At Least One Why

To demand fairness, dignity, and respect...

2011-11-10T09:21:00.006-06:00

In a Huffington Post piece US Secretary of Labor Hilda Solis praised Ohio voters for overturning a recent law, which would have restricted collective bargaining rights for some public sector employees.

After months of advocacy and organizing, the people of Ohio have defeated a law that would have silenced the middle class and curtailed the collective bargaining rights of thousands of teachers, firefighters and police officers. Ohio has made it clear: these dedicated public servants still need a seat at the table to demand fairness, dignity and respect.

This statement begs the question: Who are the majority of Ohio voters trying to protect their public servants from? Well, from the employers who are treating teachers, firefighters, and police officers unfairly and without respect. And who are these horrible employers? The state and local governments in Ohio and their agencies, clearly.

Secretary Solis makes the case that state and local governments in Ohio are pretty lousy organizations to work for who treat their employees unfairly and without respect. But Ohio isn't alone. The vociferous protest against a similar law in Wisconsin earlier this spring suggest that residents in Wisconsin feel similarly about their government.

Why do we want to give greater power to governments who treat their own employees unfairly and without respect, give them more of our money, and entrust them with the care and support of the less fortunate among us?

A free market would have saved his life

2011-01-14T03:13:00.018-06:00

Mohamed Bouazizi was described as an unemployed 26-year-old university graduate who lived in Sidi Bouzid, Tunisia. On December 17, 2010 he snapped. He grabbed a gun and sprayed a barrage of bullets on a gathering organized by his government representative--no, wait! That's not his story. Let's see... he snapped - bought a gun, went to his university, emptied a magazine in a classroom full of students and then turned the gun on himself... hm... doesn't sound right, either.

Maybe this is it: Mohamed snapped - he left his family and joined the Al Qaeda Organization in the Islamic Maghreb. On December 17 he put on a suicide vest and walked into the crowded city center of Sidi Bouzid...

Mohamed Bouazizi is dead now.

Mohamed is indeed dead, but his story isn't either of these. Mohamed's story is different and, unfortunately, already forgotten. It goes like this:

Mohamed Bouazizi was 26-year-old university graduate. He grew up in a white stuccoed house, on a dirt road near the edge of Sidi Bouzid. [1] After finishing college he couldn't find a job in his field of study. But he was unemployed only in the sense that John Jacob Astor was unemployed when he was roaming the woods of Northern Michigan.

This Mohamed, not unlike John Jacob Astor, was a trader - he sold fruits and vegetables from a cart in his hometown. He took initiative, put his own capital at risk, exerted effort humbly (he was, after all, a college graduate selling produce on the street) to earn a meager living. Thus he supported his family. Mohamed provided fresh food to the people of his town and by competing with the other sellers he helped keep prices low for all consumers.

Just because nobody in Tunisia offered Mohamed Bouazizi a job, he did not jump on a boat to immigrate to Italy or France, as many of his countrymen did. Nor did he spend his days idly at the town's coffee shops or tea houses lamenting his plight. He didn't join Al Qaeda, much less strap on a suicide vest. He became an entrepreneur.

"Mohamed hoped most to buy his own van," said his sister, Samia Bouazizi, 19. "But he wanted it for work, not for himself." [1]

On December 17 the authorities approached Mohamed, told him he did not have the right to sell vegetables because he did not have a permit, and confiscated his inventory. Mohamed snapped - he got some gasoline, poured it over himself, and set himself ablaze in the main city street. He died from his burns two weeks later.

Mohamed Bouazizi's self-immolation has sparked nation-wide protests in Tunisia with police murdering dozens of protesters, and the unrest has forced the president Ben Ali to flee the country. The political turmoil is now the lead story.

But this simple fact remains: if Tunisian police had left alone Mohamed Bouazizi to sell his fruits and vegetables he isn't likely to have set himself on fire. Perhaps one day he would have earned and saved enough to buy a beat-up old van. With that old van he would have been able to bring more fruits and vegetables from farther away, providing greater variety, and possibly lower prices, to the people of Sidi Bouzid. He may have even made a little more money for himself and his family. Then maybe he could have bought a newer van, and then another. And as the little business grew, he may have needed to hire a couple of sales people to work his fruit stalls. And then he may have needed someone to keep track of the books, and hired a young Tunisian with an accounting degree, and then maybe somebody with a marketing, and then with operations degrees... And maybe then he would have hired an architect, and a builder, and borrowed money from a bank to build a refrigerated warehouse on the outskirts of town. The architect would have made some money, and so would have the builder, and the bank, and all of their employees... And so it goes.

Laissez-fiare, in plain English, means simply "let Mohamed sell his produce." That's the free market. If you think it sounds like a fantasy, read John Jacob Astor's story. For the alternative, read the news from Tunisia.

Independent Institute Names Winners of 2010 Templeton Fellowships Essay Contest

2010-09-28T14:18:00.006-05:00

OAKLAND, Calif., September 27, 2010—The Independent Institute announces the winners of its 2010 Sir John M. Templeton Fellowships Essay Contest!

First Prize in the junior faculty division for untenured college teachers went to Evgeniy Gentchev for his essay, “Making the Case: Effectively Advocating an Old Idea in Modern Times.” An associate professor of strategy and international business at Northwood University in Cedar Hill, Texas, Mr. Gentchev is also a contributing author of In Defense of Capitalism and co-editor of When We Are Free.

Click here to read to full press release.

Click here to read the winning essays.

Keynes vs Hayek - EduMocuDocu Music Video

2010-01-30T17:14:00.012-06:00

This video was created by John Papola and Russ Roberts. Visit them at http://econstories.tv

$3.5 trillion over the next decade

2010-01-22T14:35:00.006-06:00

For a fuller discussion of the problem of high health care costs, read my analysis on Scribed (link below):

With the election of Republican Senator Scott Brown in Massachusetts and the continuous public focus on the economy, the present health care reform effort in Congress appears stalled. Whatever happens to it, it is worth considering how much it would have cost to provide coverage under the current cost structure to the 15% of the US population, which is currently uninsured.

Much of the media latched onto the talking points of “budget neutral” and “deficit reducing over 10 years.” But these are nebulous concepts, at best. Whether something is budget neutral simply depends on how much redistribution happens through the government. The better question is how much will it cost. So here are a few simple, back-of-the-napkins calculations based on data provided by the Kaiser Family Foundation, The Congressional Budget Office, and The Congressional Research Service. Most of the data is from 2007 since the period of 2006-2008 is the time frame for which there is the most complete research and information. Ten or twenty percent adjustments of these figures don’t substantially alter the final result.

So covering the uninsured under the present cost structure would look something like this:

Private insurance covered a total of 172 million non-elderly Americans for approximately $900 billion. If we assume the 45 million currently uninsured are added to the rosters of private insurers, that’s an increase of 26% in customers for the insurance companies. (It doesn’t matter whether people are forced to pay directly the cost of health premiums, or do so through taxes, or subsidies.) Assuming costs are proportionate, annual health care spending will increase by 26% of $900 billion or by $234 billion.

The Congressional Budget Office forecasts that by 2019, health care costs would double. Proportionately, this means that the $234 billion per year will grow to $468 billion per year over the next decade. Assuming a linear increase, the average annual cost over the next decade would be $351 billion per year. Thus it will cost $3.5 trillion over the next 10 years to cover the people who are presently uninsured.

This calculation is clearly an oversimplification, but the assumptions made or ignored affect the cost estimates both positively and negatively. For example, some of the money that is currently spent by the uninsured out of pocket will no longer be spent out of pocket but through the insurance program. So the net increase in costs may be less than the $234 billion estimate. On the other hand, as people gain health insurance coverage, they tend to consume more health services, which will result in an overall increase in the consumption of health services, thus growing the dollar amount beyond the $234 estimate. Furthermore, the simplified estimate above ignores any adverse selection effects – the notion that the people who currently don’t have health coverage, on balance, require more health services than the ones who are covered.

Even if my simple estimate overstates the costs by a factor of two, and it doesn’t cost $3.5 trillion over the next decade but only half as much, the implication is clear – without dealing with the high and rising costs of health services, it will be very difficult to have broader coverage and to avoid the economic disaster caused by unsustainable health care expense levels.

Health care costs in the US - why so high?

2010-01-12T02:53:00.006-06:00

If the US health care industry were its own economy, it would be large enough to have a seat at the G8 table. It provides the most expensive health care in the world, though not necessarily the best, and it’s not accessible to millions. It is becoming a large and unsustainable burden on Americans and on the US economy. Both conservatives and liberals have enough reasons to demand a significant reform in the way the system operates but current reform efforts are largely misdirected.

The real cause of high and rising health care costs is either misidentified or ignored by lawmakers. Artificial villains are designated (malpractice lawyers, health insurers), which further detracts the public discourse, policy analysis, and political decisions from focusing on and removing the true drivers of costs. I recently researched and wrote an analysis of US health care costs, which concludes that the key underlying problem in our health care system is the inefficiency of doctors and hospitals.

Click on the "View my documents on Scribd" link below to read or download my analysis. The link takes you to Scribd, which hosts the paper.

Government logic

2009-12-11T16:14:00.004-06:00

The US House of Representatives has passed two bills that affect auto dealers, reports Automotive News today.

The Dealer Arbitration Bill is described as giving the 2,150 auto dealers whose franchises were canceled by GM and Chrysler more favorable terms in the arbitration of their disputes with the automakers. So the government decides to interfere in this business dispute not by establishing a mechanism for impartial resolution, not in support of its own to companies involved in it (GM and Chrysler), but by tilting the field against them and in favor of the dealers.

The second bill is the 1,279-page financial regulation legislation, which would create the Consumer Financial Protection Agency. Its intent is to protect consumers from making bad financial decision by regulating the sources of financing, such as mortgages, credit cards, etc. Given that the second largest financial transaction for most Americans is the purchase of an automobile, and that dealers are the biggest targets of consumer complaints about financing, one could expect the new law to regulate dealer financing as well. Not so--the bill excludes dealers-assisted financing from this regulation.

If your politics lean to the left, you're likely to accept the first bill but be appalled at the omission in the second. If your politics lean right, you would likely disprove of both. If you're an auto dealer...

Also today Automotive News reports that all of Toyota's North American factories are running over time to keep up with demand. Hm... if you're an auto dealer you might just want to get a Toyota franchise.

Spending: World defense vs US health care

2009-11-22T04:45:00.008-06:00

Click on the image below to view it in detail.

Sources:
The Center For Arms Control And Non-Proliferation (http://www.armscontrolcenter.org/)
The Henry J. Kaiser Family Foundation (http://www.kff.org/)

The breast exam scandal

2009-11-19T09:28:00.005-06:00

On Monday of this week a federal task force reversed a recommendation that women between the ages of 40 and 50 get annual mammograms. This caused a furor in the media. The Diane Rehm Show on NPR had a discussion on the topic this Wednesday. Based on what I hear and read in the media, women are appalled for two reasons:

1. The new guidelines may make some women in their 40s feel that they are no longer at risk, and that these women, failing to subject themselves to annual exams and mammograms, would suffer or die from breast cancer that could have been caught in time.

2. Private health insurance companies may use these new guidelines as a pretext to drop coverage of annual mammograms for women in their 40s. The consequence, of course, is that a substantial group of women will no longer have health insurance coverage for mammograms.

The second issues seems to cause the biggest outrage, and merits asking 'why' at least once.

In the media discussions, the cost of a mammogram was mentioned as being approximately $100. If a health insurance company drops coverage for this procedure, the women, who would previously have the test paid by their insurance company, would now have to spend $100 a year for the test.

Would this additional expenditure be financially ruinous to these women? Considering that people who are covered by private health insurance tend to be in the middle and upper class, it is hard to fathom that spending the equivalent of one month's cell phone or cable bill in order to protect their lives would have any impact on their finances or would make them very upset.

But what would happen to women of any age, who are not covered by health insurance? These tend to be the working poor - not poor enough to qualify for government help, yet not earning high enough income to afford health coverage. If mammograms are no longer covered by health insurance, they are likely to go the way of breast implants - paid out of pocket. As I wrote in a previous post, the prices of medical procedures that were paid out of pocket tended to decrease over time because they were subjected to the same forces of competition that make computers ever better and ever cheaper.

The net result is that as prices of mammograms drop, they will become more affordable and more accessible to the working poor who don't have health coverage. An for those relatively wealthier women with health insurance (who still have to pay out of pocket for their exams) the price will also be somewhat less than the current $100, perhaps dropping to something closer to a pedicure...

Why Does Health Insurance Cost So Much?

2009-09-15T15:39:00.003-05:00

This is the clearest explanation I've seen of why health insurance costs so much - a John Stossel report on 20/20, courtesy of the Independent Institute's blog. (Follow the link below)

Why Does Health Insurance Cost So Much?

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Lowering the cost of health care - another Detroit billboard

2009-09-12T10:11:00.009-05:00

In the spring of 2009, as the health care "debate" was starting to brew, I saw the above billboard on Interstate 75 in Oakland County, Michigan. The county, encompassing Detroit's Northern suburbs where Dr. Rifai's practice is located, is the fourth wealthiest in the nation among counties with over one million residents.

According to a Discovery Health Article, in 2007 the average national prices for the procedures listed on the billboard were as follows:

..................2007 National Average...... 2009 Dr. Rifai ....Difference(%)

Breast Augmentation: .....$ 3,816 ...........$ 3,400.............. ( - 11%)
Tummy Tuck ...................$ 5,264 ...........$4,900............... ( - 7%)
Liposuction .......................$ 2,982 ...........$ 2,000.............. ( - 33%)

This may seem like an apples-and-oranges comparison but even those can provide some valuable information on what's not happening.

First, consider the fact that the comparison is for surgical procedures in 2007 vs 2009. Given the continuously rising cost of medical services, we should expect that the 2009 prices (Dr. Rifai's) be higher.

Second, the comparison is for the average prices in the US against the prices offered in the fourth wealthiest large county in the nation. Again, it would be a reasonable expectation that the prices offered in the rich market would be higher than the national average.

Finally, the the same Discovery Health article states, "costs in the big cities tend to be higher than in the rural areas" which gives us yet another reason to expect Dr. Rifai's prices, in a major metropolitan area, to be higher than the national average.

Contrary to all these reasonable expectations, they're not. Why? Could Dr. Rifai's practice be an exception? It's possible. Could it also be that, not covered by medical 'insurance' policies, most elective plastic surgery procedures are paid by consumers out-of-pocket? And since consumers pay directly the full cost of the procedure, they feel motivated t0 shop around, creating a truly comeptitive market for plastic surgery, where unfettered competition by providers brings prices down over time? Such a competitive market is not so unusual, folks. It happens with iPhones, and gaming consoles, and food, clothing, cars, airplane travel...

Competition is the only way to reliably and sustainably lower prices for products and services. In the current debate on health care there's absolutely no talk of creating competition among the providers of medical services (contrary to popular belief it is not your insurance company that provides your medical services). Until you can shop around comparing prices various doctors charge to fix your broken leg the same way you can shop around comparing prices for your liposuction we are not going to get the cost of health care down.

(I'd love to hear from any of you who have seen a price list for medical services... If you ever walked into a hospital or a doctors office and were offered a price list, please send me an email at atleastonewhy@gmail.com)

35 years behind the wave / Detroit billboard

2009-06-26T00:38:00.003-05:00

Driving in Detroit recently I noticed a billboard touting Detroit Medical Center's (DMC) new initiative to use bar codes to scan and track 100% of the medications it administeres. The hospital system proudly runs a TV commercial with the same message. Interestingly, this article in today's New York Times explains that today marks the 35th anniversary of the first use of a bar code in a retail setting (a ten-pack of Juicy Fruit gum that cost 67 cents, scanned on the morning of June 26, 1974).

If you are not from around here you might think that, 35 years after the first use of bar codes, the DMC is the last hospital to catch up. Unfortunately, DMC is the first hospital in Michigan, and among the first the the US, to use bar codes to track medications...

So why has it been advantageous for 35 years for retailers to track Juicy Fruit gum using bar codes, but it has not been advantageous for hospitals to use the same inexpensive technology to track medications?

"Capitalism in crisis"

2009-05-08T00:47:00.009-05:00

The phrase is the title of an opinion piece in yesterday's Wall Street Journal by federal circuit judge Richard A. Posner. One comes across the expression frequently these days, and I think it is worth examining the meaning of it a little closer. Why is "capitalism in crisis?"

What is meant by the statement? The word capitalism describes a system of economic organization, in which capital is owned and controlled by private individuals and organizations in an environment of economic competition. We also refer to this system as 'private enterprise,' or 'free enterprise' or 'free market.' It is distinct from a communist economic system, where government both owns and controls the capital of a country, or a fascist system, where capital is owned by private individuals but is largely controlled by the state, or a socialist system, where a portion of the capital may be owned by the government and a sizable portion of the capital is controlled by the state. In any case, the term capitalism describes a particular economic system.

Is this system of economic organization in crisis? To the extent that much private capital in America today (GM, AIG, many large US banks, etc.) is controlled by the federal government, one can justifiably say that the system of capitalism in the US is in crisis.

Of course, what Judge Posner and everyone else mean when they say that capitalism is in crisis is, in fact, that the economy is in crisis. This is something quite different. The rhetorical confusion has a rather unfortunate consequence: instead of focusing on fixing the economy, the gut-level reaction is to change the system. This is extremely unfortunate, since capitalism is the only economic system that has a consistent long-term record of increasing people's standard of living.

Moore and Me

2009-04-01T08:25:00.006-05:00

Today (4/1/2009) Michael Moore (the same one of "Roger and Me" and "Fahrenheit 9/11" fame) posted a letter on his website addressing the Obama's administration involvement with the US auto industry. The letter starts by suggesting that it is very inappropriate for the President of the United States to interfere directly in the business of a private corporation. It's April 1st, after all, and the punchline comes soon enough:

" 'What are we going to do about this Obama?' Not much, fellows. He has the massive will of the American people behind him -- and he has been granted permission by us to do what he sees fit."

President Obama may have the massive will of the American people behind him, except, apparently, the will of the workers at the GM Powertrain plant in Ypsilanti, MI. A relative, who drives an eighteen-wheeler, was in the plant yesterday to pick up a load. He said that the workers were so angry, frustrated, even distracted by the decision of the President (of the US, not of GM) that they loaded his truck with the wrong parts at first.

Furthermore, and Mr. Moore should know this since he has a picture of the US Constitution on his website, right above the title of his letter, the President of the United States has not been "granted permission by us to do what he sees fit." He was only elected by us to "... faithfully execute the Office of President of the United States, and ... to the best of [his] Ability, preserve, protect and defend the Constitution of the United States" (the Oath of office). Article II of the US Constitution spells out what the president can do, such as appointing ambassadors, cabinet members, even Supreme Court Justices, but nowhere does it say appointing CEOs or firing them.

Michael Moore's point later in the letter is that after all these years when GM presidents (starting with Roger Smith) laid off thousands of hard working auto workers, someone finally gave a pink slip to the president of General Motors:

"Not one of them ever thought that one day they would witness the CEO receive the same treatment. Of course Chairman Wagoner will not have to sign up for food stamps or be evicted from his home or tell his kids they'll be going to the community college, not the university. Instead, he will get a $23 million golden parachute. But the slip in his hands is still pink, just like the hundreds of thousands that others received -- except his was issued by us, via the Obama-man. Here's the door, buster. See ya. Don't wanna be ya."

Don't wanna be ya? Mr. Moore seems to miss his own point: the laid off GM workers struggled precisely because they lost their source of income. Most laid off workers would rather be Rick Wagoner with his $23 million golden parachute.

This doesn't seem to be the first time Michael Moore misses his own point. In Roger and Me (watch the movie - it's great!) he spends half the time outlining the struggles GM is facing as it attempts to adapt to global competition (which, if it had done successfully, would not have caused GM to be facing bankruptcy today) and the other half on the failures of the Flint city government to bring about economic development. It seems lost on him that while he is asking government to solve economic problems he is exposing precisely government's inability to solve economic problems.

But the points above are merely philosophical. As a practical matter, take a look at these Time magazine articles on two cars made by government-run factories: Trabant and Yugo. Though they weren't particularly environmentally friendly, they got excellent gas mileage, and with today's advanced catlytic converter technology and the right government mandates, we could make them as clean as Prius.

Lights out - now we need the light bulbs on

2009-03-26T17:02:00.014-05:00

It was sad to see the beautiful Chrysler headquarters building outside Detroit seemingly deserted when I passed by it last Saturday evening. While office buildings normally leave many of their lights on 24/7, the only lights visible that night in the glass and steel Chrysler tower were the faint emergency exit lights. I figured it must be some cost saving measure (it is), but the momentary thought that the building might actually be vacant was jolting.

Chrysler is an American institution. Founded in 1925 by Walter P. Chrysler, the company introduced numerous innovations, many of which became industry standards. Walter Chrysler was a manufacturing and engineering genius who cut his teeth in the locomotive building business before switching to automobile manufacturing. The company is one of the "Big 3" American automobile manufacturers that survived competition and consolidation in the industry that saw literally hundreds of companies go out of business since the 1920s. None of this, of course, mandates that Chrysler must survive the current economic turmoil. On the other hand, the possible demise of this venerable American corporation is neither necessary, nor necessarily helpful.

It would be really sad, I think, if Chrysler ceases to exist. Not just for sentimental reasons, either. But the current artificial life support, the government loans with their strings attached, may not be the solution to bringing Chrysler from the brink of extinction. It seems to me that now is the time to open the floodgate for all kinds of creative ideas, as many as possible, from anywhere across America and around the world. I teach my students that modern corporations must be learning organizations in order to survive the global competitive environment. Now is the time for Chrysler to become a learning organization- to plug into as many people and other organizations as possible, to plug into any source of ideas that might flame the creative sparks, which might lead to new, innovative, creative solutions for its current predicament.

There are thousands of business and engineering school students who crave for an opportunity to put their minds to work on really challenging real-life cases, there are tens of thousands of workers (and former workers), with their ears (and noses, and eyes) close to the ground who have perspectives and experiences that the corporate executives lack, there are civic organizations and others, thousands, if not hundreds of thousands, who may be interested in solving a challenging problem like bringing Chrysler back from life support. Thomas Friedman would call this "open source innovation." It's possible, it's doable, it's a bit crazy, but it's the way the knowledge economy (fyi: that's today's economy) works. The real question is, can Chrysler plug into, and manage, such an open source innovation model, or will it just wait to hear for whom the bell tolls? Alas, the answer is out there: Its own blog rules state:

1-In the spirit of honest, free-flowing conversation...
...
11-The blog is not intended as a forum for outside suggestions, including but not limited to those which pertain to vehicle design, product attributes, marketing or advertising, and no such material will be posted.

Yes, I know, the Chrysler blog is just one out of many possible ways to plug into the open source innovation 'thing' in this flat world of ours, still... The company saves a few thousand dollars by turning the lights off at night, but what it really needs is to find a way to turn lots of light bulbs on if it should have any hope of survival. In the spirit of honest conversation, I'd like to help you out, Chrysler, really, but my entire lifetime tax dollars just went to the guy sitting over there, in the dark corner of the AIG executive cafeteria. Sorry, all I've left is advice.

This all began back in the Renaissance

2009-03-18T13:50:00.009-05:00

A couple of months ago I was flying to Switzerland to co-teach a class on innovation to students from five continents. Coming from the United States, I would inevitably be asked about my take on the financial crisis. Formulating my analysis, I noticed the irony that while I would be commenting on the proposed government bailouts and economic stimulus packages, I would be doing so a few miles downhill from Hotel du Parc , Mt. Pelerin, site of the first gathering of the Mont Pelerin Society sixty years earlier. This group, mostly economists, had argued that government intervention in the economy leads to government monopoly, and worse. (related post)

Above the Atlantic, I was also catching up on my WSJ reading, perusing KLM’s in-flight magazine, HollandHerald, during my breaks from the Journal. I found two interesting articles.

The first one, When It Comes to Cash , A Thai Village Says ‘Baht, Humbug!’ in the WSJ (Jan 7, 2009), told the story of a village in Thailand, which decided to print its own money after the 1998 Asian financial crisis. Unable to rely on the value of the government-issued baht, the villagers started printing their own local currency, and have been using it successfully for a decade, side-by-side and in competition with the baht. The result has been local economic growth and development largely unaffected by the vicissitudes of the broader Thai economy that relies exclusively on the monopoly currency.

Therefore, if competition is better than monopoly (anti-trust legislation is almost universal) and government monopoly is worse (especially so, according to the Mont Pelerin Society), why do we have a government monopoly on money, and could that monopoly have contributed to the current financial crisis?

The second article, Douglas Rushkoff’s Futurenomics in the HollandHerald (Jan 2009), gave perhaps the easiest to understand answer to these questions. I strongly believe in the need for clear communication, thus, impressed by the clear explanation, I quote a few of the most relevant passages below, throwing in one example from US history for a good measure:

“This all began back in the Renaissance, when a waning monarchy was looking for ways to preserve its power in the face of a rising merchant class. The merchants were becoming richer than the royals. So the monarchs came up with an idea: chartered monopolies. By granting one of these new companies exclusive province over a particular industry or region, monarchs earned their undying loyalty—as well as a generous portion of shares in the enterprise. They began to write laws that favoured their chartered companies,…

Such a law was the Tea Act of 1773, which granted the East India Company, originally chartered by Elizabeth I in 1600, exclusive right to import duty-free tea into the American colonies. This mandated cost advantage gave it a virtual monopoly. Bostonians, in protest of such special privilege, boarded the company’s ships in the harbor and dumped the tea overboard. Interestingly, it may have been Benjamin Franklin who proposed that the British Government relieve the East India Company of paying duties on its tea as a way to prop up its finances. Nowadays we call that bailout.

“…such as preventing inhabitants of colonies from creating any value for themselves; they had to ship raw resources back to the mother country, where they were processed into clothes or other finished goods. This model of business-by-extraction carried over to finance as well. European towns had used local currencies for centuries. Farmers would bring their wheat to a grain store, who would in turn give them receipts for the amount of grain kept for them. These receipts served as local currency. The system was so efficient, and people were living so well, that people of this era were taller than at any time until the last few decades. By making local currency illegal, a monarch could force people to use his own more expensive ‘coin of the realm’ instead. So, rather than being earned into existence, this money was borrowed into existence.

“Over the next 400 years, the business of money slowly grew bigger than business itself. A central bank creates money and charges interest to the next bank down the line, and so on, until it gets to the business that needs to do something useful. The problem is, more value is being extracted on each level than business can produce. There are simply too many institutions—too many lenders—to be paid.

How the free market conserves limited resources

2009-03-02T23:50:00.006-06:00

A display in a museum in Ft. Worth, Texas. This is one way, in which the free market served both the needs of the less well off and simultaneously conserved a precious natural resource, in this case--water in the Southwest.

(Photo courtesy of Ioana-Claudia Iordache, Bucharest, Romania)

Free market - use, misuse, and an explanation

2009-02-16T15:55:00.003-06:00

In a recent editorial (Shut Up, They Said Feb 13, 2009) The Wall Street Journal claimed that Congress should not restrict companies, which receive bailout money, from using this money for lobbying Congress. A reason it gave was that it is unfair to prevent corporations from lobbying when unions, which receive bailout dollars indirectly through workers’ wages and dues, aren’t restricted from lobbying Congress. Supporting the idea that companies could use federal handouts to lobby congress for more federal handouts is decidedly not a free market principle.

‘Free market’ is an oft misunderstood notion. As I wrote in an earlier post, all markets are free. The issue here is that in much of the public’s mind ‘free market’ is essentially a fascist idea, a state of affairs in which the government supports big private businesses at the expense (it is always at someone's expense) of everyone else. The public is basically right: such was the state of economic affairs under fascism. It is wrong, however, to associate it with the ideas of individual liberty and free market capitalism as advocated by Adam Smith, Friedrich von Hayek, and Milton Friedman. The WSJ, a supposedly free-market leaning paper, contributes to the confusion by defending privileges for big corporations at the expense of taxpayers.

Free markets mean that businesses compete for consumers’ attention and dollars, and the government does not support one business or another, nor interferes in the economic activities of citizens and businesses, except to enforce the don’t lie, don’t cheat, and don’t steal laws. (Where was the government when Madoff was lying to his investors and stealing $50 billion of their savings?)

Laissez faire, that economic concept of leaving people alone refers precisely to letting companies compete for customers’ business and not having government support one corporation or another. It does not mean letting the hungry starve or letting the homeless freeze to death in winter. Free markets mean legal competition without government support for anyone. The WSJ-types who support government bailout for corporations and the use of bailout dollars for lobbying are no different than the populists and socialists who want massive government transfers from “the rich” to “the poor and the middle classes.” Both oppose free markets and competition, they just choose different beneficiaries. Here is how Friedrich von Hayek described these people and the situation in his classic 1945 book The Road to Serfdom:

What in effect unites the socialists of the Left and the Right is this common hostility to competition and their common desire to replace it by a directed economy...

Yet… the universal struggle against competition promises to produce in the first instance something in many respects even worse, a state of affairs which can satisfy neither planners nor liberals [of the classical type]: a sort of syndicalist or “corporative” organization of industry, in which competition is more or less suppressed but planning is left in the hands of the independent monopolies of the separate industries. This is the inevitable first result of a situation, in which people are united in their hostility to competition but agree on little else. By destroying competition in industry after industry, this policy puts the consumer at the mercy of the capitalist and the worker of the best organized industries. Yet…it is not a state which is likely to persist or can be rationally justified. Such independent planning by industrial monopolies would, in fact, produce effects opposite to those at which the argument for planning aims. Once this stage is reached, the only alternative to a return to competition is the control of the monopolies by the state—a control which, if it is to be made effective, it must become progressively more complete and more detailed.

A case in point: on Feb 16, 2009 WSJ reported "Bankers Face Strict New Pay Cap." In addition, the recently passed economic stimulus bill contains restrictions on hiring H1-B (professional foreign) workers by any company receiving TARP funds. Add these to the Congressional restriction on the use of bailout money mentioned earlier. These policies seem reasonable in light of the current circumstances, but they also validate Hayek's assertion that in order for government's efforts to be effective, government's control must become progressively more complete and more detailed.

The real problem of government control isn't government control per se. Nor is it, necessarily, that it will lead to total enslavement (serfdom) of the citizens by the government (although, historically, that's what happened in Soviet Russia and Nazi Germany). The more immediate problem with government control of industry is that, political ideology notwithstanding, it leads to inefficiency, fewer products, higher prices, corrupt practices, and lower standards of living. It sustains a minuscule class of super rich government-backed oligarchs and a fairly equal, in its misery, class comprising almost all of the population. Exhibit 1: most of Latin America. Exhibit 2: Eastern Europe before 1989.

Described accurately, supporting free markets is not supporting a policy to aid any one business. It is supporting a policy of competition among businesses. Such competition leads to innovation, more efficient use of resources, lower costs and greater availability for consumers, and a higher standard of living. Without competition a democratic nation will slide toward an oppressive and inefficient system, going through a corporative stage first, as Hayek very coherently explained. But perhaps such an idea of free markets and competition sounds a bit far-fetched and utopian?

Interestingly, there is one area of American life where this almost utopian laissez faire idea is both the law and the practice. Read the First Amendment of the US Constitution: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;” The resulting free market for religion, where the government neither regulates nor supports one faith or another, provides Americans with the largest possible choice of religious options in the world. There are no restrictions on the number of foreign religious workers as in the case of other foreign workers, and there is practically no unemployment among them. Every church, mosque, synagogue, or temple of any kind exists, competes with all others, and flourishes despite its inability to collect taxes or to force anyone to support it involuntarily, and despite the fact that for over 200 years, through wars and depressions, no religious institution in America has received a government bailout. Consequently, America today is the most religious country in the Western world, so much so that at the dawn of the 21st century only in America does religious doctrine vie to displace science as the explanation of the physical world taught in the classroom.

Imagine if we had a 28th amendment to the Constitution that read, “Congress shall make no law respecting an establishment of commerce, or prohibiting the free exercise thereof.." and if we enforced it as religiously as we do the First... Ah, but then we'd be quixotic dreamers...

Che vive! (Che lives!) - but why?

2009-02-13T22:20:00.006-06:00

The first condition of immortality is death.
Stanislaw J. Lec, "Unkempt Thoughts"

I recently saw the 4-hour Steven Soderberg saga Che: A Revolutionary Life. I grew up in a communist country, so Che was a hero to me when I was a teenager. I've read his biographies, one of them while doing research at Senator Margaret Chase Smith Library in Skowhegen, Maine. I've bought t-shirts with his image from street vendors in Paris. I have a poster of him in my office, right above the shelf with books by Adam Smith, Friedrich Hayek, and Milton Friedman. My relationship with Che seems to be a paradox.

And so is the fact that Ernesto "Che" Guevara, the Argentine doctor-turned-hero of the Cuban revolution is one of the most successful brands (read commercial, capitalist success) today even though he led a revolution against capitalism. As the French economist and philosopher Guy Sorman wrote recently "No teenager in rebellion against the world or his parents seems able to resist Che's alluring image. Just wearing a Che T-shirt is the shortest and cheapest way to appear to be on the right side of history."

So if Che is associated with a now-discredited political and social order, why does he continue to live in the hearts and minds of so many around the world? All the arguments against him, from the coherent (see Alvaro Vargas Llosa's excellent essay The Killing Machine: Che Guevara, From Communist Firebrand to Capitalist Brand, ) to the hateful (read Sorman's article here) do nothing to diminish the power of his symbol.

It seems to me that the detractors are barking up the wrong tree. They are historically correct: Che supported an oppressive regime, he executed people without due process, his contribution to Fidel Castro's military victory in Cuba was probably immaterial, his record as a minister of industry after the revolution was dismal; his other military endeavors, in Africa and Bolivia, were utter failures. Che did not even stay to build communism in Cuba. But Che's popularity is not related to these failures. He is not a symbol of of great military leadership, nor of just legal process, nor of economic development. He is not even a symbol of successful revolutions.

***

Che was a free spirit. He rode a motorcycle thousands of miles across Latin America, living the adventure of a lifetime that many only dream of. Budd Fox, the ambitious stock trader from the movie Wallstreet, wanted to ride his motorcycle across China. Ewan McGregor, the real-life movie actor did ride his motorcycle around the world.

Che did have a compelling B.H.A.G. (Big Hairy Audacious Goal--you Harvard MBA-types should recognize this term. For the rest, it simply means vision.) He wanted a world where most people would have a better life. He went about it the wrong way (like McKinsey consultants, he was an idea man, not much of an implementer) but his vision was one that most civilized and honest human beings share. Every politician, from the left or from the right, believes that her policies will make life better for her constituents. Every economist, whether a central planner or a free marketer believes that his theories would lead to better lives for the people. Every parent wants a better life for the children.

Che was selflessly dedicated to his vision. He suffered with his asthma during the years in the mountains of Cuba, and later in the jungles of Congo and Bolivia. He gave up his family and the cushy life as a Cuban minister of industry to lead small, disorganized bands in some of the roughest places in the world in pursuit of his vision. He did it despite the overwhelming odds against him. Ultimately, he paid with his life. Under most circumstances we call this idealism and heroism.

It was also just a coincidence that on March 5, 1960 the young, handsome, and brooding Che was captured by Alberto Korda's lens in that memorable photograph. That image has become the logo of the Che brand. Its artistic essence and impact are far better described by Trisha Ziff here. Without it "Che" would not mean the same thing. Could you imagine Nike without the swoosh and "Just Do It"? It would be just another Chinese sneaker. And Coca Cola without its cursive script and contour bottle is just another sugary drink. Coincidences, shared dreams, and misfortunes created the Che brand.

Sure, different people interpret Che differently. But for most the logo, this image, the brand have little to do with the particular political leaning of the historical person Ernesto Guevara. They have to do with the quixotic idealism and faith that, against any odds, a better life is worth fighting for. The Argentine doctor Ernesto Guevara, called Che by his friends, with all of his shortcomings, failings, and sins has long since been killed. Che--the symbol--the 20-th century Don Quixote, has taken on a distinct life of its own. And if Cervantes's character is any guide, Che will live on.

Free market fundamentalism--more pathos, less logos

2009-01-13T12:57:00.001-06:00

"Free market fundamentalism" is one of the catch phrases used by many proponents of socialist-type government intervention in the face of the current economic crisis. The phrase seems immensely powerful at implying that free market policies are evil and should not even be considered in a discourse on solving the current crisis.

I recently did a search using the ABIN/Inform Global Database (which contains full-text articles from thousands of periodicals around the world) for the word fundamentalism. The search returned 1,823 results, organized chronologically, with the most recent articles listed first.

Seven of the last ten articles were on economic or free market fundamentalism, the remaining three were on religious and Islamic fundamentalism. Of the next 50 (older) articles only one tied fundamentalism to free markets, in all others the association was with religious (Islamic in particular) fundamentalism.

Islamic and religious fundamentalism have been synonymous with something threatening and evil in recent years. Now the loaded term fundamentalism is transferred to free market policy ideas, infecting them in the public's perception with the same sense of threat and evil as is associated with terrorists.

As a rhetorical technique this is likely to be effective since it plays on people's emotions (pathos). Unfortunately, it doesn't contribute to a reasoned debate about what we should do next. That takes more logos.

Naomi Klein: A rhetorical criticism--ethos, pathos, but no logos

2009-01-08T20:25:00.001-06:00

Among my work duties is coaching the university's speech & debate team. One type of presentation my students develop is rhetorical criticism. It identifies the pattern, a so-called communication model, used by a speaker or a writer of a message; it lists the steps that the communicator takes: from getting an audiences attention to 'closing the sale' in conveying a persuasive message. The analysis culminates with a judgment about the effectiveness the communication.

I recently watched author Naomi Klein (The Shock Doctrine: The Rise of Disaster Capitalism) in several discussions on the current economic crisis. She seems to be one of the preeminent critics of free-market ideas (and of Milton Friedman) and a proponent of expanded government intervention. Listening to her I noticed a pattern in the way she communicates her radical socialist ideas to her audience. She employs a five-step model:

1. Legitimate criticism of recent policy failures
2. Stirring an emotional response from the audience
3. Proposing a radical socialist policy idea to the impassioned audience
4. Stating a positive (by anyone's standard) desired outcome

Capitalizing on humans' natural tendency to seek causal relationships, her model effectively implies that it is her radical socialist policy that would lead to the desired positive outcome.

5. Repeating steps 1 through 4 in the same order.

As a communicator, she seems very effective at winning audiences to her side using her communication model. She earns legitimacy (in rhetoric we called that ethos) by starting off as a journalist and making good, critical observations of policy failures. Then she uses emotions (pathos) to suggest that her radical socialist policy ideas would lead to better outcomes than the failed recent policies. What is lacking is the third element of rhetoric--logos--logic.

Two out of three "ain't bad" in swaying a friendly audience's opinion. But the lack of logic means that Ms. Klein's position, while helping her sell books (nothing wrong with that), doesn't make a meaningful contribution to the public debate on future policies. She's merely "preaching to her choir" as most free market proponents do to their friendly audiences.

Why can't we have a serious public discussion and a reasoned debate about how to deal with our crises and challenges?

Fidel Castro on globalization, circa 1985

2009-01-02T02:09:00.004-06:00

In today's world, in the economic arena, noone is absolutely independent, not even the United States, nor Japan, nor Western Europe. They depend on oil, raw materials, and from many other countries they need markets, they need trade. No country is totally independent economically.

Fidel Castro
February 11, 1985 interviewed by Robert MacNeil for MacNeil Lehrer News Hour on PBS.

One hopes that economic protectionists today listen, at least, to Fidel.

The least ideological defense of free markets

2008-12-30T20:47:00.002-06:00

One of the failures of proponents of free market principles is not communicating the ideas in a logical and coherent manner. Frequently, advocates make generalized, exaggerated, and unqualified claims that lead to logically weak and easily defeated arguments.

One of the least ideological and most coherent defenses of free markets is done by Alvaro Vargas Llosa and George Ayittey, contributors to the book Making Poor Nations Rich, discussing their work on a C-SPAN program. You can watch the entire program by clicking on the link below:

http://www.booktv.org/program.aspx?ProgramId=9154&SectionName=&PlayMedia=No

DART-ing to the airport (Part 2)

2008-12-23T17:26:00.007-06:00

(In the spirit of Christmas, I write this post with gratitude to my neighbors who were forced to finance about 3/4 of my public transit trip. Thank you! Read part 1 here. )

...The only notable observation as the train emerged from the tunnel into downtown was a yuppie couple walking their dog. Dallas has been making an effort to bring residents back into the downtown area with some success.

At Union Station downtown I had to switch from the DART light rail to the TRE (commuter train heading to the airport). I had never been to Union Station in Dallas and was not sure what to expect. Fortunately, all trains run on only two tracks, right next to each other. There are no different platforms to find for different trains and different destination. One only needs to make sure to get on the train going in the right direction. A man asked me what time the Blue Line train was coming, heading south. As I was running my finger down the schedule posted near the ticket vending machine, the man expressed surprise that that , actually, was a schedule. I didn’t know if he’d been this close to the ticket machine before.

The TRE commuter train arrived shortly; we boarded to stay warm during the 20 minutes to departure. Almost every seat was eventually occupied, and there were several people traveling standing. In 2007 the TRE carried a total of 2.5 million passengers. On an average weekday last month it carried more than 10,500. It took 30 minutes to reach Centerport station, halfway between Dallas and Fort Worth and nearest to the airport. A shuttle bus was waiting, a pleasant surprise given that the online schedule (on the TRE website, not on Google Maps) showed I’d have to wait 20 minutes for the shuttle. According to the driver they usually wait for five minutes past the TRE’s scheduled arrival time at the station (if the train is late) to pick up passengers for the airport. The shuttle technically goes to the airport, but in fact we were deposited at the Remote South parking lot, from which the final leg of the journey is effected on the intra-airport shuttles, depending on which terminal ones has to go to.

The entire trip, from locking my front door to lining up to check in luggage (Northwest Airlines now charges $15 for the first checked bag) cost me $5 and took two hours. The same one-way trip in a taxi costs $50 and takes 40 minutes. A friend can drive you “for free”, though the round trip would take two gallons of gas and, when you add the airport entry fee, the real price approximates the public transportation fare.

I was pleasantly surprised by my experience: although it took longer than the alternatives, it was by far the most relaxing way to accomplish the trip. And I was able to do productive work on my computer for most of that time. The only thing is, next time I will use Google (a private company) to do my trip planning on the DART system (a public organization).

And then I wonder if we shouldn’t just let Google run our public transit. I mean, my trip cost me $5 and it cost the taxpayers in Dallas around $13.50 in subsidies. (Thank you, neighbors, for paying for most of my trip!) Maybe this helps explain why my property taxes went up 10% this year when housing values (on which the taxes are based) are crashing. So I say, let Google run DART! I won’t mind looking at some targeted text ads inside the train while I’m riding for free, saving $5, saving Dallas taxpayers another $13.50, and saving Lee from his worries of being caught (again) without a ticket.

DART-ing to the airport (Part 1)

2008-12-23T16:58:00.008-06:00

The outside temperature had been 30 degrees earlier, then it dropped to 28. An hour later I felt none of the cold as I was running to the bus station dragging a suitcase behind and worrying I might miss the bus. It was a feeling I had last felt a decade and a half earlier. This would be my first purposeful use of public transit as an adult. I had declined several offers for a ride to the airport and was dead set on using only public transportation to get there from home.

Public transportation in the Dallas area is operated by the Dallas Area Rapid Transit (DART), running buses and DART light rail, and in collaboration with the Trinity Railway Express (TRE) commuter train service provides a link from the city to the Dallas Fort Worth International Airport and on to Fort Worth itself. Altogether is served more than five million passengers in November of 2008.

Two days prior I had gone on the DART website to find out how I could get to the airport from my home using only public transit. The website’s “A to B done quickly” trip planning function did not work but a customer service representative answered the phone quickly and was very informative. With her help I had the schedule figured out: I would take the bus to a DART train to the TRE train to a Shuttle to another Shuttle. Figuring it all out, including time spent on the website and speaking with customer service took me 30 minutes. It was my first time, after all. Then a friend showed me how in 30 seconds I could get the same information on Google maps. (Click on 'get directions' and then select 'by public transit' from the drop-down box, where the default is 'by car.') Except Google had more helpful scheduling and map information and was better organized.

I had not realized that on my block there were DART bus stops. Rushing and dragging the suitcase behind it took me one minute to get to the farther stop, the one I needed. I was exactly five minutes early, as the DART website advised. Four minutes later the chilly air had cooled my face pleasantly and was starting to freeze my fingertips through the gloves. Right as the bus was coming.

I was the only passenger, though on an average weekday over 160 thousand people ride on a bus in Dallas. The driver had served four years in the Army in Germany in the late 70s and early 80s. He liked it so much he extended his stay by two years. He didn’t look that old but said he had a 31-year old son. It was a short trip to the DART rail station.

I could take either the Red or Blue lines, whichever came first to go downtown. On an average weekday 70,690 passengers ride DART rail. At the station there were a few people. I met Lee. He had a sore throat. He had moved from Chicago two months ago to the south Dallas neighborhood of Oak Cliff to care for his blind mother. He was the only son out of six children. He had a jacket ripped at the left sleeve and said he earns his living by doing small projects in a woodworking shop his father had left him. He asked if I would leave him my ticket after my last stop but we were going in different direction. The time he got caught without a ticket he said he was only issued a warning. I wondered if DART statistics count all passengers or just paying ones.

The Red Line train came first and left a minute ahead of schedule. There were a few riders, Lee and I among them. Between this station and downtown the line goes underground, like a subway. As it went into the tunnel my ears popped. I suppose the fast moving train caused the air pressure in the tunnel to rise. Inside the car the electronic mini billboard caught my attention: free pregnancy tests, become a barber, try Newport seafood and steaks, hiring RNs part and full time, trivia answer: b) a can of who hash, time 3:20. It was actually 3:23.

To be continued...

Lacking: Sense of Humor And Other Things

2008-12-20T02:10:00.002-06:00

The last post (Wanna See a Bigger Crisis...) stirred some unexpected responses from readers. They seemed to take seriously the suggestion to keep healthcare costs and prices high in order to avoid a bigger economic slump. I wonder what exactly they thought… “Hm… the logic is straight forward but… something seems a bit off… “ This tells me that I am lacking as a humorist. Although it also makes me wonder why would anyone think that the suggestion was serious? Was it the reliable data from the Bureau of Labor Statistics?

Clearly, to keep healthcare costs and prices up makes no sense overall despite the fact that some in the healthcare industry benefit from the current structure. But it makes just as little sense to advocate artificially propping up housing prices when they have come down. If it is the policy of the United States to promote home ownership then why do some advocate having the government increase housing prices? Maybe it will make homeownership more affordable for the poor? It makes little sense to complain about prices going down in one industry and up in another.

Perhaps there is something wrong with both industries, and the direction in which prices have moved is merely an indication of problems. Mandating higher prices in the housing sector and lower prices in the healthcare sector doesn’t solve the problems of these industries. It would be like trying to cure your child’s fever by sticking the thermometer in the freezer for a minute to lower its reading. The indicated temperature will come down but your child is still sick. By focusing on the prices as the problem and hurrying with solutions to the price issue we not only ignore the underlying causes of the problems but we may make things worse both in housing and in healthcare.

Wanna See a Bigger Crisis – Solve the Healthcare One

2008-12-17T01:17:00.003-06:00

Why are we complaining that healthcare prices keep going up? Didn’t we just see what happened when housing prices came down? It seems the bottom fell out of our economy. I say, to keep America’s economy going strong (or at least, to keep it from completely collapsing), don’t let healthcare costs come down! Learn from the housing crisis: be proactive and keep healthcare prices up!

I looked at the US Bureau of Labor Statistics (BLS) data for the healthcare and construction industries and found some insightful information. With the collapse of the housing segment of the economy the home construction industry is taking a serious hit. Many construction workers, naturally, are losing their jobs. Consequently, these formerly employed workers lose their income (which, according to the BLS, was higher than the national average income in all private industries) and the butcher and baker, etc. who used to sell to these workers and their families lose customers and revenue, and in turn their suppliers lose revenue, etc, etc, along the chain. Clearly, the negative effect ripples (or rips?) throughout our feeble economy.

The construction industry employed (yes, past tense, since all data are for 2006, the latest available) 7.7 million workers, 2 million of them in no way associated with residential construction, which leaves 5.7 million affected by the housing crisis. These are a lot of workers in an industry that is collapsing. We are witnessing the consequences and feeling the pinch as unemployment increases and incomes slide.

Now let’s look at the healthcare industry. Like construction, it also paid above the national average. Unlike construction, it employed nearly two-and-a-half times as many workers—a whopping 13.6 million! It is the single largest industry in these United States. Imagine what would happen if healthcare prices collapsed—hospitals and doctors’ offices across the country, unable to generate the cash flow to pay their employees, would have no choice and be forced to lay off many of these workers. A lot more butchers and bakers, etc. etc. would be hurt by the ripple (or is it now tsunami?) effect of such layoffs.

Well, one might say, tough luck for those Porsche-driving, trophy-wife sporting doctors who ignored us and overcharged us on our last office visit! Alas… Of the 13.6 million workers in healthcare only 3.4% (less than half a million) are physicians and surgeons. They number fewer than even the top management and business types employed by the industry (4.2%). So if docs and execs account for less than 8% of healthcare workers… who are the 92%? According to the BLS, they are middle-class Americans whose jobs require [certain skills and training but] less than 4 years of college education. Are these the good American jobs we want to sacrifice on the altar of low healthcare costs? Haven’t we seen and suffered enough from the consequences of low housing prices and growing unemployment in the much smaller construction industry? Why do we never learn from history?

So why are we complaining that we have a healthcare crisis? Solving it would cause a much bigger one, you see.

Yet Smaller Minority View

2008-12-14T23:11:00.012-06:00

Why do proponents of freedom and free markets often sound wacky, closed-minded, ideological, and unreasonable? Why did free market ideas get their turn as public policy only after absolutely everything else had been tried and failed, and are on their way out at the first sign of economic disturbance? I suspect the answer to the first question might help with the second one.

I recently encountered a short essay by George Mason University professor Dr. Walter E Williams on the auto industry bailout. Professor Williams is a free market economist whom I greatly respect but his essay illustrates my concern. I was sad to see how most people, not sold on the free market ideas, could easily see him as ideological, disconnected from reality and, worse yet, irrelevant to the real economic issues of the day. He is neither. The problem with the small minority of true believers in individual freedom and free markets is that their approach to communicating their ideas leaves most people scratching their heads and wondering what planet those free market weirdos come from.

I take several paragraphs of Dr. Williams’ essay to illustrate why I think free market proponents sound like the members of a wacky cult to a vast majority of the people. (You can read Prof. Williams' complete essay here )

Let's not allow Congress and members of the bailout parade panic us into allowing them to do things, as was done in the 1930s, that would convert a mild economic downturn into a true calamity. Right now the Big Three auto companies, and their unions, are asking Congress for a $25 billion bailout to avoid bankruptcy. Let's think about that a bit.

I agree with the call of Prof. Williams. It just doesn’t seem that this call is really effective at having many people consider his viewpoint. Majority of people don’t understand nor, consequently, buy the idea that the federal government helped usher in the Great Depression of the 1930s. But by being controversial instead of informational in the opening paragraph the author would tend to turn away readers who he might wish to persuade.

What happens when a company goes bankrupt? One thing that does not happen is their productive assets go poof and disappear into thin air. In other words, if GM goes bankrupt, the assembly lines, robots, buildings and other tools don't evaporate. What bankruptcy means is the title to those assets change. People who think they can manage those assets better purchase them.

In theory this is always true. In practice many things influence the outcome, so it is sometimes true. In Detroit, history (empirical evidence) shows, it is frequently not true. When GM closed factories and laid off 30,000 workers in Flint, Michigan in the 1980s (subject of Michael Moore’s first film Roger and Me ) other industrial companies did not come and take over the closed GM plants or employ the laid off workers. The same is largely true of Detroit where many more American car companies have abandoned facilities. Fifteen years ago when I first moved to Detroit I was shocked by the sight of long abandoned factories and yards. The same ones still lie vacant today. Drive south on Interstate 75 and merge onto I-94 West near downtown Detroit to see the skeleton of the old Fisher Body Plant (photos/history) on Piquette Street dominating your view. Or see the photo essay The Industrial Ruins of Detroit. There is plenty of evidence that the buildings, assembly lines, and tools have lost their value, fallen into disuse in the last four decades and have never found productive purchasers and uses.

Here is how Walter P. Chrysler biographer Vincent Curcio put it in his 2000 book Chrysler: The Life and Times of An Automotive Genius:

It took Detroit a long, long time to recover from the disaster of 1933…

Investment in the city dried up for a long, long time. The skeletons of huge uncompleted buildings haunted the cityscape for decades, and large tracts of land intended for housing lie empty and weed-covered even now, sixty-five years later. Detroit became a gigantic and failed place…

With so much and so vivid evidence in plain sight, the theory that assets of bankrupt enterprises go to more productive uses sounds like a fairy tale to the lay observer.

Two vital marketplace signals are the profits that come with success and the losses that come with failure. When these two signals are not allowed to freely function, markets operate less efficiently. To be successful a business must take in enough revenue not only to cover wages, rents and interest but profits as well. In order to accomplish that feat executives must not only satisfy customers but they must do it in a manner that efficiently utilizes all of their resources. If they fail to cover costs, it means that resources are not being used efficiently and/or consumers don't value the good being produced relative to some other alternative. When a firm routinely fails to turn a profit, there are bankruptcy pressures. The firm's resources, workers, building and capital become available to someone else who might put them to better use. When government steps in with a bailout, it enables executives to continue mismanaging resources.

This is again true but we have to pay close attention to the details: First, we’ll have to see how long the dramatic decline in car sales lasts, but it may be possible that the market size during the past several years had been artificially sustained with too easy credit and profligate (and unsustainable) consumer spending. This means that it is possible for the foreseeable future to have a car market measurably smaller than it has been thus far. This in turn implies a significant overcapacity exists in the car manufacturing business, which would indicate that the auto manufacturing assets may not be turned over from an unprofitable to a profitable company (managers), but could simply be left to sit idle, the cost of converting them to other uses too high.

Second, the fact that a firm’s resources in a bankruptcy become available to someone else in no way means that there is someone else who can productively employ these resources. They may sit idle. Again, plenty of examples exist in the rust belt of America.

Herein lies the crux of the matter: Idled assets and unemployed workers may not have alternative uses and employment, unless the costs of these assets and workers becomes very attractively low. It is possible that if Detroiters were willing to accept $4/hour to work in a factory that manufacturing firms might flock to Michigan. It’s possible, even somewhat likely. This, however, would mean a reduction in the standard of living of these workers that is unseen and unimaginable in our lifetime, and unacceptable to the workers. The unspoken risk is that it may cause a disruption of the social fabric and of civil behavior. The real question is then: how do we sustain the standard of living while realizing that Toyota isn’t simply going to take over the bankrupt GM plants in Michigan?

Professor Williams’ paragraph sounds like there is no problem, that everything can work out without anyone giving it a second thought. This is perhaps why free market proponents often seem disconnected from reality: a failure to acknowledge the fact that many individuals are suffering and that, as I briefly discussed above, their suffering may not end in the foreseeable future. On the other hand, advocates of government intervention say, “We see and acknowledge the problem, we feel your pain, we’ll have the government do something.” The government, clearly, can do something—it’s an easy sell for people who face immediate economic difficulties. Instead of educating people that government intervention doesn’t help and makes things worse, and offering better alternatives, the free marketers come in and say, “Don’t worry about it, it will all work itself out.”

The failure of the free market economists is to engage in a public conversation about alternative solutions to the very real economic challenges we are facing. Just because the government shouldn’t force a solution on everyone doesn’t mean that every single individual should face and handle one’s problem completely alone without any support from or interaction with the rest of the community. Public discourse through the media, or in town halls, or in college or community seminars can be educational, it can stimulate creative ideas and solutions. All economic progress comes from inventing valuable things to do and to make. Such progress comes neither from government programs nor from doing nothing and only hoping each individual would figure something out alone.

Free marketers today seem to instinctively oppose any "public" or "community-based" solutions because they equate them with coercive government mandates. They seem to forget that Ford, Toyota, Google, and The Red Cross are all voluntary, community-based solutions to the problems of transportation, information gathering, and emergency response. By constructively engaging in public debate supporters of economic freedom are likely to contribute to both solving the current economic challenges and to legitimizing free market ideas as reasonable alternatives to socialism and coercive collective action.

There are no regulated markets, only restricted freedom

2008-11-28T08:59:00.003-06:00

"We need smart regulation!" This is the mild version of the outcry for regulating market activities that came after the economic slowdown and the housing and financial crises. The talk seems to be that markets went to excesses, that markets failed, and that markets need to be regulated in order to prevent people from losing too much money. I think that term "regulated market" is an oxymoron. It makes no sense.

Markets are simply an abstract notion that means the voluntary interactions of individuals, given any and all constraints, to solve their economic problems and desires. When we say we are regulating a market, it sounds rather impersonal, technocratic, and even appropriate. But we don't regulate the market, we limit people's freedom to interact in some way. The market is not regulated. When people have less freedom, they interact differently, taking into account their increased constraints. The resulting interaction is the market.

People always face some constraints. We don't have enough money or enough time to buy all of the things we want, so as consumers we give up some purchases. If we are offering products for sale, we are incapable of communicating to all potential customers the value of our product, so we give up some sales. These are real constraints. If the authorities tell us it is illegal to buy or sell some product, some of us stop trading that product and some simply hide from the authorities. The market is not regulated, the market is simply the individual's voluntary efforts to satisfy some economic need in the face of the given constraints, be they natural or government created.

So let's be clear, we don't regulate markets. Even "smart market regulation" plainly means restriction on citizens' freedoms.