Tag Archive for: economy

2016 Is the Year of Inequality – And Prosperity by Chelsea German

This past weekend, the Economist uploaded a short video to its Facebook page called, “The year of the 1 percent.” The video shows a graph superimposed over the Earth seen from space, while a voice narrates, “2016 is set to be a more unequal world than ever before. For the first time, the richest 1 percent of the population will enjoy a greater share of global wealth than the other 99 percent.”

The Economist’s graph reminded me of another graph, which also shows two lines that eventually cross but tells a very different story. Despite population growth, there are fewer people living in extreme poverty today than ever before:

How can both graphs be accurate? Poverty can decline even as inequality rises, as long as the total amount of wealth in the world is growing.

To ignore this is to fall prey to the “fixed pie fallacy.” Throughout most of human history, global wealth hardly changed. But thanks to trade and industrialization, wealth has skyrocketed, especially since the 1900s, and continues to climb.

At the same time, technological advances have also increased human wellbeing in ways not captured by looking at GDP alone.

Because the pie is growing, focusing solely on inequality, like the Economist’s video does, makes little sense. Most of us would rather have a relatively small slice of a gigantic pie than the biggest slice of a microscopic pie.

In other words, most of us would rather be wealthier in absolute terms, regardless of our relative position. This is why many of us, if given the choice, would choose to be an ordinary person today, instead of a member of the upper crust a century ago or a 17th century king.

Cross-posted from HumanProgress.org.

Chelsea GermanChelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Why We Need to Make Mistakes: Innovation Is Better than Efficiency by Sandy Ikeda

“I think it is only because capitalism has proved so enormously more efficient than alternative methods that is has survived at all,” Milton Friedman told economist Randall E. Parker for Parker’s 2002 book, Reflections on the Great Depression.

But I think innovation, not efficiency, is capitalism’s greatest strength. I’m not saying that the free market can’t be both efficient and innovative, but it does offer people a strong incentive to abandon the pursuit of efficiency in favor of innovation.

What Is Efficiency?

In its simplest form, economic efficiency is about given ends and given means. Economic efficiency requires that you know what end, among all possible ends, is the most worthwhile for you to pursue and what means to use, among all available means, to attain that end. You’re being efficient when you’re getting the highest possible benefit from an activity at the lowest possible cost. That’s a pretty heavy requirement.

Being inefficient, then, implies that for a given end, the benefit you get from that end is less than the cost of the means you use to achieve it. Or, as my great professor, Israel Kirzner, puts it, If you want to go uptown, don’t take the downtown train.

What Is Innovation?

Innovation means doing something significantly novel. It could be doing an existing process in a brand new way, such as being the first to use a GPS tracking system in your fleet of taxis. Or, innovation could mean doing something that no one has ever done before, such as using smartphone technology to match car owners with spare time to carless people who need to get somewhere in a hurry, à la Uber.

Innovation, unlike efficiency, entails discovering novel means to achieve a given end, or discovering an entirely new end. And unlike efficiency, in which you already know about all possible ends and means, innovation takes place onlywhen you lack knowledge of all means, all ends, or both.

Sometimes we mistakenly say someone is efficient when she discovers a new way to get from home to work. But that’s not efficiency; that’s innovation. And a person who copies her in order to reduce his commute time is not an innovator — but he is being efficient. The difference hinges on whether you’re creating new knowledge.

Where’s the Conflict?

Starting a business that hasn’t been tried before involves a lot of trial and error. Most of the time the trials, no matter how well thought out, turn out to contain errors. The errors may lie in the means you use or in the particular end you’re pursuing.

In most cases, it takes quite a few trials and many, many errors before you hit on an outcome that has a high enough value and low enough costs to make the enterprise profitable.) Is that process of trial and error, of experimentation, an example of economic efficiency? It is not.

If you begin with an accurate idea both of the value of an end and of all the possible ways of achieving that end, then you don’t need to experiment. Spending resources on trial and error would be wasteful. It’s then a matter of execution, which isn’t easy, but the real heavy lifting in the market process, both from the suppliers’ and the consumers’ sides, is done by trying out new things — and often failing.

Experimentation is messy and apparently wasteful, whether in science or in business. You do it precisely because you’re not sure how to answer a particular question, or because you’re not even sure what the right question is. There are so many failures. But in a world where our knowledge is imperfect, which is the world we actually live in, most of what we have to do in everyday life is to innovate — to discover things we didn’t know we didn’t know — rather than trying to be efficient. Being willing to suffer failure is the only way to make discoveries and to introduce innovations into the world.

Strictly speaking, then, if you want to innovate, being messy is unavoidable, and messiness is not efficient. Yet, if you want to increase efficiency, you can’t be messy. Innovation and efficiency usually trade off for each other because if you’re focused on doing the same thing better and better, you’re taking time and energy away from trying to do something new.

Dynamic Efficiency?

Some have tried to describe this process of innovation as “dynamic efficiency.” It may be quibbling over words, but I think trying to salvage the concept of efficiency in this way confuses more than it clarifies. To combine efficiency and innovation is to misunderstand the essential meanings of those words.

What would it mean to innovate efficiently? I suppose it would mean something like “innovating at least cost.” But how is it possible to know, before you’ve actually created a successful innovation, whether you’ve done it at least cost? You might look back and say, “Gee, I wouldn’t have run experiments A, B, and C if only I’d known that D would give me the answer!” But the only way to know that D is the right answer is to first discover, through experimentation and failure, that A, B, and C are the wrong answers.

Both efficiency and innovation best take place in a free market. But the greatest rewards to buyers and sellers come not from efficiency, but from innovation.

Sandy IkedaSandy Ikeda

Sandy Ikeda is a professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He is a member of the FEE Faculty Network.

What Are Your Odds of Making It to the 1%? by Chelsea German

Your odds of “making it to the top” might be better than you think, although it’s tough to stay on top once you get there.

According to research from Cornell University, over 50 percent of Americans find themselves among the top 10 percent of income-earners for at least one year during their working lives. Over 11 percent of Americans will be counted among the top 1 percent of income-earners (i.e., people making at minimum $332,000) for at least one year.

How is this possible? Simple: the rate of turnover in these groups is extremely high.

Just how high? Some 94 percent of Americans who reach “top 1 percent” income status will enjoy it for only a single year. Approximately 99 percent will lose their “top 1 percent” status within a decade.

Now consider the top 400 U.S. income-earners — a far more exclusive club than the top 1 percent. Between 1992 and 2013, 72 percent of the top 400 retained that title for no more than a year. Over 97 percent retained it for no more than a decade.

HumanProgress.org advisory board member Mark Perry put it well in his recent blog post on this subject:

Whenever we hear commentary about the top or bottom income quintiles, or the top or bottom X% of Americans by income (or the Top 400 taxpayers), a common assumption is that those are static, closed, private clubs with very little dynamic turnover. …

But economic reality is very different — people move up and down the income quintiles and percentile groups throughout their careers and lives.

What if we look at economic mobility in terms of accumulated wealth, instead of just annual income (as the latter tends to fluctuate more)?

The Forbes 400 lists the wealthiest Americans by total estimated net worth, regardless of their income during any given year. Over 71 percent of Forbes 400 listees — and their heirs — lost their top 400 status between 1982 and 2014.

So, the next time you find yourself discussing the very richest Americans, whether by wealth or income, keep in mind the extraordinarily high rate of turnover among them.

And even if you never become one of the 11.1 percent of Americans who fleetingly find themselves in the “top 1 percent” of US income-earners, you’re still quite possibly part of the global top 1 percent.

Cross-posted from HumanProgress.org.

Chelsea German

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

Government Caused the ‘Great Stagnation’ by Peter J. Boettke

Tyler Cowen caused quite a stir with his e-book, The Great Stagnation. In properly assessing his work it is important to state explicitly what his argument actually is. Median real income has stagnated since 1980, and the reason is that the rate of technological advance has slowed. Moreover, the technological advances that have taken place with such rapidity in recent history have improved well-being, but not in ways that are easily measured in real income statistics.

Critics of Cowen more often than not miss the mark when they focus on the wild improvements in our real income due to quality improvements (e.g., cars that routinely go over 100,000 miles) and lower real prices (e.g., the amount of time required to acquire the inferior version of yesterday’s similar commodities).

Cowen does not deny this. Nor does Cowen deny that millions of people were made better off with the collapse of communism, the relative freeing of the economies in China and India, and the integration into the global economy of the peoples of Africa and Latin America. Readers of The Great Stagnation should be continually reminded that they are reading the author of In Praise of Commercial Culture and Creative Destruction. Cowen is a cultural optimist, a champion of the free trade in ideas, goods, services and all artifacts of mankind. But he is also an economic realist in the age of economic illusion.

What do I mean by the economics of illusion? Government policies since WWII have created an illusion that irresponsible fiscal policy, the manipulation of money and credit, and expansion of the regulation of the economy is consistent with rising standards of living. This was made possible because of the “low hanging” technological fruit that Cowen identifies as being plucked in the 19th and early 20th centuries in the US, and in spite of the policies government pursued.

An accumulated economic surplus was created by the age of innovation, which the age of economic illusion spent down. We are now coming to the end of that accumulated surplus and thus the full weight of government inefficiencies are starting to be felt throughout the economy. Our politicians promised too much, our government spends too much, in an apparent chase after the promises made, and our population has become too accustomed to both government guarantees and government largess.

Adam Smith long ago argued that the power of self-interest expressed in the market was so strong that it could overcome hundreds of impertinent restrictions that government puts in the way. But there is some tipping point at which that ability to overcome will be thwarted, and the power of the market will be overcome by the tyranny of politics. Milton Friedman used that language to talk about the 1970s; we would do well to resurrect that language to talk about today.

Cowen’s work is a subversive track in radical libertarianism because he identifies that government growth (both measured in terms of scale and scope) was possible only because of the rate of technological improvements made in the late 19th and early 20th century.

We realized the gains from trade (Smithian growth), we realized the gains from innovation (Schumpeterian growth), and we fought off (in the West, at least) totalitarian government (Stupidity). As long as Smithian growth and Schumpeterian growth outpace Stupidity, tomorrow’s trough will still be higher than today’s peak. It will appear that we can afford more Stupidity than we can actually can because the power of self-interest expressed through the market offsets its negative consequences.

But if and when Stupidity is allowed to outpace the Smithian gains from trade and the Schumpeterian gains from innovation, then we will first stagnate and then enter a period of economic backwardness — unless we curtail Stupidity, explore new trading opportunities, or discover new and better technologies.

In Cowen’s narrative, the rate of discovery had slowed, all the new trading opportunities had been exploited, and yet government continued to grow both in terms of scale and scope. And when he examines the 3 sectors in the US economy — government services, education, and health care — he finds little improvement since 1980 in the production and distribution of the services. In fact, there is evidence that performance has gotten worse over time, especially as government’s role in health care and education has expanded.

The Great Stagnation is a condemnation of government growth over the 20th century. It was made possible only by the amazing technological progress of the late 19th and early 20th century. But as the rate of technological innovation slowed, the costs of government growth became more evident. The problem, however, is that so many have gotten used to the economics of illusion that they cannot stand the reality staring them in the face.

This is where we stand in our current debt ceiling debate. Government is too big, too bloated. Washington faces a spending problem, not a revenue problem. But too many within the economy depend on the government transfers to live and to work. Yet the economy is not growing at a rate that can afford the illusion. Where are we to go from here?

Cowen’s work makes us think seriously about that question. How can the economic realist confront the economics of illusion? And Cowen has presented the basic dilemma in a way that the central message of economic realism is not only available for libertarians to see (if they would just look, or listen carefully to his podcast at EconTalk), but for anyone who is willing to read and think critically about our current political and economic situation.

The Great Stagnation signals the end of the economics of illusion and — let’s hope — paves the way for a new age of economic realism.

This post first appeared at Coordination Problem.

Peter J. BoettkePeter J. Boettke

Peter Boettke is a Professor of Economics and Philosophy at George Mason University and director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center. He is a member of the FEE Faculty Network.

RELATED ARTICLE: 5 Reasons Why America Is Headed to a Budget Crisis

‘Could this be the year Europe dies’ as economic conditions drive a billion Africans North?

Klaus Schwab the founder of the World Economic Forum convening in Davos, Switzerland this week has a very scary prediction for the future of Europe.

Learn more here at American Resistance 2016!

See our complete ‘Invasion of Europe’ archive by clicking here.

RELATED ARTICLES:

Wisconsin: It is not just meatpackers having problems with Muslim refugee employees

See American Resistance 2016! for a couple of stories that might interest RRW readers

So-called ‘Unaccompanied alien children’ numbers are on target to surpass Invasion 2014

King Canute vs. the Climate Planners by Jeffrey A. Tucker

“With a small hammer you can achieve great things.”

Oh really?

This claim comes from French foreign minister Laurent Fabius as he banged his gavel at the close of the Paris climate summit. To the cheers of bureaucrats and cronies the world over, Fabius announced the deal that the press has been crowing about for days, the one in which “humanity” has united to stop increases in global temperature through the transfer of trillions of dollars from the rich to the poor, combined with the eventual (coercive) elimination of fossil fuels.

And thus did he bang his gavel. To his way of thinking, and that of the thousands gathered, that’s all you have to do to control the global climate, cause the world to stop relying on fossil fuels, and dramatically change the structure of all global industry, and do so with absolute conviction that benefits will outweigh the costs.

One bang of a gavel to dismantle industrial civilization by force, replace it with a vague and imagined new way of doing things, and have taxpayers pay for it.

Markets Yawn

Interestingly, the news on the Paris agreement had no notable impact on global markets at all. No prices rose or fell, no stocks soared or collapsed, and no futures responded with confidence that governments would win this one. The climate deal didn’t even make the business pages.

Investors and speculators are perhaps acculturated to ignoring such grand pronouncements. “The Paris climate conference delivered more of the same — lots of promises and lots of issues still left unresolved,” the US Chamber of Commerce said in a statement. And maybe that’s the right way to think, given that the world is ever less controlled by pieces of paper issued by government.

Still, breathless journalists wrote about the “historic agreement” and government officials paraded around as planet savers. Meanwhile, the oil price continues to fall even as demand rises, and the Energy Information Administration announced the discovery of more reserves than anyone believed possible. As for alternatives to fossil fuels, they are coming about through private sector innovation, not through government programs, and successful only when adopted voluntarily by consumers.

It’s a heck of a time to announce a new global central plan affecting the way 7 billion people use energy for the next century. Anyone schooled in the liberal tradition, or even slightly familiar with Hayek’s warning against the pretensions of the “scientific” government elites, shakes his or her head in knowing despair.

The entire scene looks like the apotheosis of the planning mentally — complete with five-year plans to monitor how well governments are doing in controlling the climate for the whole world and do so in a way that affects temperature 10-100 years from now.

King Canute?

The scene prompted many commentators to compare these people celebrating in Paris to King Canute, who ruled Denmark, England, and Norway a millennium ago. According to popular legend, as a way of demonstrating his awesome power, he rolled his throne up to the sea and commanded it to stop rising.

It didn’t work. Still, the image appears in many works of art. Even Lego offers a King Canute scene from its historical set.

Historians have challenged the point of the story. The only account with have of this incident, if it occurred at all, is from Henry of Huntingdon. He reports that after the sea rose despite his command, the King declared: “Let all men know how empty and worthless is the power of kings, for there is none worthy of the name, but He whom heaven, earth, and sea obey by eternal laws.”

He did and said this, say modern experts, to demonstrate to his courtiers and flatterers that he is not as wonderful and powerful as they were proclaiming him to be. Instead of subservience to his own person, he was urging all citizens to save their adoration for God.

His point was that power — even the absolute power of kings — has limits. During his rule, King Canute was enormously popular and evidently benefitted from the common tendency of people to credit authority for the achievements of the spontaneous evolution of the social order itself. His sea trick, if it happened at all, was designed to show people that he is not the man they thought he was.

The Pretensions of the Planners

Lacking a Canute to give us a wake-up call, we might revisit the extraordinary speech F.A. Hayek gave when he received his Nobel Prize. He was speaking before scientists of the world, having been awarded one of the most prestigious awards on the planet.

Rather than flattering the scientific establishment, particularly as it existed in economics, he went to the heart of what he considered the greatest intellectual danger that was arising at the time. He blew apart the planning mindset, the presumption that humankind can do anything if only the right people are given enough power and resources.

If the planning elite possessed omniscience of all facts, flawless understanding of cause and effect, perfect foresight to know all relevant changes that could affect the future, and the ability to control all variables, perhaps their pretensions would be justified.

But this is not the case. Hayek called the assumption the harshest possible word: “charlatanism.”

In the climate case, consider that we can’t know with certainty whether, to what extent, and how climate change (especially not 50-100 years from now) will affect life on earth. We don’t know the precise causal factors and their weight relative to the noise in our models, much less the kinds of coercive solutions to apply and whether they have been applied correctly and with what outcomes, much less the costs and benefits of attempting such a far-flung policy.

We can’t know any of that before or after such possible solutions have been applied. Science requires a process and unrelenting trial and error, learning and experimentation, the humility to admit error and the driving passion to discover truth.

In other words, science requires freedom, not central planning. The idea that any panel of global experts, working with appointed diplomats and bureaucrats, can have the requisite knowledge to make such grand and final decisions for the globe is outlandish and contrary to pretty much everything we know.

Throw the reality of politics into the mix and matters get worse. Fear over climate change (the ultimate market failure “problem”) is the last best hope for those who long to control the world by force. The entire nightmare scenario of rising tides and flooded cities — one that posits that our high standard of living is causing the world to heat up and burn — is just the latest excuse. That fact remains whether or not everything they claim is all true or all nonsense.

Pretensions Everywhere

Hayek explains further: “To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.”

Why? Because planning overrides the spontaneous discovery process that is an inherent part of the market structures.

We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based — a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.

He went further. The planning fallacy doesn’t just affect economics. It is a tendency we see in all intellectual realms, including climatology and its use by governments to justify the desire to manage the world from on high.

Hayek’s conclusion is so epic that it deserves to be quoted in full.

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.

He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants.

There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, “dizzy with success”, to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will.

The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society — a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Or we could just quote King Canute after the tides failed to respect his edict: “Let all men know how empty and worthless is the power of kings, for there is none worthy of the name.”

Jeffrey A. TuckerJeffrey 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.

‘Capitalism’ Is the Wrong Word by Steven Horwitz

We Shouldn’t Use a Term Coined by the System’s Enemies!

Wouldn’t it be nice if we could simply invent new terms to replace the words that seem to cause more heat than light? For example, I have written before of my qualms about using the word capitalism to describe the free-market economy. The word was coined by capitalism’s enemies to describe the system that they rejected.

Red Plenty, a marvelous book by Francis Spufford, offers an important perspective on our discussion of terms. The book is a must-read for fans of free markets. It combines elements from the actual history of the use of mathematics to try to plan the Soviet economy, fictional dialogue and some fictional characters, and Spufford’s excellent understanding of the economics of capitalism and socialism to create an incredibly readable account of the attempt to engineer a world of abundance in the former Soviet Union.

In the senior seminar I teach, we recently read a section of the book that deals with how the Soviet planning process actually worked. That section got me thinking about the terms capitalism and socialism again. The term capitalism suggests a system built around capital and its interests, while the word socialism suggests one built around society and its interests. Notice how these connotations beg some questions from the start.

Is it really true, for example, that capitalism is centered around capital and its interests? Is it really capitalists who benefit the most from capitalism? And on the other side: have existing socialist economies ever served the interests of society as a whole? Could socialism, in theory, do so? Do both of these names make assumptions about each of the two types of economies that reflect the biases of capitalism’s critics and socialism’s defenders?

Of course, capital does play a crucial role in capitalism. The private ownership of capital (the means of production) is a defining characteristic of a free-market economy, especially in comparison to socialism. And the ability to engage in economic calculation provided by the money prices of the market is crucial for the owners of capital to know how best to deploy it. So in those senses, capitalism is about capital.

But notice that nowhere in the previous paragraph is it claimed that the primary beneficiaries of capitalism are the capitalists! What is missing is an answer to the question of why the capitalists continually have to figure out how best to deploy their capital. The answer is because they are constantly trying to provide what consumers want using the least valuable resources possible.

Sure, the capitalists reap profits by doing so. But those profits result from the mutually beneficial exchanges capitalists have with consumers.

The main beneficiaries from capitalism are not the capitalists, but all of us in our role as consumers. Competition among the owners of private capital is all about responding to consumers’ wants. And consumers benefit from this arrangement through more, better, and cheaper goods. If we want a name for the free-market economy that indicates who its primary beneficiaries are, we should reappropriate the term consumerism.

But “consumerism” is only half of the story. It’s easy enough to show through the standard arguments that socialism doesn’t work for the benefit of society as a whole. We know from the socialist-calculation debate that eliminating the market altogether in favor of planning can’t work. But what about all of those countries, like the Soviet Union, that claimed to be planning their economies?

As we see in Red Plenty, the truth was that central planning served as a kind of myth around which economic activity could be oriented. Everyone acted as if there were a plan, but the actual way resources got allocated and shuffled around was much more complicated. In Red Plenty, we meet two characters who help us see this.

First is Cherkuskin, the middleman who trades on relationships and friendships to help producers get the goods they need to meet their centrally planned targets. Cherkuskin is the personification of what Ayn Rand called “the aristocracy of pull.” His power comes from whom he knows and what he can get them to do for you. When producers don’t have enough to fulfill their quotas because of the inability of the plan to allocate rationally or to respond to unexpected change, the Cherkuskins come into play and move resources around to help them — and to profit handsomely in the process. Underneath “the plan” was the black market that did a great deal to ensure that Soviet-style economies were minimally functional.

The other character is Maksim Maksimovich Mokhov, a high-ranking bureaucrat in the planning agency. Faced with the news of the destruction of a crucial machine, Mokhov has to figure out how to rebalance the plan given that one factory will either need a new machine or fail to produce the output that other factories need. Spufford gives us terrific imagery of Mokhov sliding around on his wheeled chair, abacus in hand, going from file to file using technology primitive by even the 1962 standard of that chapter of the book, attempting to reallocate resources with the flick of an eraser and the scratch of a pencil.

Both Cherkuskin and Mokhov are, functionally, substitutes for what the price system does under capitalism, and inferior substitutes at that.

But what’s most interesting is that neither of them cares one whit about the consumer. Cherkuskin is all about making sure that producers get what they need to fulfill the plan, never pausing to consider what the costs were for consumers. Mokhov describes consumers as a “shortage sink” because they are the end of the line, and if they don’t get what they want, no one else relies on them for further output. It was more important to balance out production than to worry if consumers got exactly what they needed.

What Spufford so nicely illustrates here is how real-world socialism, and not capitalism, put the needs of “capital” first and the wants of consumers last. In a world where producing more stuff, regardless of its value, was the path to plenty, ensuring that production continued according to the plan and that producers got what they needed were the central tasks. And the black market middlemen like Cherkuskin could make a real ruble or two doing so.

But unlike the profits of market capitalists, Cherkuskin’s rubles came at the expense of the consumer rather than reflecting mutual benefit. A system where consumers are just the folks who are expected to absorb the errors of the plan is hardly one geared to the interests of society as a whole. And a system where capital is ultimately the servant of consumers is misleadingly named if we call it capitalism.

It’s a difficult battle to get people to change the names they’ve long used for free markets and (supposedly) planned economies. Even if we don’t win that battle, it’s still important for us to point out how the terms capitalism and socialism really do give a false impression of how markets and planning work. If we want to know who really benefits from markets, a quick look around the abundance that is the typical American household will answer that question quite clearly.

Steven HorwitzSteven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions.

He is a member of the FEE Faculty Network.

Adam Smith’s Wealth of Nations and the FairTax by Rep. Dave Brat (VA-7)

Adam Smith, the father of economics, published An Inquiry into the Nature and Causes of the Wealth of Nations nearly 240 years ago[i]. Soon after, an extraordinary flourishing of innovation and human well-being took off and transformed the globe. According to economist Deirdre McCloskey, the average American today is roughly 30 to 100 times better off than our ancestors in 1800[ii], the point when humanity began to escape crushing poverty. Notwithstanding modern prosperity, however, human nature hasn’t changed much. Smith’s insights remain relevant.

The Wealth of Nations considers taxation in Book V, Chapter 2: “Of the Sources of the General or Public Revenue of the Society.” In the prior chapter, “Of the Expenses of the Sovereign or Commonwealth,” he describes the primary functions of the national government. Some—like defense—need to be paid for by general revenue, while others—like transportation infrastructure—can be built and maintained with fees paid by users.

Revenue policy should fund the necessary expenses of the government. Not to benefit this or that industry. Not to advance social objectives. Certainly not to suppress political speech.

Smith set out four goals for evaluating tax options. First, tax contributions should be proportionate to abilities. Second, the rules should be certain and not arbitrary. Third, taxes should be levied when and how its payment is most convenient. Fourth, collection should minimize administrative overhead.

He then evaluated possible tax bases using those principles: rents of land and houses, profits, wealth, wages, head taxes, and consumption. He concluded that the ideal tax bases are residential property and consumption, particularly on luxury goods.

What does Adam Smith have to do with the FairTax? Everything. Setting aside property taxes—a state and local issue—consider how his principles relate to a consumption tax like the FairTax.

Is it proportionate to abilities? Yes. Those who earn more also consume more, thus contributing proportionately more to the general revenue. Savings—which our current tax system discourages but the FairTax would not—provide no current consumption benefits. They are deferred consumption, which in the meantime enables others to borrow to finance education, infrastructure, factories, and much more while also reducing the trade deficit.

Is the FairTax certain and not arbitrary? Yes. Everyone pays the same, known rate on consumption.

Is it convenient to pay? Yes. Merchants include the tax in the prices of final goods and services, which consumers pay all at once. Businesses simply remit the revenue to the government from time to time.

The FairTax also minimizes administrative overhead. The U.S. has around six million businesses.[iii] Not all would collect revenue under the FairTax, since many don’t sell directly to consumers. Current tax law requires the processing of six million business returns, 150 million individual and household tax returns[iv] (some overlap), and various trust, foundation, and other returns that are processed today, all under a complex, burdensome, and unFairTax code.

A broad-based consumption tax like the FairTax has other benefits. It eliminates the bureaucratic discretion that enabled the illegal and corrupt targeting of political speech, as the Richmond Tea Party experienced first-hand. Less taxation on productive activities yields greater physical and human capital investment by businesses and individuals, which makes workers more productive, boosting their compensation and standards of living while also increasing returns to saving.

It eliminates a major source of favor trading between Congress and big businesses. The concentrated interests of businesses associations create enormous pressure for Congress to provide tax preferences. The FairTax dramatically reduces the ability of political insiders to manipulate the tax system.

After nearly a decade of poor economic performance, we need comprehensive, pro-growth, simplifying tax reform like the FairTax. That’s why I’m a proud cosponsor of H.R. 25. To fully restore the American Dream, however, we must also pursue major regulatory and spending reforms.

We can have even more of the market-tested innovations that improve our lives and that would have astounded Adam Smith and our ancestors. Smart policy reforms—like the FairTax—can clear the path.

[i] http://www.econlib.org/library/Smith/smWN.html

[ii] https://www.aei.org/publication/perhaps-the-most-powerful-defense-of-market-capitalism-you-will-ever-read/

[iii] http://www.census.gov/content/dam/Census/library/publications/2015/econ/g12-susb.pdf, Appendix Table 1, pp. 7.

[iv] https://www.irs.gov/uac/SOI-Tax-Stats—Individual-Statistical-Tables-by-Size-of-Adjusted-Gross-Income, “All Returns: Selected Income and Tax Items: 2013”

ABOUT CONGRESSMAN DAVE BRAT

Congressman Dave Brat represents Virginia’s 7th congressional district, serving since 2014 when he won a special election. Brat is a member of the House Budget Committee, Education and the Workforce Committee, and Small Business Committee. He has a Ph.D. in economics, formerly was a professor of economics and chairman of the economics department at Randolph Macon College, and previously worked for the World Bank and Arthur Andersen.

EDITORS NOTE: To learn more about the FairTax please click here.

Bernie Sanders and the Fixed Pie Fallacy by Chelsea German

“The rich are getting richer and the poor are getting poorer.” Senator Bernie Sanders first said those words in 1974 and has been repeating them ever since.

Senator Sanders is not alone in his belief. Three out of four Americans agree with the statement, “Today it’s really true that the rich just get richer while the poor get poorer.”

Senator Sanders is half right: the rich are getting richer. However, his assertion that the poor are becoming poorer is incorrect. The poor are becoming richer as well.

Economist Gary Burtless of the Brookings Institute showed that between 1979 and 2010, the real (inflation-adjusted) after-tax income of the top 1% of U.S. income-earners grew by an impressive 202%.

He also showed that the real after-tax income of the bottom fifth of income-earners grew by 49%. All groups made real income gains. While the rich are making gains at a faster pace, both the rich and the poor are in fact becoming richer.

label

In addition to these measurable real income gains, decreases in prices have given the poor increased purchasing power, helping to raise living standards for the worst off in society. As a result of falling prices such as for groceries and material goods, along with gains in real income, Americans have more income left after basic expenses.

Technology has also become cheaper, improving our lives in unexpected ways. For example, consider the spread of cell phones. There was a time when only the wealthiest Americans could afford one. Today, over 98% of Americans have a cellular subscription, and the rise of smart phones has made these devices more useful than ever.

Unfortunately, progress has been uneven. In those areas of the economy where competition is hobbled, such as education, housing, and healthcare, prices continue to increase.

Still, the percentage of the population classified as living in relative poverty has decreased over time. Why then do three quarters of Americans, including Senator Sanders, believe that the poor are “getting poorer?”

A simple logical error underlies Sanders’ belief. If we assume that wealth is a fixed pie, then the more slices the rich get, the fewer are left over for the poor. In other words, people can only better themselves at the expense of others. In the world of the fixed pie, if we observe the rich becoming richer, then it must be because other people are becoming poorer.

Fortunately, in the real world, the pie is not fixed. US GDP is growing, and it’s growing faster than the population.

Poverty remains a pressing issue, but Senator Sanders is incorrect when he says that the poor are becoming poorer. In the words of HumanProgress.org advisory board member Professor Deirdre McCloskey,

The rich got richer, true. But millions more have gas heating, cars, smallpox vaccinations, indoor plumbing, cheap travelrights for womenlower child mortalityadequate nutrition, taller bodies, doubled life expectancyschooling for their kids, newspapers, a vote, a shot at university, and respect.

This post first appeared at HumanProgress.org.

Chelsea German

Chelsea German

Chelsea German works at the Cato Institute as a Researcher and Managing Editor of HumanProgress.org.

3 Ways to Destroy American Prosperity

If you absolutely had to draw up a set of policy proposals to dislodge the United States from its position as the most prosperous country in the world, how would you do it?

Your first step would be to pinpoint which factors have produced levels of prosperity unseen in human history and which exist here in the United States. Step two would be to convince impressionable citizens that their eyes and ears are deceiving them, and that the policies that have produced our unprecedented prosperity are failures. Your third step would be to get those same impressionable people to become advocates for legislation which will ensure that the deterioration of the United States occurs slowly, so the contrast between a less prosperous today and a more prosperous yesterday is less noticeable; the regression of prosperity becomes accepted as the norm. Your fourth step is to laser-focus all blame for this regression on your ideological opponents.

Understandably this is an extremely touchy subject, so in this piece I’m going to avoid speculation about the motives of any particular individual or individuals, as I feel conjecture may obscure the seriousness of our subject matter.

With that caveat, here are a set of policy proposals which will ensure the destruction of prosperity.

POLICY OF DESTRUCTION PROPOSAL #1

The first policy priority would be to separate Americans from their money and to convince them that bureaucrats and elected officials can spend their money—for them—better than they can spend it on themselves.

After all, you cannot have both vibrant economic and political liberty and expect to implement your anti-prosperity platform at the same time. Separating people from their own hard-earned money is not easy and requires some slick marketing. Here’s how to do it: Find a charismatic speaker, with no qualms about bending the truth, and ensure he or she depersonalizes and demonizes hard-working taxpayers.

Very few Americans, when asked about specific people (i.e. their neighbors, family members, or friends) want to confiscate their money for their own personal use, but when the charismatic speaker engages in a full blown class-warfare campaign and avoids specifics, using terms such as “the rich,” “pay your fair-share,” and “big business,” it becomes easier to convince others that they are entitled to the earnings of fellow citizens. What many of these people fail to understand, when they buy into the big lie about income confiscation and redistribution, is that their own prosperity is next.

POLICY OF DESTRUCTION PROPOSAL #2

The second policy priority would be to separate Americans from control of their health and medical care.

You cannot destroy American prosperity while allowing people to freely choose when and where they seek medical care, whether acute or chronic. There are only two ways to organize a healthcare distribution system. Healthcare can either be rationed by those in power or priced through free-markets; there is no other way. Medicine, a hospital bed, and a doctor or nurse’s time are resources that can only be allocated by rationing or pricing. In dismantling the pricing signals of healthcare by inserting the government as a third-party payer of healthcare services, and disconnecting the patient from his or her own healthcare provider, you can convince the public that the inevitable exploding health care costs are the fault of greedy boogeymen. This will allow the government to come in and save the day, even after having caused the problem in the first place.

Once this step is achieved, grab your charismatic leader again, and encourage him to demonize “profits” in healthcare—despite the fact that he or she doesn’t work for free—and you’re on the road to government rationing of healthcare and the destruction of your health and prosperity.

Policy of Destruction Proposal #3

The third and final step is to expand the government bureaucracy and ensure it has maximum discretion in the implementation of regulations.

You cannot destroy American prosperity with a Constitution and laws that limit government power and maximize individual freedom. The way around this dilemma is to expand and empower the government bureaucracy and write a series of regulations that mimic laws by giving the bureaucrats power to interpret what the regulations say.

Go get your charismatic leader again and ask him or her to give a series of apocalyptic speeches about our future and man’s role in the inevitable destruction of the planet, and while giving the speeches, be sure to demonize any opposition as “deniers.” This will pave the road to establishing an unchecked government bureaucracy with the power to take your private property, your business, and your bank account. It will most certainly destroy the path to prosperity.

Ask yourself: Who are these charismatic leaders?

EDITORS NOTE: This column originally appeared in the Conservative Review. The featured image is by Robert F. Bukaty | AP Photo.

The Economics of a Toddler and the Ethics of a Thug by Donald J. Boudreaux

Reflecting on the recent Democratic debate, Dan Henninger reports that Bernie Sanders said that he would fund his plan to make college free for students “through a tax on Wall Street speculation” (“Bernie Loves Hillary,” Oct. 15).

This statement reveals the frivolousness of Mr. Sanders’s economics. If such speculation is as economically destructive as Mr. Sanders regularly proclaims it to be, the tax on speculation should be set high enough to drastically reduce it.

But if — as Mr. Sanders presumably wishes — speculation is drastically reduced, very little will remain of it to be taxed and, thus, such a tax will not generate enough revenue to pay for Mr. Sanders’s scheme of making all public colleges and universities “tuition-free.”

That Mr. Sanders sees no conflict between using taxation to discourage (allegedly) harmful activities and using taxation as a source of revenue proves that he ponders with insufficient sobriety the economic matters on which he pontificates so sternly.

Excerpted from Cafe Hayek.

Donald J. Boudreaux

Donald J. Boudreaux

Donald Boudreaux is a professor of economics at George Mason University, a former FEE president, and the author of Hypocrites and Half-Wits.

RELATED ARTICLE: A Look Inside the Courtroom Where Property Owners Fight the Government to Get Back Their Cash, Homes, and Cars

PODCAST: You Cannot Multiply Wealth By Dividing It

A sermon given in 1984 by Dr. Adrian Pierce Rogers, Baptist Pastor, Author, and Political Commentator titled, “God’s Way to Health, Wealth and Wisdom.”

“You cannot legislate the poor into freedom by legislating the industrious out of it. You don’t multiply wealth by dividing it. Government cannot give anything to anybody that it doesn’t first take from somebody else. Whenever somebody receives something without working for it, somebody else has to work for it without receiving. The worst thing that can happen to a nation is for half of the people to get the idea they don’t have to work because somebody else will work for them, and the other half to get the idea that it does no good to work because they don’t get to enjoy the fruits of their labor.”

Please listen to Dr. Roger’s entire sermon “God’s Way to Health, Wealth and Wisdom“:

We’re on the verge of a major international conflict

I know most of us are still reeling from the Umpqua Community College shooting in Roseburg, Oregon. Prayers for the souls of those who lost their lives, their families, and those wounded and perhaps scarred for life. But we must never forget the carnage and death that occurs regularly in our inner cities, our urban areas, such as President Obama’s hometown of Chicago, that goes unmentioned from the nation’s biggest bully pulpit.

obama_angry_2012_8_63

But that is not want I want to focus on right now.

Today we got the September jobs report and it is still disturbing. Our economy is not growing at the necessary rate. The report put the unemployment rate at 5.1 percent, which is unfathomable when you consider the U.S. workforce participation rate remains at a historic low near 62.7 percent. In the entire month of September, the American economy added 142,000 jobs, 30,000 below what was estimated. These numbers are anemic, and do not represent a flourishing free market economy but one that is struggling — under crippling tax and regulatory policies implemented over the past seven years.

This cannot be the new normal and accepted as “positive” gains, especially considering annual GDP growth is below 2.5 percent. These are the reasons why the Obama administration has turned to Janet Yellin and the Federal Reserve to prop up the economy with artificial measures called “quantitative easing” — incessantly low interest rates and printing. It’s creating another bubble that will certainly burst. And it’s not about raising taxes on high wage earners; it’s about sound fiscal policy that restores our economy.

That is the major domestic economic concern for today, but there is a greater international concern. Due to the weakness of the Obama administration — or perhaps the intentional decimation of our global influence and military capacity — we could be on the verge of a major conflict.

A declared state terrorist organization, Iran’s Quds Force, led by General Qassem Suleimani, is now openly operating on the ground in Syria. Yes, Iran has “boots on the ground” in Syria using Russian air assets to attack the Syrian rebel forces supposedly supported by the Obama administration. I think it is fair and honest to say, another “red line” has been crossed in Syria. Sadly, President Obama took to the stage yesterday, showing his unrighteous indignation over having new gun safety laws – but said nothing about the Russian-Iranian-Syrian-Hezbollah alliance.

Perhaps President Obama should take to the world’s largest bully pulpit today and announce that the Joint Comprehensive Plan of Action (JCPOA), the Iranian nuclear deal, is cancelled. It is beyond belief that President Obama and his cohort of 42 Democrat Senators, who blocked the Resolution of Disapproval from even reaching the Senate floor for a vote, could still support this foolish agreement.

I’d like Obama, any Democrat, any liberal progressive supporter or their media accomplices to explain to me why ….

Continue here


How can President Obama actually look at himself in the mirror, look at the American people and tell us Bashar Assad must go — when he has created the conditions for him to stay? ~ Allen West


Dear Millennials, the Dems are Screwing You

At what point does the millennial generation wake up and realize that their love affair with the Democratic Party has been one-sided? While the Democrats have benefitted enormously from millennials’ overwhelming support of their brand in national, state and local elections, the affection has gone unrequited. Granted, the Democrats talk a big game about the youth of America, but it’s what they’re actually doing to younger Americans that matters. In nearly every significant policy arena the modern, far-Left Democratic Party is pushing policies that will undoubtedly jeopardize the futures of young Americans working hard to make a better tomorrow.

Conservative activist, former Reagan administration official, and nationally-syndicated radio host Mark Levin’s new book Plunder and Deceit is a thorough examination of the ideological and legislative assault on young Americans. The book uses extensive data points and a second-to-none analysis to make the case that the modern Democratic Party’s allegiance to liberal ideology on the social front, and to tax-and-spend economics on the fiscal front, is selling out young Americans. It is a must-read for young Americans who are looking to escape the Democratic Party’s deceptive, focus group tested talking points and looking to find the truth.  Additionally, the book is a must-read for Americans of all ages who want to understand, and be able to explain to open-minded young Americans, the danger we are in if we fail to correct our course.

What is perhaps most disturbing about this disconnect between what the modern Democratic Party says to young Americans, and what it does to them, is that it’s not simply that the Democrats are failing to help the youth in our society, but that they are deliberately harming them. After reading Levin’s book and being reminded of the grave economic future being created by the Obama administration, their congressional allies, and weak-knee’d Republicans too cowardly to fight back, I wonder where young Americans think the money to pay off the growing national debt, which is equal to the value of everything the country produces, is going to come from? There is no significant difference between annual deficits, accumulated government debt, and taxes coming out of your pocket, absent the time preference. And the modern Democratic Party prefers to burden young Americans with the debt and spending they are accumulating right now, rather than to govern responsibly, due to their continued quest for the consolidation of government economic power. This allegiance to the broken economics of unsustainable government debt, is not just failing to provide young Americans with the promised “hope and change,” but it is unquestionably doing significant damage to the potential prosperity of young Americans hoping for a bright economic future.

Facts matter and the facts are not on the side of the modern Democratic Party. The laws of both arithmetic and economics dictate that all debts both public and private must be paid. Those debts are either paid by the debtor, who fulfills his obligation to pay back the debt, or the creditor, who unwillingly pays the debt himself when he fails to receive the money he loaned back from the debtor. There is no third way, these are the only options. With these hard facts in mind, it’s clear there are only a couple of options for young Americans going forward if we do not begin to control the federal government’s profligate spending. The first option for young Americans is a future of confiscatory tax rates so high that they will choke off any chance that they can live economically prosperous lives in an increasingly shrinking private sector future. Our unsustainable and growing national debt, with its entitlement promises and grim discretionary spending outlook, will strangle private sector opportunity in favor of public sector thievery.

The second option is just as disturbing for young Americans. The federal government can simply ignore its accumulated debt obligations and fail to repay its creditors, both foreign and domestic. This disastrous scenario would destroy the economic credibility of the world’s greatest supporter and dramatically increase the cost of debt in the future. Young Americans need to understand that this means that their car loans, their home loans, their credit card interest rates, and any other attempt to finance their lifestyles, or their futures, with debt will be dramatically more expensive than it was for their parents. You can thank the big spenders in elected positions in our government for this disparity between what your parent’s lifestyle was, and what yours is going to be.

Yes young America, you are being screwed, big time. It’s easy to make the faux “tough choices” to pile on government debt today, when cowardly politicians, and their silent opposition, anchor the costs of those “tough choices” to my children and yours, who will pay for them for decades.

For the sake of the country and its future, I am hoping that Levin’s book becomes the centerpiece of a long overdue national discussion about what our real “priorities” are as a nation. I refuse to accept that the greatest country in the history of mankind, when confronted with the hard facts in Levin’s book, will choose the route of a profligate present, and a bankrupt future for their children, rather than a responsible present and a prosperous future.

RELATED ARTICLE: Nearly Half of Millennials Say the American Dream Is Dead. Here’s Why.

RELATED VIDEO: Why the GOP Sucks at Courting Millennials: ‘The Selfie Vote’ Author Kristen Soltis Anderson

EDITORS NOTE: This column originally appeared in the Conservative Review.

7 Things the Left Should Apologize For

While attending a gathering of conservatives a few years ago in Washington, D.C., I was confronted by a far Left group conducting an amateur “ambush interview.” They demanded I opine on the comments of a number of 2012 Republican U.S. Senate candidates whom they found objectionable, and it was clear that they were seeking some sort of apology.

The Left loves to demand apologies from conservatives for grievances both real and imagined and, sadly, sometimes we play along with this ridiculous game.

The Left loves to demand apologies from conservatives for grievances both real and imagined and, sadly, sometimes we play along with this ridiculous game. I frequently wonder why conservatives don’t pay back the favor and demand apologies from the Left.

At the macro level, the Left should apologize to America for their continued allegiance to European-style welfare statism. At the micro level, they should apologize for their ongoing use of hateful division politics.

These two guiding ideologies of the Left have caused immeasurable poverty, misery and grief. Their intent to divide us is leading to concertina-wire-reinforced borders among the individual race, gender, and religious silos that they have chosen for us.

With the continued focus on the 2016 presidential elections we should start demanding apologies from the Left. Here are seven things the Left is largely responsible for which I’m demanding apologies before Election Day.

The death of four American patriots in Benghazi and the disgusting lies told to the families of the deceased…

  1. Sanctuary cities and the murder of Kate Steinle, by an illegal immigrant deported, an unforgivable five times.
  2. The ruthless political targeting of conservatives by the IRS to silence conservatives and advance the Left’s political agenda.
  3. The Obama economic “recovery,” where a tragic 1 in 5 Americans are now on some form of government welfare and over 90 million Americans are not working.
  4. The continuing destruction of the economies and education infrastructures of America’s once great inner cities by liberal governance.
  5. The massive health insurance premium hikes, outrageously high deductibles, and doctor and hospital restrictions imposed on middle class Americans by the disastrous Obamacare legislation.
  6. The death of four American patriots in Benghazi and the disgusting lies told to the families of the deceased, and to concerned American citizens, by the Obama administration afterwards.
  7. And, most importantly, the continued shredding of our Constitutional Republic, and what little faith we had left in our government.

Demand an apology from the Left for this, America deserves it.

EDITORS NOTE: This column originally appeared in the Conservative Review. The featured image of former Secretary of State Hillary Clinton testifying before Congress on Benghazi is courtesy by Bill Clark Roll Call CQ | AP Photo.