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California’s Disastrous State Illustrates The Limits Of Progressivism.

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More than 2 million Californians recently were left without power after the state’s largest utility, Pacific Gas and Electric—which filed for bankruptcy earlier this year—preemptively shut down transmission lines in fear that they might spark fires during periods of high autumn winds.

Consumers blame the state for not cleaning up dead trees and brush, along with the utility companies for not updating their ossified equipment. The power companies in turn fault the state for so overregulating utilities that they had no resources to modernize their grids.

Californians know that having tens of thousands of homeless in their major cities is untenable. In some places, municipal sidewalks have become open sewers of garbage, used needles, rodents, and infectious diseases.

Yet no one dares question progressive orthodoxy by enforcing drug and vagrancy laws, moving the homeless out of cities to suburban or rural facilities, or increasing the number of mental hospitals.

Taxpayers in California, whose basket of sales, gasoline, and income taxes is the highest in the nation, quietly seethe while immobile on antiquated freeways that are crowded, dangerous, and under nonstop makeshift repair.

Gas prices of $4 to $5 a gallon—the result of high taxes, hyper-regulation, and green mandates—add insult to the injury of stalled commuters. Gas tax increases ostensibly intended to fund freeway expansion and repair continue to be diverted to the state’s failing high-speed rail project.

Residents shrug that the state’s public schools are among the weakest in the nation, often ranking in the bottom quadrant in standardized test scores. Elites publicly oppose charter schools, but often put their own kids in private academies.

Californians know that to venture into a typical municipal emergency room is to descend into a modern Dante’s Inferno. Medical facilities are overcrowded. They can be as unpleasant as they are bankrupting to the vanishing middle class that must face exorbitant charges to bring in an injured or sick child.

No one would dare to connect the crumbling infrastructure, poor schools, and failing public health care with the non-enforcement of immigration laws, which has led to a massive influx of undocumented immigrants from the poorest regions of the world, who often arrive without fluency in English or a high school education.

Stores are occasionally hit by swarming looters. Such Wild West criminals know how to keep their thefts under $950, ensuring that such “misdemeanors” do not warrant police attention. California’s permissive laws have decriminalized thefts and break-ins. The result is that San Francisco now has the highest property crime rate per capita in the nation.

Has California become premodern?

Millions of fed-up middle-class taxpayers have fled the state. Their presence as a stabilizing influence is sorely missed. About one-third of the nation’s welfare recipients live in California. Millions of poor newcomers require enormously expensive state health, housing, education, legal, and law enforcement services.

California is now a one-party state. Democrats have supermajorities in both houses of the Legislature. Only seven of the state’s 53 congressional seats are held by Republicans. The result is that there is no credible check on a mostly coastal majority.

Huge global wealth in high-tech, finance, trade, and academia poured into the coastal corridor, creating a new nobility with unprecedented riches. Unfortunately, the new aristocracy adopted mindsets antithetical to the general welfare of Californians living outside their coastal enclaves.

The nobodies have struggled to buy high-priced gas, pay exorbitant power bills, and deal with shoddy infrastructure—all of which resulted from the policies of the distant somebodies.

California’s three most powerful politicians—House Speaker Nancy Pelosi, Sen. Dianne Feinstein, and Gov. Gavin Newsom—are all multimillionaires. Their lives, homes, and privileges bear no resemblance to those of other Californians living with the consequences of their misguided policies and agendas.

The state’s elite took revolving-door entries and exits for granted. They assumed that California was so naturally rich, beautiful, and well endowed that there would always be thousands of newcomers who would queue up for the weather, the shore, the mountains, and the hip culture.

Yet California is nearing the logical limits of progressive adventurism in policy and politics.

Residents carefully plan long highway trips as if they were ancient explorers charting dangerous routes. Tourists warily enter downtown Los Angeles or San Francisco as if visiting a politically unstable nation.

Insatiable state tax collectors and agencies are viewed by the public as if they were corrupt officials of Third World countries seeking bribes. Californians flip their switches unsure of whether the lights will go on. Many are careful about what they say, terrified of progressive thought police who seem more worried about critics than criminals.

Our resolute ancestors took a century to turn a wilderness into California. Our irresolute generation in just a decade or two has been turning California into a wilderness.

(C) 2019 TRIBUNE CONTENT AGENCY, LLC. Photo by Nathan DeFiesta on Unsplash

Economics For Entrepreneurs:Entrepreneurship Creates More Value For Everyone In Society. Economic Freedom Creates More Entrepreneurs.

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An entrepreneur is someone who organizes, manages, and assumes the risks of a business or enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering new ways of combining resources. When the market value generated by this new combination of resources is greater than the market value these resources can generate elsewhere individually or in some other combination, the entrepreneur makes a profit. An entrepreneur who takes the resources necessary to produce a pair of jeans that can be sold for thirty dollars and instead turns them into a denim backpack that sells for fifty dollars will earn a profit by increasing the value those resources create. This comparison is possible because in competitive resource markets, an entrepreneur’s costs of production are determined by the prices required to bid the necessary resources away from alternative uses. Those prices will be equal to the value that the resources could create in their next-best alternate uses. Because the price of purchasing resources measures this opportunity cost— the value of the forgone alternatives—the profit entrepreneurs make reflects the amount by which they have increased the value generated by the resources under their control.

Entrepreneurs who make a loss, however, have reduced the value created by the resources under their control; that is, those resources could have produced more value elsewhere. Losses mean that an entrepreneur has essentially turned a fifty-dollar denim backpack into a thirty-dollar pair of jeans. This error in judgment is part of the entrepreneurial learning, or discovery, process vital to the efficient operation of markets. The profit-and-loss system of capitalism helps to quickly sort through the many new resource combinations entrepreneurs discover. A vibrant, growing economy depends on the efficiency of the process by which new ideas are quickly discovered, acted on, and labeled as successes or failures. Just as important as identifying successes is making sure that failures are quickly extinguished, freeing poorly used resources to go elsewhere. This is the positive side of business failure.

Successful entrepreneurs expand the size of the economic pie for everyone. Bill Gates, who as an undergraduate at Harvard developed BASIC for the first microcomputer, went on to help found Microsoft in 1975. During the 1980s, IBM contracted with Gates to provide the operating system for its computers, a system now known as MS-DOS. Gates procured the software from another firm, essentially turning the thirty-dollar pair of jeans into a multibillion-dollar product. Microsoft’s Office and Windows operating software now run on about 90 percent of the world’s computers. By making software that increases human productivity, Gates expanded our ability to generate output (and income), resulting in a higher standard of living for all.

Sam Walton, the founder of Wal-Mart, was another entrepreneur who touched millions of lives in a positive way. His innovations in distribution warehouse centers and inventory control allowed Wal-Mart to grow, in less than thirty years, from a single store in Arkansas to the nation’s largest retail chain. Shoppers benefit from the low prices and convenient locations that Walton’s Wal-Marts provide. Along with other entrepreneurs such as Ted Turner (CNN), Henry Ford (Ford automobiles), Ray Kroc (McDonald’s franchising), and Fred Smith (FedEx), Walton significantly improved the everyday life of billions of people all over the world.

The word “entrepreneur” originates from a thirteenth-century French verb, entreprendre, meaning “to do something” or “to undertake.” By the sixteenth century, the noun form, entrepreneur, was being used to refer to someone who undertakes a business venture. The first academic use of the word by an economist was likely in 1730 by Richard Cantillon, who identified the willingness to bear the personal financial risk of a business venture as the defining characteristic of an entrepreneur. In the early 1800s, economists Jean-Baptiste Say and John Stuart Mill further popularized the academic usage of the word “entrepreneur.” Say stressed the role of the entrepreneur in creating value by moving resources out of less productive areas and into more productive ones. Mill used the term “entrepreneur” in his popular 1848 book, Principles of Political Economy, to refer to a person who assumes both the risk and the management of a business. In this manner, Mill provided a clearer distinction than Cantillon between an entrepreneur and other business owners (such as shareholders of a corporation) who assume financial risk but do not actively participate in the day-to-day operations or management of the firm.

Two notable twentieth-century economists, Joseph Schumpeter and Israel Kirzner, further refined the academic understanding of entrepreneurship. Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. In the Schumpeterian view, the entrepreneur is a disruptive force in an economy. Schumpeter emphasized the beneficial process of creative destruction, in which the introduction of new products results in the obsolescence or failure of others. The introduction of the compact disc and the corresponding disappearance of the vinyl record is just one of many examples of creative destruction: cars, electricity, aircraft, and personal computers are others. In contrast to Schumpeter’s view, Kirzner focused on entrepreneurship as a process of discovery. Kirzner’s entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur’s discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity. Unlike Schumpeter’s disruptive force, Kirzner’s entrepreneur is an equilibrating force. An example of such an entrepreneur would be someone in a college town who discovers that a recent increase in college enrollment has created a profit opportunity in renovating houses and turning them into rental apartments. Economists in the modern austrian school of economics have further refined and developed the ideas of Schumpeter and Kirzner.

During the 1980s and 1990s, state and local governments across the United States abandoned their previous focus on attracting large manufacturing firms as the centerpiece of economic development policy and instead shifted their focus to promoting entrepreneurship. This same period witnessed a dramatic increase in empirical research on entrepreneurship. Some of these studies explore the effect of demographic and socioeconomic factors on the likelihood of a person choosing to become an entrepreneur. Others explore the impact of taxes on entrepreneurial activity. This literature is still hampered by the lack of a clear measure of entrepreneurial activity at the U.S. state level. Scholars generally measure entrepreneurship by using numbers of self-employed people; the deficiency in such a measure is that some people become self-employed partly to avoid, or even evade, income and payroll taxes. Some studies find, for example, that higher income tax rates are associated with higher rates of self-employment. This counterintuitive result is likely explained by the higher tax rates encouraging more tax evasion through individuals filing taxes as self-employed. Economists have also found that higher taxes on inheritance are associated with a lower likelihood of individuals becoming entrepreneurs.

Some empirical studies have attempted to determine the contribution of entrepreneurial activity to overall economic growth. The majority of the widely cited studies use international data, taking advantage of the index of entrepreneurial activity for each country published annually in the Global Entrepreneurship Monitor. These studies conclude that between one-third and one-half of the differences in economic growth rates across countries can be explained by differing rates of entrepreneurial activity. Similar strong results have been found at the state and local levels.

Infusions of venture capital funding, economists find, do not necessarily foster entrepreneurship. Capital is more mobile than labor, and funding naturally flows to those areas where creative and potentially profitable ideas are being generated. This means that promoting individual entrepreneurs is more important for economic development policy than is attracting venture capital at the initial stages. While funding can increase the odds of new business survival, it does not create new ideas. Funding follows ideas, not vice versa.

One of the largest remaining disagreements in the applied academic literature concerns what constitutes entrepreneurship. Should a small-town housewife who opens her own day-care business be counted the same as someone like Bill Gates or Sam Walton? If not, how are these different activities classified, and where do we draw the line? This uncertainty has led to the terms “lifestyle” entrepreneur and “gazelle” (or “high growth”) entrepreneur. Lifestyle entrepreneurs open their own businesses primarily for the nonmonetary benefits associated with being their own bosses and setting their own schedules. Gazelle entrepreneurs often move from one start-up business to another, with a well-defined growth plan and exit strategy. While this distinction seems conceptually obvious, empirically separating these two groups is difficult when we cannot observe individual motives. This becomes an even greater problem as researchers try to answer questions such as whether the policies that promote urban entrepreneurship can also work in rural areas. Researchers on rural entrepreneurship have recently shown that the Internet can make it easier for rural entrepreneurs to reach a larger market. Because, as Adam Smith pointed out, specialization is limited by the extent of the market, rural entrepreneurs can specialize more successfully when they can sell to a large number of online customers.

What is government’s role in promoting or stifling entrepreneurship? Because the early research on entrepreneurship was done mainly by noneconomists (mostly actual entrepreneurs and management faculty at business schools), the prevailing belief was that new government programs were the best way to promote entrepreneurship. Among the most popular proposals were government-managed loan funds, government subsidies, government-funded business development centers, and entrepreneurial curriculum in public schools. These programs, however, have generally failed. Government-funded and -managed loan funds, such as are found in Maine, Minnesota, and Iowa, have suffered from the same poor incentives and political pressures that plague so many other government agencies.

My own recent research, along with that of other economists, has found that the public policy that best fosters entrepreneurship is economic freedom. Our research focuses on the public choice reasons why these government programs are likely to fail, and on how improved “rules of the game” (lower and less complex taxes and regulations, more secure property rights, an unbiased judicial system, etc.) promote entrepreneurial activity. Steven Kreft and Russell Sobel (2003) showed entrepreneurial activity to be highly correlated with the “Economic Freedom Index,” a measure of the existence of such promarket institutions. This relationship between freedom and entrepreneurship also holds using more widely accepted indexes of entrepreneurial activity (from the Global Entrepreneurship Monitor) and economic freedom (from Gwartney and Lawson’s Economic Freedom of the World) that are available selectively at the international level. This relationship holds whether the countries studied are economies moving out of socialism or economies of OECD countries. Figure 1 shows the strength of this relationship among OECD countries.

The dashed line in the figure shows the positive relationship between economic freedom and entrepreneurial activity. When other demographic and socioeconomic factors are controlled for, the relationship is even stronger. This finding is consistent with the strong positive correlation between economic freedom and the growth of per capita income that other researchers have found. One reason economic freedom produces economic growth is that economic freedom fosters entrepreneurial activity.

Figure 1 Economic Freedom and Entrepreneurship in OECD Countries, 2002

ZOOM

 

Economists William Baumol and Peter Boettke popularized the idea that capitalism is significantly more productive than alternative forms of economic organization because, under capitalism, entrepreneurial effort is channeled into activities that produce wealth rather than into activities that forcibly take other people’s wealth. Entrepreneurs, note Baumol and Boettke, are present in all societies. In government-controlled societies, entrepreneurial people go into government or lobby government, and much of the government action that results—tariffs, subsidies, and regulations, for example—destroys wealth. In economies with limited governments and rule of law, entrepreneurs produce wealth. Baumol’s and Boettke’s idea is consistent with the data and research linking economic freedom, which is a measure of the presence of good institutions, to both entrepreneurship and economic growth. The recent academic research on entrepreneurship shows that, to promote entrepreneurship, government policy should focus on reforming basic institutions to create an environment in which creative individuals can flourish. That environment is one of well-defined and enforced property rights, low taxes and regulations, sound legal and monetary systems, proper contract enforcement, and limited government intervention.

About the Author

Russell S. Sobel is a professor of economics and James Clark Coffman Distinguished Chair in Entrepreneurial Studies at West Virginia University, and he was founding director of the Entrepreneurship Center there.

There Should Be No Such Thing As “Economic Policy”.

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In the last few years, the topic of trade and trade policy has returned to center stage in the United States, thanks to the protectionist policy and rhetoric of Donald Trump. The result has been a reopening of many debates and also an apparent shift in public opinion, toward stronger support for the free trade position. What this public argument has also done is to reveal some very basic assumptions about economics and public policy.

These foundational assumptions are particularly widespread among professional economists but are also found among social and political commentators more generally. They reflect the way that economics as a discipline has developed over the last 30 to 40 years. The assumptions are about public policy in general, not just trade, and from the individualist or classical liberal standpoint are dangerous and misleading — in fact their becoming explicit because of the current debate over trade highlights the need to clarify language in these discussions and through that thought.

In the current argument about trade, Donald Trump’s protectionism and the trade war he has started with China have led to a strong reassertion of the free trade position. Most of this has taken the form of arguments that the United States should follow a free trade policy.

Closer examination of these positions should leave one feeling very uneasy. The implication is that free trade is a policy of the government. In other words, the assumption is that free trade only exists or comes about as the result of an active government policy. Very often the explicit thesis is that free trade is something created by and dependent upon complex and elaborate intergovernmental trade agreements, such as NAFTA or the proposed Transatlantic Trade and Investment Partnership (TTIP) and Trans-Pacific Partnership (TPP).

If you actually think about it, this is a bizarre position. Free trade simply means the absence of government action, leaving people free to exchange goods and services across national borders. To have free trade, governments do not have to do anything; they simply have to stop doing things, such as imposing duties and tariffs or imposing regulatory barriers. This shows we should become aware of the misleading language used in much public discussion and commentary, particularly in the business and financial press and in academic journals.

So-called “free trade agreements,” such as the ones mentioned, are not about free trade properly understood. They are about managed and regulated trade. A trade policy centered around them is not about free trade; it is about extending the scope of regulations beyond national borders through a process of harmonization. To put it simply and bluntly, if you are an individualist liberal you do not want the government to have a “free trade policy”; you do not want it to have any kind of policy in that area. You want it to simply leave trade alone.

This principle has wider application, however. It is not simply a point about trade. A common argument about economics in general is that countries and governments should pursue a “free market economic policy.” Sometimes this simply means a transitional policy, but more often it means a continuing policy and set of government actions.

Again, the often-explicit assumption is that a free market economy is something that is produced and sustained by a suite of actions taken by governments. In this view, governments bring about a market economy by having the correct regulatory regime and by creating institutions. More significantly those making this kind of argument seem to think that the action has to be ongoing; in other words, absent continued action by government you will not have a functioning market economy.

As in the more specific question of trade, this is not the true individualist position or understanding. From that perspective, you want the government to have no economic policy at all. You want it in other words to simply leave people alone, to let them contract and exchange freely with each other. This is the true meaning of the expression laissez-faire (let do or let be). Laissez-faire is not a policy; it is the absence of an economic policy.

There is one obvious qualification. What governments do have to do is to provide an environment of law that protects rights. Arguably they should also provide things such as money and a means of registering title and ownership. The purpose of these institutions however is not to create a market economy — that will happen by itself. Rather it is to ensure that certain kinds of actions that are predatory and rights-violating are not allowed and are sanctioned, with redress for those harmed by things such as force and fraud.

The position though is that economic life should not be the concern of government and therefore of public policy in the way that law and foreign affairs are. It should be a private matter. From that perspective, a “free market policy” is a contradictory notion.

One way to understand this is to think of another area of human life. That is religion. Today, if you asked most people whether religious belief and observance should be a matter for politics and whether the government should have a religious policy and, if so, what it should be, they would look at you as though you had grown an extra head. Until relatively recently though, they would not have been surprised. In almost all societies, religion was seen as being perhaps the most quintessentially public matter and regulating and governing it was the central activity of the state along with warfare.

This was true in Imperial China, ancient Rome, and medieval and Renaissance Europe, to give just three examples. Upholding the true religion and making sure that rituals and public observance were carried out in the correct way were some of the most important things rulers did, not least in their own eyes. Sometimes there was a policy of toleration, with several faiths allowed to coexist. The key word here though is “allowed.” Religion and religious observance were still a matter of public policy, and toleration was simply one of the policy options.

Today religion is thought to be a purely private matter that does not come within the purview of politics. The practice is still subject to law; so a religion that practiced human sacrifice would not last long and beliefs and practices that lead to things such as denial of medical care to minors are overruled, but otherwise governments simply do not concern themselves with religious matters: there is no Department of Religious Affairs, and we do not have passionate op-ed debates over what the administration’s religious policy should be.

People who think there should be a “free market economic policy” are like those who, while accepting that government had a responsibility for and ultimate control over religion, advocated a policy of toleration. The point is that in both cases, the default position is that of a politically controlled and regulated aspect of life, with the option of relaxing the controls and giving the appearance (and in practical terms the reality) of greater liberty.

The underlying reality however remains that this area of life (economic life or religion) is something that government can and should be concerned with and can therefore act on to a greater or lesser degree as seems proper. So, government control remains the default position. This also means that the free exercise of religion and free economic exchange and production are both things that exist only by the grace of political power. Even more dramatically it means that power and its exercise, in the shape of a religious or economic policy, is needed to bring about a free economy or a state of religious liberty.

Why though are so many economists attracted to this way of thinking, including so many of those who see themselves as supporters of free markets? We no longer see the corresponding phenomenon of theologians who see themselves as advocates of a particular religious policy (there are a hardy few, but they are exceptions).

The explanation lies in the way the profession of economics has come to see itself since the 1930s or even earlier (some would argue from the very start, but that is much more debatable). Many economists do not see themselves simply as scholars who study and try to understand how economic life and exchange work, in the way that natural scientists study and observe the physical world. Instead they see themselves as technocratic experts whose task and role is to advise the sovereign power as to the best and most efficient way of realizing its economic goals (such as greater prosperity, full employment, economic growth).

They are not alone in this; doctors and medical scientists also increasingly see themselves in this way. An interesting contrast is between sociologists, who would like to have the expert status of economists, and epidemiologists, who in general do not. As a result, epidemiologists do still focus mainly on their academic role, of understanding human social interaction.

What too many contemporary economists do not consider is the question of whether the sovereign should have goals (and hence policies) in the economic area of human life. To assume that it does, and that their job is to use their understanding of economic life to come up with diagnoses and prescriptions for the rulers, is to concede the fundamental point.

Instead, the real point that this is none of the rulers’ business and they should simply leave people alone to get on with things and focus on other matters. The classical liberal insight and position is that governments should not have positive goals (such as national greatness or social equality or greater wealth). They should simply do the negative task of protecting rights and leave human beings to do what they want within that framework. You do not want the government to have an economic policy, even a free market one: you should want it to let people be.

 Dr Steven Davies, a Senior Fellow at AIER,  is the Head of Education at the IEA.

“Dog Eat Dog” Is A Horribly Inappropriate Metaphor For Competition Among Entrepreneurs To Serve Customers Better.

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Dog-eat-dog, “survival of the fittest” rhetoric has long been a favorite grenade thrown by opponents of private property, voluntary exchange systems (i.e., capitalism without crony as a modifier). But it is striking that they never answer a central question without which their verbal assaults are logically meaningless—fit for what?

Fit as Determined by Reward

Murray Rothbard may have stated this best in Man, Economy, and State:

To apply the principle of the “survival of the fittest” to both the jungle and the market is to ignore the basic question: Fitness for what? The “fit” in the jungle are those most adept at the exercise of brute force. The “fit” on the market are those most adept in the service of society. The jungle is a brutish place where some seize from others and all live at the starvation level; the market is a peaceful and productive place where all serve themselves and others at the same time and live at infinitely higher levels of consumption.

What is fit, and therefore who is fit, depends on what is rewarded. As Sheldon Richman put it, “The ‘fittest’ are those who best meet the requirements of the system.” Matt Zwolinski extends the analysis to what being the fittest does not mean:

To be “fit” is not necessarily to be “better” or “more virtuous” than one who is unfit. All that fitness means, in the evolutionary sense, is adaptation to environment.

Zwolinski’s makes his meaning clear with an example:

The fact that a rattlesnake will outlive a horse in a desert doesn’t make the rattlesnake morally better than the horse. It just means that the rattlesnake is better adapted to surviving in the desert.

And David Henderson brings it closer to home, citing Stalin and street gangs as examples of how, as the most ruthless, they were the fittest for survival in their human jungles, but that those jungles provide

no protection of the rights of someone who simply wants to go about his or her business peacefully. Peaceful, productive people are in fact sitting ducks waiting to be picked off by the violent.

To best understand what is fit and who that makes fittest, it is useful to return to the sine qua non of capitalism: private property rights.

Private property prevents the physical invasion of a person’s life, liberty, or property without their consent. By preventing such invasions, private property is an irreplaceable defense against aggression by the strong against the weak.By enriching most those who are most productive, capitalism makes those they deal with more fit for survival, as well.

In other words, private property protects those fit for voluntary cooperation against those fit for the jungle.Ludwig von Mises explainedprivate property as the basis for “joint action and cooperation in which each participant sees the other partner’s success as a means for the attainment of his own,” creating a situation where people benefit from looking for ways to help you rather than ways to hurt you. That is also why, by enriching most those who are most productive (most fit for voluntary cooperation), capitalism makes those they deal with more fit for survival, as well.

Rothbard recognized that

The free market, therefore, transmutes the jungle’s destructive competition for meager subsistence into a peaceful co-operative competition in the service of one’s self and others… On the market, everyone gains. It is the market—the contractual society…that permits the “weak” to live productively.

He also described the jungle as where “the stronger crush the weaker” but markets as rewarding “those better at serving others.” And who would not rather be served than crushed?

So how should we characterize fitness for market economies?

Unlike the domination of some by others suggested by dog-eat-dog imagery, the marketplace rewards those who cooperate best in providing others what they want. Market competition—the freedom to offer cooperation on terms one is willing to accept—allows capitalism to create wealth out of otherwise latent abilities. And it favors those better able to serve others, however weak they may be in politics or social power.

Capitalism’s competition in production was captured well by George Reisman when he wrote:

Instead of…animals striving to grab off limited supplies of nature-given necessities, with the strong succeeding and the weak perishing, economic competition under capitalism is a competition in who can increase the supply of things the most…offering the best and most economical products their minds can devise…in the positive creation of new and additional wealth.

Zwolinski recognized the “peaceful economic competition that exists within industrial society” as a crucial “evolutionary advance from early forms of more violent competition.” William Graham Sumner saw that

markets turn the competition of man with man from violence and brute force into an industrial competition under which men vie with one another for the acquisition of material goods by industry, energy, skill, frugality, prudence, temperance, and other industrial virtues.

Ken Ewert added that

Markets reward morality in the form of honesty, keeping commitments, entrepreneurship, and hard work turned to others’ advantage.

These characteristics are dramatically different from those fittest to survive in an environment of arbitrary power. There, those most willing to use coercive power to reward friends and punish enemies are most likely to attain their desired results at someone else’s expense, in contrast to the fittest in markets, who make others their friends by their creative and productive willingness and ability to serve their desires.

Finally, to understand the emptiness of the dog-eat-dog critique of market competition, we need to return to its results. Steven Horwitz saw that

Once people no longer needed permission to innovate, and once the value of new inventions was judged by the improvements they made to the lives of the masses…the poor began to live lives of comfort and dignity.

And Howard Baetjer Jr. put it all together when he wrote,

In the market, people cooperate in a production process. Not limited to nature’s bare provision, they transform natural resources and produce an abundance of new goods. Each tries to provide what others want. All contribute; all gain from others’ efforts.

Gary M. Galles is a professor of economics at Pepperdine University. This article first appeared at FEE.org

Let’s Hear It For The Middleman: A Critical Player In Economic Growth And Prosperity.

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I heard on the radio an ad for Mervis Diamond Importers. Ronnie Mervis, the owner, boasted that “by importing directly, Mervis eliminates the middleman” — and, thus, sells diamond jewelry at unusually low prices.

This stratagem of claiming to “eliminate the middleman” is common in advertising done by retailers. The great frequency of the use of this stratagem testifies to its believability, for the claim that money is saved by eliminating the middleman does indeed seem sensible. After all, wholesalers and other middlemen don’t work for free; they must be paid. So if a retailer eliminates the middleman, that retailer apparently has “savings” that it “passes on to you!”

But if middlemen raise retailers’ costs, why would any retailer ever use such parasites? Simply to ask this question about middlemen is to cast doubt on the widespread myth that middlemen raise the retail costs of goods.

It’s true that middlemen (and, of course, middlewomen) must be paid for their services. But these services are paid for only because they are valuable. And these services are valuable only because, and only insofar as, they reduce the prices that consumers pay at retail. Middlemen who don’t enable retailers to lower their prices go bankrupt. These middlemen are indeed “eliminated” — by the market. In contrast, successful middlemen reduce the costs that consumers pay at retail.

A Role of Retailers

To see the economic value of middlemen, it’s helpful to realize that retailers themselves are middlemen. A man wishing to acquire an engagement ring could “eliminate the middleman” by steering clear of all retail jewelers and himself personally go mining for diamonds and gold. But doing so would obviously be a much more costly means of presenting an impressive ring to his sweetheart than buying the ring from a jeweler, despite the fact that the jeweler must be paid for his services.

Or recognize that, say, the furniture retailer that brags of “eliminating the middleman” by “buying direct from the factory” doesn’t itself manufacture sofas, beds, and dining room tables. That retailer instead specializes in purchasing inventories of furniture and then assembling these in locations that consumers find convenient to visit.

And understand that you yourself could buy furniture for your home directly from furniture manufacturers and at prices lower than you pay at retail furniture stores. But you almost never do so. You typically buy furniture from retailers. The reason you don’t “eliminate the middleman” — the retailer — when you buy furniture is that this middleman saves you money.

To “eliminate the middleman” here would require that you buy or rent a large truck and drive it (depending on where you live) hundreds of miles to the nearest furniture factory. Although the factory owner will charge for the likes of chairs and bookcases prices lower than you’d pay at retail, these price discounts are seldom worthwhile.

The cost of “eliminating the middleman” in this manner is not only that you must spend time and money driving to and from the factory. There’s also this inconvenience: once at the factory, you can’t directly compare that factory’s offerings with those of competing furniture producers. To make such comparisons, you have to climb back into your truck and drive to many other furniture factories.

By the time you do all this driving around, the price reductions that you get on furniture by “eliminating the middleman” won’t be worthwhile. You’ll bankrupt yourself by avoiding the middleman markup!

A Role of Wholesalers

Wholesalers supply services to retailers similar to the services that retailers supply to final consumers. No supermarket grows its own lettuce, churns its own butter, or cans its own soups. It buys these and each of the other tens of thousands of different items on its shelves from wholesalers. And just as retailers lower your cost of buying goods for you and your family, wholesalers lower retailers’ costs of acquiring inventories.

Wholesalers specialize in transporting goods from around the country, or even the world, and assembling these in accessible, central locations at which retailers’ delivery trucks can be loaded. Also like retailers, wholesalers also generally vouch to their customers for the quality of the goods they supply.

Nothing said here implies that retailers (or wholesalers) never innovate in ways that indeed enable them to profitably “eliminate” some middlemen and genuinely pass some of these savings on to consumers. If a retailer discovers a way to itself produce some retail item at a cost lower than the price it must pay to a wholesaler, that retailer will eliminate the middleman wholesaler and produce that item itself. And this retailer will turn this cost saving into a competitive advantage by passing along to consumers at least some of these lower costs in the form of lower retail prices.

Our Economy Is a Vast Complex of Middlemen

But it’s important to remember that eliminating a supplier from a supply chain merely because that supplier charges for its services is foolish. If those services are valuable — if those services reduce retailers’ costs of acquiring some good for resale — then for retailers to refuse to purchase that supplier’s services causes retailers’ costs not to fall, but to rise. Any retailer who “eliminates” middlemen in this foolish way will itself soon be eliminated by its more competent competitors.

Because in our modern economy every one of us purchases from others nearly everything we use, our economy is a vast complex of middlemen. Its supply chains span the globe. And because these supply chains have been crafted by decades of relentless, innovation-driven competition, they are mind-bogglingly efficient. (If you doubt this last claim, ask yourself what makes possible the inexpensive blueberries that Minnesotans and New Yorkers routinely purchase from supermarkets in January.) And so let’s applaud middlemen, for without them we would all — or, rather, the few of us who would somehow manage to survive — be mired in unimaginable poverty.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

What – Exactly – Constitutes Economic Progress? It’s Not GDP Growth. Then, What Is It?

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Current academic research – into the impact of new technologies, the economics of innovation, and the quality of management, for example – may be providing ever more pieces of the puzzle. But many crucial questions about economic progress remain unanswered, and others have not yet even been properly posed.

Do we know how economies develop? Obviously not, it seems, or otherwise every country would be doing better than it currently is in these low-growth times. In fact, cases of sustained rapid growth, like Japan beginning in the 1960s, or other Southeast Asian countries a decade later, are so rare that they are often described as “economic miracles.”

Yet when Patrick Collison of software infrastructure company Stripe and Tyler Cowen of George Mason University recently wrote an article in The Atlantic calling for a bold new interdisciplinary “science of progress,” they stirred up a flurry of righteous indignation among academics.

Many pointed to the vast amount of academic and applied research that already addresses what Collison and Cowen propose to include in a new discipline of “Progress Studies.” Today, armies of economists are researching issues such as what explains the location of technology clusters like Silicon Valley, why the Industrial Revolution happened when it did, or why some organizations are much more productive and innovative than others. As the University of Oxford’s Gina Neff recently remarked on Twitter, the Industrial Revolution even gave birth to sociology, or what she called “Progress Studies 1.0.”

This is all true, and yet Collison and Cowen are on to something. Academic researchers clearly find it hard to work together across disciplinary boundaries, despite repeated calls for them to do so more often. This is largely the result of incentives that encourage academics to specialize in ever-narrower areas, so that they can produce the publications that will lead to promotion and professional esteem. The world has problems, as the old saying puts it, but universities have departments. Interdisciplinary research institutes like mine and Neff’s therefore have to consider carefully how best to advance the careers of younger colleagues. The same silo problem arises in government, which is likewise organized by departments.

Moreover, fashions in research can lead to hugely disproportionate intellectual efforts in specific areas. To take one example, the ethics of artificial intelligence is clearly an important subject, but is it really the dominant research challenge today, even in the fields of AI or ethics? The financial incentives embedded in technology companies’ business models seem to me at least as important as morality in explaining these firms’ behavior.

At the same time, some important economic questions are curiously underexplored. For example, in his recent book The Technology Trap, Carl Frey expands on his gloomy view of what automation will mean for the jobs of the future, pointing to the adverse effects that the original Industrial Revolution had on the typical worker. Yet Frey also notes that a later period of automation, the era of mass production in the mid-twentieth century, was one of high employment and increasingly broad-based prosperity. What explains the great difference between those two eras?

Today, the role of research in changing behavior – whether that of government officials or of businesses and citizens – is part of the broader crisis of legitimacy in Western democracies. By the early 2000s, technocrats – and economists in particular – ruled the roost, and governments delegated large swaths of policy to independent expert bodies such as central banks and utility regulators. But then came the 2008 global financial crisis. With real incomes stagnating for many, and “deaths of despair” increasing, it is not surprising that expertise has lost its luster for much of the public.

This leads to a final point about the need for a science of progress: what do we actually mean by “progress”? How should it be and monitored, and who experiences it? For many reasons, the standard indicator of real GDP growth, which leaves out much of what people value, will no longer do.

The debate about progress therefore raises profound political and philosophical questions about the kind of societies we want. If the global economy falls into recession, as now seems likely, then social divisions and political polarization will intensify further. And the clear message since the turn of the millennium is that if most people do not experience progress, then society isn’t really progressing at all.

Current academic research – into the impact of new technologies, the economics of innovation, and the quality of management, for example – may be providing ever more pieces of the puzzle. But many crucial questions about economic progress remain unanswered, and others have not yet even been properly posed.

The Economics Of Recycling: Is It A Valuable Commodity Or Is It Garbage?

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In 2008 I was invited to a conference called Australia Recycles! in Fremantle. I flew coach for 30 hours (we had to divert, at one point, to Auckland instead of Sydney because huge headwinds used up more fuel than expected) and landed in Perth and then was driven to Freo by one of the conference organizers. (If you are keeping score at home, that’s 2.78 metric tons of carbon for the flight from Raleigh-Durham to Perth and back.)

It became clear that I was the “tethered goat,” brought in for entertainment and to spice things up a bit.

I had a day before my plenary address, and walked around the conference hall. Everyone there, everyone, represented either a municipal or provincial government, or a nonprofit recycling advocacy group, or a company that manufactured and sold complicated and expensive recycling equipment.

And what a wealth of machinery and equipment it was. Recycling requires substantial infrastructure for pickup, transportation, sorting, cleaning, and processing. I have sometimes suggested a test for whether something is garbage or a valuable commodity. Hold it in your hand, or hold a cup of it, or tank, or however you can handle it. Consider: Will someone pay me for this? If the answer is yes, it’s a commodity, a valuable resource. If the answer is no, meaning you have to pay them to take it, then it’s garbage.

It’s useful to pause for a moment and consider some definitions.

Is Recycling Useful, or Is It Garbage?

The problem with recycling is that people can’t decide which of two things is really going on.

  • One possibility is that recycling transforms garbage into a commodity. If that’s true, then the price of pickup, transport, sorting, cleaning, and processing can be paid out of the proceeds, with something left over. That’s how it is with real commodities, such as wheat or pork bellies, after all. It’s expensive and complicated to produce wheat or pork bellies, and then deliver them to the market in a form that they can be used. But people will pay you for the wheat or pork bellies. In fact, the “profit test” shows that people will pay you enough to cover all those costs and still have something left over.
  • The other possibility, and it’s a completely different possibility, is that recycling isn’t a commodity at all. But it is a cheaper or more environmentally friendly way to dispose of garbage. After all, if you bury something in a landfill, it’s gone. And you still had to collect it, transport it, and process it into the landfill. Recycling might cost money, but if you can sell the stuff for any price you are getting some of those costs back. Further, recycling keeps things out of landfills, and we systematically underprice landfill space. The reason is that we don’t want people dumping garbage in vacant lots or by the side of the road. But that means that recycling may be cheaper, all things considered, than using the space in the landfill. The problem is that “all things considered.” You really do have to add up all the costs — resources, money, convenience, environmental damage — of landfilling, and recycling, and then compare them.

These arguments are often muddled and mixed together, by both proponents and critics. And “recycling” is, after all, not just one homogeneous activity, but a whole collection of possible streams of waste or resources, each of which has to be evaluated separately. Should we recycle aluminum cans? Probably, because the price of recycling aluminum compares very favorably to using virgin materials, the mining and smelting of which are expensive in terms of energy and harmful to the environment.

Should we recycle toilet paper? We could, at some price. But it’s likely not worth it, because it can be composted, it would be awfully hard to clean and sort, and in any case paper products are actually a renewable resource, rather like wheat. You rarely hear someone saying, “Save the wheat! Give up bread!” But that kind of argument is often made for paper, even though the trees grown to produce pulp are simply a fast-growing crop grown on farms expressly for that purpose.

For recycling to be a socially commendable activity, it has to pass one of two tests: the profit test, or the net environmental-savings test. If something passes the profit test, it’s likely already being done. People are already recycling gold or other commodities from the waste stream, if the costs of doing so are less than the amount for which the resource can be sold.

Voluntary “recycling” like scrap iron or aluminum businesses will take care of that on their own. The real question arises with mandatory recycling programs — people recycle because they will be fined if they don’t, not because they expect to make money—or “voluntary” recycling programs such as those at universities or other communities where failure to recycle earns you public shaming.

For coercive or social-pressure recycling to make sense, three things have to be true.

  1. Scale. You need substantial amounts of the “input,” or garbage. Hauling small amounts is wasteful. Many suburban neighborhoods in the U.S. have small amounts of recycling out by the curb, and fossil fuel–powered trucks come by spewing greenhouse gases. Part of the reason wheat and pork bellies are valuable is that the average costs of transport and handling are low, because the scale is so large. I once watched a young woman in Vitacura, Chile, wait in line in her idling auto for more than 10 minutes so she could park and put two two-liter plastic bottles into a recycle bin. That’s not economics, that’s a religious ceremony. Without scale, most recycling harms the environment.
  2. Convenience. There is one resource we can’t get more of: time. Our lives pass quickly, and we have many things to do. But we are asked to donate our time to recycling, to “save” resources. We are asked to wash out and clean the stuff (I actually know people who run their garbage through the dishwasher, so it will be clean. Think of the time, coal-produced electricity, and hot water that uses.) Then we are supposed to sort the garbage and deliver it to the recycling facility.

Why isn’t this done at the recycling facility? Because the government realizes (correctly) it is too expensive, and the costs would swamp the tiny savings, if there are any, in doing recycling in the first place. But if the costs of cleaning and sorting are too great at scale, with commercial resources, why isn’t the sum of the individual costs of cleaning and sorting, in each household, even greater?

If you add up the time being wasted on recycling rituals, it’s even more expensive to ask each household to do it. The difference is that this is an implicit tax, a donation required of citizens, and doesn’t cost money from the public budget. But time is the least renewable of all resources; demanding that it be donated to a pointless or even harmful ritual such as recycling glass is government malpractice.

  1. Environmental savings. For recycling to make any sense, it must cost less to dispose of recycled material than to put the stuff in a landfill. But we have plenty of landfill space, in most of the country. And much of the heaviest material we want to recycle, particularly glass, is chemically inert and will not decompose in a landfill.

Ground “recycled” glass, or “cullet,” is less useful than the virgin silica sand from which glass is made. Cullet has impurities and chemical colorings that make it difficult to use for glass without further processing. To be clear, then: landfilling glass does no environmental harm, and the glass is more expensive than the virgin material it is supposed to replace. Further, glass is heavy, and carting it to distant processing centers, in any but the most urban areas, pollutes the air.

So, is recycling useful? As I said at the outset, for some things it is. Aluminum cans and corrugated cardboard, if they can be collected clean and at scale, are highly recyclable. I myself, on finding an aluminum can in the garbage, will generally take it out and try to find a recycle bin. It seems dumb to waste the aluminum, even though the value of the aluminum in one can is less than 2 cents.

But for most other things, recycling harms the environment. I’m not (just) saying it’s costly. I’m saying recycling is harmful. If you care about the environment, you should put your bottles and other glass in the regular garbage, every time.

This is now truer than ever. But it was also true back in 2008, when I visited Australia. And that was the case I tried to make. Let me go back and tell the rest of that story.

Tethered Goat

Remember, this was a conference for recycling advocates and manufacturers of recycling equipment, from around the Pacific Rim.

I was going to argue that there were economic reasons, technical but clear, why glass recycling was not only prohibitively expensive but also harmful to the environment. It made me wonder why I had been invited, but I surmised that they wanted to have at least one tethered goat for target practice, to keep sharp in being able to advocate their position.

I gave the talk, and… Nothing. Some polite applause, a few desultory questions. And then people just drifted off. I tried to strike up a conversation with some people who were still in the hall, and I asked them why there was no controversy.

One fellow was perfectly forthcoming: “Oh, we all know it makes no sense to recycle glass. The economic case is easy. But people should still recycle, because it’s simply the right thing to do. It’s not about the actual environment. It’s about enlisting people to care about the symbol of the environment. Overall, recycling is still worth doing, regardless of its effects.”

A young woman piped up: “It’s okay to say that sort of thing here, because we are insiders. But it’s better not to talk about the economics of things to the general public. We need to help train them to care about the environment, and recycling is one of the best ways to do that.”

I had heard something like this before, as I discussed in the 2007 article that likely got me the conference invite in the first place. An earnest young woman, the public spokesperson for the waste and recycling agency of a medium-sized town in the northeastern U.S. had told me breezily, “Oh, you have to understand: recycling is always cheaper, no matter how much it costs.” Oh, my.

The message I had worried about, and expected to be controversial, was old hat to the industry folks. But it was beside the point, because recycling was for them a moral imperative. Once you begin to think of recycling as a symbol of religious devotion rather than a pragmatic solution to environmental problems, the whole thing makes more sense.

As in any religious ceremony, the whole point is sacrifice: Abraham was ready to slay Isaac; Catholics give up meat during Lent; Muslims fast all day during Ramadan. And a young woman in Chile with two two-liter bottles sits in her car in line, knowing she is publicly visible and that her green moral virtue is apparent to everyone.

But lately the cost of the symbolic act of recycling, particularly for glass, has simply gotten too large. Cities and other local units were willing for a long time to sell their “customers” the chance to feel good about themselves, as long as the costs were reasonable. Recently however there has been a general decline in recycled commodity prices, and glass recycling in particular has crashed.

The recycling-industrial complex has been reduced to arguing that recycling “creates jobs,” though of course that’s only useful if the jobs produce something useful for consumers or improve the environment.

The real problem, as I see it, is that the recycling industry is selling indulgences, giving people the moral license to pollute because “Hey, I recycle!” To the extent that a lot of recycling is harmful to the environment, this is a double whammy: recycling is largely fake, but it enables people to feel okay about doing other things that pollute.

That young woman, in Chile? She was waiting in that line at the wheel of a large SUV.

Michael Munger is Professor of Economics at Duke University and Senior Fellow of the American Institute for Economic Research.

Photo by Javier Huedo on Unsplash

Trumpian Deregulation Boosts Economic Growth And Household Income.

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When I assess President Trump’s economic policy, I generally give the highest grade to his tax policy.

But as I pointed out in this interview from last year, there’s also been some progress on regulatory policy, even if only in that the avalanche of red tape we were getting under Bush and Obama has abated.

But perhaps I need to be even more positive about the Trump Administration.

For instance, I shared a graph last year that showed a dramatic improvement (i.e., a reduction) in the pace of regulations under Trump.

For all intents and purposes, this means the private sector has had more “breathing room” to prosper. Which means more opportunity for jobs, growth, investment, and entrepreneurship.

To what extent can we quantify the benefits?

Writing for the Washington Post, Trump’s former regulatory czar said the administration has lowered the cost of red tape, which is a big change from what happened during the Obama years.

Over the past two years, federal agencies have reduced regulatory costs by $23 billion and eliminated hundreds of burdensome regulations, creating opportunities for economic growth and development. This represents a fundamental change in the direction of the administrative state, which, with few exceptions, has remained unchecked for decades. The Obama administration imposed more than $245 billion in regulatory costs on American businesses and families during its first two years.

The benefits of deregulation are felt far and wide, from lower consumer prices to more jobs and, in the long run, improvements to quality of life from access to innovative products and services. …When reviewing regulations, we start with a simple question: What is the problem this regulation is trying to fix? Unless otherwise required by law, we move forward only when we can identify a serious problem or market failure that would be best addressed by federal regulation. These bipartisan principles were articulated by President Ronald Reagan and reaffirmed by President Bill Clinton, who recognized that “the private sector and private markets are the best engine for economic growth.”

But how does this translate into benefits for the American people?

Let’s look at some new research from the Council of Economic Advisers, which estimates the added growth and the impact of that growth on household income.

Before 2017, the regulatory norm was the perennial addition of new regulations. Between 2001 and 2016, the Federal government added an average of 53 economically significant regulations each year. During the Trump Administration, the average has been only 4… Even if no old regulations were removed, freezing costly regulation would allow real incomes to grow more than they did in the past, when regulations were perennially added… The amount of extra income from a regulatory freeze depends on (1) the length of time that the freeze lasts and (2) the average annual cost of the new regulations that would have been added along the previous growth path.

…In other words, by the fifth year of a regulatory freeze, real incomes would be 0.8 percent (about $1,200 per household in the fifth year) above the previous growth path. …As shown by the red line in figure 3, removing costly regulations allows for even more growth than freezing them. As explained above, the effect, relative to a regulatory freeze, of removing 20 costly Federal regulations has been to increase real incomes by 1.3 percent. In total, this is 2.1 percent more income—about $3,100 per household per year—relative to the previous growth path.

Here’s the chart showing the benefits of both less regulation and deregulation.

The chart makes the change in growth seem dramatic, but the underlying assumptions aren’t overly aggressive.

What you’re seeing echoes my oft-made point that even modest improvements in growth lead to meaningful income gains over time.

Daniel J. Mitchell is a Washington-based economist who specializes in fiscal policy. This article appeared at fee.org.

 

 

Green Fanatics Would Ban Airplane Travel. Entrepreneurs Will Innovate To Make Air Travel More Efficient And More Comfortable. Who Helps People More?

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Growing up, I lived next to an airport. It isn’t an airport that does connecting flights, nor does it allow for night flights. However, arrivals and departures are audible, and during the occasional military airplane test run, the windows tend to vibrate accordingly. Both my parents and I recognize that things have changed over the years, not least because we were spared the loud Soviet-era Tupolev airplanes for good.

Aircraft today are quieter. We’ve seen a reduction of 95 percent in sound power generated by aircraft jet engines since their invention. The technology of acoustic absorbers, through so-called “liners” or fans, creates drag that slows down the plane. Despite these innovations, modern aircraft also have better fuel efficiency, which results in burning less kerosene.

The International Council on Clean Transportation (ICCT) shows that between 1968 and 2014, the average fuel burn of new aircraft fell by approximately 45 percent.

Adding to that, we have more exciting news regarding aircraft to be released in the near future. Take the Airbus A321XLR: It has 30 percent less kerosene consumption per passenger than the previous generation of planes while adding 30 percent more range than the currently used A321neo.

That should not come as a surprise to anyone: Both the aviation sector and airlines lack any incentive to use more kerosene than they have to. Airlines are just as interested in fuel efficiency as you are.

A company such as Airbus can reinvest considerable amounts of resources into research for new models because they are making a profit. In 2018, the company invested over €2 billion into research and development. These funds employ researchers, engineers, and manual workers and pay for the services of producers of lightweight metals, such as aluminum. The current trend of decreasing fuel burn, as demonstrated by the curve of the graph above, is likely to continue.

Yes, companies are profit-driven. This expression is now frowned upon—as if seeking to make a surplus is something pejorative. Profits mean more money for research, turning into more profit. A number of examples illustrate how this has made our products easier to use, cheaper, and more efficient. Take the example of cars.

We know from the US Department of Energy that the average fuel economy of cars more than doubled from 1975 to 2018. The department also adds that increased performance typically comes as a trade-off with fuel economy but that light vehicle manufacturers have been able to employ advanced technologies to improve both performance and fuel economy:

Despite a 128% increase in horsepower and 49% improvement in acceleration from model year 1980 to 2018, the fuel economy of vehicles improved 32%. In the 1990s and early 2000s, fuel economy decreased while vehicle weight increased. Fuel economy has improved nearly every year since 2004.

This achievement would not have been possible in a time when automobiles were reserved only for the very wealthy. It is only the mass use of cars that has made it profitable to invest in fuel efficiency.

The phenomenal performance of innovation through businesses has not only been present in the transportation market but also in everything from faster internet to new varieties of beer, new medicines, and better delivery services. All of these things have been incentivized through the profit motive and made possible through the investment of part of that profit into R&D.

As governments around the globe attempt to reduce air travel for environmental reasons, increased taxation is an easy answer that we’ll keep hearing in the coming years. There are three ways through which governments are now looking to increase the price of your tickets.

First, they are considering putting a direct tax on your ticket. This is the most straightforward proposal and simultaneously the most visible to consumers, as it shows up in your shopping cart online when purchasing plane tickets. In Europe, passenger taxes already exist in the UK, Italy, Germany, France, Sweden, and Austria. The Netherlands is currently pushing the European Council to adopt an EU-wide tax.

By ending tax exemptions on kerosene, governments could tax fuel, which would result in consumers bearing the financial burden. In the European Union, a proposal is being floated of €330 ($370) per thousand liters of kerosene.

Through a reformed ETS (emissions trading system), governments can introduce a tax that isn’t as visible and is not even called a tax. In Europe, the EU created a system called EUA (European Emission Allowances), which is currently valued at €28.50 ($32.02) per ton of CO2. This is essentially a carbon tax that can be increased according to the interpretation of the environmental costs of emissions. For climate change activists in Germany, that price is $200.No matter which proposal governments choose and what the taxes would be called, they serve as nothing more than a short revenue increase for treasuries.

Let’s say you were to put a $100 tax on every flight ticket sold. This would render flying impossible for low-income travelers, and it would become a rare occasion for many others, resulting in families visiting each other less and long-distance relationships breaking apart. The people who would still be able to fly as frequently as before would be high-income earners, diplomats, bureaucrats, politicians, actors, musicians, and the like. Low-cost airlines would go bankrupt, and air travel would become the exclusive domain of business. The government would probably have to introduce subsidies for people living on island nations and to countries that have historically inefficient road and rail infrastructure.

As demand decreases, so will the incentive to innovate. Nobody buys a Ferrari for its fuel efficiency, so putting fuel consumption on the backs of high-income consumers (as well as those who have the cost of their tickets covered by taxpayers) won’t be a problem. Ultimately, the less people fly, the less airlines care about reducing carbon emissions. Adding to the problem, low-income consumers will still want to travel, forcing them into their CO2-emitting cars.

Flying less is not a solution to reducing carbon emissions—innovation is.

5 Charts Vividly Demonstrate The Economic Divide Between Socialist Venezuela And Free Market Chile

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Since Nicolas Maduro was sworn into his second term as President of Venezuela in January 2019, stories of civil unrest and economic hardship from the small Latin American country have dominated the media headlines. In the build-up to his controversial re-election, Maduro prevented opposition parties from freely and fairly competing for public support. Because of those electoral shenanigans and the human rights violations that followed, most Venezuelan citizens, as well as most Western governments, refuse to recognize Maduro’s legitimacy as President.

As widespread protests continue into their fourth month, one thing has become very clear: Venezuela’s experiment with socialism has been a resounding failure. The annual inflation is more than 80,000 percent and it is estimated that almost 90 percent of Venezuelans now live in poverty. Mass food shortages mean that the average Venezuelan has lost over 11kg in weight, despite Maduro’s waistline continuing to expand. The government’s murder squads fanned out throughout the capital, assassinating the ruling regime’s opponents. However, it’s important to remember that conditions in Venezuela haven’t always been this tragic.

Between 1958 and 1999, Venezuela was a democracy—albeit an imperfect one. The country suffered from corruption, but Venezuelans did not face food shortages or experience widespread human rights abuses. By regional standards, Venezuela also had a relatively free-market economy. Chile’s success starts in the mid-1970s, when the government abandoned socialism and started to implement economic reforms.

In the early 1950s, Venezuela’s gross domestic product per capita was among the highest in the world. It was higher than that in the United States and three times as high as that in Chile. Up until 1982, Venezuela was the richest country in Latin America. To fully appreciate Venezuela’s decline, it is useful to compare its fate to the massive political and economic improvements experienced by the people of Chile.

The story of Chile’s success starts in the mid-1970s, when the country’s government abandoned socialism and started to implement economic reforms. In 2016, Chile was the world’s 15th freest economy. Venezuela, in the meantime, declined from being the world’s 15th freest economy in 1975 to being the world’s least free economy in 2016 (Human Progress does not have data for the notoriously unfree North Korea).

As Chile’s economic freedom increased, so did income per capita (adjusted for inflation and purchasing power parity), which rose from being 32 percent of that in Venezuela in 1975, to being 287 percent of that in Venezuela by 2019. Between 1975 and 2019, the Chilean economy grew by 293 percent. Venezuela’s shrunk by 54 percent.

 

As its economy expanded, so did Chile’s ability to provide good healthcare for its people. In 1975, Chile’s infant mortality rate was 29 percent higher than Venezuela’s. By 2017, four times more infants died per 1,000 live births in Venezuela than in Chile.

With declining infant mortality and improving standard of living came a steady increase in life expectancy. In 1975, Venezuelans lived longer than Chileans. In 2017, a typical Chilean lived over five years longer than the average citizen of the Bolivarian Republic.

Moreover, more Chileans of both sexes survive to old age than they do in Venezuela. As they enter their retirement, the people of Chile enjoy a private social security system that was put into place by Cato’s distinguished senior fellow José Piñera. The system generates an average return of 10 percent per year (rather than the paltry two percent generated by the state-run social security system in the United States).

Finally, consider democracy. In his 1944 book The Road to Serfdom, the Austrian-born economist Friedrich Hayek explained that economic interventionism leads to massive inefficiencies and long lines outside of empty shops. A state of economic crisis ensues, leading to calls for yet more economic interventionism.

But increasing state control of the economy is inimical to freedom. First, there can be no agreement on a single economic plan in a free society. As such, centralization of economic decision-making has to be accompanied by the centralization of political power in the hands of a small elite. Second, as the economy deteriorates, authoritarian regimes that are determined to stay in power must silence the dissenters – through incarceration and even murder.

The economic and political deterioration of Venezuela has followed the pattern that Hayek described in 1944. In Chile, in contrast, free markets dispersed economic power amongst millions of Chileans and the military government, which ran the country between 1973 and 1990, gave way to democracy. Today, Chile is both economically and politically free.

This article appeared at fee.org, republished from Human Progress.

Marian L. Tupy is the editor of HumanProgress.org. Alexander C. R. Hammond is a researcher at a Washington D.C. think tank and Senior Fellow for African Liberty.
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