Tag Archive for: Competition

Young Montana Entrepreneur Is Being Legally Barred from Hauling Trash Because Established Players Don’t Want the Competition

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If it sounds crazy that established players get a say on who is allowed to compete with them, well, it should.

When Parker Noland launched his trash-hauling business at age 20 in the summer of 2021, he was excited about the opportunities that lay before him. After taking out a loan from a local bank, the Montana native bought a truck and some dumpsters and got to work promoting his services. The business plan was simple: he would deliver dumpsters to construction sites looking to get rid of debris and then transport the dumpsters to the county dump once they were full.

Things quickly got complicated for Noland, however. Though he had registered his business, gotten the proper insurance, and complied with all public health and safety standards, he was still missing one thing, a Certificate of Public Convenience and Necessity. As a result, right when he was about to get his business off the ground he was given a cease and desist order by the Montana Public Service Commission, the agency responsible for administering the Certificate law.

Noland applied for the Certificate shortly thereafter on September 8, 2021, but his troubles were just getting started. Two national garbage companies—his would-be competitors—protested his application, which they are allowed to do under the law. The companies issued various demands, such as data requests, and Noland’s legal expenses to fight the protests were soon thousands of dollars and counting.

On November 9, 2021, Noland made the difficult decision to withdraw his Certificate application, seeing as he could not afford the mounting legal expenses involved with fighting the protests. To this day, Noland remains ready and willing to run his trash-hauling business, but he is legally barred from doing so until he gets the Certificate.

On November 15, 2022, Noland teamed up with the Pacific Legal Foundation (PLF) to file an official complaint with Montana’s eleventh judicial district court, seeking a permanent injunction against further enforcement of the law on the ground that it violates his Constitutional rights.

If it sounds crazy that established players in an industry are empowered by the government to bury would-be competitors in unnecessary legal fees, well, it should. As PLF argues, these laws practically amount to a “competitor’s veto.”

“Montana’s Certificate of Public Convenience and Necessity law allows established garbage companies to keep potential competitors like Noland out of the market,” PLF writes in their complaint. “Noland applied for a Certificate, but was forced to withdraw his application after some of the largest garbage companies in the nation protested his application, which imposed massive delays and created enormous financial costs. The Certificate provisions challenged in this case prevent Noland and other would-be entrepreneurs from working—not because they are unfit to operate—but to protect incumbent garbage companies from having to compete fairly.”

“Incumbents can protest for the bare reason that they do not want to face new competition,” PLF continues. “The Montana Public Service Commission is further empowered to reject an applicant because it believes there is no ‘need’ for a new company, and therefore that a new business would take away from the incumbent’s profits. Together these provisions create a Competitor’s Veto over those who wish to exercise their right to earn a living as a Class D hauler. This blatant economic protectionism is prohibited by the Montana and U.S. Constitutions.”

In sum, “the Competitor’s Veto allows existing garbage companies to force an applicant to undergo the time and expense of an administrative hearing that has nothing to do with the applicant’s public safety record, or any other matter related to public health or safety, but instead simply because existing garbage companies seek to restrict market competition.”

Noland is hardly the only entrepreneur running into this problem. As PLF notes, there were eight applications for a Class D (trash hauling) Certificate in Montana between January 1, 2018 and September 8, 2021. All eight faced protests. As a result of the protests, four of the applications were withdrawn, one was denied, and two were granted the Certificate only after agreeing to reduce the scope of their business.

The story of the one successful applicant who didn’t have to reduce their scope is revealing.

“The only applicant who succeeded in securing a Certificate over a protest, and without reducing the scope of its business, was L&L Site Services, Inc., on December 15, 2020,” PLF notes. “After a lengthy legal fight before the Commission, which involved extensive discovery, including 13 supplemental responses to Allied Waste Services’ data requests, a 5-day evidentiary hearing requiring legal representation, and contentious oral argument, L&L’s application was granted on April 29, 2022, over two dissenting votes from Defendants Brad Johnson and Randy Pinocci.”

The garbage company which protested their application has since filed a Motion for Reconsideration, which remains pending.

“Over the past 3 years,” PLF concludes, “the strongest predictor for getting permission to enter the trade of dumpster servicing was agreeing to reduce one’s operating authority to not compete with incumbents. And even though one applicant was able to afford the time and expense of the legal battle required by an incumbent’s protest, the challenged provisions still allowed the incumbent to inflict significant costs and delay on its potential competitor for purely anti-competitive reasons.”

Laws requiring a Certificate of Public Convenience and Necessity (CPCN) cover a variety of industries in different states—from trash collection to telecommunications to natural gas—but they all have similar impacts. They are closely related to Certificate of Need laws (CON laws) which create similar barriers in the healthcare industry (hospitals, nursing homes, ambulances, etc.) and in other industries such as transportation (specifically moving companies).

The justification for these kinds of laws is twofold. For one, proponents argue that allowing businesses to compete without demonstrating a “need” will lead to duplicative services, that is, an overabundance of supply in a given area. The problem, they contend, is that this will lead to higher prices because companies will charge more for the capacity they do use to compensate for the unused capacity. If a company builds a hospital, for example, but realizes it can’t fill half its beds because the market is already saturated with hospitals, it will ostensibly hike prices for the beds it does fill to compensate for its loss.

The other argument is that by restricting entry into “saturated” markets, politicians can use CPCN and CON laws to encourage entrepreneurs to set up shop in areas that tend to have less access to these services, such as rural areas.

These arguments may sound plausible at first glance, but upon closer inspection they are rather spurious. For one, how does a bureaucrat determine when a market is too saturated? There are no objective criteria here. What’s more, the very fact that an entrepreneur is planning to enter a market is evidence that, at least from their perspective, there are needs that are currently not being met by established players.

Another major problem with this analysis is the assumption that businesses can unilaterally raise prices in order to cover their costs. This is not how prices work. Prices are set by supply and demand. If anything, a greater supply in a region will lead to lower prices.

The idea that these laws are needed to push entrepreneurs to “lower access” regions is also dubious. An entrepreneur, almost by definition, is seeking to meet needs that haven’t already been satisfied. Thus, they naturally gravitate to precisely these “low access” regions. If they successfully set up shop in a supposedly “saturated” market, it is evidence that the market wasn’t, in fact, saturated. If their business in that region fails, on the other hand, the market will quickly usher them elsewhere all on its own.

Noland’s story is a case in point on this. As PLF notes, construction companies specifically sought out Noland because the large incumbent companies weren’t picking up bins in a timely manner. In other words, there was a market need that was clearly going unfulfilled. The market was not saturated, and that’s precisely why Noland was setting up shop in the first place. Further, Noland’s more compact truck “allowed him to offer services to areas where the incumbent companies did not,” something he was no doubt planning to take advantage of.

There’s a curious irony here. Though the Certificate law was intended to increase services in underserved areas, its practical impact is to restrict services in evidently underserved areas.

There’s an irony on the price front too. Though the law was intended to keep prices down, by restricting entry it is actually creating opportunities for incumbents to keep prices up!

Thus, on both issues, these laws are not only unnecessary, but counterproductive. They are hurting the very consumers they were supposed to protect, not to mention the would-be competitors like Noland who are effectively prohibited from entering the market.

The economist Murray Rothbard summarizes the effect of these policies well in his book Power & Market.

“Certificates of convenience and necessity are required of firms in industries—such as railroads, airlines, etc.—regulated by governmental commissions. These act as licenses but are generally far more difficult to obtain. This system excludes would-be entrants from a field, granting a monopolistic privilege to the firms remaining; furthermore, it subjects them to the detailed orders of the commission. Since these orders countermand those of the free market, they invariably result in imposed inefficiency and injury to the consumers.”

While the Certificate law in Noland’s story is certainly troubling, the deeper problem this story highlights is the belief that government restrictions of the market can help consumers. The reality is exactly the opposite. The best way for the government to help consumers is to get out of the way, and in particular, to stop enforcing regulations that protect established players from new entrants. Let entrepreneurs compete. Let consumers have choices.

America was built by the Parker Nolands of the world, young entrepreneurs full of dreams and ambitions.

It would be a shame if we strangled that spirit with red tape.

This article was adapted from an issue of the FEE Daily email newsletter. Click here to sign up and get free-market news and analysis like this in your inbox every weekday.

AUTHOR

Patrick Carroll

Patrick Carroll has a degree in Chemical Engineering from the University of Waterloo and is an Editorial Fellow at the Foundation for Economic Education.

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EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

U.S. State GDPs Compared to Entire Countries

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It’s pretty difficult to even comprehend how ridiculously large the US economy is.

Click here to view the U.S. State GDPs Compared to Entire Countries map.

The map above (click to view and enlarge) matches the economic output (Gross Domestic Product) for each US state (and the District of Columbia) in 2018 to a foreign country with a comparable nominal GDP last year, using data from the BEA for GDP by US state (average of Q2 and Q3 state GDP, since Q4 data aren’t yet available) and data for GDP by country from the International Monetary Fund. Like in past years, for each US state (and the District of Columbia), I’ve identified the country closest in economic size in 2018 (measured by nominal GDP) and those matching countries are displayed in the map above and in the table below. Obviously, in some cases, the closest match was a country that produced slightly more, or slightly less, economic output in 2018 than a given US state.

It’s pretty difficult to even comprehend how ridiculously large the US economy is, and the map above helps put America’s Gross Domestic Product (GDP) of $20.5 trillion ($20,500,000,000,000) in 2018 into perspective by comparing the economic size (GDP) of individual US states to other country’s entire national output. For example:

  1. America’s largest state economy is California, which produced nearly $3 trillion of economic output in 2018, more than the United Kingdom’s GDP last year of $2.8 trillion. Consider this: California has a labor force of 19.6 million compared to the labor force in the UK of 34 million (World Bank data here). Amazingly, it required a labor force 75% larger (and 14.5 million more people) in the UK to produce the same economic output last year as California! That’s a testament to the superior, world-class productivity of the American worker. Further, California as a separate country would have been the 5th largest economy in the world last year, ahead of the UK ($2.81 trillion), France ($2.79 trillion) and India ($2.61 trillion).
  2. America’s second largest state economy—Texas—produced nearly $1.8 trillion of economic output in 2018, which would have ranked the Lone Star State as the world’s 10th largest economy last year. GDP in Texas was slightly higher than Canada’s GDP last year of $1.73 trillion. However, to produce about the same amount of economic output as Texas required a labor force in Canada (20.1 million) that was nearly 50% larger than the labor force in the state of Texas (13.9 million). That is, it required a labor force of 6.2 million more workers in Canada to produce roughly the same output as Texas last year. Another example of the world-class productivity of the American workforce.
  3. America’s third largest state economy—New York with a GDP in 2018 of $1.68 trillion—produced slightly more economic output last year than South Korea ($1.65 trillion). As a separate country, New York would have ranked as the world’s 11th largest economy last year, ahead of No. 12 South Korea, No. 13 Russia ($1.57 trillion) and No. 14 Spain ($1.43 trillion). Amazingly, it required a labor force in South Korea of 28 million that was nearly three times larger than New York’s (9.7 million) to produce roughly the same amount of economic output last year! More evidence of the world-class productivity of American workers.
  4. Other comparisons: Florida (about $1 trillion) produced almost the same amount of GDP in 2018 as Mexico ($1.19  trillion), even though Florida’s labor force of 10.2 million less than 20% of the size of Mexico’s workforce of 59 million.
  5. Even with all of its oil wealth, Saudi Arabia’s GDP in 2018 at $683 billion was below the GDP of US states like Pennsylvania ($793 billion) and Illinois ($863 billion).

Overall, the US produced 24.3% of world GDP in 2017, with only about 4.3% of the world’s population. Four of America’s states (California, Texas, New York and Florida) produced more than $1 trillion in output and as separate countries would have ranked in the world’s top 16 largest economies last year. Together, those four US states produced nearly $7.5 trillion in economic output last year, and as a separate country would have ranked as the world’s third-largest economy.

Adjusted for the size of the workforce, there might not be any country in the world that produces as much output per worker as the US, thanks to the world-class productivity of the American workforce. The map above and the statistics summarized here help remind us of the enormity of the economic powerhouse we live and work in.

So let’s not lose sight of how ridiculously large and powerful the US economy is, and how much wealth, output, and prosperity is being created every day in the largest economic engine there has ever been in human history. This comparison is also a reminder that it was largely free markets, free trade, and capitalism that propelled the US from a minor British colony in the 1700s into a global economic superpower and the world’s largest economy, with individual US states producing the equivalent economic output of entire countries.

This article is reprinted with permission from The American Enterprise Institute.

AUTHOR

Mark J. Perry

Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.

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The Economic Theory That Explains Biden’s Response to the Baby Formula Shortage

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In a famous lecture, economist Ludwig von Mises showed how government intervention begets more intervention.

Over the last month, president Biden invoked the Defense Production Act in an attempt to fix the formula shortage. In a statement, the White House highlighted that,

“The President is requiring suppliers to direct needed resources to infant formula manufacturers before any other customer who may have ordered that good. Directing firms to prioritize and allocate the production of key infant formula inputs will help increase production and speed up in supply chains.”

In other words, the government is now engaging in what economist Don Lavoie referred to as non-comprehensive economic planning. It’s imposing rules requiring businesses to operate in a way that bureaucrats believe will quickly resolve this crisis. But the planning seems to have failed. Since Biden invoked the DPA, the number of stores out of stock has increase to 70% according to ABC news.

While some may be surprised that the US government can so quickly command industry, it should be no surprise at all. In fact, some basic understanding of government intervention shows that this sort of result is seemingly inevitable.

There have been several good articles explaining the source of this infant formula shortage. FEE’s own Jon Miltimore produced a great story on the topic. But, to keep it short, Abbott, one of the country’s largest formula producers, had a plant shut down by the FDA due to safety concerns.

But how could shutting down one plant in the whole country cause this? Well, formula production is one of the most tightly regulated industries in the US. Because of this, it’s very difficult to enter the market, so there are a few firms that  dominate the industry. So, when one has problems, the national supply is severely impacted.

One of the most harmful regulations are related to WIC and SNAP programs aimed at providing taxpayer subsidized formula to low-income consumers.

As reported in Time, Congress, in a supposed attempt to limit the cost of this program, made each state select one company to have formula which can be bought with WIC and SNAP in 1989. Since up to two thirds of formula is purchased with WIC and SNAP, the winners of these bids are able to crush competition.

Furthermore, until recently, the FDA banned importation of formula that listed ingredients in an order not prescribed by US bureaucrats. This limit on imports further restricts competition on a basis unrelated to health.

Meanwhile Fortune highlights research that shows despite European brands meeting safety regulations by and large, the FDA still restricts these imports due to the instructions being confusing.

Economist Alex Tabarrok highlights how price controls may be playing a role in the shortage as well.

Policy analyst Gabriella Beaumont-Smith examines the trade restrictions on baby formula, which includes tariffs of up to 17.5 percent.

In short, the industry is tangled in a web of intervention which is killing competition.

It’s this abundance of regulation that makes Biden’s use of the Defense Production Act so unsurprising.

In 1950, economist Ludwig von Mises gave a lecture titled “The middle of the road policy leads to socialism.” In this lecture, Mises expounded upon a theory now known by many as “the dynamics of interventionism.”

Mises uses an example of the dairy industry to show how intervention unfolds dynamically. Imagine the government decides that the price of milk is too high for poor people to afford it. In order to remedy the problem, the government passes a price control. For example, “milk cannot cost more than $2/gallon.”

But another problem arises. At this lower price, dairy farmers can no longer sell their milk at a high enough price to make a profit. Instead, they would be better off exiting the industry. But if dairy farmers exit, there will be less milk to buy. If the government wants to continue to make milk affordable and accessible, they’ll have to bail out the dairy industry. One way they could do this is by setting a price control on feed for cows.

But then producers of cattle feed will make losses. So, the interventions must occur again.

Intervention begets intervention.

This dynamic is exactly what is occurring in the formula industry. FDA regulations have made it impossible in the current industry for sufficient competition to arise.

This lack of competition combined with FDA shutdowns exacerbates the possibility of shortages like this. The shortages lead to the executive branch using the Defense Production Act to control the industries which provide imports to the formula industry.

Again, intervention begets intervention.

Some may accept the argument but argue that now that we have a crisis, we need to use things like the Defense Production Act to end it.

I disagree.

Government bureaucrats have insufficient knowledge and incentives to craft regulations which actually help. The Defense Production Act won’t help, because the government does not effectively plan the economy.

Need proof? The Abbot formula plant was shut down in February. The politicians and bureaucrats in Washington had from February to May to create and carry out a plan which would prevent this crisis. They failed.

Rather than solve the problem by using the same means that created it, central planners would be wise to lay down their Excel spreadsheets and let the market solve problems.

Allowing consumers to give their money and provide profits to companies which best solve their needs is how babies get fed.

Time to clean up the web of intervention.

AUTHOR

Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. His website can be found here.

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EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Why Schools Don’t Learn by Kevin Currie-Knight

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The last 100 years have seen drastic technological innovations — from the way we communicate to the way we travel to the way we consume entertainment. One thing that hasn’t changed is the way we do school. Teacher, chalkboard, lesson, test, move up a grade, repeat.

Maybe the best argument for school choice is that we have no idea what kind of innovations could improve education until we allow radical competition. After all, if government ran the entertainment industry, we might still be watching black and white movies and listening to phonograph records. Instead, we stream films and songs online through a galaxy of services from Netflix and Hulu to Pandora and Spotify.

Where We Are

Think about how many features of our existing education system are wrongly treated as inevitable:

  1. Students are segregated by age. This means that all students have the same amount of time to learn a certain amount of stuff in nth grade before we test them to see if they can move to grade n + 1.
  2. We divide our school curricula into discrete subjects: math, science, language, history, arts, physical education, and so on. Students learn the math required to do science in math class and read about history in history class but read literature in English class.
  3. The school day starts in the early morning and runs until mid-afternoon, and the school year is a fairly big chunk of 175 to 180 days (with a few small breaks) followed by a two- to three-month summer break.

These are just three routine features of school that we barely notice, let alone question.

Once we do question them, alternatives quickly come to mind. One could imagine, for instance, a school that didn’t teach math, science, and history as separate disciplines but found creative ways to teach them in combination — or schools that aren’t automatically structured by age.

School choice allows schools to experiment with different curricula and teaching approaches, but it also allows them to experiment by modifying some of those features that we often take for granted but probably shouldn’t.

How We Got Here

To fully appreciate the need for experimentation in educational spaces, let me introduce two terms, one from behavioral psychology, the other from economics. The first is status quo bias, which sounds like what it means. Behavioral psychologists have discovered in people a marked (often unconscious and uncritical) acceptance of the way things are. When we experience the world a certain way, we often become attached to that way without even realizing our attachment. Of course students are divided into grades based roughly on age. Of course we teach science and history in different classes.

The second term, from political science, is path dependence. Path dependence is the idea that certain things come to be the way they are because past decisions affect the range of available subsequent choices. Picture a business spending lots of money on a certain software program that everyone at the company learns. The business and employees will become so invested in the current program that it will be hard to switch to a different one later. Even if a much better program comes along, the cost of switching may become prohibitively high, so the company will stick with what it knows.

Path dependence caused the unquestioned features of our education system to evolve the way they did. Why are schools open in fall, winter, and spring but closed during summer? The myth is that this schedule has to do with the days when kids were expected to work on farms, but really the shape of the school calendar is a vestige of the pre-air-conditioning era.

With widespread air conditioning, why do we continue to adjourn for summers? Because we have structured so much of our social fabric on the idea that kids and teachers have summers off. Theme parks, summer vacation destinations, and other business interests depend on kids having summer breaks. Parents plan for their children to be off during the summer. Summer break has a cultural inertia akin to a company’s commitment to legacy software. Once we get used to schooling done a certain way, we come to think of that as how school should be done, which ensures that even things like summer break continue well past their usefulness. That’s path dependence.

Status quo bias factors in when we become so used to schools having a summer break (or operating from early morning to mid-afternoon, Monday through Friday) that we fail to think of this system as anything but the way it has to be.

The Way Forward

Surpassing the educational equivalent of legacy software is precisely what makes school choice important. Competition allows some people to experiment with different ways of doing things while others can stick with what’s familiar. Markets also disrupt the kind of lock-in that path dependence often creates. While it may be costly for our imagined business to switch to the new software, other businesses may find it easier, and the market will help decide which decision was wiser.

One could object, of course, that new alternative schools — with their different schedules of operation or different approaches to curricula — will get things wrong, to the detriment of students. Yes, some schools will try what ultimately fails. But unlike big centralized bureaucracies, businesses learn quickly from their failures and adapt — or they go broke. Contrast that process to the time it takes for government to abandon a program everyone knows isn’t working.

Unless you think the current school system is doing fine, the only way forward is through innovation, and innovation requires the sort of experimentation that happens naturally in the free market.

Kevin Currie-KnightKevin Currie-Knight

Kevin Currie-Knight teaches in East Carolina University’s Department of Special Education, Foundations, and Research. His website is KevinCK.net. He is a member of the FEE Faculty Network.

Our Awesome, Creative, Fashionable Knockoff Culture by Jeffrey Tucker

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The modern fashion industry is one of the most creative, dynamic, fast-moving, profitable, and downright interesting sectors in the economy. But right now, there are worries in the air. It seems like the old-fashioned fashioned runway show — groovy music, cameras flashing, debuts of new stuff you can buy months later — is no longer working for the industry.

“Everyone drank the Kool-Aid for too long, but it’s just not working anymore,” Diane von Furstenberg of the Council of Fashion Designers of America told theNew York Times. “We are in a moment of complete confusion between what was and what will be. Everyone has to learn new rules.”

The problem, as industry sees it, comes down to two factors.

The first problem: smartphones. As soon as the models hit runways, the images are spread everywhere and instantly. They are Tweeted, Instagramed, Youtubed, Facebooked, and instantly saturate the culture. This makes life easier for “pirates” (in quotes because you can’t actually “steal” a design).

They can go into production very quickly and have knockoffs on the shelves in weeks. The price premium that has made high fashion highly profitable is no longer working as it once did.

IWWIWWIWI

Also contributing is the influence of what is called “IWWIWWIWI”: I Want What I Want When I Want It. Rapid information flows have heightened the intensity of demand. With complete public awareness of new fashions happening within hours of their being made public, people are already ready for something new by the time the clothing is available for purchase. IWWIWWIWI is dramatically shortening the time structure of production.

Even the traditional four seasons of clothing, with a traditional lag between display and availability, is changing. Designers are being pressured to make new designs available the day of the show. Releasing Spring fashions in January and Fall fashions in May isn’t doing it anymore. The seasons that have shaped the industry for many decades are becoming one, ever-evolving season. “Panseasonal,” they call it.

Sharing the Runway

What has this meant for the runway show? They’ve had to change to become massive public events, featuring concerts, album releases, fireworks, courting of editors and writers, and elaborate media shows. The big show this year was in Madison Square Garden with 18,000 attendees and ticket sales running as high at $6,000 on the secondary market, featuring the release of Kanye West’s new album.

Here’s the rub: fashion itself plays a diminished role relative to pop music and the glitzy stardom associated with it. In fact, the fashion industry is seeking to gain attention by hitching its act to the popularity of other sectors. That’s apparently wounded some egos.

As always, however, the fashion industry will change and adapt. This is an industry trained over generations to compete, persuade, and sell. Cronyism doesn’t work in fashion like it does for banking, education, or even software. There are no bailouts, no subsidies to speak of, and no government favors that insiders can count on to protect them against upstarts. And these upstarts can come from anywhere.

Markets without IP

This is the industry’s second gripe: its lack of government protection.

Here’s the crucial and counterintuitive fact: intellectual property legislation, as it applies to literary works and software, has never applied to fashion. If you see something, you can copy it. It’s legal and expected. This is why even big box stores like Walmart and Target carry cheap knockoffs of the very thing you saw on New York runways just a few months ago. And it’s why the distance between what average people can look like and what the rich look like is growing shorter by the day.

The absence of strict rules has created this hyper-competitive environment and made less discernible the class identity distinctions associated with clothing.

There are a few intellectual property rules. You can copyright original prints and patterns and novel designs. That rule, however, hardly ever applies, and even then, it is almost impossible to enforce. It requires litigation and time, and the courts have not consistently sided in favor of the designer, so it is an iffy proposition. True, Christian Louboutin won his lawsuit to protect the red sole of his shoes. But this is rare. And the big money isn’t always on the side of the copyrighters — companies like Forever 21 specialize in knockoffs and hardly ever lose a case.

A Culture of Fakes

There is also the issue of trademark, which applies to brands. Only Calvin Klein can really make a Calvin Klein. Only Nike can be Nike✓. But trademark has done next to nothing to stop the flood of knockoffs, as anyone who has shopped the streets of any large city can tell you. In a typical shopping district in Istanbul or Rome, or just about any other major city in the world, fakes and the real thing are sold practically next door to each other, and all sellers make money doing so. The fakes are sometimes so sophisticated that it takes an industry expert to tell the difference.

Efforts by law enforcement have done nothing to shut down the industry of fakes. And this is despite efforts by ICE, CBP, FDA, FBI, the Patent and Trademark Office, the Postal Service, and other alphabet soup agencies. In the end, most everyone has come to terms with the reality: the industry is being created by a culture of fakes.

You might say that this is a market in fraud, but that’s not quite accurate. Consumers know exactly what they are buying. They are not being fooled. They want to spend far less for something that looks very expensive. The people meant to be fooled are third parties who see them wearing it. And those with the financial means — and high risk aversion to having their friends find out that they are not carrying a real Gucci — pay for it. Everyone makes money, and no one is physically harmed.

Finally, there are patents that apply to actual new innovations, such as the Vibram 5-finger shoe. It was the coolest thing to happen to footwear in ages. So of course everyone wanted to make their own. Even with the patent, and deep pockets to enforce the patent, it didn’t work. Within months after this implausible shoe caught on, other companies made 4-finger and 3-finger models, and everyone had the new running style ramp up. Vibram sued, but they eventually settled, after finding that it was fighting a losing battle.

A Market that Works

Apart from these two protections, fashion is a free market, and this accounts for why the industry is so crazy competitive, innovative, and profitable — even if those profits aren’t as concentrated as they once were.

Of course, the industry’s biggest players don’t approve. For years, they’ve been pushing Congress for legislation that would apply copyright to fashion. So far, Congress hasn’t gone along. But it is hardly surprising that industry would want to ratchet down the competitive mania a few notches. Having legislation on their side would promote a longer period of profitability for unique items. It would permit the largest players to enjoy great safety, and perhaps not have to sweat so much about staying ahead of the curve.

It’s good that Congress has never gone along. The free market in fashion has been beneficial for everyone, in the long run. Contrary to our standard assumptions about intellectual property, its virtual absence in fashion hasn’t reduced innovation at all. In fact, the entire industry provides a paradigmatic look at how a creative industry can function without government regulation and monopolization.

Since the advent of the capitalist revolution in the late middle ages, the market has provided humankind with an endless variety of garments at ever low prices, reducing class barriers and delighting the working multitudes at the same time. This continues to this day, despite ever falling prices for just about everything. In a global market without substantial state regulation, one might not expect a beautiful creative order to emerge. But that is exactly what has happened.

This market is too marvelous, productive, and delightful to be brought down by the advent of smartphones and social media. Fashion will survive and thrive as never before.

Jeffrey A. Tucker

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE and CLO of the startup Liberty.me. Author of five books, and many thousands of articles, 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. Email.

There’s No Escaping Competition by Steven Horwitz

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People Need a Way to Decide Who Gets What. 

“The motives of fear and greed are what the market brings to prominence,” argues G.A. Cohen in Why Not Socialism? “One’s opposite-number marketeers are predominantly seen as possible sources of enrichment, and as threats to one’s success.”

Cohen further notes that these are “horrible ways of seeing other people” that are the “result of centuries of capitalist civilization.”

If only we had a different economic system where people viewed each other as brothers and sisters in a common effort rather than competitors trying to grab the largest share of the economic pie.

Implicitly drawing on Marx’s idea that the forces and relations of production determine the ideas people have and the way they behave, this criticism imagines that competition is a contingent feature of human interaction caused by capitalism.

But is it? Are we only competitive because capitalism makes us so?

By contrast, consider a line in my class notes for the day we start talking about competition in my Introduction to Economics course: “Competition is not a product of living in a capitalist society — it’s a product of not living in heaven.”

Despite the dreams of the socialists, competition is not going away any time soon. As long as resources are scarce and not all of our wants can be fulfilled, humans require some way of determining who will get which goods.

Competing Versions of Competition

Suppose for a moment that we want to figure out how best to allocate goods to consumers. In a market economy, we allow people to engage in competitive bidding to try to acquire the things they think are most valuable to them. But we can imagine other ways of allocating goods. Perhaps we ask people to line up. Or maybe we try to figure out who is more deserving. Perhaps we do it by the pure discretion of bureaucrats. Or we decide things Fight Club style. Would those end competition?

I don’t think so. All that those methods would accomplish is to divert competition into less productive forms. For example, if we distributed resources first come, first served, does anyone doubt that people would find new ways to compete for an early place in line? Or think of the people who camp out for sports or concert tickets and the opportunity cost of the time they spend waiting rather than doing other things.

Or if we did it by evaluating who is more deserving, wouldn’t people simply compete over what should count as the relevant moral criteria — and then compete to demonstrate that they deserve goods more than others do?

Imagine if a board of economic planners said they would distribute resources to the people who are most honest. It wouldn’t surprise us to see people then start to expend resources to convince the planners that productivity or intelligence were more important than honesty in distributing resources, nor would it surprise us for people to then compete to prove to the planners that they were the most honest, or productive, or intelligent. All of those forms of competition are wastes of resources compared to competing for consumers in the marketplace.

Or imagine goods distributed by government fiat. Wouldn’t people find new and creative ways to compete to persuade the relevant bureaucrats to favor them? In fact, isn’t this exactly what we see right now as lobbyists engage in competitive rent-seeking to persuade legislators and bureaucrats to allocate more government goodies in their direction? The rent-seeking that takes place in Washington and the state capitals is just another form of competition — appealing to politicians rather than customers.

Were resources distributed through might-makes-right, we can easily imagine the competition that would ensue for people to have the best weaponry or armor, or to hit the gym to get the strength and endurance they would need to survive the fighting. This, too, is competition, but of a very different sort.

As long as goods and services are scarce compared to wants, decisions will have to be made that involve some number of people not getting access to those goods. The fact of scarcity is what makes competition ubiquitous. And if there is a heaven, one of its defining characteristics is surely the absence of scarcity. Humanity has long dreamed of a Land of Cockaigne where roast chickens fly into our mouths without effort and where the seas are made of lemonade. Until that heaven arrives on earth, competition of some sort will rule the roost.

How Is Market Competition Better?

If we are going to have competition, then why prefer one sort over any other?

The competition we see in the marketplace has the important advantage of creating benefits for the rest of society and not just the competitors.

Consider rent-seeking. It’s true that the exchange between a lobbyist and a politician is mutually beneficial. The rent-seeker, if successful, gets resources allocated in her direction, while the politician receives the free lunches and fawning attention from the rent-seeker — as well as some possible leverage over the rent-seeker down the road.

The competition associated with rent-seeking, however, does not benefit anyone else. In fact, the whole criticism of rent-seeking behavior is that expending resources to generate transfers of wealth — not to create new wealth — is socially wasteful. We would be better off if those resources were used to produce new and better products rather than to persuade others to transfer wealth to us, or to reduce the wealth of others.

Similar arguments can be made about all other forms of nonmarket competition. They all involve expending resources in ways that do not benefit society as a whole because they do not create wealth. They just divert resources from other uses to become part of the attempt to transfer existing wealth to another person or group.

Why Price Competition?

The other problem with all of those other forms of competition is that they ignore the question of where resources come from. There is no connection between the distribution of resources (and the form of competition that generates) and the supply of those resources.

Put differently, how do any of those other processes create the knowledge signals and incentives needed to know what to produce and how to produce it to ensure that there are future supplies of goods? Think about Fight Club-style distribution. If everyone is busy pummeling each other to death to get existing resources, what incentive does that create for anyone to produce anything if they will have to spend even more resources to defend any wealth they might create? How would anyone know what to produce in such a world, and why would anyone want to produce it in the first place?

In a system where competition takes place through offering money to acquire resources, we get the emergence of prices, which serve as both the incentive for ongoing production and the information about what to produce. When buyers compete with buyers to acquire a good and thereby bid up the price, it tells existing and prospective producers that this good is more valuable and that they should produce more of it. Similar competitive bidding for the inputs into a production process informs other producers about what should and should not be used to make various goods and services.

Competition through money prices connects the competition over the distribution of goods with the production of goods in a way that no other form of competition does. In this way, market competition benefits not just the direct parties to the competition but all of us by encouraging the ongoing production of goods in ways that economize on resources.

Scarcity is a defining characteristic of the human condition, and scarcity means there will be competition over who gets what. Market capitalism has the great advantage of channeling that competition through the price system, which not only ensures an ongoing supply of goods but also encourages their efficient production.

We may not be in heaven, but the peaceful and socially beneficial competition of the market is downright heavenly compared to the alternatives.

Steven Horwitz
Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

New York’s Taxi Cartel Is Collapsing — Now They Want a Bailout! by Jeffrey A. Tucker

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An age-old rap against free markets is that they give rise to monopolies that use their power to exploit consumers, crush upstarts, and stifle innovation. It was this perception that led to “trust busting” a century ago, and continues to drive the monopoly-hunting policy at the Federal Trade Commission and the Justice Department.

But if you look around at the real world, you find something different. The actually existing monopolies that do these bad things are created not by markets but by government policy. Think of sectors like education, mail, courts, money, or municipal taxis, and you find a reality that is the opposite of the caricature: public policy creates monopolies while markets bust them.

For generations, economists and some political figures have been trying to bring competition to these sectors, but with limited success. The case of taxis makes the point. There is no way to justify the policies that keep these cartels protected. And yet they persist — or, at least, they have persisted until very recently.

In New York, we are seeing a collapse as inexorable as the fall of the Soviet Union itself. The app economy introduced competition in a surreptitious way. It invited people to sign up to drive people here and there and get paid for it. No more standing in lines on corners or being forced to split fares. You can stay in the coffee shop until you are notified that your car is there.

In less than one year, we’ve seen the astonishing effects. Not only has the price of taxi medallions fallen dramatically from a peak of $1 million, it’s not even clear that there is a market remaining at all for these permits. There hasn’t been a single medallion sale in four months. They are on the verge of becoming scrap metal or collector’s items destined for eBay.

What economists, politicians, lobbyists, writers, and agitators failed to accomplished for many decades, a clever innovation has achieved in just a few years of pushing. No one on the planet could have predicted this collapse just five years ago. Now it is a living fact.

Reason TV does a fantastic job and covering what’s going on with taxis in New York. Now if this model can be applied to all other government-created monopolies, we might see genuine progress toward a truly competitive economy. After all, it turns out that the free market is the best anti-monopoly weapon ever developed.

Jeffrey A. Tucker
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.

Are CEOs Overpaid? by Gary M. Galles

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Are corporate managers and CEOs overpaid?

Many politicians rail against “overpaid” corporate managers. But these attacks overlook the issues of risk and uncertainty.

Workers agree to compensation before performing their work. Consequently, their compensation reflects not a known value but their expected value when arrangements are made.

Managers who turn out more productive than expected will have been underpaid, those less productive than expected will have been overpaid. But examples of the latter don’t prove managers are generally overpaid.

As performance reveals productivity, competition will also bid compensation of superior managers up and inferior managers down. And we must consider the present value of that entire stream, not a given year’s results, to evaluate managers’ productivity versus pay.

No manager is always right, but not every mistake is proof that they’re overpaid. They are paid for superior, not flawless, judgment — fewer mistakes, but not no mistakes.

That is another reason top managers of large enterprises will be very highly compensated. A 1% higher probability of being right on a $1 billion bet is very valuable, and even more so for a $10 billion bet. But even the best will err sometimes, so mistakes don’t prove shareholders are overpaying for managerial judgment.

This is part of a series of micro-blogs by Professor Galles responding to frequently asked questions on economic issues. If you have a question, emailAnythingPeaceful@FEE.org. 

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

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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

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

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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.

New York Orders Fast-Food Workers Replaced With Robots, Kiosks, Mobile Apps by Daniel Bier

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Well, they didn’t quite put it that way — the New York Times‘ headline read “New York panel recommends $15 minimum wage for fast-food workers” — but it amounts to the same thing.

A panel appointed by Gov. Andrew M. Cuomo recommended on Wednesday that the minimum wage be raised for employees of fast ­food chain restaurants throughout the state to $15 an hour over the next few years. Wages would be raised faster in New York City than in the rest of the state to account for the higher cost of living there.

The panel’s recommendations, which are expected to be put into effect by an order of the state’s acting commissioner of labor, represent a major triumph for the advocates who have rallied burger­ flippers and fry cooks to demand pay that covers their basic needs.

They argued that taxpayers were subsidizing the workforces of some multinational corporations, like McDonald’s, that were not paying enough to keep their workers from relying on food stamps and other welfare benefits.

The $15 wage would represent a raise of more than 70 percent for workers earning the state’s current minimum wage of $8.75 an hour. Advocates for low­ wage workers said they believed the mandate would quickly spur raises for employees in other industries across the state, and a jubilant Mr. Cuomo predicted that other states would follow his lead.

In other news, I ordered my lunch yesterday on my computer and picked it up from Panera Bread without ever talking to a person. Last night, I picked up a couple groceries and paid through the self-checkout lane. This morning, I ordered a latte on my Starbucks app, and it was waiting for me when I walked into the store. I’m thinking of going to a burger joint later, where I’ll tap out my order on a kiosk.

Of course, it’s not fair to blame the minimum wage exclusively for the increasingly widespread automation of service jobs. Ordering kiosks and mobile apps are becoming more popular as the technology becomes better, cheaper, and more popular. That will probably happen no matter what the price of labor is.

But the fact that the cost of not using technology — that is, an employee — is about to cost 70% more will give the entire New York fast-food industry a great big shove away from labor and towards machines. And since chain restaurants don’t just operate in New York, the investment in automation will spill into stores everywhere.

Who wins from this?

Unions and more experienced workers, at least in the short-run. Labor unions’ entire purpose is to push up wages for their members, which makes them more expensive and less attractive compared to non-union workers.

But if unions — like, say, the Service Employees International Union — can make all workers more expensive, it makes union labor look relatively better by comparison. They won’t have to compete against cheaper labor anymore (which is to say, less-skilled workers won’t be allowed to compete by underbidding them).

Why arbitrarily single out “fast food” for the hike?

First, it makes the fight politically easier because the unions only have to defeat one industry lobby, instead of every business that uses unskilled labor. Second, the SEIU, in particular, represents a lot of food workers and has for years been pushing to unionize the big fast-food chains.

Who loses?

First, businesses, especially those operating on thin margins. They’ll be staring at a 70% increase in labor costs, already typically one of the biggest expenses for restaurants.

Less experienced workers — especially unskilled immigrants and young people starting out in the job market — will also lose. Businesses will try to offset some of higher cost of labor by cutting hours or jobs, delaying or cancelling expansions, replacing labor with capital where they can, and replacing less skilled with more skilled workers where they can’t.

They’ll also try to raise prices to cover costs, so consumers lose, too — especially those who eat fast-food more often, have tighter budgets, and have food as a bigger share of their budgets: i.e., low and lower-middle income families.

The net effect this will be less employment, less production, and less consumption. The economy and especially less-advantaged people will be worse off for it.

Miscellaneous arguments:

  • CEO pay: The Times awkwardly shoehorns in the fact that McDonald’s chief executive made $7.5 million last year, presumably trying to suggest that he’s the reason its other 420,000 employees are paid so little. In case you’re wondering, redistributing his salary comes out to 5 cents per employee per day. And then McDonald’s has no CEO. Hurray?
  • Corporate Subsidy: The Times also uncritically repeats the incoherent claim that taxpayers are somehow “subsidizing” these “multinational corporations” because they don’t pay “enough to keep their workers from relying on food stamps and other welfare benefits.” This makes no sense at all.
  • No Big Deal: The economists who claim that raising the minimum wage won’t hurt employment that much always couch it with the caveat that the increase be “small” or “moderate.” By no stretch of the imagination is hiking the wage floor to $15 “moderate.” In New York, it’s a 70% increase; in states with the federal minimum of $7.25, it’s 107% increase.

Antony Davies has charted the relationship between the minimum wage as a share of the average wage and the unemployment rates for different workers over time.

There’s no connection between the minimum wage and unemployment for the college-educated, but for those with high school or less, there’s a strong positive correlation:

Notice that the chart axis stops at 45% of the average hourly wage: in more than three decades, the minimum wage has never gone higher. Today, according to BLS data, a $15 minimum wage would be 60% of the average hourly wage — the highest relative minimum wage ever. We are literally going into uncharted territory.

Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

The Politics of Nostalgia: Why Does the Left Want to Take Us Backwards? by Steven Horwitz

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One of the more curious developments in the last couple of years has been left-wing nostalgia for the economy of the 1950s.

Don’t political progressives usually portray themselves as being on “the right side of history” — representing, as the term suggests, the march of “progress”?

Not when it comes to the economy.

Paul Krugman has written a number of columns over the last decade about how much better things were in the middle of the 20th century. More recently, we have presidential candidate Hillary Clinton making a major economic policy statement in which she 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.”

To protect Americans from the uncertain future, Clinton promised she would “crack down on bosses that exploit employees by misclassifying them as contractors or even steal their wages.”

In an economy where technology has enabled people to have a great deal more flexibility with their workdays and independence with their work choices, it’s now the “progressives” who are complaining about the economic organizations that have been agents of more efficient resource use, expanded choice for workers, and cheaper goods for consumers.

In short, the progressives are complaining about what would otherwise be called progress.

And let’s not let the conservatives off the hook here either, as they demonstrate their own nostalgia for an economy of the past, with cheers for Donald Trump’s anti-immigrant and anti-trade tirades and for his general love of dirigiste policies. Immigration and trade have also expanded the range of work available, lifted millions out of poverty through better-paying jobs in the United States, and enriched the rest of us through more affordable goods and services.

What’s particularly amusing about both sides, but especially the progressives, is how wrong they are about life for the average American being better back in the 1950s, including how much more secure they were. In a terrific paper for the Cato Institute, Brink Lindsey effectively demolished Krugman’s nostalgia with some actual data about the economy of the 1950s. He pointed out that the increase in income inequality since then noted by so many progressives is largely overstated, and that the economy they are nostalgic for is one that restricted competition in a variety of ways, mostly to the benefit of the politically influential. Limits on immigration and trade, in particular, prevented the 1950s economy from achieving the reductions in cost and increase in variety that we associate with our economy today.

Does anyone really want to go back to the stagnant, conformist, more poverty-stricken world of the 1950s?

It is more than a little ironic that modern progressives are nostalgic for the very economy that GOP front-runner Donald Trump would appear to want to create.

As I argued in a recent paper, when we look at the cost of living in terms of the work hours required to purchase basic household items, most goods and services are far cheaper today than in the 1950s. The equivalents of those items today are also of higher quality: think about the typical household TV or refrigerator in 1955 versus 2015. These substantial decreases in cost have had another effect. They have made these goods increasingly accessible to the poorest of Americans. American households below the poverty line are far more likely to have a whole variety of items in their homes than did poor families in the 1950s. In fact, they are more likely to have those things in their houses than was a middle-class American family in the 1970s.

When you also consider the number of goods that weren’t even available in the 1970s or 1950s, from technology like computers and smartphones, to innovative medicines and medical procedures, to various forms of entertainment, to a whole number of inventions that have made us safer, healthier, and longer-lived, it’s difficult to argue that things were better “back then.”

The effect of all of this change driven by increased competition is that our world is one in which the middle class and poor are better off, and the gap between poor and rich as measured by what they consume has narrowed substantially. Does anyone really want to go back to the stagnant, conformist, more poverty-stricken world of the 1950s?

Politicians do. And here’s one reason why: back then, it was easier to influence and control people’s economic lives. Progressives with a desire to shape their ideal economy aren’t happy with the world of freelancers, Uber, and independent contractors.

The economy of the 1950s and 1970s had organizational focal points where politicians could exercise leverage and thereby influence the lives of large numbers of citizens.

I’m thinking here of the auto companies in the 1950s, the oil companies in the 1970s, and any number of industries where large firms were created by restrictions on domestic and foreign competition, which were easy points of contact for politicians with a desire to control, and which had corporate leaders who were happy to reap the benefits of corporatism.

In a world of Uber, Airbnb, and all the rest, there are no central points of leverage. Facebook produces no content, Uber owns no cars, Alibaba owns no inventory. More important: Uber has no employees, only contractors. If you are Clinton or Trump, or even Krugman, there’s nowhere to go to exercise your power or to drum up support from workers in one place. There’s nothing to grab hold of. There are just people trading peacefully with each other, enriching everyone in the process.

The real irony, once again, is that what this decentralized economy has produced is more freedom and more flexibility for more workers. The same progressives who railed against the conformism of the 1950s a decade later are now nostalgic for what their predecessors rejected and are rejecting exactly the “do your own thing” ethos their 1960s heroes fought for.

The “gig” economy works for people who want options and who want flexible hours so they can pursue a calling the rest of the day. Or perhaps they want to spend a few hours a week driving an Uber because Obamacare caused their employers to cut their hours at their other job.

Whatever the reason, this economy offers the freedom and flexibility for workers, and the benefits for consumers, that represent the progress progressives should love. That progressives (and conservatives) with power are fighting against it tells you that they are much more concerned with power than with progress.

Nostalgia is a dangerous basis for making policy, whether left or right.


Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

The Hidden Costs of Tenure by Jonathon Anomaly

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Conversations I’ve had with non-academics about university employment practices usually evoke surprise and skepticism. Most people have a hard time understanding the point of a system that makes it so difficult to dismiss faculty members who are not especially good at their job.

The recent motion in Wisconsin to remove state laws that protect teacher tenure has re-ignited the debate over providing special protections to teachers—protections that don’t apply to journalists, gardeners, or bloggers who are occasionally fired for expressing unpopular views.

In some ways, regulations that determine how university professors are hired and fired in the United States are analogous to the restrictive labor laws in Spain and Greece. By raising the cost of firing bad workers, they increase the relative cost of hiring good ones.

The consequence is persistent unemployment and low productivity in Greece and Spain. The consequences of our tenure system are the proliferation of poor teaching and arcane research in university departments that are immunized from market forces.

Those who pursue a career as a university professor are mostly incentivized to produce specialized work aimed at impressing people who may end up on their promotion committee rather than a wider audience.

In the sciences, this may be a good thing, since one’s peers are likely doing narrow but important work that uncovers the basic structure of the universe. But in the humanities and social sciences, it often leads to the pursuit of bizarre research that is inscrutable to outsiders and of little value even to scholars in related fields.

Another hidden effect of the tenure system is that it often sifts out the very people it is supposed to protect: those with unusual or unpopular ideas. The original justification for tenure was to protect teachers and scholars who hold unpopular views by making it difficult to fire them. But when tenure is the main game in town, the stakes associated with hiring a new faculty member are high, making departments risk-averse. Thus, in order to be considered for tenure-track jobs, candidates have strong reasons to conceal unpopular political beliefs and to pursue relatively conservative lines of research.

By “conservative” I do not mean politically conservative. Quite the opposite.

If most people in a department where you’ve applied are progressives, it is not likely that your allegiance to any non-progressive views will help your cause. Tenured faculty members who make those decisions are often unwilling to take a chance on somebody with eccentric or politically unpopular views, since when a tenure-track position is filled, the candidate who fills it will probably be a colleague for life.

This is not only unfair; it is contrary to the mission of most universities. Research by Professor Jonathan Haidt suggests that political bias negatively impacts the quality of research by stifling open debate. But it’s one of the unintended results of tenure.

Tenure can, of course, protect people with unpopular views. Consider Edward Wilson and Arthur Jensen, eminent scholars at Harvard and Berkeley who have argued, among other things, that different groups of human beings exhibit average differences in genetically-mediated characteristics, including general intelligence and impulse control. Tenure protected their careers, although it didn’t protect them from death threats and intimidation.

On the other hand, it is likely that many more controversial scholars will never be hired in the first place because those on the hiring committee are hostile to their ideas.

Tenure also makes it much harder to terminate faculty members. It was never supposed to be a guarantee that one will never be fired. According to the American Association of University Professors, tenure can be revoked if members of a department can demonstrate that a colleague exhibits incompetence, or engages in academic fraud or seriously immoral behavior.

But even when these things can be shown, it is often easier for faculty and administration to ignore the problem than to mount a costly battle to fire a colleague.

This is one reason many tenure-track jobs are being replaced with adjunct positions, which is a temporary fix for a deeper problem. In the long run, it is likely that the quality of student education and faculty research would increase under a system that offered faculty a greater diversity of contracts, reflecting a faculty member’s ongoing accomplishments, experience, and contributions to the university.

In effect, tenure is a barrier to entry in the academic job market that makes it difficult to replace poorly performing faculty with better alternatives. We should applaud rather than protest the recent decision of the Wisconsin legislature to force the University of Wisconsin to experiment with new ways of conducting the business of hiring and firing faculty.

This post first appeared at the John William Pope Center. 

Jonathan Anomaly

Should We Fear the Era of Driverless Cars or Embrace the Coming Age of Autopilot? by Will Tippens

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Driving kills more than 30,000 Americans every year. Wrecks cause billions of dollars in damages. The average commuter spends nearly 40 hours a year stuck in traffic and almost five years just driving in general.

But there is light at the end of the traffic-jammed tunnel: the driverless car. Thanks to millions of dollars in driverless technology investment by tech giants like Google and Tesla, the era of road rage, drunk driving, and wasted hours behind the wheel could be left in a cloud of dust within the next two decades.

Despite the immense potential of self-driving vehicles, commentators are already dourly warning that such automation will produce undesirable effects. As political blogger Scott Santens warns,

Driverless vehicles are coming, and they are coming fast…. As close as 2025 — that is in a mere 10 years — our advancing state of technology will begin disrupting our economy in ways we can’t even yet imagine. Human labor is increasingly unnecessary and even economically unviable compared to machine labor.

The problem, Santens says, is that there are “over 10 million American workers and their families whose incomes depend entirely or at least partially on the incomes of truck drivers.” These professional drivers will face unemployment within the next two decades due to self-driving vehicles.

Does this argument sound familiar?

These same objections have sprung up at every major stage of technological innovation since the Industrial Revolution, from the textile-working Luddites destroying looming machines in the 1810s to taxi drivers in 2015 smashing Uber cars.

Many assume that any initial job loss accompanying new technology harms the economy and further impoverishes the most vulnerable, whether fast food workers or truck drivers. It’s true that losing a job can be an individual hardship, but are these same pundits ready to denounce the creation of the light bulb as an economic scourge because it put the candle makers out of business?

Just as blacksmithing dwindled with the decline of the horse-drawn buggy, economic demand for certain jobs waxes and wanes. Jobs arise and continue to exist for the sole reason of satisfying consumer demands, and the consumer’s demands are continuously evolving. Once gas heating devices became available, most people decided that indoor fires were dirtier, costlier, and less effective at heating and cooking, so they switched. While the change temporarily disadvantaged those in the chimney-sweeping business, the added value of the gas stove vastly improved the quality of life for everyone, chimney sweeps included.

There were no auto mechanics before the automobile and no web designers before the Internet. It is impossible to predict all the new employment opportunities a technology will create beforehand. Countless jobs exist today that were unthinkable in 1995 — and 20 years from now, people will be employed in ways we cannot yet begin to imagine, with the driverless car as a key catalyst.

The historical perspective doesn’t assuage the naysayers. If some jobs can go extinct, couldn’t all jobs go extinct?

Yes, every job we now know could someday disappear — but so what? Specific jobs may come and go, but that doesn’t mean we will ever see a day when labor is no longer demanded.

Economist David Ricardo demonstrated in 1817 that each person has a comparative advantage due to different opportunity costs. Each person is useful, and no matter how unskilled he or she may be, there will always be something that each person has a special advantage in producing. When this diversity of ability and interest is coupled with the infinite creativity of freely acting individuals, new opportunities will always arise, no matter how far technology advances.

Neither jobs nor labor are ends in themselves — they are mere means to the goal of wealth production. This does not mean that every person is concerned only with getting rich, but as Henry Hazlitt wrote in Economics in One Lesson, real wealth consists in what is produced and consumed: the food we eat, the clothes we wear, the houses we live in. It is railways and roads and motor cars; ships and planes and factories; schools and churches and theaters; pianos, paintings and hooks.

In other words, wealth is the ability to fulfill subjective human desires, whether that means having fresh fruit at your local grocery or being able to easily get from point A to point B. Labor is simply a means to these ends. Technology, in turn, allows labor to become far more efficient, resulting in more wealth diffused throughout society.

Everyone knows that using a bulldozer to dig a ditch in an hour is preferable to having a whole team of workers spend all day digging it by hand. The “surplus” workers are now available to do something else in which they can produce more highly valued goods and services.  Over time, in an increasingly specialized economy, productivity rises and individuals are able to better serve one another through mutually beneficial exchanges in the market. This ongoing process of capital accumulation is the key to all meaningful prosperity and the reason all of humanity has seen an unprecedented rise in wealth, living standards, leisure, and health in the past two centuries.

Technology is always uncertain going forward. Aldous Huxley warned in 1927 that jukeboxes would put live artists out of business. Time magazine predicted the computer would wreak economic chaos in the 1960s.

Today, on the cusp of one of the biggest innovations since the Internet, there is, predictably, similar opposition. But those who wring their hands at the prospect of the driverless car fail to see that its greatest potential lies not in reducing pollution and road deaths, nor in lowering fuel costs and insurance rates, but rather in its ability to liberate billions of hours of human potential that truckers, taxi drivers, and commuters now devote to focusing on the road.

No one can know exactly what the future will look like, but we know where we have been, and we know the principles of human flourishing that have guided us here.

If society is a car, trade is the engine — and technology is the gas. It drives itself. Enjoy the ride.

Will Tippens

Will Tippens is a recent law school graduate living in Memphis.

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Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

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It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.


Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.