Tag Archive for: markets

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

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“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.

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

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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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lawrence W. Reed

Lawrence W. Reed

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

Blurring the Lines between Products and Services: What matters is producing value by SANDY IKEDA

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Angst over the alleged shrinking of the so-called industrial sector has been a staple of business journalism and fodder for political bloviating since at least the 1970s.

Is the United States losing manufacturing jobs to other countries? Or are manufacturing jobs coming back to the United States? Is the hamburger flipper pushing out the drill-press operator?

I won’t try to explain why or even whether all this has been happening. I’ll leave that to those better informed on the issue, like my friend, economist Don Boudreaux. Instead, I’d like to focus on the distinction people tend to make between manufacturing jobs and service-sector jobs, because that distinction is not as clear as many believe.

Does manufacturing matter?

One view is that, desirable or not, there’s no point in hoping for a return of manufacturing to the United States:

More than 70 percent of the wealth created in the U.S. today comes from providing services, a 33 percent increase since 1950. The shift from goods to services is likely to continue. In other words, our future prosperity is not going to come from buying more stuff, but from doing more for each other.

So accept harsh reality, strap on our aprons, and keep flipping those burgers. But that attitude simply hides a deeper confusion.

In a recent column, Steve Horwitz made the important point that:

[T]he purchase of a service is no less able to improve our lives, and thereby be a source of economic growth, than are the production and purchase of material goods. In fact, what we really care about when we purchase a material good is not the thing itself, but the stream of services it can provide us.

Looking beyond superficial differences, what matters from our individual perspectives is whether those services provide meaningful improvement in our lives, not whether driving a car is somehow “better” than eating a hamburger. I’d like to pick up on Steve’s theme and take it in a slightly different direction.

Producing versus selling

My great teacher Israel Kirzner has pointed out that all production costs are really selling costs.

No single penny of the outlay — even those usually considered as strictly production, rather than selling, costs — can be perceived as anything but costs incurred in order to sell.

That might sound a little confusing at first, because most of us see producing something as a very different activity from selling something. Production involves combining labor and capital, in often complex ways, over time; sales involves marketing and advertising what has been produced. Right? But look a little deeper.

What is production but the attempt to make inputs — labor, know-how, machines, raw materials, organization — more attractive and more salable to the final consumer? What clothing companies such as Gap actually do is increase consumers’ demand for cloth, thread, sewing machinery, electricity, and skill by putting these inputs together in a more marketable way. Gap might be able to sell a bag of inputs to a person and hope she buys it, but it’s probably had greater success by making the package a little more attractive. That’s what production does; it makes inputs more marketable to buyers.

The false division between production and advertising

Seeing production as essentially a selling activity erases the distinction between production and advertising. If the seller and customer aren’t aware of each other, it doesn’t matter a bit if a seller makes a shirt that a customer is willing and able to buy at a price that would more than cover the shirt’s opportunity cost.

Without that awareness, it’s as if the shirt had not been produced. So more than simply providing information about the shirt’s qualities, advertising serves to bring the shirt’s very existence to a customer’s attention. In that way, advertising completes the selling process that began at the earlier stages.

The false division between manufacturing and service

Seeing the production process as a selling process also erases the distinction between manufacturing and service.

A person who operates a drill press is using her knowledge to maximize the machine’s effectiveness. She is providing a service to the buyer in the next stage of production, no less than the Apple worker at the Genius Bar is servicing the computers that buyers use for their individual purposes. All labor is, in this sense, a service.

Such service, if appropriate, represents value added to the selling process. Labor services can enhance the value of capital, just as capital can enhance the value of labor. When successful, labor and capital complement each other, increasing their respective value productivities, because they make the final product more valuable, more salable, to the final customer. What we conventionally call a “service job” is merely the final stage of delivering a product, whose inputs have been serviced and sold, stage by stage, all the way down the supply chain.

Viewed this way, it’s easy to see that some services along the production process (even in the “manufacturing sector”) add little value, just as there are services (in the traditional “service” sector) that add much more value in the eyes of the final consumer. That’s fine, because people differ in how much they are willing to sacrifice for high-paying jobs, and each worker chooses the job that she thinks comes closest to having the best trade-off between labor and leisure.

Thus, the issue is not service jobs versus manufacturing jobs, but low-value-added services versus high-value-added services. There’s no need to bemoan the loss of “manufacturing jobs” or celebrate their return. No need to flip out over flipping burgers. All jobs are services.

Matching, not flipping, is the problem

So services include not only labor applied at the final stage of production — the final point of sale — but also knowledge and skills that can be and often are highly valuable. Those services include the traditional practices of medicine and legal and financial consulting, as well as newer sectors in computational and Internet technology — the so-called knowledge economy — and a host of others.

Looking at all jobs as services brings into focus what may be of greater concern: whether jobs on the whole are becoming more or less value productive. The problem, if it is a problem, should not be framed in terms of working in manufacturing or in service. The question is whether people who want to work and earn more have the skills that match the requirements for such jobs. If the answer is no, then that may be a problem.

And the solution may then be to reexamine the role and effectiveness of formal education and training. These are big, complex issues. But at least now we’re asking the right questions.

Sandy 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.

Progress and Poverty, Then and Now by JEFFREY A. TUCKER

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Everyone seems to know about Thomas Piketty’s Capital in the Twenty-First Century. It’s all about unequal distribution of wealth and the government measures we need to fix it. But we’ve been here before.

Deja vu. The same focus drove the public debate more than a century ago.

It’s strange how a bestselling book from a century ago could so completely disappear from view. But that’s the case with Henry George’s Progress and Poverty, written in 1879. It became the single most influential book on economics during the highest period of economic growth ever recorded. This was true for decades after its publication.

I’ve seen it in used book stores for years but never bothered to pick it up. I recently had the chance to read George’s book through. The themes of the book were strangely familiar. In fact, in many ways, they are identical: the problem of massive poverty amidst plenty, the corrupt relationship between wealth and political power, the sense that the social order has vast potential that is being locked up by a ruling elite. It’s all here in George’s book.

“The present century has been marked by a prodigious increase in wealth-producing power,” reads the opening salvo. This was America in the Gilded Age, when double-digit growth was not unusual. The country was on a gold standard. New innovations and their disbursement through the population were dramatically changing the culture and challenging people’s thinking on economics. There were railroads, steel, internal combustion, flight, the telephone, electricity, and huge developments in medicine. Life spans increased, income boomed, and infant mortality receded.

It was the birth of the modern world, and George became its leading social and economic thinker. There was probably not an intellectual in the English-speaking world between the book’s appearance and the 1930s who did not read the book. Most everyone praised it, including Albert Einstein, Frank Chodorov, Leon Tolstoy, Philip Wicksteed, F.A. Hayek, John Dewey, and Bertrand Russell, among thousands of others. The praise extended far beyond politics, with free-market radicals and socialists all finding ways to credit his contributions as their primary influence.

The book eventually sold 6 million copies and was translated into 15 languages, becoming the second-best selling book next to the Bible (before Ayn Rand’s Atlas Shrugged displaced it for that title). This is notoriety is especially unusual given that George was never formally educated beyond the age of 14. He was a sometime businessman who grew up in poverty, eventually becoming a writer for newspapers. He had no academic standing at all.

What was the argument? On technical matters, George sought to address why it is that poverty persists despite the massive rise of wealth. How could so many create and possess such vast new wealth, while yet so many remain in a state of grueling poverty?

It was the inequality that struck him, and his casual observation seemed to suggest that the inequality grew even as wealth expanded. He noted that the poor in New York, where wealth was highest, were worse off than they were in California even though the West had far fewer barons of great wealth. How can we account for this? He was also struck by the cycles of boom and bust that caused so much suffering among so many, and speculated on their cause.

“So long as all the increased wealth which modern progress brings goes but to build up great fortunes, to increase luxury, and make sharper the contrast between the House of Have and the House of Want,” he wrote, “progress is not real, and cannot be permanent. The reaction must come. The tower leans from its foundations, and every new story but hastens the final catastrophe.”

His core theory was that the untaxed private ownership of land and resources was locking up wealth in a way that it could not be accessed by everyone but its owners. The value of land rose higher and higher, even though its owners were not themselves producing anything.

This was particularly true of the railroads, he noted. Wherever the tracks were laid, and the banks appeared, we saw large pockets of wealth appear, but it was channeled only to the few who were involved in land speculation.

He said that this was due to the fact that land is an example of a fixed resource. It doesn’t grow in supply. So when it becomes more valuable, the rent to the land flows only to its owner, who unjustly benefits while everyone else suffers.

His solution was a broad and sweeping tax on land, which he proposed as a replacement to all other existing taxes, including excise taxes of all sorts and also all tariffs (he was a radical proponent of free trade between nations). This tax, wrote George, would fund the whole of the government in all its operations and help discourage the monopolization of land in the hands of a few. This would create the conditions for a more widespread sharing of wealth.

What’s crucial here is that George was not in any way a socialist. In fact, he saw government as a tool of the ruling class that should not be empowered.

“The ideas that there is a necessary conflict between capital and labour,” he wrote, and “that machinery is an evil, that competition must be restrained and interest abolished, that wealth may be created by the issue of money, that it is the duty of Government to furnish capital or to furnish work, are rapidly making way among the great body of the people, who keenly feel a hurt, and are sharply conscious of a wrong. Such ideas, which bring great masses of men, the repositories of ultimate political power, under the leadership of charlatans and demagogues, are fraught with danger.”

Though he believed that poverty was traceable to private land, he nowhere proposed the end of private ownership of every sort. Indeed, he was a champion of all forms of private ownership, trade, innovation, and association.

“Laissez faire (in its full true meaning) opens the way to the realization of the noble dreams of socialism,” he wrote.

His one exception was land. He believed that a land tax would perfect the vision of Adam Smith and David Ricardo.

Why was this book so stunningly popular? There was in the world at that time a rising fear of socialist revolution. The socialists were gaining ground in Europe, and among academia generally, and a widespread fear of an all-out worker revolution was common.

George’s passion on the issue of poverty and equality, together with what seemed to be a common-sense solution, offered an alternative to revolutionary upheaval and the imposition of despotism. He seemed to provide a way to save economic freedom from being overthrown, at once protecting the rights of the wealthy while spreading the benefit of that wealth more broadly among the population. This solution had a huge appeal.

There is an additional factor here. Massive portions of this book are devoted to pushing the land tax idea as an explanation for poverty and cycles of business activity. He saw this solution as a way of lessening the overall tax burden on society.

“Nearly all of the manifold taxes by which the people of the United States are now burdened have been imposed rather with a view to private advantage than to the raising of revenue,” he wrote, “and the great obstacle to the simplification of taxation is these private interests, whose representatives cluster in the lobby whenever a reduction of taxation is proposed, to see that the taxes by which they profit are not reduced.”

His technical analysis here was deeply flawed. There is no theoretical case for singling out land as a unique form of property. Yes, it is limited, but so are all resources. The supply of and demand for valuable land is subject to all the usual economic laws. A tax on land is a tax on people, and this reduces overall prosperity.

And, in any case, this policy idea cannot account for the appeal of the book — the tax never happened nor was ever likely to.

To understand its draw, one has to move to the last chapters, which lay out a beautiful vision of a liberal economy, universal prosperity, and the moral urgency of freedom. He believed it belonged to all peoples in all times, and he was convinced that it could be had in the new century. In this sense, he defined the very essence of what became the highest aspirations of the best intellectuals of his age.

For, in the end, he was a lover of freedom and free markets. “We honour Liberty in name and in form. We set up her statues and sound her praises. But we have not fully trusted her.”

And he loathed power:

With the growth of the collective power as compared with the power of the individual, his power to reward and to punish increases, and so increase the inducements to natter and to fear him; until finally, if the process be not disturbed, a nation grovels at the foot of a throne, and a hundred thousand men toil for fifty years to prepare a tomb for one of their own mortal kind.

George’s perspective makes for a striking contrast to the views of other contemporaries, who expressed alarm at the radical demographic changes of the last quarter of the 19th century. Population exploded, infant mortality collapsed, and the middle class dawned and began to earn new levels of income.

These were the two warring factions at the time: those who aspired to global prosperity and those who wanted to use government to stop the progress of peoples and restore ruling class control of a static society. Intellectuals like T.S. Elliot and D.H. Lawrence, along with the Ivy League faculties of colleges and universities on the East Coast, were pushing for eugenic policies to curb the rise of a new middle class. They feared, even hated, the advance of commercial society.

Henry George, despite his confused economics and his advocacy of the land tax, was an eloquent and passionate advocate of the free society pushed toward progress through a laissez-faire economy. He rallied around the principle of association as the basis for the existence of society as we know it, and the lack of association or its forbidding is the condition that leads to its unraveling. He saw people as an asset that made society more prosperous, and thereby completely rejected the Malthusian idea that more people leads to more poverty.

His massive influence is sometimes credited with many of the reforms of the progressive era, but he is more correctly seen as a critical influence in the development of the 20th century libertarian tradition. In short, his concern for equality led him to seek conditions to raise everyone up, not merely build the state to tear down wealth.

“Liberty calls to us again,” he wrote. “We must follow her further; we must trust her fully. Either we must wholly accept her or she will not stay. It is not enough that men should vote; it is not enough that they should be theoretically equal before the law. They must have liberty to avail themselves of the opportunities and means of life.”

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.

Do Corporations Run the Market? Do companies control consumers?

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One this day in 1985, the Coca-Cola Company introduced “New Coke” to replace its flagship soft drink Coca-Cola. Their executives were so sure that they knew what consumers wanted, they pulled the old formula from the shelves entirely.

The new product — or, rather, the new product combined with the loss of the old familiar one — generated so much negative response that the company put “Classic Coke” back on the market less than 3 months later.

As Vox notes, however, the company hadn’t been stupid or reckless. Coke had been losing market share to the sweeter-tasting Pepsi for years, and they needed to shake things up.

They conducted countless hours of consumer research, performing over 200,000 blind taste tests between Classic Coke, New Coke, and Pepsi — and New Coke swept the field.

Moreover, in their judgment, Coke had to be replaced with a better product — the company couldn’t simply add an additional flavor:

It didn’t have a choice — Coke needed to retain market share for a single drink.

Fountain sales made up a formidable two-thirds of Coke’s market. . . . Many of the contracts depended on Coke being the top-ranked cola. And if market share for Coca-Cola fell, the company might lose even more ground to Pepsi. If Coke had planned to run New Coke and original Coke side by side, it would have risked splitting its market share and alienating valuable fountain clients.

The smartest guys in the room all knew what the market needed. They pulled the trigger on New Coke, lost millions of dollars, and became a punchline for decades.

A line from Ludwig von Mises’s Human Action is informative: “The entrepreneur in his entrepreneurial capacity is always subject to the full supremacy of the consumers.”

In Bureaucracy, Mises elaborated:

The capitalists … are instrumental in the conduct of economic affairs. They are at the helm and steer the ship. But they are not free to shape its course. They are not supreme, they are steersmen only, bound to obey unconditionally the captain’s orders. The captain is the consumer. . . .

The real bosses are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality.

It was a lesson that Coke learned the hard way. In free markets, even the biggest, most entrenched corporations must follow the orders of the consumers. Icebergs await those who flout their preferences.

Anything Peaceful

Anything Peaceful is FEE’s new online ideas marketplace, hosting original and aggregate content from across the Web.

Are Markets Myopic? The illusion of government looking out for the long term by ROBERT P. MURPHY

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We often hear that individual investors are myopic. They make decisions based on a relatively short time horizon, so forget about the long run. That’s why we need government officials to step in with regulations, as well as corrective taxes and subsidies, to guide the market toward long-term social goals. Or so the story goes.

Though this view of markets versus government is common, it has things exactly backwards: markets do contain sophisticated mechanisms for rewarding long-term planning, and democratic political institutions encourage extremely short-term thinking.

The fundamental institution for promoting proper planning is private property. The owner of a piece of property has an incentive to take actions that enhance its market value. For example, consider the owner of a giant tin deposit who must decide how rapidly to extract the resource.

Those who are naïve about the operations of a market economy might suppose that the greedy capitalist owner would “strip mine” the deposit as quickly as possible, channeling all of the accessible tin into projects serving the current generation while ignoring the needs of future generations. A moment’s reflection shows this is nonsense.

The greedy capitalist owner is at least vaguely familiar with the notion that tin deposits — unlike apples and wheat — do not naturally replenish themselves year after year. An extra pound of tin extracted and sold this year means exactly one fewer pound of tin that this deposit can yield in some future year. Once we realize that the greedy capitalist doesn’t want to maximize revenue but instead wants to maximize market value, it is obvious that he must take the future into account when making current decisions.

Specifically, to maximize the market value of his asset, the owner should extract additional pounds of tin in the present (putting the proceeds in a financial investment earning the market rate of interest), until the point at which he would earn a greater return by leaving the next pound of tin in the deposit, to be sold next year at the expected market price. For example, if tin is selling today at $8 per pound, and the interest rate on financial assets is 10 percent, then the owner would halt his operations if he ever came to confidently expect the price of tin next year to be $8.80 or higher. (I’m assuming the marginal costs of extraction and selling are the same, year to year, just to keep things simple. See this article for a more comprehensive explanation using oil.) Once he reaches this point, the best “investment” of his additional units of tin would be to leave them in the mine, “ripening” for another year.

Thus we see that a greedy capitalist would implicitly (and unwittingly) take into account the desires of consumers next year when making current production decisions. He would be guided not by altruistic concern, but instead by personal enrichment. We see the familiar pattern of market prices guiding even selfish individuals into promoting the general welfare. If for some reason tin were expected to be scarcer in the future, then its expected spot price in the future would be higher. This would lead owners to hold tin off the market in the present, thus driving up its price even today, in anticipation of the expected future price. Modern financial and commodities markets — with futures and forward contracts, as well as more exotic derivatives — refine things even more, drawing on the dispersed knowledge and different risk appetites of millions of people.

The critics of capitalism would probably complain again at this point, bemoaning the fact that the greedy owner was now “undersupplying tin” and gouging today’s consumers with artificially higher prices. But if so, the critics need to make up their minds: do we want the tin going to the present or to the future? There’s a finite amount of it to go around — that’s the whole (alleged) problem.

Notice that even if a particular owner of a tin deposit is diagnosed with terminal cancer, he still has an incentive to behave in this “efficient” manner. The reason is that he can sell the tin deposit outright. The market value of the entire deposit will reflect the (present discounted) future flow of net income derived from owning the deposit and operating it in the optimal manner indefinitely. If the owner ever thinks, Well, if I had 10 years left, I would run the operation in such-and-such a way, then that decision won’t change just because he only has one year left. Instead, he can sell the operation to the highest bidder, including people who do have 10 or more years left of expected life.

Thus, we see that contrary to the critics, a pure market economy contains sophisticated mechanisms to guide owners into acting as farsighted stewards of depletable natural resources. In complete contrast, political officials who control natural resources face no such incentives. Because they can’t personally pocket the revenues, or bequeath the asset to their heirs, political officials have the incentive to maximize thecurrent income from the natural resources under their temporary control, to the extent that they are guided by pecuniary motives.

Even here, it’s usually not the case that the government sells access to a resource in order to maximize current receipts. Rather, what often happens is that the government officials will give sweetheart deals to private interests (such as a logging company operating in a state-owned forest), allowing these officials to develop a business relationship that will benefit them after leaving government.

Private owners in a free-market economy have the incentive to maximize the long-term value of their property, which implicitly leads them to consider the desires of future generations. Democratically elected government officials, on the other hand, act as temporary custodians who will not personally benefit from maintaining the market value of the assets they control.

Rental car companies would be foolish to suppose that their customers will put the more expensive high-octane gas into their vehicles, even though the customers might do so if they personally owned the rental car. Yet, for some reason, millions of voters think that politicians with two-year terms will be more farsighted when it comes to economic resources than private shareholders will be.

ABOUT ROBERT P. MURPHY

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal. He is also the Senior Economist with the Institute for Energy Research and a Research Fellow at the Independent Institute. You can find him at http://consultingbyrpm.com/.

For the Love of Money?

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Money at the margin, not everything for money by Gary M. Galles:

It’s not unusual to hear market systems criticized for relying too much on money, as if this comes at the expense of the altruistic relationships that would otherwise prevail. Ever heard the phrase “only in it for the money”? It’s as if self-interest has a stink that can corrupt transactions that generate benefits for others, turning them into offenses. So this line of thinking suggests reliance on market systems based in self-ownership would be tantamount to creating a world where people only do things for money, and lose the ability to relate to one another on any other terms.

People Don’t Do Everything for Money

One need not go far to see the falsity of the claim that everything is done for money in market systems. My situation is but one example: I have a Ph.D. in economics from a top graduate program. It is true that, as a result, I have an above-average income. But I did not do it all for the money. One of my major fields was finance, but if all I cared about was money—as my wife reminds me when budgets are particularly tight—I would have gone into finance rather than academia and made far more. But I like university students. I think what I teach is important, and I value the ability to pass on whatever wisdom I have to offer. I like the freedom and time to pursue avenues of research I find interesting. I enjoy the ability to tell and write the truth as I see it (particularly since I see things differently from most) and I prefer a “steady job” to one with far more variability.

Every one of those things I value has cost me money. Yet I chose to be a professor (and would do it again). While it’s true that the need to support my family means that I must acquire sufficient resources, many things beyond just money go into choosing what I do for a living. And the same is true for everyone.

Ask any acquaintances of yours who they know that only does things for money. What would they say? They would certainly deny it about themselves. While they might apply this characterization to people they don’t know, beyond Dickens’s Ebenezer Scrooge and his comic book namesake, Scrooge McDuck, they would be unable to provide a single convincing example. If market critics performed that same experiment, they would recognize that they are condemning a mirage, not market arrangements.

Confusing Ends and Means

Beyond the fact that all of us forego some money we could earn for other things we value, the fact that every one of us gives up money we have earned for a vast multitude of goods, services, and causes also reveals that individuals don’t just do things for the money. Each of us willingly gives up money up to further many different purposes we care about. Money is not the ultimate end sought, but a means to a vast variety of possible ends. Mistakenly treating money as the end for which “people do everything” is fundamentally flawed—both for critics of the market and for the participants in it.

To do things for money is nothing more than to advance what we care about. In markets, we do for others as an indirect way of doing for ourselves. This logic even applies to Scrooge. His nephew Fred’s assertion that he doesn’t do any good with his wealth is false; he lends to willing borrowers at terms they find worth meeting, expanding the capital stock and the options of others.

That an end of our efforts is to benefit ourselves, in and of itself, merits neither calumny nor congratulations. Money’s role is that of an amoral servant that can help us advance whatever ends we ultimately pursue, while private property rights restrict that pursuit to purely voluntary arrangements. Moral criticism cannot attach to the universal desire to be able to better pursue our ends or to the requirement that we refrain from violating others’ rights, only to the ends we pursue.

To do things for money in order to achieve world domination could justify moral condemnation. But the problem is that your intended end will harm others, not the fact that you did some things for money, benefitting those you dealt with in that way, to do so. Using money to build a leprosarium, as Mother Teresa did with her Nobel Prize award, does not justify moral condemnation. Similarly, using money to support your family, to live up to agreements you made with others, and to try not to burden others is being responsible, not reprehensible. Further, there is nothing about voluntary arrangements that worsens the ends individuals choose. But by definition, they place limits on ends that require harming others to achieve them.

It is true that money represents purchasing power that can be directed to ends others object to. Money is nothing more than a particularly powerful tool, and all tools can be used to cause harm. Just as we shouldn’t have to forego the benefits of hammers because somebody could cause harm with one, there’s no reason to think society would be better off without money or the market arrangements it makes possible just because some people can use those things for harmful ends. And if the ends aren’t actually causing harm, then the objections over them come down to nothing more than disagreements about inherently subjective valuations. Enabling a small class of people to decide which of these can be pursued and which can’t makes everyone worse off.

Those who criticize people for doing everything for money also do a great deal for money themselves. How many campaigns have religious groups and non–profit organizations run to get more money? How much of government action is focused on getting more money? Why do the individuals involved not apply the same criticism to themselves? Because they say they will “do good” with it. But every individual doing things for money also intends to do good, as he or she sees it, with that money. And if we accept that people are owners of themselves, there is no obvious reason why another’s claims about what is “good” should trump any “good” that you hold dear, or provide for another in service through exchange.

Criticizing a Straw Man

Given that the charge that “people do everything for money” in market systems is both factually wrong and logically lame, why do some keep repeating it? It creates a straw man easier to argue against than reality, by misrepresenting alternatives at both the individual and societal level.

At the individual level, this assertion arises when people disagree about how to spend “public” resources (when we respect private property, this dispute disappears, because the owner has the right to do as he or she chooses with it, but cannot force others to go along with or allow it; “public” resources are obtained by force). The people who wish to spend other people’s confiscated resources in ways the original owners disagree with claim a laundry list of caring benefits their choice would provide, but foreclose similar consideration of the harms that would be caused to those they claim care only about money. That, in turn, is used to imply that the purportedly selfish person’s claims are unworthy of serious attention. (Something similar happens when politicians count “multiplier effects” where government money is spent, but ignore the symmetrical negative “multiplier effects” radiating from where the resources are taken.)

This general line draws support from a misquotation of the Bible. While more than one recent translation of 1 Tim 6:10 renders it “the love of money is a root of all sorts of evils,” the far less accurate King James Version rendered it, “the love of money is the root of all evil.” When one simply omits or forgets the first three words, it becomes something very different—“money is the root of all evil.” Portray those who disagree with your “caring” ends as simply loving money more than other people, and they lose every argument by default. Naturally, it’s a seductive strategy.

At the societal level, criticizing market systems as tainted by the love of money implies that an alternate system would escape that taint and therefore be morally preferable. By focusing attention only on an imaginary failing of market systems that would be avoided, it allows the implication of superiority to be made without having to demonstrate it. This is a version of the Nirvana fallacy.

By blaming monetary relationships for people’s failings, “reformers” imply that taking away markets’ monetary nexus will somehow make people better. But no system makes people angels; all systems must confront human flaws and failings. That means a far different question must be addressed: How well will a given system do with real, imperfect, mostly self-interested people? And it shouldn’t be necessary, but most political rhetoric makes a second question nearly as important: Does the given system assume that people are not imperfect and self-interested when they have power?

Given that the utopian alternatives offered always involve some sort of socialism or other form of tyranny, an affirmative case for them cannot be made. Only by holding the imaginary “sins” of market systems to impossible standards, while holding alternatives to no real standards except the imagination of self-proclaimed reformers, can that fact be dodged. But there’s nothing in history or theory that demonstrates that overwriting markets with expanded coercion makes people more likely to do things for others. As Anatole France noted, “Those who have given themselves the most concern about the happiness of peoples have made their neighbors very miserable.” And as economist Paul Heyne wrote, “Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced . . . something very close to hell on earth.”

Money at the Margin

Money is not everything. But changes in the amounts of money to be earned or foregone as a result of decisions change our incentives at the many margins of choice we face, and so change our behavior. Such changes—money at the margin—are the primary means of adjusting our behavior in the direction of social coordination in a market system.

Changes in monetary incentives are how we adapt to changing circumstances, because whatever their ultimate ends, everyone cares about commanding more resources for those purposes they care about. It is how we rebalance arrangements when people’s plans get out of synch, which is inevitable in our complex, dynamic world. In such cases, changing money prices allow each individual to provide added incentives to all who might offer him assistance in achieving his ends, even if he doesn’t know them, doesn’t know how they would do so, and doesn’t think about their well–being (in fact, it applies even if he dislikes those he deals with, as long as the benefits of the arrangements exceed his perceived personal cost of doing so).

For instance, consider a retail gas station faced with lengthy lines of cars. That reflects a failure of social cooperation between the buyers and the seller. Those in line are revealing by their actions that they are willing to bear extra costs beyond the current price to get gas, but their costs of waiting do not provide benefits to the gas station owner. So the owner will convert those costs of waiting in line, which are going to waste, into higher prices (unless prevented by government price ceilings or antigouging directives) that benefit him. That use of money at the margin benefits both buyers and sellers and results in increased amounts of gasoline supplied to buyers.

Further, people can change their behavior in response to price changes in far more ways than “outsiders,” unfamiliar with all the local circumstances, realize. This makes prices, in turn, far more powerful than anyone recognizes.

Consider water prices. If water prices rose, your first thought might well be that you had no choice but to pay them. You might very well not know how many different responses people have already had to spikes (ranging from putting different plants in front yards to building sophisticated desalinization plants). Similarly, when airline fuel prices rose sharply, few recognized in advance the number of changes that airlines could make in response: using more fuel-efficient planes, changing route structures, reducing carry-on allowances, lightening seats, removing paint, and more.

If people recognized how powerful altered market prices are in inducing appropriate changes in behavior, demonstrated by a vast range of examples, they would recognize that the cost of abandoning money at the margin, which enables these responses by offering appropriate incentives to everyone who could be of assistance in addressing the problem faced, would enormously exceed any benefit.

Massive Improvements in Social Cooperation

If we could just presume that individuals know everyone and all the things they care about and the entirety of their circumstances, we could imagine a society more focused on doing things directly for others. But in any extensive society, there is no way people could acquire that much information about the large number of people involved. Instead, this would extend the impossible information problem that Hayek’s “The Use of Knowledge in Society” laid out in regard to central planners. You can care all you want, but that won’t give you the information you need. Beyond that insuperable problem, we would also have to assume that people cared far more about strangers than human history has evidenced.

Those information and other-interestedness requirements would necessarily dictate a very small society. But the costs of those limitations, if people recognized them, would be greater than virtually anyone would be willing to bear.

Without a broad society, the gains from cross-pollination of ideas and different ways of doing things would be hamstrung. The gains from comparative advantage (areas and groups focusing on what they do best, and trading with others doing the same thing) would similarly be sharply curtailed. A very small society would eliminate the incentive for large-scale specialization (requiring more extensive markets) and division of labor that makes our standard of living possible. Virtually every product that involves a large number of separate arrangements—such as producing cars or the gasoline to power them—would disappear, because the arrangements would be overwhelmed by the costs of making them without money as the balance-tipper. As Paul Heyne once put it,

The impersonal transactions that constitute the market system . . . have, over the course of a few centuries, enormously expanded our ability to provide [for] one another . . . while at the same time vastly extending our freedom both by offering us a multitude of options and by freeing us from arbitrary restrictions on our choice of life goals and on the means to further those goals. To reject impersonal transactions as unethical amounts to rejecting the foundation of modern life.

Conclusion

A pastiche of false premises leads many to reject out of hand what Hayek recognized as the “marvel” of market systems, which, if they had arisen from deliberate human design, “would have been acclaimed as one of the greatest triumphs of the human mind.” This is great for those who seek power over others—they have an endless supply of bogeymen to promise to fight.

But it’s a disaster for social coordination. The record of disasters inflicted on society demonstrates what follows when voluntary arrangements are replaced by someone else’s purportedly superior vision.

But it’s often forgotten. We must continue to make the case.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University. His recent books include Faulty Premises, Faulty Policies (2014) and Apostle of Peace (2013).

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Happy Capital Day? Why not? by Lawrence W. Reed

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Any good economist will tell you that as complementary factors of production, labor and capital are not only indispensable but hugely dependent upon each other as well.

Capital without labor means machines with no operators, or financial resources without the manpower to invest in. Labor without capital looks like Haiti or North Korea: plenty of people working but doing it with sticks instead of bulldozers, or starting a small enterprise with pocket change instead of a bank loan.

Capital can refer to either the tools of production or the funds that finance them. There may be no place in the world where there’s a shortage of labor but every inch of the planet is short of capital. There is no worker who couldn’t become more productive and better himself and society in the process if he had a more powerful labor-saving machine or a little more venture funding behind him. It ought to be abundantly clear that the vast improvement in standards of living over the past century is not explained by physical labor (we actually do less of that), but rather to the application of capital.

Harmony of Interest

This is not class warfare. I’m not “taking sides” between labor and capital. I don’t see them as natural antagonists in spite of some people’s attempts to make them so. Don’t think of capital as something possessed and deployed only by bankers, the college-educated, the rich, or the elite. We workers of all income levels are “capital-ists” too—every time we save and invest, buy a share of stock, fix a machine, or start a business.

And yet, we have a “Labor Day” in America but not a “Capital Day.”

Perhaps subconsciously, Americans do understand to some extent that those who invest and deploy capital are important. After all, most people would surely have an easier time naming the “top ten capitalists” in our history than the “top ten workers.” We take pride in the kids in our neighborhoods when they put up a sidewalk lemonade stand. President Obama continues to be roundly excoriated for his demeaning remark, “You didn’t build that; somebody else made that happen.”

Bad Eggs

That’s not to say there aren’t bad eggs in the capitalist basket. Some use political connections to get special advantages from government. Others cut corners, cheat some customers or pollute a stream. But those are the exception, not the rule, in a society that values character. Workers are not all saints either—who among us doesn’t know of one who stole from his employer, called in sick when he wasn’t, or abused the disability or unemployment compensation rules? Those exceptions shouldn’t diminish the importance of work or the nobility of most workers.

Like most Americans, I’ve traditionally celebrated labor on Labor Day weekend—not organized labor or compulsory labor unions, mind you, but the noble act of physical labor to produce the things we want and need. Nothing at all wrong about that!

But this year on Labor Day weekend, I’ll also be thinking about the remarkable achievements of inventors of labor-saving devices, the risk-taking venture capitalists who put their own money (not your tax money) on the line and the fact that nobody in America has to dig a ditch with a spoon or cut his lawn with a knife. Indeed, what could possibly be wrong about having a “Capital Day” in odd numbered years and a “Labor Day” in the even-numbered ones?

Labor Day and Capital Day. I know of no good reason why we should have just one and not the other.

EDITORS NOTE: This article first ran on September 3, 2012.

larry reed new thumbABOUT LAWRENCE W. REED

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s. Prior to becoming FEE’s president, he served for 20 years as president of the Mackinac Center for Public Policy in Midland, Michigan. He also taught economics full-time from 1977 to 1984 at Northwood University in Michigan and chaired its department of economics from 1982 to 1984.

For the Love of Money? by Gary M. Galles

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Money at the margin, not everything for money.

It’s not unusual to hear market systems criticized for relying too much on money, as if this comes at the expense of the altruistic relationships that would otherwise prevail. Ever heard the phrase “only in it for the money”? It’s as if self-interest has a stink that can corrupt transactions that generate benefits for others, turning them into offenses. So this line of thinking suggests reliance on market systems based in self-ownership would be tantamount to creating a world where people only do things for money, and lose the ability to relate to one another on any other terms.

People Don’t Do Everything for Money

One need not go far to see the falsity of the claim that everything is done for money in market systems. My situation is but one example: I have a Ph.D. in economics from a top graduate program. It is true that, as a result, I have an above-average income. But I did not do it all for the money. One of my major fields was finance, but if all I cared about was money—as my wife reminds me when budgets are particularly tight—I would have gone into finance rather than academia and made far more. But I like university students. I think what I teach is important, and I value the ability to pass on whatever wisdom I have to offer. I like the freedom and time to pursue avenues of research I find interesting. I enjoy the ability to tell and write the truth as I see it (particularly since I see things differently from most) and I prefer a “steady job” to one with far more variability.

Every one of those things I value has cost me money. Yet I chose to be a professor (and would do it again). While it’s true that the need to support my family means that I must acquire sufficient resources, many things beyond just money go into choosing what I do for a living. And the same is true for everyone.

Ask any acquaintances of yours who they know that only does things for money. What would they say? They would certainly deny it about themselves. While they might apply this characterization to people they don’t know, beyond Dickens’s Ebenezer Scrooge and his comic book namesake, Scrooge McDuck, they would be unable to provide a single convincing example. If market critics performed that same experiment, they would recognize that they are condemning a mirage, not market arrangements.

Confusing Ends and Means

Beyond the fact that all of us forego some money we could earn for other things we value, the fact that every one of us gives up money we have earned for a vast multitude of goods, services, and causes also reveals that individuals don’t just do things for the money. Each of us willingly gives up money up to further many different purposes we care about. Money is not the ultimate end sought, but a means to a vast variety of possible ends. Mistakenly treating money as the end for which “people do everything” is fundamentally flawed—both for critics of the market and for the participants in it.

To do things for money is nothing more than to advance what we care about. In markets, we do for others as an indirect way of doing for ourselves. This logic even applies to Scrooge. His nephew Fred’s assertion that he doesn’t do any good with his wealth is false; he lends to willing borrowers at terms they find worth meeting, expanding the capital stock and the options of others.

That an end of our efforts is to benefit ourselves, in and of itself, merits neither calumny nor congratulations. Money’s role is that of an amoral servant that can help us advance whatever ends we ultimately pursue, while private property rights restrict that pursuit to purely voluntary arrangements. Moral criticism cannot attach to the universal desire to be able to better pursue our ends or to the requirement that we refrain from violating others’ rights, only to the ends we pursue.

To do things for money in order to achieve world domination could justify moral condemnation. But the problem is that your intended end will harm others, not the fact that you did some things for money, benefitting those you dealt with in that way, to do so. Using money to build a leprosarium, as Mother Teresa did with her Nobel Prize award, does not justify moral condemnation. Similarly, using money to support your family, to live up to agreements you made with others, and to try not to burden others is being responsible, not reprehensible. Further, there is nothing about voluntary arrangements that worsens the ends individuals choose. But by definition, they place limits on ends that require harming others to achieve them.

It is true that money represents purchasing power that can be directed to ends others object to. Money is nothing more than a particularly powerful tool, and all tools can be used to cause harm. Just as we shouldn’t have to forego the benefits of hammers because somebody could cause harm with one, there’s no reason to think society would be better off without money or the market arrangements it makes possible just because some people can use those things for harmful ends. And if the ends aren’t actually causing harm, then the objections over them come down to nothing more than disagreements about inherently subjective valuations. Enabling a small class of people to decide which of these can be pursued and which can’t makes everyone worse off.

Those who criticize people for doing everything for money also do a great deal for money themselves. How many campaigns have religious groups and non–profit organizations run to get more money? How much of government action is focused on getting more money? Why do the individuals involved not apply the same criticism to themselves? Because they say they will “do good” with it. But every individual doing things for money also intends to do good, as he or she sees it, with that money. And if we accept that people are owners of themselves, there is no obvious reason why another’s claims about what is “good” should trump any “good” that you hold dear, or provide for another in service through exchange.

Criticizing a Straw Man

Given that the charge that “people do everything for money” in market systems is both factually wrong and logically lame, why do some keep repeating it? It creates a straw man easier to argue against than reality, by misrepresenting alternatives at both the individual and societal level.

At the individual level, this assertion arises when people disagree about how to spend “public” resources (when we respect private property, this dispute disappears, because the owner has the right to do as he or she chooses with it, but cannot force others to go along with or allow it; “public” resources are obtained by force). The people who wish to spend other people’s confiscated resources in ways the original owners disagree with claim a laundry list of caring benefits their choice would provide, but foreclose similar consideration of the harms that would be caused to those they claim care only about money. That, in turn, is used to imply that the purportedly selfish person’s claims are unworthy of serious attention. (Something similar happens when politicians count “multiplier effects” where government money is spent, but ignore the symmetrical negative “multiplier effects” radiating from where the resources are taken.)

This general line draws support from a misquotation of the Bible. While more than one recent translation of 1 Tim 6:10 renders it “the love of money is a root of all sorts of evils,” the far less accurate King James Version rendered it, “the love of money is the root of all evil.” When one simply omits or forgets the first three words, it becomes something very different—“money is the root of all evil.” Portray those who disagree with your “caring” ends as simply loving money more than other people, and they lose every argument by default. Naturally, it’s a seductive strategy.

At the societal level, criticizing market systems as tainted by the love of money implies that an alternate system would escape that taint and therefore be morally preferable. By focusing attention only on an imaginary failing of market systems that would be avoided, it allows the implication of superiority to be made without having to demonstrate it. This is a version of the Nirvana fallacy.

By blaming monetary relationships for people’s failings, “reformers” imply that taking away markets’ monetary nexus will somehow make people better. But no system makes people angels; all systems must confront human flaws and failings. That means a far different question must be addressed: How well will a given system do with real, imperfect, mostly self-interested people? And it shouldn’t be necessary, but most political rhetoric makes a second question nearly as important: Does the given system assume that people are not imperfect and self-interested when they have power?

Given that the utopian alternatives offered always involve some sort of socialism or other form of tyranny, an affirmative case for them cannot be made. Only by holding the imaginary “sins” of market systems to impossible standards, while holding alternatives to no real standards except the imagination of self-proclaimed reformers, can that fact be dodged. But there’s nothing in history or theory that demonstrates that overwriting markets with expanded coercion makes people more likely to do things for others. As Anatole France noted, “Those who have given themselves the most concern about the happiness of peoples have made their neighbors very miserable.” And as economist Paul Heyne wrote, “Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced . . . something very close to hell on earth.”

Money at the Margin

Money is not everything. But changes in the amounts of money to be earned or foregone as a result of decisions change our incentives at the many margins of choice we face, and so change our behavior. Such changes—money at the margin—are the primary means of adjusting our behavior in the direction of social coordination in a market system.

Changes in monetary incentives are how we adapt to changing circumstances, because whatever their ultimate ends, everyone cares about commanding more resources for those purposes they care about. It is how we rebalance arrangements when people’s plans get out of synch, which is inevitable in our complex, dynamic world. In such cases, changing money prices allow each individual to provide added incentives to all who might offer him assistance in achieving his ends, even if he doesn’t know them, doesn’t know how they would do so, and doesn’t think about their well–being (in fact, it applies even if he dislikes those he deals with, as long as the benefits of the arrangements exceed his perceived personal cost of doing so).

For instance, consider a retail gas station faced with lengthy lines of cars. That reflects a failure of social cooperation between the buyers and the seller. Those in line are revealing by their actions that they are willing to bear extra costs beyond the current price to get gas, but their costs of waiting do not provide benefits to the gas station owner. So the owner will convert those costs of waiting in line, which are going to waste, into higher prices (unless prevented by government price ceilings or antigouging directives) that benefit him. That use of money at the margin benefits both buyers and sellers and results in increased amounts of gasoline supplied to buyers.

Further, people can change their behavior in response to price changes in far more ways than “outsiders,” unfamiliar with all the local circumstances, realize. This makes prices, in turn, far more powerful than anyone recognizes.

Consider water prices. If water prices rose, your first thought might well be that you had no choice but to pay them. You might very well not know how many different responses people have already had to spikes (ranging from putting different plants in front yards to building sophisticated desalinization plants). Similarly, when airline fuel prices rose sharply, few recognized in advance the number of changes that airlines could make in response: using more fuel-efficient planes, changing route structures, reducing carry-on allowances, lightening seats, removing paint, and more.

If people recognized how powerful altered market prices are in inducing appropriate changes in behavior, demonstrated by a vast range of examples, they would recognize that the cost of abandoning money at the margin, which enables these responses by offering appropriate incentives to everyone who could be of assistance in addressing the problem faced, would enormously exceed any benefit.

Massive Improvements in Social Cooperation

If we could just presume that individuals know everyone and all the things they care about and the entirety of their circumstances, we could imagine a society more focused on doing things directly for others. But in any extensive society, there is no way people could acquire that much information about the large number of people involved. Instead, this would extend the impossible information problem that Hayek’s “The Use of Knowledge in Society” laid out in regard to central planners. You can care all you want, but that won’t give you the information you need. Beyond that insuperable problem, we would also have to assume that people cared far more about strangers than human history has evidenced.

Those information and other-interestedness requirements would necessarily dictate a very small society. But the costs of those limitations, if people recognized them, would be greater than virtually anyone would be willing to bear.

Without a broad society, the gains from cross-pollination of ideas and different ways of doing things would be hamstrung. The gains from comparative advantage (areas and groups focusing on what they do best, and trading with others doing the same thing) would similarly be sharply curtailed. A very small society would eliminate the incentive for large-scale specialization (requiring more extensive markets) and division of labor that makes our standard of living possible. Virtually every product that involves a large number of separate arrangements—such as producing cars or the gasoline to power them—would disappear, because the arrangements would be overwhelmed by the costs of making them without money as the balance-tipper. As Paul Heyne once put it,

The impersonal transactions that constitute the market system . . . have, over the course of a few centuries, enormously expanded our ability to provide [for] one another . . . while at the same time vastly extending our freedom both by offering us a multitude of options and by freeing us from arbitrary restrictions on our choice of life goals and on the means to further those goals. To reject impersonal transactions as unethical amounts to rejecting the foundation of modern life.

Conclusion

A pastiche of false premises leads many to reject out of hand what Hayek recognized as the “marvel” of market systems, which, if they had arisen from deliberate human design, “would have been acclaimed as one of the greatest triumphs of the human mind.” This is great for those who seek power over others—they have an endless supply of bogeymen to promise to fight.

But it’s a disaster for social coordination. The record of disasters inflicted on society demonstrates what follows when voluntary arrangements are replaced by someone else’s purportedly superior vision.

But it’s often forgotten. We must continue to make the case.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.