Tag Archive for: Entrepreneurship

How Entrepreneurs Are Expanding Education Options For Families in Texas

/in , , , , , , /by

“Parents are the best advocates of their children and ultimately know what type of schooling is best from an academic, social and moral perspective,” said Braveheart founder Chrystal Bernard.

In early 2020, Chrystal and Joshua Bernard decided that they would begin homeschooling their four young children at the start of the following school year. Their two oldest children were completing first grade and pre-kindergarten, respectively, at a traditional private school in the greater Fort Worth, Texas area, but the Bernards were drawn to homeschooling’s more personalized, family-centered educational approach.

The school shutdowns later that year accelerated their homeschooling plans, and the Bernards became increasingly convinced that more learner-centered education was the path forward—both for their own children as well as for others in their local community. “Homeschooling enabled us to connect more as a family and helped our two eldest children skyrocket in their academics, drawing other people to our method of schooling,” said Chrystal, who taught high school mathematics in Texas public schools before launching her own CPA firm.

During the 2020/2021 school year, the Bernards heard from a growing number of parents who wanted a more personalized, accessible, faith-based educational option. “As pastors of our local church, we saw the desires of people in our community who wanted a Christian education with low student-teacher ratios without the hefty tuition prices of the local private schools,” said Chrystal. “Additionally, with the rise of virtual learning due to the COVID-19 pandemic, we saw how some students were falling through the cracks.”

In the fall of 2021, the couple founded Braveheart Christian Academy, a pre-kindergarten to 7th grade microschool in Arlington, Texas that emphasizes individualized, mastery-based learning with a focus on character development. Some of Braveheart’s teachers taught in the local public schools but were attracted to the new school’s smaller, more holistic learning environment. “Instead of placing students in a box, education is brought to their level,” said Chrystal, who uses assessment tests to evaluate each child’s skill level upon enrollment and then adapts the curriculum accordingly. “We had one child who entered school as a fourth grader by age but who performed at a first grade level. Now, after a school-year-and-a-half with us, that student has nearly caught up academically to his fifth grade peers,” she told me during my recent visit to Braveheart.

With an annual tuition of about $7,000, Braveheart is significantly lower in cost than most traditional private schools in the area, but it is still financially out of reach for many families. “Cost is the major barrier,” said Chrystal, who hears often from parents who wish to enroll their children but can’t afford it.

The Bernards do what they can to lower the tuition burden. They received a microgrant from the VELA Education Fund, a national philanthropic non-profit that provides small amounts of funding to education entrepreneurs who are creating individualized, out-of-system learning models. One local VELA partner, The Miles Foundation, recently dedicated $1 million to support the rising number of founders in Tarrant County. “By investing in everyday education entrepreneurs, we can create real change in the education system,” said Grant Coates, president of The Miles Foundation.

In addition to philanthropy, the Bernards also rely on personal fundraising efforts to reduce costs to parents, but Braveheart is still financially inaccessible to many who want it. “One parent was actually weighing whether she should pay her rent or the school tuition,” said Chrystal, acknowledging that providing a quality education for their children is a top priority for many families.

Last week, Texas became the latest in a string of states to introduce school choice legislation that would enable education funding to follow students to whichever school their parents choose. The bill would provide an annual education savings account up to $8,000 for each Texas student to use toward tuition, books and supplies. This amount would more than cover the cost of Braveheart and similar schools across the state, including the new ones that have been quickly emerging over the past three years of education disruption.

Chrystal is a strong supporter of these school choice initiatives. “Every Texas family should be afforded the opportunity to attend their school of choice, including private schools,” she said. “For many families, the sole barrier is the financial requirement needed to do so. Parents are the best advocates of their children and ultimately know what type of schooling is best from an academic, social and moral perspective.”

The Bernards will continue their efforts to make Braveheart more accessible to the families that want it, but Chrystal believes that statewide education choice policies will be most empowering. “The Texas school choice bill would give more freedom and leverage to parents to make the best schooling decision for their children,” she said.

This article was originally published at Forbes.com. It has been reprinted with permission.

AUTHOR

Kerry McDonald

Kerry McDonald is a Senior Education Fellow at FEE and host of the weekly LiberatED podcast. She is also the author of Unschooled: Raising Curious, Well-Educated Children Outside the Conventional Classroom (Chicago Review Press, 2019), an adjunct scholar at the Cato Institute, education policy fellow at State Policy Network, and a regular Forbes contributor. Kerry has a B.A. in economics from Bowdoin College and an M.Ed. in education policy from Harvard University. She lives in Cambridge, Massachusetts with her husband and four children. You can sign up for her weekly email newsletter here.

RELATED ARTICLES:

More Than One Million Students Left District Schools. How Do We Know They’re Learning?

New York City’s Not-So-Secret World of Low-Cost Private Schools

Why Can’t This Retired US Navy Officer and Engineer Open a Private School in Nevada?

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

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

/in , , , /by

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.

RELATED ARTICLE: Cuba’s Bustling Black Markets Hold an Important Economic Lesson

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

PODCAST: Why This East Coast State Is Becoming a Hub of Education Entrepreneurship

/in , , , , /by

New Jersey education entrepreneurs are embracing an ethos of permission less innovation, creating new learning solutions that work well for children and others in their communities rather than trying to change an entrenched traditional school system.

When Ben Ashfield and Tammy Tiranasar couldn’t find their preferred educational environment for their two younger children, they decided to build it. Ben works in advertising and Tammy is an artist, but first and foremost they are entrepreneurial parents who want the best for their children. Last fall, the couple took over a vacated classroom space in Mountainside, New Jersey, and created The Village Electric as a full-day, co-learning center for local children ages two to twelve, open five days a week. They launched with 45 kids and several teachers.

This year, their program continues to thrive, but Ben and Tammy aren’t content with creating just one alternative learning model that satisfies their family’s needs. They want their space to become an incubator for many other entrepreneurial parents and teachers who wish to build microschools and co-learning communities of their own.

“The benefit of The Village Electric is making it easier to get involved in education and to innovate in education,” said Ben, likening his vision to that of WeWork and related coworking spaces that help to foster collaboration and knowledge-sharing. I talked with Ben and Tammy on this week’s episode of the LiberatED podcast.

“We felt we could benefit from creating a community for kids where we are working together, but it’s also a place for entrepreneurial teachers to start their vision of what school can be,” Ben continued. “It’s a place for people to start co-ops if they’re homeschoolers. It’s a place where homeschoolers can find community on their schedule. It’s a place where people can do their online learning except do it in a community of people learning other things. I would love to see an explosion of innovation happening like what you saw in Silicon Valley 15 years ago where people are trying lots of different things.”

Over the past two years, the Garden State has emerged as an ideal spot to pursue education entrepreneurship and invent a variety of schooling alternatives. You may recall my conversation earlier this year with Jill Perez, a long-time teacher and supervisor of student-teachers at the university level, who created a “pandemic pod” in 2020 with other New Jersey families. She then shifted that into a full-fledged microschool last fall, opening with more than 40 students, along with teachers she recruited from the New York City public schools. She recently purchased a building for her microschool and her program continues to grow.

Similarly, last spring I spoke with Lorianne Bolotin, an immigrant physician and midwife who never thought she would be in the education business until school closures prompted her to homeschool her children. Like Jill, she created a pod with local families and turned that into an established microschool in leased commercial space in a New Jersey office park. Her program also continues to expand and evolve, including her efforts to support a network of similar microschools across the country.

What is it about New Jersey that is making it a developing hub of education entrepreneurship and creative learning options? Certainly prolonged school closures and related pandemic policies contributed to more families exiting district schools for private education options, including homeschooling. New Jersey public schools experienced lengthy closures and reopened with mask mandates and other policies that frustrated some parents. The New Jersey Department of Education reported that the state’s traditional public schools lost a record 18,000 students during the 2020/2021 and 2021/2022 school years, reflecting a larger trend in declining public school enrollment nationwide since 2020. Enrollment declines were steepest in school districts that remained closed longer and relied more on remote learning, as well as those that kept mask mandates, according to data from the American Enterprise Institute.

New Jersey is also one of the least restrictive states for homeschooling, with no notification requirement for parents who want to homeschool their children, and few regulations. This ease of homeschooling has contributed to the proliferation of microschools, learning centers, and similar schooling alternatives, and all of the New Jersey microschools I have spotlighted this year operate as full-time, drop-off programs for homeschoolers. Some also offer part-time options as well. This enables families to be integrally involved with their children’s education while providing the flexibility for parents to continue working full-time and allowing their children to have a consistent peer group and ongoing academic enrichment.

These New Jersey microschools also tend to be less costly than other private schools in the state. For example, The Village Electric’s annual tuition is $10,500 for a full-day, Monday through Friday program, while the average New Jersey private school tuition is 42 percent higher than that. If New Jersey adopted school choice policies like those in Arizona and West Virginia that enable education funding to follow students instead of going to school districts, then microschools and similar learning communities would be accessible to even more families.

Some New Jersey microschools, including The Village Electric, are recipients of microgrants from VELA Education Fund, a non-profit organization that provides funding to non-traditional education organizations and schooling alternatives. VELA grant recipients frequently use their funds to help provide scholarships and tuition assistance to families who need it.

New Jersey education entrepreneurs are embracing an ethos of permissionless innovation, creating new learning solutions that work well for their children and others in their communities rather than trying to change an entrenched traditional school system. “As parents, we need to exercise our right to educate our children in the way that we think they need to be educated, and not ask for permission for that,” said Ben. “If you’re going to your school board and fighting with your public school, while I so appreciate that and understand that, we also need to just exercise our right to educate our children. That’s what inspired Tammy and me. We asked: How can we do something productive where we don’t feel like we’re wasting our energy trying to change something that really has no interest in changing?”

More entrepreneurial parents and educators in New Jersey and beyond are asking, and answering, that question.

AUTHOR

Kerry McDonald

Kerry McDonald is a Senior Education Fellow at FEE and host of the weekly LiberatED podcast. She is also the author of Unschooled: Raising Curious, Well-Educated Children Outside the Conventional Classroom (Chicago Review Press, 2019), an adjunct scholar at the Cato Institute, education policy fellow at State Policy Network, and a regular Forbes contributor. Kerry has a B.A. in economics from Bowdoin College and an M.Ed. in education policy from Harvard University. She lives in Cambridge, Massachusetts with her husband and four children. You can sign up for her weekly email newsletter here.

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

How Disruptive Innovation Is Accelerating the Growth of Alternative Learning Models

/in , , , , , /by

Disruptive innovation is reshaping how children learn and expanding access to alternative education models.

Disruptive innovation usually begins on the margins, with a few, intrepid users embracing a new product or service. Abetted by new technologies, a disruptive innovation penetrates the mainstream when its quality is proven to be as good, if not better, than more established models.

According to author and investor, Michael Horn, a classic example of disruptive innovation is Airbnb, which began on the margins as a couch-surfing tool and then, enabled by technology, upended the hospitality industry.

“Initially we thought [disruptive innovation] could be any low-cost innovation,” Horn told me on this week’s episode of the LiberatED podcast. “What we observed over time was that you needed some sort of technology enabler that allowed you to carry the original value proposition around convenience, affordability, and accessibility and allowed you to improve without just replicating all of the cost features of the incumbent.”

Horn should know. He co-founded the Clayton Christensen Institute with Clayton Christensen, who coined the term “disruptive innovation” back in the 1990s. Since then, Horn has studied the role of disruptive innovation in education and has written several books on the topic, including his newly-released book, From Reopen to Reinvent: (Re)Creating School for Every Child.

In our podcast conversation this week, Horn and I focused on the ways in which disruptive innovation is reshaping how many children learn, as well as accelerating the growth of alternative learning models.

For instance, while homeschooling began its modern revival a half-century ago, and microschools, or small, multi-age learning environments, have existed for decades—including some of the ones I highlighted in my Unschooled book—it wasn’t until the advent of new technologies that homeschooling and microschooling became a mainstream option for millions of families.

Virtual schools and platforms such as Sora Schools, My Tech High, ASU Prep Digital, and Socratic Experience, enable students, many of whom may be registered as homeschoolers, to learn from anywhere and have access to a more personalized curriculum. Similarly, Khan Academy, Coursera, Udemy, and Outschool give students around the world access to content and curriculum experts to make it easier to choose an alternative learning path, or supplement a conventional one.

Fast-growing microschool networks such as Prenda and KaiPod are combining educational technology with small, in-person learning pods to enable many more families to have access to a personalized, flexible microschool experience. KaiPod has recently teamed up with virtual providers such as Sora Schools and Socratic Experience to offer pods tailored to families choosing a specific curriculum.

“Leveraging technology allows you to stay connected to the curriculum, learn from anywhere, learn from the best experts anywhere,” said Horn. “And then surround the child with a variety of novel supports that are customized to what that child needs, what the family needs, and unleashes all sorts of things.”

Blending new technologies with the personalization and flexibility of microschooling and homeschooling will continue to disrupt the education sector and turn alternative learning models into mainstream options for many more families.

AUTHOR

Kerry McDonald

Kerry McDonald is a Senior Education Fellow at FEE and host of the weekly LiberatED podcast. She is also the author of Unschooled: Raising Curious, Well-Educated Children Outside the Conventional Classroom (Chicago Review Press, 2019), an adjunct scholar at the Cato Institute, and a regular Forbes contributor. Kerry has a B.A. in economics from Bowdoin College and an M.Ed. in education policy from Harvard University. She lives in Cambridge, Massachusetts with her husband and four children. You can sign up for her weekly newsletter on parenting and education here.

​​Listen to the weekly LiberatED Podcast on Apple, Spotify, Google, and Stitcher, or watch it on YouTube, and sign up for Kerry’s weekly LiberatED email newsletter to stay up-to-date on educational news and trends from a free-market perspective.

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

Arizona’s New School Choice Bill Moves Us Closer to Milton Friedman’s Vision

/in , , , , , /by

“Our goal is to have a system in which every family in the U.S. will be able to choose for itself the school to which its children go,” the Nobel Prize-winning economist Milton Friedman stated in 2003. “We are far from that ultimate result. If we had that, a system of free choice, we would also have a system of competition, innovation, which would change the character of education.”

Last week, Arizona lawmakers moved us much closer to that ultimate result. Legislators in that state, which already had some of the most robust school choice policies in the US, passed the country’s first universal education savings account bill, extending education choice to all K-12 students.

The education savings accounts, or Empowerment Scholarship Accounts as they are known in Arizona, had previously been available to certain Arizona students who met specific criteria, including special needs students and children in active-duty military families. This new bill, which the Governor Doug Ducey is expected to sign, extends education choice to all school-age children throughout Arizona.

Every family will now have access to 90 percent of the state-allocated per pupil education dollars, or about $7,000 per student, to use toward approved education-related resources, including private school tuition, tutors, curriculum materials, online learning programs, and more.

“Arizona is now the gold standard for school choice,” Corey DeAngelis, senior fellow at the American Federation for Children, told me this week. “Every other state should follow Arizona’s lead and fund students instead of systems. Education funding is meant for educating children, not for protecting a particular institution. School choice is the only way to truly secure parental rights in education.”

Several states have introduced or expanded school choice policies over the past couple of years, enabling taxpayer funding of education to go directly to students rather than bureaucratic school systems. In this week’s LiberatED podcast episode, I spoke with one education entrepreneur, Michelle McCartney, whose homeschool resource center is an approved vendor for New Hampshire’s Education Freedom Accounts, an education savings account program for income-eligible students that was implemented last year.

While McCartney sees a fully private, free market in education as the ideal circumstance, she recognizes that education choice policies are an important first step toward expanding education options for more families, and reducing government involvement in the education sector.

“If it was up to me we wouldn’t pay any money to the government and school would be entirely privatized,” said McCartney. “That’s how I believe it should be, but it’s not. So I think we can all sit here and have discussions about what would be the ideal circumstance, but I think sometimes we’ve got to roll with what we have, and if we can get any of that money back to the families I think that’s an important first step.”

Indeed, Milton Friedman also saw school choice policies such as vouchers as a first step in education reform, not a final one. Friedman popularized the idea of school choice policies, specifically universal school vouchers, in his 1955 paper, “The Role of Government in Education,” and elaborated on his views over the following decades up until his death in 2006 at the age of 94.

Friedman and his economist wife Rose wrote in their influential book, Free To Choose: “We regard the voucher plan as a partial solution because it affects neither the financing of schooling nor the compulsory attendance laws. We favor going much farther.”

While Arizona’s new legislation now makes it the forerunner in education choice policies across the country, West Virginia is close behind and begins to address compulsory attendance. Lawmakers there recently passed legislation that loosens state compulsory school attendance laws for participants in learning pods and microschools, two emerging, decentralized K-12 learning models that are gaining popularity across the country. West Virginia also passed an education savings account program last year, known as the Hope Scholarship, that extends education choice to nearly all K-12 students.

The education disruption over the past two years has re-energized parents and taxpayers alike. They are demanding more options beyond an assigned district school, embracing innovative learning models, and loosening the government grip on education. As Friedman envisioned, a choice-based system of education weakens the government monopoly on schooling and sparks innovation and competition to ultimately “change the character of education.”

We are seeing that change occur right before our eyes.

Listen to the weekly LiberatED Podcast on Apple, Spotify, Google, and Stitcher, and sign up for Kerry’s weekly LiberatED email newsletter to stay up-to-date on educational news and trends from a free-market perspective.

AUTHOR

Kerry McDonald

Kerry McDonald is a Senior Education Fellow at FEE and host of the weekly LiberatED podcast. She is also the author of Unschooled: Raising Curious, Well-Educated Children Outside the Conventional Classroom (Chicago Review Press, 2019), an adjunct scholar at the Cato Institute, and a regular Forbes contributor. Kerry has a B.A. in economics from Bowdoin College and an M.Ed. in education policy from Harvard University. She lives in Cambridge, Massachusetts with her husband and four children. You can sign up for her weekly newsletter on parenting and education here.

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

Failure Made Disney Great by Lawrence W. Reed

/in , /by

December 15, 2016, will mark the 50th anniversary of Walt Disney’s passing. Half a century later, I vividly recall the intense sadness I felt when I learned, at age 13, that he had died. It was as though I had lost a close member of the family. I doubt that I ever missed a single episode of his television show. I can still hear his avuncular voice in my head as if he had spoken to me just yesterday. I can’t think of a single movie he made that I haven’t seen and enjoyed immensely, multiple times.

What a phenomenal man Walt Disney was! A cartoonist and animator, businessman, filmmaker, theme park pioneer, and cultural icon, he may have manufactured more happiness in the world than any other man or woman of the 20th century. He was an American original and an American patriot, too. He deeply appreciated that liberty in America allowed him to invent, experiment, and ultimately succeed, as evidenced in this remark three years before his death: “To retreat from any of the principles handed down by our forefathers, who shed their blood for the ideals we still embrace, would be a complete victory for those who would destroy liberty and justice for the individual.”

The characters Disney and his colleagues created or popularized boast names that billions of people still know today: Mickey Mouse, Jiminy Cricket, Donald Duck, Goofy, Pinocchio, Snow White and the Seven Dwarfs, the Three Little Pigs, Peter Pan, Bambi, and Cinderella, to name only a few. His films include so many that are unforgettable — it’s no wonder he remains the record-holder (a total of 59) for both Oscar nominations and actual wins. Hundreds of millions of people have been enthralled by the movies that featured those characters, as well as by other Disney flicks like Old Yeller, The Absent-Minded Professor, Mary Poppins, Sleeping Beauty, and One Hundred and One Dalmatians. His company’s representative song, “When You Wish upon a Star,” evokes smiles from all ages in 2016, just as it did when Disney unveiled it way back in 1940.

Some people think that entrepreneurs build, innovate, and take risks just for the money they might make. To the imaginative Walt Disney, money was never the prime motivator. Not even close — though what could be wrong about that if it had been? Money paid the bills, but he hired his brother Roy to worry about it. Walt was driven by the sheer joy of creativity and the fulfillment that comes from bringing happiness to others. “It’s kind of fun to do the impossible,” he once said. These words from his dedication speech at the July 1955 opening of Disneyland in Anaheim, California, encapsulate his amazing spirit:

To all who come to this happy place, Welcome! Disneyland is your land. Here, age relives fond memories of the past … and here youth may savor the challenge and promise of the future. Disneyland is dedicated to the ideals, the dreams, and the hard facts that have created America … with the hope that it will be a source of joy and inspiration to all the world.

No one could do justice to the life of Walt Disney in a short article, so I won’t even attempt to. Allow me to zero in on one particular aspect that underscores why he’s a hero: he knew failure and how to learn and prosper from it. As he put it himself, “All the adversity I’ve had in my life, all my troubles and obstacles, have strengthened me.… You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you.”

In “The Importance of Failure” (Freeman, November 2011), economists Steven Horwitz and Jack Knych explained that permitting failure is just as important as allowing success:

For example, in 1921 Walt Disney started a company called the Laugh-O-Gram Corporation, which went bankrupt two years later. If a friend of Disney or the government hadn’t let him fail and move on, he might never have become the Walt Disney we know today.

More important than this individual learning process is the irreplaceable role failure plays in the social learning process of the competitive market. When we refuse to allow failure to happen, or we cushion its blow, we ultimately harm not only the person who failed but also all of society by denying ourselves a key way to learn how best to allocate resources. Without failure there’s no economic growth or improved human well-being.…

To the imaginative Walt Disney, money was never the prime motivator. 

Failure drives change. While success is the engine that accelerates us toward our goals, it is failure that steers us toward the most valuable goals possible. Once failure is recognized as being just as important as success in the market process, it should be clear that the goal of a society should be to create an environment that not only allows people to succeed freely but to fail freely as well.

Disney heard a lot about failure at the family dinner table before he ever failed himself. His father, Elias, tried twice to be a successful orange grower in Florida but couldn’t make it work. He flopped as a professional fiddle player in Colorado. He didn’t do much better farming in Missouri. Elias tried a lot of things to keep his family fed. That he never quit trying left a deep impression on young Walt.

Before he was 20, Walt Disney had to make several adjustments in his career. He drove an ambulance in France for a time, but when he returned to the United States, he couldn’t find a similar job. He decided to be an actor, then changed his mind in favor of drawing comic strips for newspapers. No luck there, either. Roy found him a job at a bank, but Walt didn’t find the work satisfying. From there, in 1921, he started his first company, the soon-to-go-bankrupt Laugh-O-Gram Corporation. Unable to pay his rent, he even ate dog food until he could get back on his feet.

In 1926, Walt’s prospects suddenly brightened with an animated series centered around a character he created, Oswald the Lucky Rabbit, but his luck ran out two years later when he lost the rights to Oswald to Universal Studios.

Stephen Schochet, author of Hollywood Stories: Short, Entertaining Anecdotes about the Stars and Legends of the Movies, notes some of Disney’s later misfortunes, big and small:

When Walt tried to get MGM studios to distribute Mickey Mouse in 1927 he was told that the idea would never work — a giant mouse on the screen would terrify women.

The Three Little Pigs was rejected by distributors in 1933 because it only had four characters; it was felt at that time that cartoons should have as many figures on the screen as possible. It later became very successful and played at one theater so long that the poster outside featured the pigs with long white beards.

Snow White and the Seven Dwarfs was sneak previewed to college students in 1937 who left halfway during the film causing Disney great despair. It turned out the students had to leave early because of dorm curfew.…

For the premiere of Pinocchio Walt hired 11 midgets, dressed them up like the little puppet and put them on top of Radio City Music Hall in New York with a full day’s supply of food and wine. The idea was they would wave hello to the little children entering into the theater. By the middle of the hot afternoon, there were 11 drunken naked midgets running around the top of the marquee, screaming obscenities at the crowd below. The most embarrassed people were the police who had to climb up ladders and take the little fellows off in pillowcases.

Even after Disney scored international fame for his film making, not all of his films made money. Pinocchio, Fantasia, and Pollyanna, for example, were all box office flops at first. Undaunted, Disney faced each disappointment by planning his next adventure.

“A person should set his goals as early as he can and devote all his energy and talent to getting there,” he said. “With enough effort, he may achieve it. Or he may find something that is even more rewarding. But in the end, no matter what the outcome, he will know he has been alive.”

While making movies, he found time for another challenge. It was literally in his own backyard, where he designed and built a miniature, half-mile-long steam railroad. The locomotive was big enough for him to personally ride on it. The project had its own trestle, overpasses, and even a 90-foot tunnel beneath his wife Lillian’s flowerbed. It inspired the railroad he later built around the perimeter of Disneyland.

Unable to pay his rent, Disney even ate dog food until he could get back on his feet.

Perhaps because he had learned from so many previous failures and disappointments, Disney burned the midnight oil to make his Anaheim theme park dream succeed. It was a financial success from the day it opened. Today, the Walt Disney Company is easily the world’s largest operator of theme parks in terms of guest attendance per year and is a $50 billion firm employing more than 175,000 people.

Walt Disney’s legacy is deeply embedded in our culture and for good reason: he knew how to entertain. He produced lasting and happy memories for people in nearly every nation. And he never, ever quit. His advice to young people is as commendable today as it was when he offered it more than half a century ago, in part because it’s also the way he lived his own life: “Do a good job. You don’t have to worry about the money; it will take care of itself. Just do your best work— then try to trump it.”

For additional information, see:

Lawrence W. ReedLawrence W. Reed

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

AUTHORS NOTE: This is the final essay in my formal, weekly Real Heroes series, which began in April 2015. I wish to thank the many readers who sent me encouraging notes after reading one or more of my articles that made an impact in some way. It’s a theme I’ll likely return to in this Friday spot with some frequency, though I now welcome the time to write about some other things as well. In the coming weeks, FEE and a publisher will be announcing the details of a mass-market paperback, due for release in bookstores in September, which will present approximately 40 of my Real Heroes essays.

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

/in , , /by

“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.

Tech Sector Bears Brunt of Capital Taxes, Random Regulation by Dan Gelernter

/in , , , /by

According to our president’s final State of the Union, we’ve recovered from the economic crisis and now enjoy the strongest, most durable economy in the world. Obama does acknowledge that startups and small businesses may need some help, so he wants to reignite our “sprit of innovation” — which he plans to do by putting Vice President Biden in charge of curing cancer.

But the problem facing startups is not a lack of innovation. We are being killed by the economy, which, for those of us who have to live in it, is not good at all. Young entrepreneurs may have spent last year working hard, innovating and building, only to find their companies are worth less now than when they started.

The market is adjusting downwards. Valuations are sinking. The investors I’ve spoken to feel the Fed’s free-money policy has created a dangerous over-valuation of companies and stocks and, now that the rates are coming back up, the air is being let out. 2015, they say, was a tough year because we knew this was coming. 2016 is going to be even tougher.

There is something else weighing on the minds of entrepreneurs and investors alike — regulatory uncertainty. No startup can deal with compliance by itself — not even software companies with no physical products to sell. Startups have to hire lawyers and compliance experts to help them, and this is money we’re not spending on product development or marketing or making our prices more competitive.

The way Obamacare is being implemented, for example, makes our hair white. The rules seem to change with bureaucratic whim; various parts of the law are suspended by executive order. How will we comply next year, and what will it cost? Nobody knows.

In the meantime, the Democratic candidates for President are proposing large hikes to the capital gains tax, which increases effective risk for investors and depresses valuations. Will these hikes ever take place? We don’t know, and that uncertainty carries an additional price.

We’re already seeing more investors decide to weather the storm on the sidelines, keeping an eye on their current affairs and declining to invest in companies they would have snapped up a year ago. A tech startup with a working product will find it harder to raise money today than it would have two years before with nothing but a concept. Not only are we faced with a weak market now, the trend is even more disturbing.

The problem is easier to diagnose than to repair. As an entrepreneur, I’d like to see less regulation and lower taxes. And not just lower taxes on the companies themselves, but on the people who can afford to invest in them. This may come as a surprise, but it’s the hated “one percent” that invests in startups and helps entrepreneurs’ dreams come true. When taxes cut deeper into the pockets of the wealthy, it most negatively affects us — the entrepreneurs and the people we would have hired — not the wealthy.

Regulation remains erratic, and the policies of the next administration cannot be foreseen. 2016 is going to be a hard year for the startup. Investments will continue to decline until investors see a stable market. And they’re not looking at one right now. Companies will die as a result, and not for lack of innovative ideas.

Dan Gelernter

Dan Gelernter is CEO of the technology startup Dittach.

The Rise of ‘Reality Capitalism’ by Wendy McElroy

/in , , , /by

If pop culture is a leading indicator of social change, one emerging TV genre should be applauded. It is a flood of reality shows that focus on the daily dynamics by which self-made people conduct business: Pawn Stars, Ice Road Truckers, American Pickers, Deadliest Catch, Hardcore Pawn, Yukon Gold, Storage Wars, and others.

I call it “reality capitalism,” and it is the polar opposite of crony capitalism.

They display people taking risks and prospering (or not) through hard work and good judgment. They embody the opposite of cronyism because government privilege is nowhere to be seen.

Some aspects of the programs feel contrived, but what matters is that small businessmen and working people are elevated to a status that used to be reserved for those featured on Lifestyles of the Rich and Famous.

Fans tune in to see whether Mike and Frank (American Pickers) will find a “honey hole” as they travel America. Perhaps a barn in Rhode Island will contain a rare Harley or one of the old metal gasoline signs that sells in a flash in their Iowa shop. Viewers groan in amused exasperation as Rick (Pawn Stars) flaunts arcane facts about the antiques people bring in. The items and negotiation are fascinating, and the businessmen are thoroughly likable because of the honesty, humor, and respect with which they treat sellers.

The shows also explain the simple mechanisms of the free market. Mike and Frank discuss the end-price they will put on items and tell the seller why they need to buy at approximately 50% of that figure. The words “gas money” come up frequently. Rick’s favorite phrase is, “I’m taking all the risk.” Then he comments on overhead and how long an item might take up room in his store. In both programs, the buyer sometimes pays more than the asking price because he knows the true value of a good and does not want to cheat the seller. The fairness is not only a matter of ethics but also good business: it establishes trust.

The reality capitalism genre can be roughly broken into two categories: entrepreneurs who are business owners, and working people who struggle to prosper against the odds.

Yukon Gold features small mining crews who search for gold in the Yukon during its four-month window of opportunity. Machinery breaks, nature strikes, and crew members fight against their own discouragement. Ice Road Truckersfollows truck drivers who confront frozen lakes and treacherous situations as they haul loads across Arctic areas of Alaska and Canada. Both shows focus on why the people assume work in such terrible conditions: money. Most of them are after a better life for their families.

They are entrepreneurs who gamble with their own time, money, and energy to establish businesses through which everyone profits. They are people who overcome obstacles for a chance for their families to prosper. It is heartening to see society’s true heroes receive the acknowledgement they deserve.

Wendy McElroyWendy McElroy

Contributing editor Wendy McElroy (wendy@wendymcelroy.com) is an author, editor of ifeminists.com, and Research Fellow at The Independent Institute (independent.org).

Everyone Is Talking about Bitcoin by Jeffrey A. Tucker

/in , , , /by

I’m getting a flurry of messages: how do I buy Bitcoin? What’s the best article explaining this stuff? How to answer the critics? (Might try here, here, here, and here.)

Markets can be unpredictable. But the way people talk about markets is all too predictable.

When financial assets go up in price, they become the topic of conversation. When they go way up in price, people feel an itch to buy. When they soar to the moon, people jump in the markets — and ride the price all the way back down.

Then while the assets are out of the news, they disappear from the business pages and only the savviest investors buy. Then they ride the wave up.

This is why smart money wins and dumb money loses.

Bitcoin Bubbles and Busts

It’s been this way for seven years with Bitcoin. When the dollar exchange rate is falling, people get bored or even disgusted. When it is rising, people get interested and excited. The challenge of Bitcoin is to see through the waves of hysteria and despair to take a longer view.

In the end, Bitcoin is not really about the dollar exchange rate. It is about its use as a technology. If Bitcoin were only worth a fraction of a penny, the concept would already be proven. It demonstrates that money can be a digital product, created not by government or central banks but rather through the same kind of ingenuity that has already transformed the world since the advent of the digital age.

When the Bitcoin white paper came out in October 2008, only a few were interested. Five years would pass before discussion of the idea even approached the mainstream. Now we see the world’s largest and most heavily capitalized banks, payment processing companies, and venture capitalists working to incorporate Bitcoin’s distributed ledger into their operations.

In between then and now, we’ve seen wild swings of opinion among the chattering classes. When Bitcoin hit $30 in February 2013, people were screaming that it was a Ponzi-like bubble destined to collapse. I’ve yet to see a single mea culpa post from any of these radical skeptics. It’s interesting how the incessantly wrong slink away, making as little noise as possible.

For the last year, the exchange rate hovered around $250, but because this was down from its high, people lost interest. What is considered low and what is considered high are based not on fundamentals but on the direction of change.

What Is the Right BTC Price?

The recent history of cryptocurrency should have taught this lesson: No one knows the right exchange rate for Bitcoin. That is something to be discovered in the course of market trading. There is no final answer. The progress of technology and the shaping of economic value knows no end.

On its seventh birthday, Bitcoin broke from its hiatus and has spiked to over $350, on its way to $400. And so, of course, it is back in the news. Everyone wants to know the source of the last price run up. There is speculation that it is being driven by demand from China, where bad economic news keeps rolling in. There has also been a new wave of funding for Bitcoin enterprises, plus an awesome cover story in the Economist magazine.

Whatever the reason, this much is increasingly clear: Bitcoin is perhaps the most promising innovation of our lifetimes, one that points to a future of commodified, immutable, and universal information exchange. It could not only revolutionize contracting and titling. It could become a global currency that operates outside the nation state and banking structures as we’ve known them for 500 years. It could break the model of money monopolization that has been in operation for thousands of years.

Technology in Fits and Starts

Those of us in the Bitcoin space, aware of the sheer awesomeness of the technology, can grow impatient, waiting for history to catch up to technical reality. We are daily reminded that technology does not descend on the world on a cloud in its perfected form, ready for use by the consuming public. It arrives in fits and starts, is subjected to trials and improvement, and its applications tested against real world conditions. It passes from hand to hand in succession, with unpredictable winners and losers.

Successful technology does not become socially useful in the laboratory. Market experience combined with entrepreneurial risk are the means by which ideas come to make a difference in the world at large.

Bitcoin was not created in the monetary labs of the Federal Reserve or banks or universities. It emerged from a world of cypherpunks posting on private email lists — people not even using their own names.

In that sense, Bitcoin had every disadvantage: No funding, no status, no official endorsements, no big-name boosters. It has faced an ongoing flogging by bigshots. It’s been regulated and suppressed by governments. It’s been hammered constantly by scammers, laughed at by experts, and denounced by moralists for seven straight years.

And yet, even given all of this, it has persisted solely on its own merits. It is the ultimate “antifragile” technology, growing stronger in the face of every challenge.

What will be the main source of Bitcoin’s breakout into the mainstream? Commentary trends suggest it will be international remittances. It is incredible that moving money across national borders is as difficult and expensive as it is. With Bitcoin, you remove almost all time delays and transaction costs. So it is not surprising that this is a huge potential growth area for Bitcoin.

The Economist takes a different direction. It speculates that Bitcoin technology will be mostly useful as a record-keeping device. It is “a machine for creating trust.”

One idea, for example, is to make cheap, tamper-proof public databases — land registries, say, (Honduras and Greece are interested); or registers of the ownership of luxury goods or works of art. Documents can be notarised by embedding information about them into a public blockchain — and you will no longer need a notary to vouch for them.

Financial-services firms are contemplating using blockchains as a record of who owns what instead of having a series of internal ledgers. A trusted private ledger removes the need for reconciling each transaction with a counterparty, it is fast and it minimises errors.

We Need Bitcoin 

No one knows for sure. What we do know is that we desperately need this as a tool to disintermediate the world, liberating us from the governments that have come to stand between individuals and the realization of their dreams.

In 1974, F.A. Hayek dreamed of a global currency that operated outside governments and central banks. If governments aren’t going to reform money, markets would need to step up and do it themselves. Bitcoin is the most successful experiment in this direction we’ve yet seen.

And that is true whether or not your friends and neighbors are talking about it.

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.

Obama Administration Declares War on Franchisors and Subcontractors by Walter Olson

/in , , , /by

In a series of unilateral moves, the Obama administration has been introducing an entirely new regime of labor law without benefit of legislation, upending decades’ worth of precedent so as to herd as many workers into unions as possible.

The newest, yesterday, from the National Labor Relations Board, is also probably the most drastic yet: in a case against waste hauler Browning-Ferris Industries, the Board declared that from now on, franchisors and companies that employ subcontractors and temporary staffing agencies will often be treated as if they were really direct employers of those other firms’ workforces: they will be held liable for alleged labor law violations at the other workplaces, and will be under legal compulsion to bargain with unions deemed to represent their staff.

The new test, one of “industrial realities,” will ask whether the remote company has the power, even the potential power, to significantly influence working conditions or wages at the subcontractor or franchisee; a previous test sought to determine whether the remote company exercised “ ‘direct and immediate impact’ on the worker’s terms and conditions — say, if that second company is involved in hiring and determining pay levels.”

This is a really big deal; as our friend Iain Murray puts it at CEI, it has the potential to “set back the clock 40 years, to an era of corporate giants when few people had the option of being their own bosses while pursuing innovative employment arrangements.”

  • A tech start-up currently contracts out for janitorial, cafeteria, and landscaping services. It will now be at legal risk should its hired contractors be later found to have violated labor law in some way, as by improperly resisting unionization. If it wants to avoid this danger of vicarious liability, it may have to fire the outside firms and directly hire workers of its own.
  • A national fast-food chain currently employs only headquarters staff, with franchisees employing all the staff at local restaurants. Union organizers can now insist that it bargain centrally with local organizers, at risk for alleged infractions by the franchisees. To escape, it can either try to replace its franchise model with company-owned outlets — so that it can directly control compliance — or at least try to exert more control over franchisees, twisting their arms to recognize unions or requiring that an agent of the franchiser be on site at all times to monitor labor law compliance.

Writes management-side labor lawyer Jon Hyman:

If staffing agencies and franchisors are now equal under the National Labor Relations Act with their customers and franchisees, then we will see the end of staffing agencies and franchises as viable business models.

Moreover, do not think for a second that this expansion of joint-employer liability will stop at the NLRB. The Department of Labor recently announced that it is exploring a similar expansion of liability for OSHA violations. And the EEOC is similarly exploring the issue for discrimination liability.

And Beth Milito, senior legal counsel at the National Federation of Independent Business, quoted at The Hill: “It will make it much harder for self-employed subcontractors to get jobs.”

What will happen to the thriving white-van culture of small skilled contractors that now provides upward mobility to so many tradespeople? Trade it in for a company van, start punching someone’s clock, and just forget about building a business of your own.

What do advocates of these changes intend to accomplish by destroying the economics of business relationships under which millions of Americans are presently employed? For many, the aim is to force much more of the economy into the mold of large-payroll, unionized employers, a system for which the 1950s are often (wrongly) idealized.

One wonders whether many of the smart New Economy people who bought into the Obama administration’s promises really knew what they were buying.

This post first appeared at Cato.org.

Walter Olson
Walter Olson

Walter Olson is a senior fellow at the Cato Institute’s Center for Constitutional Studies.

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

/in , , , , /by

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

/in , , , /by

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 Minimum Wages Discourage Entrepreneurship by Donald J. Boudreaux

/in , , , /by

In a letter to the Wall Street Journal, Brian Collins asks, “Do you truly believe that absent any increase in the minimum wage that Wendy’s or any other business will suspend efforts to develop and implement new forms of automation that promise to reduce staff levels?”

The answer is “no.” Contrary to Mr. Collins’s implication, however, this fact does nothing to excuse raising the minimum wage.

Even in a world in which market forces naturally promote automation, raising the minimum wage has two pernicious effects.

First, it causes the rate of automation to be faster than it would be if the minimum wage were not raised. That is, raising the minimum wage results in automation being introduced at a rate that is too fast given the size of the low-skilled labor force.

Second, raising the minimum wage destroys incentives for entrepreneurs and businesses to find ways to profitably employ workers whose limited skills prevent them from producing hourly outputs valued at least as high as the minimum wage.

The first effect throws some low-skilled workers out of jobs that they would otherwise retain, while the second effect ensures that no one has incentives to find ways to profitably employ these and other low-skilled workers.

If it is inhumane to outlaw the profitable employment of those workers whose skills are the least valuable, then the minimum wage is deeply inhumane.

If the government instituted a minimum wage of $100 per hour and, therefore, made unlawful the profitable employment of all those people whose skills are too meager to enable them to produce at least $100 worth of output per hour, there would be a national uproar — and rightly so.

Yet when the government implements such a policy but in a way that outlaws the profitable employment only of people whose skill-sets are among thelowest, relatively few people object and many people — especially “Progressives” — applaud the policy as humane.

How sad. And how especially sad that many economists today, who above all should know better, lend their authority to such an inhumane policy.

A version of this letter first appeared at Café 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.

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

/in , , , , /by

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Dan Gelernter

Dan Gelernter is CEO of the technology startup Dittach.