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Even If The Stories Of Socialist Sharks Are Overblown, We Should Still Be Concerned About Attitudes To Capitalism.

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The summer of 2001 was slow in the news business. But that changed over the Fourth of July weekend, when a shark attacked a young boy in Florida. Suddenly, it seemed as if sharks were attacking Americans every day. The news cycle was consumed; experts weighed in on television; tourists canceled their beach vacations. It was dubbed the “ Summer of the Shark,” and wall-to-wall coverage continued for two months — until 9/11, when the shark news ended abruptly.

Here’s the thing: It was all hype. According to the International Shark Attack Files at the Florida Museum of Natural History, there were fewer unprovoked shark attacks in the United States in 2001 (50) than the year before (52), as well as the most recent year on file, 2016 (53).

Forgive my cynicism, but whenever I hear about a scary new crisis, I think about the Summer of the Shark. And that’s happening right about now as I listen to the constant drumbeat of news that young Americans are turning to socialism, which has become the conventional wisdom, especially in conservative media. I say: maybe, and maybe not.

It’s true that young people are more sympathetic to socialism than their elders are. According to Gallup, in 2018, 51 percent of adults ages 18 to 29 had a positive view of socialism vs. 41 percent of 30- to 49-year-olds, 30 percent of 50- to 64-year-olds and 28 percent of people older than that. This shouldn’t be much of a surprise. It’s more or less like observing that Florida has more shark attacks than Maine.

The claim goes further, though: that young people are increasingly turning to socialism. As my American Enterprise Institute colleague Karlyn Bowman has argued, there is little evidence of that. Few polls have asked about views on socialism over the years; those that do find no change. For example, the Gallup survey in 2010 found the percentage among 18- to 29-year-olds with a positive view of socialism was 51 percent, precisely the same then as now.

So, why all the alarms? Because it fits a handy narrative of American political dynamics currently offered up by the media — one that keeps people addicted to political entertainment. “Young Jacobins want the government to take over the means of production” is a lot more interesting to viewers of cable news than “Young people are more progressive than old people, but not more so than usual.” By appealing to fear, it also exempts defenders of capitalism from making the positive case for the system’s merits. Sharks everywhere!

But just because young people aren’t signing up in droves for socialism doesn’t mean they aren’t concerned about the future of the U.S. economic system. A 2015 poll by the Harvard Institute of Politics found that nearly  half of 18- to 29-year-olds believe the American Dream is “dead” for them. That is the real challenge — and a welcome one, because it provides an incentive to discuss the merits and problems of free enterprise as it now functions in the United States.

For those of us who are enthusiastic about market systems, the discussion starts by accurately depicting the voices of people who aren’t. Conservatives often “nutpick” liberal arguments, emphasizing voices that are extremely radical and exotic — those that defend the depraved Maduro regime in Venezuela, for example. That tactic doesn’t work with unaligned observers, who correctly sense that focusing on outliers is meant to discredit, not illuminate. Listen to mainstream voices on the left, and two themes emerge when it comes to economic policy: a concern about alleviating poverty and a desire to increase opportunity for people at the periphery of society.

These are excellent goals, in my view — moral objectives that attracted me philosophically to the free-enterprise system in the first place but that are too often forgotten even by capitalism’s proponents. As I show in a  documentary film released this month, the percentage of the world’s population living in absolute poverty — living on a dollar a day or less, adjusted for inflation — has fallen by four-fifths since the 1970s, with at least 2 billion people having escaped the grip of extreme poverty. At the same time, the under-age-5 child mortality rate has fallen by 58 percent just since 1990, and adult global literacy has risen from 75 percent in 1990 to 86 percent in 2016.

What explains this amazing progress? Globalization, free trade, the proliferation of property rights and the rule of law, and the culture of democratic capitalism spreading around the world. As President Barack Obama, not known as a conservative dogmatist, put it in 2015, the “free market is the greatest producer of wealth in history — it has lifted billions of people out of poverty.”

Some will counter that the free market is not enough, that millions are still left out of capitalism’s bounty (including in the United States) and others are getting rich through exploitation. And they’re right: Too many have been excluded while others have taken unfair advantage. Free enterprise can be distorted by the powerful, whether through corporate cronyism or the complicated web of social advantages protected by the wealthy.

But that fact isn’t an argument to roll capitalism back; it is an argument for sharing its benefits more widely. Are the potential and merit of people at the margins being rewarded? (Answer: Not enough.) Are the wealthy truly being exposed to the creative destruction of markets? (Answer: Not enough.) More mobility is needed, upward from the bottom and, yes, downward from the top.

Further, defenders of free enterprise must acknowledge that markets are not at odds with a social safety net. The goal, in conservative economist Friedrich Hayek’s words, should be to ensure “some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody,” and insurance against “those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.”

The Summer of the Shark was fiction, and the Surge of the Socialist is overblown. However, concerns about the capitalist system are real. This is an opportunity, not a threat.

Photo by Jakob Owens on Unsplash

To Maintain Economic Progress, We Need More Entrepreneurial Innovation.

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Each of us seeks economic progress, both individually and for society. Economic progress is different than economic growth, even though that’s what the government peddles. Economic growth is a quantitative concept, captured in government accounting as increased consumption. Economic progress is qualitative: a subjective feeling about the quality of life we lead and our anticipation for its future improvement.

America’s new democratic socialists promise more social justice and a higher level of consumption for all. They think that more government intervention, more taxation, more redistribution and more control over business can achieve their goals. The opposite is the case. In order to provide both better living standards and economic progress, entrepreneurial innovation is required.

Among other errors, the democratic socialists make the mistake of believing in a simplified productivity theory of capital: that accumulating savings and investment and a higher capital stock raises future investment yields, no matter whose hands they are in.

But without entrepreneurs, capital is dead. It takes entrepreneurs to bring capital to life and keep it alive. Capital needs to be constantly renewed, to be put to innovative uses that improve lives and achieve the progress we all seek. Our pension savings will not ensure future wealth unless they get into the hands of the entrepreneur who – motivated by profits – can find new productive applications for them. Investing in stocks does not create more real capital. Most stock trades represent merely a rotation of ownership. It is true profit-generating entrepreneurial activity that creates future wealth and income. The future environment for entrepreneurial activity will determine whether savings are put to productive use, and the democratic socialists prefer to suppress, if not destroy, economic activity.

Can we count on our large corporations to deliver the innovation that is needed for economic progress? There is certainly a case to be made that they are constantly testing and marketing new ideas, new devices, new services and new service extensions. Amazon, Google, Uber and Apple and Microsoft and the rest of them are lowering our transaction costs which is an improvement to our lives and represents economic progress.

But there are many curses of bigness, and one of them is an inevitable slowing down of innovation. Bigness tends to lead to defensiveness in the protection of high market shares; corporations become reluctant to innovate with the risk-taking bravado that took them to prominence in the first place, because they begin to fear the destabilization of their own marketplace.

M&A is one way to protect high-share and quasi-monopolistic market positions, and is often defensive in style: bring the innovators in house and control them rather than let them disrupt from outside. And if a company’s large scale was built partially or completely with debt borrowed to make acquisitions (as if often the case with private equity funded firms), then innovation will tend to be even more suppressed, because free cash is diverted from investment in R&D to debt service.

Worse, it is often the case that our large corporations get closer and closer to government, making a deal to accept greater supervision (it keeps bureaucrats in long term jobs) in return for regulation that makes it harder for upstart innovators to enter protected markets.

Tim Wu, a Columbia law professor who wrote a book called The Curse of Bigness, explains one way in which this sidling up to governments works for big corporations. Let’s say a large corporation wants to make a defensive acquisition to acquire a competitor. They submit the proposal for merger review by the government. The government, in turn, issues a consent decree, which means that permission to make the acquisition is given, with conditions. It is the administration of the conditions of the consent decree that keeps bureaucrats in a job for years, perhaps decades to come. The acquiring company meets the goal of its merger, and the government gets to write more administrative law and to load up the pubic payroll with more bureaucrats. Here’s what Wu said in an interview with ProMarket.

Overall, I think consent decrees appeal to academic economists, but they have a bad track record. One problem with consent decrees is that you have the most talented attorneys and economists negotiating these on the government side, but once they’re done, they’re given to an enforcement bureau which is typically not heavily staffed. And sometimes it can be forgotten, and certainly not enforced with any kind of vigor.

Structural separation is self-executing. The blocking of mergers is self-executing. You don’t have to have the government constantly trying to make sure the thing is working. I think Europe has really gone down the wrong path in that direction.

Capitalism is a dynamic system, alway changing, always adapting, always innovating. That’s because consumers are always changing, always demanding better lives, and insisting on economic progress. Socialism certainly can’t deliver what consumers want, and big companies have a tendency to become defensive in the face of consumers’ unrelenting insistence on improvement. It is the entrepreneur who imagines the better future that consumers wish for, and, in the pursuit of profit, finds a way to deliver it by refreshing capital and putting it to new uses. No other system has this capability.

For more like this, see Why Capital Needs Entrepreneurs at mises.org, which was a source for some of this article.

The World Is Getting Quietly, Relentlessly Better.

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If you spent 2018 mainlining misery about global warming, inequality, toxic politics or other anxieties, I’m here to break your addiction with some good news: The world got better last year, and it is going to get even better this year.

Poverty around the world is plummeting; half the world is now middle class; and illiteracy, disease and deadly violence are receding. These things don’t make headlines because they are gradual, relentless and unsurprising. That is why they are worth highlighting. The problems the world faces are far smaller than those it has already overcome and can be solved the same way: not by betting on miracles but by patiently applying knowledge and tools we already possess.

For most of recorded history humanity lived on the brink of starvation. As recently as 1980 nearly half the world lived in “extreme poverty,” that is, consuming less than the basic necessities, which the World Bank values at $1.90 a day in 2011 dollars, adjusted for the differing costs of goods and services between countries. The proportion of people in extreme poverty was projected to fall to an estimated 8.6% last year and, given the correlation between growth and poverty, is almost certain to drop further this year.

Rising incomes alone cannot capture how much better life has gotten. “Nathan Rothschild was surely the richest man in the world when he died in 1836,” economists Max Roser and Esteban Ortiz-Ospina wrote in 2017. “But the cause of his death was an infection—a condition that can now be treated with antibiotics sold for less than a couple of cents. Today, only the very poorest people in the world would die in the way that the richest man of the 19th century died.”

Mr. Roser is the founder of Our World in Data, a website that tracks the evolution of human welfare over the last few centuries. Scroll through the charts, articles and data sets, and you will be stunned by how much better life has become in just the last few decades: Child mortality, illiteracy and deaths from violence have all plummeted, and life expectancy has gone up.

The world first eradicated a disease, smallpox, in 1980. It could soon eradicate a few more: 2016 saw just 46 new cases of paralytic polio recorded; in 2017, there were just 25 new infections of Guinea worm, a painful and disabling parasitic infection. These victories come not through laboratory breakthroughs but the meticulous application of tried-and-true tools, such as vaccination and improved sanitation.

Much of the decline in poverty happened in China, where per-person income has risen 25-fold since China’s then-leader Deng Xiaoping inaugurated its economic reforms in 1978. India‘s economy, though, is now growing faster than China’s. If India can maintain its pace, the impact on global well-being will be just as momentous, given that India’s population should soon pass China’s.

As with disease, poverty is being eradicated not through technological miracles but basic rules of growth: Invest more in your human and physical capital, open yourself to markets and trade—that’s right, globalization is good—and incomes will rise.

Allow this growth to continue long enough, and something else momentous happens. As of September, more than half the world—3.8 billion people—are middle-class or rich, Homi Kharas of the Brookings Institution and Kristofer Hamel of World Data Lab found. They define middle class as consuming between $11 and $110 a day, in 2011 dollars adjusted for varying costs between countries. At this level, households devote ever more of their incomes to discretionary items such as motorcycles, refrigerators, movies or vacations.

Money and well-being aren’t the same, but Mr. Kharas and Mr. Hamel note that moving from poor to middle class does correspond to a big jump in happiness and much greater demands on governments to deliver affordable housing, education, health care and safety.

If the world is getting so much better, why does everyone seem so miserable? Perhaps because in the U.S., life is improving more slowly than in poorer countries, and in some places it is getting worse. Yet for most Americans, life is getting better: Median incomes are rising, average health is improving, and violent crime, divorce and teen pregnancy are all trending down.

Perhaps it also feels irresponsible to celebrate the many ways the world is quietly getting better because it distracts from the fight against things that are loudly getting worse: polarized and authoritarian politics, deadly opioids, nuclear proliferation, and most of all, a warming climate—a consequence of all those new middle-class entrants burning fossil fuels.

Yet obsessing over such perils is how we’ll likely solve them. Take global warming: Public concern over climate change is rising in the wake of wildfires and floods. Some media reports last year made much of a federal assessment that a warming climate could leave the U.S. economy 10% smaller by 2100.

First, note that if growth continues at 2%, gross domestic product would be 350% bigger by 2100, as opposed to 400%. Second, only one study is that dire: The consensus is more like a 5% hit, not 10%.

More important, the policy tools and technology exist to avoid those worst-case scenarios at a price considerably less than 5% of GDP; we only need the political will to apply them. Today that political will looks remote. But in 1980, the prospect that most of the world would one day be middle class looked even bleaker.

First published at wsj.com 1-2-19

 

 

 

Entrepreneurs Bring Economic Progress – Which Is Far More Important To People Than GDP Growth.

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Economists tend to represent economic growth as growth in the level of income and of GDP. But economic progress is far broader than that, and to focus on GDP growth is to ignore the most important elements of economic progress – the elements that improve people’s lives.

Why do economists miss this point? Because they don’t understand entrepreneurship, and the role of entrepreneurs in economic progress. In economists’ models, firms are run by managers who choose low cost resources and manage processes in order to achieve greater efficiency. In a competitive economy, this would drive companies out of business. Continuous improvement and innovation are the drivers of economic progress, and they come from entrepreneurs not managers.

We invented economic progress only recently. It began in the late eighteenth century with the industrial revolution. Before that, the standard of living and the quality of life was much the same in 1750 as it was in 1650, and it was much the same in 1650 as it was in 1550 and, indeed, as it was in 550.

Since then, economic progress has been greater in the nineteenth century than the eighteenth, greater in the twentieth century than the nineteenth, and every indication is that the progress will continue to accelerate in the twenty-first century.

In the United States, per capita GDP was nearly seven times greater at the end of the twentieth century than it was at the beginning. But looking at only growth numbers seriously misrepresents the nature of the economic progress that took place in that century.

At the beginning of the twentieth century only about 1 percent of American households had cars; by the end of the century 91 percent of households had them. Largely because of advances in medical technology, life expectancy rose from 47 years at the beginning of the century to 77 years by the century’s end. Telephones were rare at the beginning of the century, but commonplace by the end of the century. Information acquisition and entertainment were completely transformed in the twentieth century. At the beginning of the century there were no movie theaters, no radio broadcasts, and no television. By 1900 electricity was available to some, and was used mainly for lighting, but by 1950, electricity powered radios, electric washing machines, and refrigerators.

By 2000, most people classified as poor in the United States had indoor plumbing, air conditioning, telephones, and automobiles. The Internet revolutionized communication and allowed business ventures to span the globe. While only a few computers existed in the world in 1950, many people had more than one computer in their homes by 2000. Computers did not become common until the 1980s, and the World Wide Web did not exist until the 1990s. The first airplane had not yet flown at the beginning of the twentieth century, but by the end of the century travel throughout the world in jet aircraft was commonplace. Despite the tremendous GDP growth over the twentieth century, when one reflects on economic progress over the century, it is apparent that the primary component of economic progress is not the amount of income growth, as impressive as it was, but rather the substantial change in the qualitative nature of the economy’s output, and the extent to which people enjoyed consuming it.

They were also able to enjoy producing progress. At the beginning of the twentieth century the average work week in the United States was about 50 hours, and by the end of the century it had fallen to about 35 hours. Again, this quantitative change in hours worked, while impressive, does not reflect the changing nature of work, which became less dangerous and less physically demanding. People worked more with their minds and less with their bodies by the end of the century, and this is reflected in the fact that at the beginning of the century only 22 percent of adults had completed high school, while by the end of the century 88 percent had at least a high school degree. Accidental deaths, including those on the job, fell from 88 per 100,000 to 34 per 100,000 over the course of the century.

While people work fewer hours for more income, the more significant element of progress in the work people do is not the quantitative reduction in work hours or increase in output, but rather the qualitative changes in the nature of work. At the beginning of the century the reward for work was money, and most jobs were mainly manual labor. While money was still a primary motivation at the end of the century, people considered the pleasantness of a job, including intellectual stimulation, challenges, and workplace amenities as significant rewards for employment. Many people enjoy the work they do: something that would have been much rarer in 1900, when work was often physically demanding, dangerous, and tedious. One can look at growth in terms of increased output per hour of work, but the progress in terms of qualitative changes at the workplace is at least as significant as the quantitative growth.

Henry Ford was the entrepreneurial innovator who brought assembly line production to the automobile industry, which enabled a substantial increase in the output of automobiles per worker. But focusing on growth in output per worker misses the much more important truths about the transformation of lifestyles that resulted. People’s transportation options were greatly enhanced, making automobile travel available to a large segment of the population. This changed many other things – such as shopping for example. Supermarkets, shopping malls and large discount stores would not be feasible if people could not drive their own cars to transport substantial quantities of goods. Because shoppers can buy more each time they shop – because they can transport more in their automobile – stores can offer a greater variety of goods at a lower cost. Entrepreneurs who supply the retailers are encouraged to think up a larger variety of new goods for sale.

Because of the introduction of low-cost long distance telephone calling – and now the internet – these entrepreneurs can contact sellers thousands of miles away to order new products immediately. Sharp declines in transportation costs make it feasible to ship individual purchases thousands of miles to buyers. The variety of goods and services offered for sale continues to expand. Progress in one area leads to progress in others. Life gets better. Progress brings economic growth with it, but growth is a minor component of economic progress.

Progress is not brought to us by managers striving for efficiency, but by entrepreneurs developing specialist knowledge about their area of expertise and thereby discovering new opportunities to serve customers better and to make a profit doing so. The profit-and-loss system amplifies progress. Profits reinforce the pursuit of ideas that are wealth-enhancing for entrepreneurs, and losses terminate the ideas that are not. As a result, the positive impact of successful entrepreneurship is much larger in magnitude than the negative impact of unsuccessful attempts. That’s how progress occurs. Specialization is an important element – something Adam Smith knew at the beginning of the Industrial Revolution.

Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things. . . . It is naturally to be expected, therefore, that some one or another of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, whenever the nature of it admits of such improvement. (Adam Smith, Wealth Of Nations, 1776)

Entrepreneurs invest in producing the specialized knowledge that will enable them to make future entrepreneurial discoveries. Their pursuit of knowledge makes innovation and progress more likely.

To read more, see Progress And Entrepreneurship; Randall G. Holcombe; QJAE Fall 2003.

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