number of investors who are looking for something more exciting than the establishment choices and are willing to take a big gamble in the hope of a big, short-term payoff. Though Ms. Clinton’s proposal would only affect those in the top income bracket, she may be surprised to learn that those are the only people who can afford to make such investments.

Professional investors think in terms of risk: they balance the likelihood of a startup’s failure against the potential payoff of its success. Increasing the tax rate reduces the effective payoff, which increases risk. Investors can lower that risk by reducing the valuation at which they are willing to invest, which means they take a larger share of the company — a straightforward transfer of risk from investors to entrepreneurs.

Ms. Clinton’s tax therefore will not be borne by wealthy investors: it comes out of the entrepreneur’s payday. The increased tax rate means a risk-equivalent decrease in the percentage of the company the entrepreneur gets to keep. And that’s just the best-case scenario.

The other option is that the tax doesn’t get paid at all, because the investor decides the increased risk isn’t worth it — the startup can’t attract funding and dies.

That sounds melodramatic, but it is no exaggeration. A startup company never has more offers than it needs; it never raises money with time spare. Even a slight change in the risk-return balance — say, the 3.8% which Obamacare quietly laid on top of the current capital-gains — kills companies, as investors and entrepreneurs see the potential upside finally shaved past the tipping point.

A tech startup has short-term potential. That is a major part of the attraction to investors, and that makes Ms. Clinton’s proposal especially damaging. In the tech world, we all hope we’ll be the next Facebook or Twitter, but you can’t pitch that to an investor. A good tech startup takes a small, simple idea and implements it beautifully.

The most direct success scenario is an acquisition by a larger company. In the app world — and this is the upside to not having physical limitations on distribution — the timescale is remarkably accelerated. A recent benchmark example was Mailbox, purchased by Dropbox just two months after it launched.

Giving investors an incentive to not to sell will hurt entrepreneurs yet again, postponing the day their sweat equity finally has tangible value, and encouraging decisions that make tax-sense rather than business-sense.

If Hillary Clinton really wants to help entrepreneurs, she should talk to some and find out what they actually want. A lower capital-gains tax — or no capital-gains tax — would be an excellent start.

Dan Gelernter

Dan Gelernter is CEO of the technology startup Dittach.

The Man Who Sowed the Seeds of Puerto Rico’s Collapse by Lawrence W. Reed

Is there anything more tragically monotonous than a failing welfare state? From ancient Rome to modern Greece, the story is one of the most repetitive in history. It goes like this:

People increasingly decide they’d rather vote for a living than work for one. An academic and intellectual class, dependent on subsidies and anxious to command the economy, advises the people that this is a really good thing. Politicians cater to them with high-sounding rhetoric (“We’ll take care of you”) and low-balling promises (“We can afford it. It won’t cost much. We’ll just take it from the rich”).

Responsibility, self-reliance, and enterprise give way to an entitlement mentality. Power concentrates and corruption ensues. Taxes and debt rise. The government debases the money. Crisis leads to more government, which leads to more crisis. What was always bankrupt morally finally goes bankrupt economically. Goodbye economy, liberty, and often even civilization itself. The barbarians take over. What else is new?

Now it’s Puerto Rico’s turn.

The Commonwealth of Puerto Rico is a US territory in the northeastern Caribbean. Its governor, Alejandro García Padilla, startled the world back in June when he announced that the island cannot pay back its $72 billion public debt.

“The debt is not payable,” García Padilla said. “There is no other option. I would love to have an easier option. This is not politics; this is math.”

He called the situation a “death spiral.” Suddenly, millions of Americans were learning what a basket case the Puerto Rican economy has become. It is indeed a crisis but one that was, to an embarrassing extent, made right here in America.

It was foisted on Puerto Ricans by one lousy New Dealer in particular. His name was Rexford Guy Tugwell.

More on the egghead Tugwell in a moment, but let me bring everybody up to date on just how bad things are down there. Be sure to read to the end because there’s a silver lining in this very dark cloud.

Puerto Rico has been in a funk for a good while. Its stubbornly high, double-digit unemployment rate is more than twice that of the United States. In fact, it hasn’t been below 9.7 percent in 40 years.

The island’s debt is higher on a per capita basis than that of any US state and four times that of Detroit, which went bankrupt two years ago. Businesses are collapsing. People are fleeing (200,000 have left since 2005). Almost half of the island’s 3.7 million residents earn incomes under the US federal poverty line. Nearly 40 percent of all households get food stamps. Until recently, the retirement age for government school teachers was as low as 47, prompting underfunded pension fund crisis so endemic to welfare states. (The retirement age has lately been raised to at least 55 for current teachers, and 62 for new teachers.)

As Tyler Durden explains at ZeroHedge.com, policies imposed from Washington must shoulder a big part of the blame for this mess: the wizards on the Potomac encouraged debt and deficit spending, priced hundreds of thousands of Puerto Ricans out of entry-level jobs with a punishing minimum wage, taxed and regulated commerce and investment to a crawl, and showered the island with debilitating welfare. The place would be a showcase of government-induced prosperity except for one sticking point: government.

All of this has been decades in the making, which brings me to the character named Tugwell. I’ve long had a distaste for this pompous meddler. The more I learn about his role as Puerto Rico’s appointed governor (1941–1946), the more I’m ashamed that a US president was dumb enough to put him in charge of anything.

I first heard of Tugwell as an undergraduate economics major at Grove City College in the early 1970s. Fascinated by what my econ prof, Dr. Hans Sennholz, had said in class about America’s 22nd and 24th president, Grover Cleveland, I checked out a biography of him. It carried the imaginative title, GroverCleveland, and included a revealing subtitle, A Biography of the President Whose Uncompromising Honesty and Integrity Failed America in a Time of Crisis.

The author was Rexford Guy Tugwell, widely regarded as the most influential ideologue of economic planning during Roosevelt’s New Deal. The Cleveland terms were largely wasted opportunities, according to Tugwell, because Cleveland would not turn the economy into his personal plaything. If only he had trashed his honesty and integrity, Cleveland could have been the scientist and the rest of us the lab rats.

Tugwell was the Jonathan Gruber of his day. (Recall the smug academic who admitted that deception was employed to fool stupid Americans into supporting Obamacare.) He went straight from academia as a student (the Wharton School at U-Penn, then Columbia) to academia as a professor (University of Washington, American University in Paris, and Columbia University). His intellectual mentors were socialists like Upton Sinclair and Edward Bellamy. Woodrow Wilson’s wartime administration gave him his first real glimpse of the glorious fun of central planning, and he loved it even when it flopped.

In 1932, President-elect Franklin Roosevelt invited Professor Tugwell to join the first White House “brain trust.” These were the whiz kids — the social scientists and experimenters of the administration. Blessed with power and attention, they were ready to “transform” America and “plan” our way out of the Great Depression.

H.L. Mencken was less charitable in his description. He called them “an astonishing rabble of impudent nobodies,” “a gang of half-educated pedagogues, starry-eyed uplifters and other such sorry wizards.” Along with FDR, they “planned” the Depression into the longest slump in American history.

Tugwell loved to set up and run what came to be known as “boondoggles.” He was an architect of the Agricultural Adjustment Act and later director of its Agricultural Adjustment Administration (AAA), which taxed agricultural processors and used the revenue to destroy crops and cattle to raise prices. It was declared unconstitutional by the Supreme Court and ridiculously destructive by clear thinkers.

From its inception in 1935, he directed the Resettlement Administration (RA), which relocated the rural unemployed to new, planned communities in suburbs. Urban authority Jane Jacobs, in her classic The Death and Life of Great American Cities, showed that his program simply displaced people and ruined neighborhoods. The RA was also thrown out as unconstitutional. True to the statist stereotype, Tugwell learned nothing from either experience. “Planning” was his religion and he was going to be its high priest, come hell or high water.

In 1936, Tugwell left Washington and two years later showed up as the first director of the New York City Planning Commission. He tried retroactively to enforce nonconforming land uses with almost no legal or public support. He proved too much an ideologue even for the polarizing Robert Moses, who killed Tugwell’s 50-year, pie-in-the-sky master plan for public housing.

Now let’s get back to Puerto Rico.

By 1941, Rexford Guy Tugwell had behind him a 20-year career of pontificating for big government and managing expensive government flops. Somehow that gave Franklin Roosevelt the idea of naming him governor of Puerto Rico. What Tugwell did for the mainland, he could now do for an island. Maybe this central planning stuff works better if you work small, right?

Nope.

So for five years, Professor Tugwell became Governor Tugwell. One of the first things he did was to create, with the legislature’s approval, the Puerto Rico Planning, Urbanization, and Zoning Board in 1942. If only he had done what John Copperthwaite did later in Hong Kong or what Ludwig Erhard did in postwar Germany or what inspired free marketers have done in freeing their cities, Puerto Rico might today be a beacon of liberty and prosperity. But Tugwell wanted to plan, plan, plan.

Pedro Serra is president of a new organization in Puerto Rico, the Alliance for the Protection of Liberties. He is a businessman from San Juan whose interest in free-market economics led him to work with the 2012 Ron Paul campaign. Looking back on the Tugwell period, he observes,

When President Roosevelt appointed Rexford G. Tugwell governor of Puerto Rico, it was in keeping with the same economic attitude that characterized the New Deal — that the government can solve an economy’s woes. Our government has since taken as an axiom that economic stagnation results from too little government, not too much. If this were the case, then today’s Puerto Rico should be paradise on earth. Instead our economy is depressed, our people jobless, and our government bankrupt.

Climate would seem to have blessed Puerto Rico for agricultural pursuits. Tugwell’s infinite wisdom suggested it should opt for industry instead, so he directed public policy against farming and toward manufacturing. He lobbied for all the aid and welfare from the mainland he could get. He set the tone for decades of a top-down welfare state. Joe Milligan, a colleague of Serra’s, is originally from Rochester, Michigan, and now brings his passion for free markets to San Juan, Puerto Rico, as the director of development for the Alliance for the Protection of Liberties. Here is how Milligan sums it up:

Governor Tugwell’s legacy is alive and apparent on the island. His tenure in office was characterized by central planning, government growth, and expansion of the welfare state. He stamped out the thriving sugar cane and coffee industries in favor of manufacturing. The result is that now we have neither. Today in Puerto Rico our government is the island’s largest employer and half of all residents require government financial assistance to subsist. In this sense Governor Tugwell truly left his mark.

Indeed, for many years after Governor Tugwell left Puerto Rico for academia back in the United States (where failure is celebrated as long as you worship the state and have good intentions), other New Dealers sojourned to the island to offer more of the same.

One of them was Hugh Barton, who had directed the US State Department’s Office of Strategic Services until he was fired for his knowledge of the communist affiliations of some of his top staff. Barton set up shop with the Puerto Rico Planning Board and the Office of Economic Research. If you had a college degree and a penchant for planning the economy of other people, you could get a government job in Puerto Rico in the 1950s and ’60s. Except for a brief retrenchment under one-term Governor Luis Fortuño, Puerto Rico has been run for decades as Tugwell first envisioned it, exacerbated by Washington’s poor policies to boot.

As I promised early in this article, there’s some good news in this bleak course of events. Puerto Rico now has a nascent libertarian movement and an organization devoted to spreading ideas of liberty as an antidote to the Tugwell legacy — the Alianza para la Protección de Libertades (Alliance for the Protection of Liberties) that Pedro Serra and Joe Milligan have launched.

The Alliance seeks to improve the lives of Puerto Ricans by building a new consensus around this proposition: a free society — not a centrally planned, politicized one — is a more prosperous and tolerant society. It works to build public support for smaller government and advise policy makers in choosing the proven path toward prosperity. The Alliance’s programs include developing a college campus lecture circuit, starting a YouTube channel specific to Puerto Rico’s issues, and disseminating compelling literature to legislators.

Never let a crisis go to waste, as the saying goes. Puerto Rico represents a unique opportunity to undo a painful, statist history. I hope readers will want to help.

To support the efforts of the Alliance, email Pedro Serra, the director, at pedro@protecciondelibertades.org.

“The curious task of economics,” Austrian economist F.A. Hayek taught us, “is to demonstrate to men how little they really know about what they imagine they can design.”

Rexford Guy Tugwell never understood that. With the help of the Alliance for the Protection of Liberties, Puerto Ricans may yet embrace Hayek’s wisdom and thereby shake the curse of Tugwell.


Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

Economists Steve Forbes, Larry Kudlow, Dr. Arthur B. Laffer, Steve Moore Launch the Committee to Unleash Prosperity

NEW YORK /PRNewswire-USNewswire/ — Economists Steve Forbes, Larry Kudlow, Dr. Arthur B. Laffer, and Steve Moore have launched the Committee to Unleash Prosperity. This group aims to end America’s growth slump and restore faith in the American Dream.

The Committee to Unleash Prosperity was founded to combat America’s “growth gap” by promoting an agenda that will revitalize America’s economy. In the past decade and a half, under both Republican and Democratic presidents, U.S. economic growth has diminished to roughly 2% annually—a significant decrease from its Post-World War II average of 3.5%.

This subpar growth rate has come at tremendous cost to American families, household incomes, employment opportunities, investment, and poverty levels. Above all, the lack of growth has led some to doubt the attainability of the American Dream and to wonder if our current economic climate is the new norm.

The Committee to Unleash Prosperity is working to change this. In pursuit of rapid growth, the Committee promotes the following six economic principles:

  1. A broad-based, low rate, flat tax
  2. Limited government spending
  3. Decreased regulation
  4. Sound money
  5. Free trade
  6. Rule of constitutional law

Thus far, the Committee has hosted several Presidential candidates to discuss their economic platforms including Governor Scott Walker, Governor Bobby Jindal, Governor John Kasich, Governor Mike Huckabee, Senator Ted Cruz, Senator Lindsey Graham, and Carly Fiorina. The Committee has invited other Republican and Democrat presidential candidates to attend future events.

Today, the Committee will host a luncheon with former Texas Governor Rick Perry to discuss how to restore economic growth and opportunity for all Americans. The event is sponsored by Margo and John Catsimatidis.

Prominent thought leaders have joined the four founders in their mission:

David L. Bahnsen
Richard Breeden
Travis H. Brown
Andrea Catsimatidis
John Catsimatidis, Sr.
John Catsimatidis, Jr.
Margo Catsimatidis
Veronique de Rugy
Steve Elieff
Dr. Edwin Feulner, Jr.
Harold Hamm
Kevin A. Hassett
Roger Hertog
James Kemp
Lewis E. Lehrman
Adele Malpass
David Malpass
Betsy McCaughey
Dan Mitchell
Georgette Mosbacher
David Mullins
Mary Ann Mullins
Deroy Murdock
Liz Peek
Alexandra V. Preate
Andrew F. Puzder
Avik Roy
Rex Sinquefield
David Webb

The Executive Director is political strategist Jon Decker. The Committee to Unleash Prosperity looks forward to promoting its optimistic vision for America’s economic future.

STEVE FORBES

Steve Forbes is Chairman and Editor-in-Chief of Forbes Media. In both 1996 and 2000, Mr. Forbes campaigned vigorously for the Republican nomination for the Presidency. Key to his platform were a flat tax, medical savings accounts, a new Social Security system for working Americans, parental choice of schools for their children, term limits, and a strong national defense.

LARRY KUDLOW

Larry Kudlow is CNBC’s Senior Contributor. He was previously host of CNBC’s primetime “The Kudlow Report.” He is also the host of “The Larry Kudlow Show,” which broadcasts each Saturday from 10:00 a.m.–1:00 p.m. on WABC Radio and is syndicated nationally by Cumulus Media.  Kudlow is the author of “American Abundance: The New Economic and Moral Prosperity,” published by Forbes in January 1998. He served on the transition committees for Reagan-Bush in 1980 and Bush-Cheney in 2000. During President Reagan’s first term, Kudlow was the associate director for economics and planning, Office of Management and Budget, Executive Office of the President, where he was engaged in the development of the administration’s economic and budget policy.  He was formerly chief economist and senior managing director of Bear Stearns & Company. Kudlow started his professional career at the Federal Reserve Bank of New York where he worked in open-market operations and bank supervision. He is co-authoring a forthcoming book about President John F. Kennedy’s tax cuts.

DR. ARTHUR B. LAFFER

Dr. Arthur B. Laffer is founder and chairman of Laffer Associates and was a member of President Reagan’s Economic Policy Advisory Board for both of his two terms. Dr. Laffer also advised Prime Minister Margaret Thatcher on fiscal policy in the U.K. during the 1980s. He has been a faculty member at the University of Chicago, University of Southern California, and Pepperdine University. Dr. Laffer received a B.A. in economics from Yale University in 1963. He received a MBA and a Ph.D. in economics from Stanford University in 1965 and 1972 respectively.

STEVE MOORE

Stephen Moore, who formerly wrote on the economy and public policy for The Wall Street Journal, is the Distinguished Visiting Fellow, Project for Economic Growth, at The Heritage Foundation.  Moore, who also was a member of The Journal’s editorial board, returned to Heritage in January 2014—about 25 years after his tenure as the leading conservative think tank’s Grover M. Hermann Fellow in Budgetary Affairs from 1984 to 1987. He was a senior economist under Dick Armey’s Joint Economic Committee, and he played a large role in the creation of the FairTax proposal.

MARGO AND JOHN CATSIMATIDIS

John Catsimatidis is the Chairman and CEO of the Red Apple Group, a Fortune 500 company with annual revenues in excess of $5 billion. The Red Apple Group is a diverse holding company comprised of an energy sector which includes oil refineries, bio-diesel plants, and extensive New York area storage facilities with a deep draft tanker facility on the eastern shore of Long Island.  The Red Group also carries a real estate portfolio valued at nearly $1 billion. In addition, Red Apple Group has an aviation component which leases corporate aircrafts as well as a major supermarket chain in New York City.  Margo Catsimatidis is the President of MCV Advertising and is heavily involved with philanthropy. One of Mrs. Catsimatidis’ primary charities is the Hellenic Times Scholarship Fund which has provided college scholarships for the past 25 years. Margo and John are parents of Andrea and John Jr., both graduates of NYU and now work alongside their parents in all facets of their businesses.  Margo and John are firm believers in giving back to the community and they have a large portfolio of charitable interests which have a common theme of assisting young people.

RELATED ARTICLE: The Path to Repeal Obamacare With Just 51 Votes

VIDEO: Liberty Still Has a Fighting Chance by Lawrence W. Reed

This speech was delivered at FreedomFest in Las Vegas, Nevada, on July 8, 2015.

Over a nine-month period beginning in 1831, a 26-year-old Frenchman visited nearly every corner of what were then the 24 states of the American Republic. He traveled from New England to the upper Midwest to the Gulf Coast in the Deep South to the mid-Atlantic. Then he wrote a great book full of amazing insights. It made its appearance 180 years ago, in 1835. Perhaps nobody before or since has defined the essence of America better than he did; but then, no other nation in history offered an essence so profoundly exceptional.

Less than half a century after the ratification of the Constitution, America was still an infant nation, but Alexis de Tocqueville sensed the stirrings of greatness. He praised our entrepreneurial drive and initiative, our self-reliance and personal independence, and our vibrant civil society institutions and voluntary associations. He felt that our ideals would eventually lead us to lead the world. He believed that America had placed two sacred principles — freedom and equality — on a higher pedestal than any previous civilization had. They were, he said, our most defining characteristics, the sources of our strength. But he also feared that we would carry one to an extreme that would undermine the other. Milton Friedman was echoing Tocqueville when he said in the 20th century, “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

Tocqueville’s appreciation of freedom knew few bounds. Here is perhaps his most eloquent endorsement of it:

Even despots accept the excellence of liberty. The simple truth is that they wish to keep it for themselves and promote the idea that no one else is at all worthy of it. Thus, our opinion of liberty does not reveal our differences but the relative value which we place on our fellow man. We can state with conviction, therefore, that a man’s support for absolute government is in direct proportion to the contempt he feels for his country.

He masterfully described how the growth of government could smother our freedoms:

After having thus successively taken each member of the community in its powerful grasp and fashioned him at will, the government then extends its arm over the whole community. It covers the surface of society with a network of small, complicated rules, minute and uniform, through which the most original minds and the most energetic characters cannot penetrate to rise above the crowd. The will of man is not shattered, but softened, bent, and guided; men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence: it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies a people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which the government is the shepherd.

Tocqueville’s view of equality is more nuanced. He had no issue with the ideal of equality before the law or even equality of opportunity. He hated slavery and any unwarranted discrimination. He agreed with the words of our Declaration of Independence that “all men are created equal.” But he had no illusions that individuals were thereafter equal in their energies, their talents, their ambitions, their intellect or their character. He was afraid that our egalitarian impulses might someday get the better of us.

“I have a passionate love for liberty, law, and respect for rights,” he wrote. “Liberty is my foremost passion. But one also finds in the human heart a depraved taste for equality, which impels the weak to want to bring the strong down to their level, and which reduces men to preferring equality in servitude to inequality in freedom.”

This issue is so critical to our freedoms and our future that I want to dwell on it for a moment.

Remember this: Free people are not equal, and equal people are not free.

Put another way, in terms of economics, think of it this way: Free people will earn different incomes. Where people have the same income, they cannot be free.

Economic equality in a free society is a snare and a delusion that redistributionists envision. But free people are different people, not programmable robots, so it should not come as a surprise that they earn different incomes. Our talents and abilities are not identical. We don’t all work as hard. And even if we all were magically made equal in wealth tonight, we’d be unequal in the morning because some of us would spend our newfound wealth, and some of us would save it.

To produce even a rough measure of economic equality, governments must issue the following orders and back them up with punishment and prisons:Don’t excel or work harder than the next guy, don’t come up with any new ideas, don’t take any risks, and don’t do anything different from what you did yesterday.

In other words, don’t be human.

Economic inequality, when it derives from the voluntary interaction of creative individuals and not from political power or connections, testifies to the fact that people are being themselves, putting their unique skills to work in ways that are fulfilling to themselves and of value to others. As Tocqueville himself might say, Vive la différence!

People obsessed with economic equality do strange things. They become envious of others. They covet. They divide society into two groups: villains and victims. They spend far more time dragging somebody down than they do pulling anybody up. They’re not fun to be around.

And if they make it to a legislature, they can do real harm. Then they not only call the cops — they are the cops.

If economic inequality is an ailment, punishing effort and success is no cure in any event. Coercive, envy-based measures that aim to redistribute wealth prompt the smart or politically well-connected “haves” to seek refuge in havens here or abroad, while the hapless “have-nots” bear the full brunt of economic decline. A more productive expenditure of time would be to work to erase the mass of intrusive government that ensures that the “have-nots” are also the “cannots.”

Another superb alternative to coercive redistribution would be to work on our character — each of us, one at a time — so that we’re not only good enough for liberty, but good enough to earn a living instead of voting for one.

This economic-equality thing is not compassionate. When it’s just an idea, it’s bunk. When it’s public policy, it’s compulsory insanity. To those who can’t understand how different or unequal we are as individuals, I say, “Get over it!”

Tocqueville warned that this unhealthy obsession with economic equality, combined with an erosion in the respect for liberty and property, would produce what we today would call the welfare state. Let me offer you a description of the welfare state. Somebody once said that it got its name because in it, the politicians get well and the rest of us pay the fare. Just picture people in a giant circle with each having one hand in the next person’s pocket.

The whole notion of the welfare state rests on this really dumb proposition: since people are not decent and compassionate enough to assist their deserving fellows in distress, we must expect them to elect politicians who are more decent and compassionate than they are. How ridiculous! Those politicians then take money from us under threat of imprisonment, launder it through an expensive bureaucracy, and spend what’s left not to actually solve the problem but to manage it into perpetuity for endless dependency, demagoguery, and political gain. And then the advocates of the welfare state compliment themselves for possessing a monopoly on compassion and totally ignore the destructive results of their own handiwork.

So here we are now, decades into the very egalitarian welfare state Tocqueville warned would be the death of American exceptionalism. It threatens to make us like all the other forgettable welfare states that languish in history’s dustbins, Greece included. Should we just assume it’s inevitable and go along for the ride? Or should we muster the character that built a nation and that Tocqueville identified as quintessentially American?

If you’re pessimistic, then you’re no longer part of the solution. You’ve become part of the problem. What chance does liberty have if its supposed friends desert it in its hour of need or speak ill of its prospects?

Ask yourselves, What good purpose could a defeatist attitude possibly promote? Will it make me work harder for the causes I know are right? Is there anything about liberty that an election or events in Congress disprove? If I exude a pessimistic demeanor, will it help attract newcomers to the ideas I believe in? Is this the first time in history that believers in liberty have lost some battles? If we simply throw in the towel, will that enhance the prospects for future victories? Do we turn back just because the hill we have to climb got a little steeper?

This is not the time to abandon time-honored principles. I can’t speak for you, but someday, I want to go to my reward and be able to look back and say, “I never gave up. I never became part of the problem I tried to solve. I never gave the other side the luxury of winning anything without a rigorous, intellectual contest. I never missed an opportunity to do my best for what I believed in, and it never mattered what the odds or the obstacles were. I did my part.”

Remember that we stand on the shoulders of many people who came before us and who persevered through far darker times. The American patriots who shed their blood and suffered through unspeakable hardships as they took on the world’s most powerful nation in 1776 are certainly among them. But I am also thinking of the brave men and women behind the Iron Curtain who resisted the greatest tyranny of the modern age and won. I think of those like Hayek and Mises who kept the flame of liberty flickering in the 1940s. I think of the heroes like William Wilberforce and Thomas Clarkson who fought to end slavery and literally changed the conscience and character of Britain in the face of the most daunting of disadvantages. And I think of the Scots who, 456 years before the Declaration of Independence, put their lives on the line to repel English invaders with these thrilling words: “It is not for honor or glory or wealth that we fight, but for freedom alone, which no good man gives up except with his life.”

As I think about what some of those great men and women faced, the obstacles before us today seem rather puny.

This is a moment when our true character, the stuff we’re really made of, will show itself. If we retreat, that would tell me we were never really worthy of the battle in the first place. But if we resolve to let these challenging times build our character and rally our dispirited friends to new levels of dedication, we will look back on this occasion someday with pride at how we handled it. Have you called a friend yet today to explain to him or her why liberty should be a top priority?

Nobody ever promised that liberty would be easy to attain or simple to keep. The world has always been full of greedy thieves and thugs, narcissistic power seekers, snake-oil charlatans, unprincipled ne’er-do-wells, and arrogant busybodies. No true friend of liberty should just roll over and play dead for any of them.

Take an inventory every day of what you’re doing for liberty. Get more involved in the fight. There are plenty of things you can do. If your state isn’t a right-to-work state, work to make it so. Support people and organizations like the Foundation for Economic Education that are teaching young people about the importance of liberty and character. Get behind the Compact for America and its plan for a balanced federal budget and an end to reckless spending and debt. Work for school choice in your state to help break the government monopoly on education. And be the very best example for liberty and character that you can possibly be in everything you do.

Whatever you do, don’t give up no matter what. Remember these words of the great US Supreme Court justice George Sutherland: “The saddest epitaph which can be carved in memory of a vanished liberty is that it was lost because its possessors failed to stretch forth a saving hand while yet there was time.”

Can Tocqueville’s American exceptionalism be restored? Can it last? You bet it can. The American Dream still lives, in the hearts of those who love liberty and refuse to meekly surrender it. So let’s wipe the frowns off our faces and get to work. Our future, our children’s future — liberty’s future — all depend on us.


Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

Who Is Building the Private, Peer-to-Peer Marketplace? An Interview with Sam Patterson

Sam Patterson (sam@samuelrpatterson.com) is an author and technology enthusiast from Virginia. He has written about decentralized technologies such as bitcoin and OpenBazaar. Sam recently cofounded a company called OB1 to help build the decentralized marketplace OpenBazaar.

The Freeman: Your project, OpenBazaar, has been awarded $1 million in seed funding so far. Congratulations. What is it, and what does it do?

Patterson: OpenBazaar is an open source project to create a decentralized marketplace online where anyone in the world can buy or sell any goods or services with anyone else in the world, for free, using bitcoin. A few of the core project members (including myself) recently started a company called OB1, which received the funding in order to hire full-time developers and make OpenBazaar a reality.

Online commerce today is mostly centralized; companies own websites where users visit to buy and sell things. Those companies charge fees, monitor their users’ data, and censor their transactions based on their own rules and on behalf of the government.

OpenBazaar is different. Instead of relying on a centralized third party, trades occur directly between buyers and sellers. Users install peer-to-peer software on their computers, similar to bitcoin or BitTorrent, and this connects them to other users running the same software. They transact in bitcoin. Since there’s no middleman, there are no fees, no collection of data, and no censorship of trade.

The Freeman: Some people will object to OpenBazaar by saying it’s not transparent — that it will help criminals thrive. How do you answer such charges?

Patterson: Some have inaccurately labeled us as an evolved Silk Road — an underground drug marketplace. This is absolutely false, for many reasons. The Silk Road was centralized and run by a small group for profit. It catered to a specific group of people who traded in illicit goods.

In contrast, OpenBazaar is a decentralized marketplace, not run for profit. It doesn’t cater to any group, or any type of trade, but is open for all users to buy and sell anything they want with each other. It’s a much bigger vision than these narrow dark markets.

We expect that use of OpenBazaar will reflect markets in society. There will be some users who engage in activity that is morally or legally objectionable, but the vast majority of users will be engaging in positive and constructive trade. We don’t know exactly how people will use OpenBazaar to better their lives, but we believe that it will, and we can’t wait to see it happen.

The Freeman: What are the implications of this kind of technology for the world’s poorest people?

Patterson: Most of the existing centralized market platforms that I mentioned earlier don’t focus on the developing world, or even if they do, the payment methods used aren’t accessible for many of the world’s poor. Bitcoin requires no credit checks to use; an Internet connection and computer are all that’s needed. OpenBazaar is the same as bitcoin in this sense. It costs nothing to join and use, and the trade is direct between buyers and sellers; there are no middlemen to take a cut. We hope that by lowering the barriers to entry for online trade, OpenBazaar and bitcoin will bring millions of new users into the online economy.

The Freeman: What are the implications of this kind of technology for most of our readers — that is, wealthier Westerners?

Patterson: Establishing a protocol, client, and network for people to directly engage in trade with each other allows for more efficient transactions. Sellers on eBay who use PayPal regularly pay up to 10 percent fees on each sale. Those are 0 percent on OpenBazaar.

OpenBazaar is also more private. Instead of the centralized platforms getting all the information about your buying or selling habits, now that information is only available to the parties you directly engage with.

Also, if some of your readers are already bitcoin users, OpenBazaar is the first decentralized platform for them to spend their decentralized money. Many value decentralized technology simply because it takes power away from the gatekeepers in our world.

The Freeman: How do you market OpenBazaar? How do you build culture around it?

Patterson: We haven’t needed to market OpenBazaar so far. The bitcoin community is very excited to see it built. Once we look to go beyond bitcoin users and into the broader e-commerce space, then we’ll need to consider how to market ourselves. Likely, it will be around the lack of fees, which is compelling to retailers who have small margins.

Our culture is one that supports free trade and voluntary interactions in society. The ability to engage in trade directly with someone in person is a great thing, and it’s a shame that hasn’t been possible online — until now.

The Freeman: How flexible, robust, and “anti-fragile” is this system — especially with respect to predatory states who will likely try to foil its development?

Patterson: OpenBazaar is very robust, similar in design to bitcoin or BitTorrent. Because it’s run locally on users’ computers, there’s no central point of failure to attack. We don’t anticipate that OpenBazaar will face opposition from governments any more than other online platforms have; they have the same tools at their disposal to go after individual storeowners. But they cannot take down the whole system at once, unlike the existing platforms.

The Freeman: When will OpenBazaar be ready to use?

Patterson: We plan on publishing the first full release in November this year. The code is open source so developers can view it any time at our Github.

The Freeman: Thank you for speaking with us, Sam.


The Freeman

The Freeman is the flagship publication of the Foundation for Economic Education and one of the oldest and most respected journals of liberty in America. For more than 50 years it has uncompromisingly defended the ideals of the free society.