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Month: December 2015

Comparative Advantage: An Idea Whose Time Has Passed – Article by Michael Munger

Comparative Advantage: An Idea Whose Time Has Passed – Article by Michael Munger

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The New Renaissance HatMichael Munger
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The Division of Labor Is the Engine That Drives Prosperity

Many economists will tell you that the most important principle in economics is comparative advantage — the idea that it is expensive to grow oranges in Alaska or to flood rice paddies in Saudi Arabia, so Alaska and Saudi Arabia should import oranges and rice, respectively, and base local production on the advantages of local conditions. We got this idea from classical economist David Ricardo, who famously observed in 1821 that England and Portugal would both be wealthier if Portugal exported its wine and imported England’s textiles, and vice versa.

Ricardo’s principle even demonstrated the advantages of trading with those who are less productive at everything. For example, my wife is an attorney. She is also a fast and accurate typist. Yet she hires a secretary who is considerably slower at typing. Secretaries get paid less than attorneys, so if my wife specializes in law and the secretary specializes in typing, my wife can earn more for her firm and a secretary gets a job. Both end up better off. That’s true even though my wife is better at both jobs: comparative advantage means trade helps everyone.

Division of Labor Trumps Comparative Advantage

The problem is that fixed comparative advantage — derived from weather, culture, and location — is vanishing in the modern world. Ricardo’s classical formulation leaves no space for human creativity, no role for division of labor, and no room for innovation to affect the dynamics of cost.

So economists have it wrong, as my friend Russ Roberts argued in 2010. The most important principle in economics is opportunity cost. Here’s proof: you can define opportunity cost without resorting to comparative advantage. But you can’t possibly define comparative advantage without invoking opportunity cost.

The notion of comparative advantage is empirically misleading, because it sounds deterministic. There are few situations where fixed factors make the relative opportunity costs of different actions immutable. Instead, cost and productivity differences are endogenous, the consequence of human ingenuity and the division of labor. Today’s cost advantage for one country may disappear if another country finds a better, cheaper way to produce the product. And the way to specialize is to exploit the division of labor.

Sock City

What nation lost the most manufacturing jobs from 1990 to 2000? China. That may seem surprising, given the media stereotype of how we “ship US jobs overseas,” but it’s true (PDF). In 1990, Chinese manufacturing meant large sheds filled with hundreds of people working with sewing machines and other small tools. The scale was huge, with at least 100 million manufacturing workers. But productivity was terrible.

In the late 1990s, China began to automate, taking advantage of division of labor. A thousand women with sewing machines in a barn turned into 25 women running enormous machines in a factory, with a gigantic increase in productivity. A fraction of the workers produced 10 times as much output, increasing productivity a hundredfold and forcing 97.5 percent of the workers out. But those workers found new jobs, as China used the division of labor more and more effectively. The country’s advantage was not climate, not soil quality, but human action consciously designing production processes that were cheaper and faster.

Nowhere did productivity rise faster than in the city of Datang in Guangdong Province. Part of Datang is actually called “Sock City,” because more than a third of all socks sold in the entire world (yes, the world) are manufactured there. Datang boasts more than 8,000 hosiery makers ringing the city center, and they produced more than 11 billion pairs of socks in 2012. The socks you’ll find at Walmart — or even at Neiman Marcus or another more upscale store — were likely made in or around Datang.

The concentration of manufacturing at Sock City means this: there is a well-developed labor market for exotic sock-making specialties. The occupations that are well known in Datang don’t exist elsewhere, because no other location has been able to take such full advantage of the division of labor. What limits the division of labor in Datang? Only the extent of the market, just as Adam Smith said in The Wealth of Nations. And remember that Datang is producing at a rate of nearly two pairs of socks per year, for every human on the planet. Datang’s market is Earth.

It wasn’t always that way. Datang does not have any comparative advantage, at least not in the way Ricardo meant. The climate is not especially favorable, the city is not near an essential natural-resource base, and sock making is not part of traditional culture. Datang’s dominance is new and is overtaking historical frontrunners like Fort Payne, Alabama, the self-proclaimed Sock Capital of the World.

Fort Payne “began making stockings in 1907 and once boasted of producing 1 of every 8 pairs worn on the planet,” writes Don Lee in “The New Foreign Aid,” published April 10, 2005, in the Los Angeles Times. However, he explains,

China’s advantages in the global marketplace are moving well beyond cheap equipment, material and labor. The country also exploits something called clustering in a way that the United States just can’t match.… Industrial clusters are like one-stop production centers, achieving economies of scale and driving innovation by geographically bunching suppliers, manufacturers and contractors.…

Meanwhile, American producers, pummeled by imports from China and elsewhere, saw their share of the US hosiery market fall from 69% in 2000 to 44% in 2003, according to the latest industry data.

Comparative advantage is fixed and exogenous. Opportunity cost is mutable, the product of innovation. Datang’s Sock City itself may soon lose its dominance.

Who “should” produce socks? Comparative advantage here is no guide; the situation is more like comparing two street porters who appear to be quite similar. One of the street porters figures out ways to make socks much more cheaply. Over time, the advantage in opportunity cost grows because of the improvements in dexterity, tool use, and design of new production processes. Human ingenuity created an opportunity for nations to specialize in activities where their opportunity costs were lower. Specialization and trade are what produce prosperity, and opportunity costs guide the choice of what each country should specialize in. My comparative advantage today may be your comparative advantage next year. But all the street porters started out the same.

Focus on Opportunity Cost

Economists routinely act as if three related key concepts — division of labor, comparative advantage, and opportunity cost — are distinct.

They are not. Comparative advantage is not a separate concept at all. It is simply an explanation of the implications of the division of labor (the engine that drives prosperity) and opportunity cost (the concept that guides the choice of which activities a person, or a nation, should specialize in).

Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.

Let’s downgrade comparative advantage from our list of key concepts in economics, and recognize that the human mind is the mainspring of a market economy.

Michael Munger is the director of the philosophy, politics, and economics program at Duke University. He is a past president of the Public Choice Society.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

Why Is the Middle Class Shrinking? – Article by Steven Horwitz

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The New Renaissance HatSteven Horwitz
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Two Arguments in Favor of Economic Inequality

Economic inequality continues to be a major political issue even as the headlines scream about terrorism and climate change. Bernie Sanders has made it a centerpiece of his presidential campaign, and other candidates have addressed it along the way. And a recent study by the Pew Research Center has added new, though misplaced, fuel to the fire of those concerned about inequality.

The Pew study has been discussed in the media, and one key point has been grossly misunderstood. Among other things, the study found that the American middle class is shrinking and is now just under half of the population. Commentators quickly began to refer to the “hollowing out” of the middle class and to tie this study to the concerns about growing inequality.

However, a close look at the data shows that the middle class has shrunk since 1971 because more members of the middle class have moved up the income ladder than down it.

Don’t believe me? Look for yourself at the terrific graphic that the Financial Times created to illustrate the data:

ft2015inequalitygraphYou can watch as the folks on the left slowly slide to the right over 44 years. When you compare the 1971 distribution with the 2015 one, what do you see? A growth in households earning around $80,000 or above, adjusted for inflation, since 1971 and a significant decline in those making less than that amount (with the exception of the folks right around $0). It’s true that there’s not a fat middle class anymore, but why should that trouble us if there are more high-income households and fewer low-income households overall?

The funny part of this is that if you read the story in the Financial Times that accompanies this graphic, it’s as if they never actually looked at the graphic they produced. Their narrative is at odds with it, as the narrative proclaims the doom-and-gloom story that the graphic actually refutes. As they say, never let the facts get in the way of a good story.

This growth in household income may, to some extent, be a by-product of the same economic processes that have produced the concerns about inequality, illustrated in this graphic by the significant growth of the ultra-rich.

There are far more very rich people today than there were 44 years ago, but the growth of the upper class has gone hand in hand with the enrichment of a large number of less-well-off households. Are there ways in which economic inequality is good, then? I think the answer to that question is yes. If so, then, what are they? Here are two defenses of economic inequality that proponents of the free market could make.

First is the more obvious one: growing inequality is good because it might be a consequence of economic institutions that produce all kinds of results that we think are desirable. For example, if competitive markets lead to peace and rising prosperity for all but also create inequality along the way by allowing some folks to get very rich, then we should at least tolerate that inequality because the things that produce it also produce other things we like.

This is the usual defense libertarians invoke, and it’s a good argument. The critic, however, might say that even if the defense is true, it doesn’t prove that inequality is necessary for that result. There’s a difference between saying, “Good economic institutions will produce inequality while creating good economic outcomes for all,” and saying, “Good economic outcomes for all can’t be produced without inequality.” The critic would likely ask how reducing the inequality that markets produce will harm their ability to produce those good results.

And here is where we come back to the Pew study and get a second defense of inequality. One way the middle class (and all of us) has become richer in the last generation is that the cost of so many goods and services has dropped in terms of the number of hours we have to work at the average wage in order to purchase them. The lower price of basic goods has enabled more and more people to afford things like large TVs, smartphones, and new, cheaper medications.

One thing that has made this process happen is inequality. In The Constitution of Liberty, F.A. Hayek argued,

A large part of the expenditure of the rich, though not intended for that end, thus serves to defray the cost of the experimentation with the new things that, as a result, can later be made available to the poor.… Even the poorest today owe their relative material well-being to the results of past inequality.

Having a group of very rich people is what enables yesterday’s luxuries to become today’s basics.

There are two parts to this process: cost bearing and discovery. The very rich are able to afford the high prices of new technologies, thereby providing an incentive for firms to market new and expensive products. Once the rich pay the high initial price and cover the fixed costs of research and development, sellers can begin to price closer to the much lower marginal cost of producing additional units, making the good much more affordable to more people.

But the rich are also an economic canary in the coal mine that informs producers whether they are getting it right.

For example, a critic of inequality might complain that no one “really needs” a $100,000 luxury car with all kinds of new high-tech gadgets on it. But the fact that some can afford it and want to buy it helps the car companies figure out which new features might be popular. Rear-view cameras were once only available on top-end cars, but they have slowly become a standard feature. The same may soon be true of collision warning systems now available on high-end models of some cars.

In fact, everything we think of as basics today was once the province of only the well-off. The first microwaves were expensive and bought mostly by the rich. I can remember my parents paying about $900 for a VCR in the late 1970s. VCRs, of course, fetch a price close to zero these days. The rich who bought the early LCD TVs helped manufacturers defray the fixed production costs and figure out what people wanted, and now these TVs are in the vast majority of houses at a more affordable price.

The inequality at any point in time is a key part of the process that creates wealth for the rest of society over the years to follow. The very rich enable producers to experiment and cover their costs, and that makes more goods more affordable for the rest of us, from fun toys to life-saving necessities.

The inequality produced by the market is a key part of how the market moves forward, enriching all of us in the process. And that’s why the middle class is shrinking: the rich, through the competitive market, have helped make the middle class richer.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

America’s Concentration Camps Are a Warning, Not a Model – Article by Gary McGath

America’s Concentration Camps Are a Warning, Not a Model – Article by Gary McGath

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The New Renaissance HatGary McGath
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But some politicians are trying to revive their legacy

Woodrow Wilson’s reputation has recently taken a well-deserved beating because of his racial policies. He restored segregation in the federal civil service, and the infamous movie Birth of a Nation highlights his support for the Ku Klux Klan. Those policies are dead today, with very few advocates.

However, a more recent president implemented an even worse race-based policy against Americans, and some politicians say we should emulate it today. Franklin D. Roosevelt’s executive order forcibly removed about 120,000 Japanese-Americans, mostly US citizens, from their homes.

After the bombing of Pearl Harbor, people feared a Japanese attack on the West Coast, and many regarded the Japanese American population in California as disloyal. On February 19, 1942, Roosevelt issued Executive Order 9066, which authorized the military to remove people from designated military areas.

As explained in Greg Robinson’s By Order of the President, Roosevelt’s language was broad, but everyone understood “any and all persons” to mean Japanese-Americans and “military areas” to mean the West Coast. The removals included “Issei” — resident immigrants — as well as “Nisei” — native-born Americans with Japanese parents. Immigration from Japan had been banned since 1924, and all Japanese immigrants were ineligible for citizenship, although all had been living in America for at least eighteen years.

They were forcibly removed to ten concentration camps. The government officially called them “relocation centers,” but Roosevelt himself used the words “concentration camp” in a recommendation as early as 1936, as did a military proposal in 1942. The occupants were kept behind barbed wire, and armed guards kept them from leaving.

The mass displacement of Japanese-Americans, but not people of German or Italian extraction, was the result of racial rather than security considerations. Roosevelt showed a lifelong hostility toward the Japanese. Robinson states:

FDR had a long and unvaried history of viewing Japanese-Americans in racialized terms, that is, as essentially Japanese in their identity and emotional allegiance, and of expressing hostility toward them on that basis.

In the years before World War I, Roosevelt considered immigration part of the Japanese threat to the West Coast. During the 1920s, when Roosevelt urged better relations with Japan, he supported immigration restriction and legal discrimination in order to deter Japanese-American settlement.

A report commissioned by Congress concluded that

Executive Order 9066 was not justified by military necessity, and the decisions that followed from it — exclusion, detention, the ending of detention and the ending of exclusion — were not founded upon military considerations. The broad historical causes that shaped these decisions were race prejudice, war hysteria and a failure of political leadership.

As documented by Thomas Fleming in The New Dealers’ War, Roosevelt proposed removing an even larger number of Japanese and Japanese-Americans in Hawaii. The military objected because so many of them were skilled workers who were necessary to the war effort.

The order banning Japanese-Americans from the West Coast was lifted in January of 1945, and the camps were shut down soon afterward. Many returned to find they couldn’t reclaim their property or return to their homes.

These events should be a shameful chapter in America’s past, but even today people cite them as an example to follow. David Bowers, mayor of Roanoke, Virginia, ordered the city government to stop helping Syrian refugees, citing Roosevelt’s internment order as justification.

Al Baldasaro, a New Hampshire state representative and co-chair of Donald Trump’s state veterans’ coalition, has defended Trump’s proposal to ban Muslim immigration by citing World War II internment: “What he’s saying is no different than the situation during World War II, when we put the Japanese in camps.”

Trump has made the connection between his call for banning Muslim immigrants and creating a national registry and FDR’s policies explicit:

What I’m doing is no different than FDR’s solution for German, Italian, Japanese, you know… They stripped them of their naturalization proceedings. They went through a whole list of things; they couldn’t go five miles from their homes. They weren’t allowed to use radios, flashlights. I mean, you know, take a look at what FDR did many years ago and he’s one of the most highly respected presidents.

Trump evaded the question of whether he would have supported Japanese internment, saying, “I would have had to be there at the time to give you a proper answer.” He wasn’t there, but there are still living Americans who were. One was George Takei, who played Lt. Sulu on Star Trek and was sent off at the age of five. He recalls how it happened:

Without charges, without trial, without due process — the fundamental pillar of our justice system — we were summarily rounded up, all Japanese-Americans on the West Coast, where we were primarily resident, and sent off to 10 barb wire internment camps — prison camps, really, with sentry towers, machine guns pointed at us — in some of the most desolate places in this country.

For the sake of a false sense of security, the US government ruined countless lives, imprisoned tens of thousands without charges, without even accusation, with only the mere fact of their skin color and ancestry. The internment stoked hatred against a minority group, squandered potential assets in the war, and fueled the Axis’s anti-American propaganda.

The lesson that America’s concentration camps should have burned into our national consciousness that we must never do that again — not to a racial, national, or a religious minority, nor anyone else — no matter how afraid we are. They are a warning, not a model.

Gary McGath is a freelance software engineer living in Nashua, New Hampshire.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

Sci-Fi City – Art by Maxime Delcambre

Sci-Fi City – Art by Maxime Delcambre

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maxime-delcambre-sci-fi-city-md-bannerjpgNote: Left-click on this image to get a full view of this digital work of art.

Created by digital artist Maxime Delcambre, this futuristic matte painting portrays a flourishing science fiction cityscape.

Visit Maxime Delcambre’s portfolio for more of his matte paintings and illustrations.

This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License and was originally posted on DeviantArt.

What Are The Chances For Peace in 2016? – Article by Ron Paul

What Are The Chances For Peace in 2016? – Article by Ron Paul

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The New Renaissance HatRon Paul
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Each year more than one trillion dollars goes up in smoke. More accurately, it is stolen from the middle and working classes and shipped off to the one percent. I am talking about the massive yearly bill to maintain the US empire. Washington’s warmongers have sold the lie that the military budget has been gutted under President Obama, but even when the “Sequester” was in effect, military spending continued to increase. Only the pace of increase was reduced, not actual spending.

None of this trillion dollars taken from us is spent to keep us safe, despite what politicians say. In fact, this great rip-off actually makes us less safe and more vulnerable to a terrorist attack, thanks to resentment overseas at our interventions and to the blowback they produce.

The money is spent to maintain existing conflicts and to create new areas of conflict overseas that in turn feed the demands for more military spending. It is an endless cycle of theft and deceit.

Billions were spent not long ago overthrowing an elected government in Ukraine and provoking Russia. A new Cold War is a bonanza for the military-industrial complex, the pro-war think tanks, and the politicians. NATO is on the move in eastern Europe, placing heavy weapons right on Russia’s border and then blaming the Russians when they complain about the rising militarism. NATO military exercises on Russia’s border have increased and become more confrontational.

In the Middle East, more billions have been spent attempting to overthrow the secular government of Syria over the past five years. The big winners in this grand scheme have been the Islamist extremists, who are funded directly and indirectly by the US and its allies. NATO is planning to go back into Libya, an admission that its 2011 “liberation” of that country has been a disaster.

In Asia, the US empire challenges and provokes China, sending military ships and aircraft into territory China claims in the South China Sea. How much will the US continue to escalate before China gets fed up?

The more money sent to the Pentagon and other parts of the Washington war apparatus, the more danger we are in.

Meanwhile, almost all of the presidential candidates promise more military spending and more war if they are elected. Did no one tell them we are broke and making enemies fast with our interventions? Do they think Fed-created money will really continue to fuel the US empire indefinitely?

What are the prospects for a U-turn toward peace and prosperity in 2016? We must be realistic. Presently the numbers are not on our side. But the good news is we do not need a majority to succeed in our fight for peace and liberty. We need only a dedicated and uncompromising critical mass to make great headway.

What can we do to work for peace in 2016? First we must tune out the lying propaganda served up by the US mainstream media. We must educate ourselves so that we can help educate others. We can be sure to tune in and support alternative sources of news and analysis like the Ron Paul Liberty Report, LewRockwell.com, Antiwar.com, and many others. We can tell others about the wealth of truth available to those who seek and question. We must not compromise and never accept the lesser of two evils.

If the people demand peace, the politicians will follow. Let’s demand peace in 2016!

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Are We Entering The Age of Exponential Growth? – Article by Marian L. Tupy

Are We Entering The Age of Exponential Growth? – Article by Marian L. Tupy

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The New Renaissance HatMarian L. Tupy
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In his 1999 book The Age of Spiritual Machines, the famed futurist Ray Kurzweil proposed “The Law of Accelerating Returns.” According to Kurzweil’s law, “the rate of change in a wide variety of evolutionary systems (including but not limited to the growth of technologies) tends to increase exponentially.” I mention Kurzweil’s observation, because it is sure beginning to feel like we are entering an age of colossal and rapid change. Consider the following:

According to The Telegraph, “Genes which make people intelligent have been discovered [by researchers at the Imperial College London] and scientists believe they could be manipulated to boost brain power.” This could usher in an era of super-smart humans and accelerate the already fast process of scientific discovery.

Elon Musk’s SpaceX Falcon 9 rocket has successfully “blasted off from Cape Canaveral, delivered communications satellites to orbit before its main-stage booster returned to a landing pad.” Put differently, space flight has just become much cheaper since main-stage booster rockets, which were previously non-reusable, are also very expensive.

The CEO of Merck has announced a major breakthrough in the fight against lung cancer. Keytruda “is a new category of drugs that stimulates the body’s immune system.” “Using Keytruda,” Kenneth Frazier said, “will extend [the life of lung cancer sufferers] … by approximately 13 months on average. We know that it will reduce the risk of death by 30-40 percent for people who had failed on standard chemo-therapy.”

Also, there has been massive progress in the development of “edible electronics.” New technology developed by Bristol Robotics Laboratory “will allow the doctor to feel inside your body without making a single incision, effectively taking the tips of the doctor’s fingers and transplant them onto the exterior of the [edible] robotic pill. When the robot presses against the interior of the intestinal tract, the doctor will feel the sensation as if her own fingers were pressing the flesh.”

Marian L. Tupy is the editor of HumanProgress.org and a senior policy analyst at the Center for Global Liberty and Prosperity. He specializes in globalization and global wellbeing, and the political economy of Europe and sub-Saharan Africa. His articles have been published in the Financial Times, Washington Post, Los Angeles Times, Wall Street Journal, U.S. News and World Report, The Atlantic, Newsweek, The U.K. Spectator, Weekly Standard, Foreign Policy, Reason magazine, and various other outlets both in the United States and overseas. Tupy has appeared on The NewsHour with Jim Lehrer, CNN International, BBC World, CNBC, MSNBC, Al Jazeera, and other channels. He has worked on the Council on Foreign Relations’ Commission on Angola, testified before the U.S. Congress on the economic situation in Zimbabwe, and briefed the Central Intelligence Agency and the State Department on political developments in Central Europe. Tupy received his B.A. in international relations and classics from the University of the Witwatersrand in Johannesburg, South Africa, and his Ph.D. in international relations from the University of St. Andrews in Great Britain.

This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.

The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

The Hoverboard’s Patent Problem – Article by Jeffrey A. Tucker

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The New Renaissance HatJeffrey A. Tucker
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Who has the right to make a “hoverboard”?

Shane Chen of Portland, Oregon, owns the patent to one of the hottest holiday gifts this season. It is a kind of hoverboard, a small item that keeps its user upright using infrared sensors, gyroscopes, and motors. You have probably seen them all over your city. You might even have been approached by a street seller.

The authorized version — licensed by Chen himself — is being made and distributed by Razor USA. Prices started at $1,000 and up, but competition from cheap knockoffs, selling for as low as $200, has brought the price for the authorized version to $600. Still, there are places online where you can get them for $200. If experience in new products in a guide to the future, in a year, they will be available for less than $100.

And truly, these knockoffs are everywhere. Small entrepreneurs are importing them from small manufacturers by the thousands and selling them on the streets. They are making and selling so fast that quality control has been… lax. There are anecdotal reports of explosions and sudden acceleration (parodies on this Saturday night live skit). Amazon has refused to sell many brands.

The patent has proven difficult to enforce. Razor is spending up to $1 million per week to sue unauthorized manufactures. It’s a reminder: it’s never enough just own the government-granted monopoly rights to produce something. It always costs money to enforce it. You have to investigate. You have to litigate. You have to win. And by the time that day comes, you might have lost vast market share.

If the product is popular enough, the task is essentially hopeless. The resources and time expended on patent enforcement might instead of gone to innovation and marketing toward actually making profits. Enforcing a monopoly isn’t necessarily the same as making money. Indeed, it is the opposite.

The Case of Eli Whitney
The hoverboard saga brings to mind the history of one of the 19th-century’s most famous inventions: the cotton gin. The holder of the patent was Eli Whitney. A year after his graduation from Yale, he designed and constructed an improvement in the cotton gin — a technology that had existed since the ancient world. He obtained the patent on a single feature, a brush-like extension that improved the way the seeds were extracted from the cotton.

According to Boldrin and Levine, Eli and his partner Phineas Miller has dreams of getting rich with a monopoly pricing scheme. They would install their machines throughout the South and ask a royalty of two fifths, payable in ginned cotton. This prospect seriously annoyed farmers throughout the region, understandably.

So it became a common practice for farmers to reverse engineer the innovation — not a difficult thing to do. Rather than lease the Whitney machine, they would just make their own. Does this violate anyone’s rights? Of course not. A design of a contraption is made scarce and “owned” only by legislation. To forcibly prevent farmers from making their own machines is actually an invasion of their rights.

Still, with the prospect of riches dancing in his head, Eli and Phineas set out to sue every farmer who reverse engineered their design. “Whitney and Miller spent a lot of time and money trying to enforce their patent on the cotton gin, but with little success,” write Boldrin and Levine. “Between 1794 and 1807 they went around the South bringing to court everyone in sight, yet received little compensation for their strenuous efforts.”

Meanwhile, the gin led to vast increases in productivity. The cotton industry boomed. But the holders of the patent became ever poorer.

Fortunately, the story ends well. Whitney learned that suing people is less profitable than actually marketing products. His next project was to invent a machine that created interchangeable parts for muskets. Having learned his lesson, he did not seek a patent for his innovation. He just got busy right away and began selling. (His main customer, as it turns out, became the US Army.)

He finally did strike it big. As Boldrin and Levine summarize the lesson: “It was not as a monopolist of the cotton gin, but rather as the competitive manufacturer of muskets that Whitney finally became rich.”

Will Shane Chen Learn the Lesson?
The hoverboard, like the cotton gin, is in enormous demand. All the government power is the world will not prevent hundreds of manufacturers from making them, driving the price down and down until everyone can afford one. That one million per week that Razor is spending on trying to stop copycats is probably better spent on marketing and innovation — actually selling stuff rather than trying to prevent others from selling stuff.

Absent the government regulation, how can innovators make money? They have the first-mover advantage. This is what provides a period of high profitability before others get in on the act. This is the competitive market at work, inspiring everyone to serve the customer ever more faithfully through lower prices and better products.

Another factor that gives advantage to the innovators is trust. Even now, you can go to the drug store and see name-brand products living alongside store-branded products. Both make money. Both appeal to certain market segments. One producer’s gain does not necessarily come at the expense of other producers, unless the government intervenes.

It is common wisdom to say that the patent system is broken. But what is broken about it? It’s not that the system is abused. It is that it is used at all. Industrial monopolies achieved through government grants of special privileges create waste — and the ongoing lawsuits concerning the hoverboard are a case in point.

Whether it is ginning cotton or zipping around on city sidewalks, a true innovative society encourages as much production and innovation as possible, in service of the masses who love the newest and coolest thing.

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook. 

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Why Capitalists Are Repeatedly “Fooled” By Business Cycles – Article by Frank Shostak

Why Capitalists Are Repeatedly “Fooled” By Business Cycles – Article by Frank Shostak

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The New Renaissance Hat
Frank Shostak
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According to the Austrian business cycle theory (ABCT) the artificial lowering of interest rates by the central bank leads to a misallocation of resources because businesses undertake various capital projects that — prior to the lowering of interest rates —weren’t considered as viable. This misallocation of resources is commonly described as an economic boom.

As a rule, businessmen discover their error once the central bank — which was instrumental in the artificial lowering of interest rates — reverses its stance, which in turn brings to a halt capital expansion and an ensuing economic bust.

From the ABCT one can infer that the artificial lowering of interest rates sets a trap for businessmen by luring them into unsustainable business activities that are only exposed once the central bank tightens its interest-rate stance.

Critics of the ABCT maintain that there is no reason why businessmen should fall prey again and again to an artificial lowering of interest rates.

Businessmen are likely to learn from experience, the critics argue, and not fall into the trap produced by an artificial lowering of interest rates.

Correct expectations will undo or neutralize the whole process of the boom-bust cycle that is set in motion by the artificial lowering of interest rates.

Hence, it is held, the ABCT is not a serious contender in the explanation of modern business cycle phenomena. According to a prominent critic of the ABCT, Gordon Tullock,

One would think that business people might be misled in the first couple of runs of the Rothbard cycle and not anticipate that the low interest rate will later be raised. That they would continue to be unable to figure this out, however, seems unlikely. Normally, Rothbard and other Austrians argue that entrepreneurs are well informed and make correct judgments. At the very least, one would assume that a well-informed businessperson interested in important matters concerned with the business would read Mises and Rothbard and, hence, anticipate the government action.

Even Mises himself had conceded that it is possible that some time in the future businessmen will stop responding to loose monetary policy thereby preventing the setting in motion of the boom-bust cycle. In his reply to Lachmann (Economica, August 1943) Mises wrote,

It may be that businessmen will in the future react to credit expansion in another manner than they did in the past. It may be that they will avoid using for an expansion of their operations the easy money available, because they will keep in mind the inevitable end of the boom. Some signs forebode such a change. But it is too early to make a positive statement.

Do Expectations Matter?
According to the critics then, if businessmen were to anticipate that the artificial lowering of interest rates is likely to be followed some time in the future by a tighter interest-rate stance, their conduct in response to this anticipation will neutralize the occurrence of the boom-bust cycle phenomenon. But is it true that businessmen are likely to act on correct expectations as critics are suggesting?

Furthermore, the key to business cycles is not just businessmen’s conduct but also the conduct of consumers in response to the artificial lowering of interest rates — after all, businessmen adjust their activities in accordance with expected consumer demand. So on this ground one could generalize and suggest that correct expectations by people in an economy should prevent the boom-bust cycle phenomenon. But would it?

For instance, if an individual John, as a result of a loose central bank stance, could lower his interest rate payment on his mortgage why would he refuse to do that even if he knows that a lower interest rate leads to boom-bust cycles?

As an individual the only concern John has is his own well-being. By paying less interest on his existent debt John’s means have now expanded. He can now afford various ends that previously he couldn’t undertake.

As a result of the central bank’s easy stance the demand for John’s goods and services and other mortgage holders has risen. (Again it must be realized that all this couldn’t have taken place without the support from the central bank, which accommodates the lower interest-rate stance.)

Now, the job of a businessman is to cater to consumers’ future requirements. So whenever he observes a lowering in interest rates he knows that this most likely will provide a boost to the demand for various goods and services in the months ahead.

Hence if he wants to make a profit he would have to make the necessary arrangements to meet the future demand.

For instance, if a builder refuses to act on the likely increase in the demand for houses because he believes that this is on account of the loose monetary policy of the central bank and cannot be sustainable, then he will be out of business very quickly.

To be in the building business means that he must be in tune with the demand for housing. Likewise any other businessman in a given field will have to respond to the likely changes in demand in the area of his involvement if he wants to stay in business.

A businessman has only two options — either to be in a particular business or not to be there at all. Once he has decided to be in a given business this means that the businessman is likely to cater for changes in the demand for goods and services in this particular business irrespective of the underlying causes behind changes in demand.

Failing to do so will put him out of business very quickly. Now, regardless of expectations once the central bank tightens its stance most businessmen will “get caught.” A tighter stance will undermine demand for goods and services and this will put pressure on various business activities that sprang up while the interest-rate stance was loose. An economic bust emerges.

We can conclude that correct expectations cannot prevent boom-bust cycles once the central bank has eased its interest-rate stance. The only way to stop the menace of boom-bust cycles is for the central bank to stop the tampering with financial markets. As a rule however, central banks respond to the bust by again loosening their stance and thereby starting the new boom-bust cycle phase.

Frank Shostak is an Associated Scholar of the Mises Institute. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. He received his bachelor’s degree from Hebrew University, master’s degree from Witwatersrand University and PhD from Rands Afrikaanse University, and has taught at the University of Pretoria and the Graduate Business School at Witwatersrand University.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Do We Need the Fed? – Article by Ron Paul

Do We Need the Fed? – Article by Ron Paul

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The New Renaissance HatRon Paul
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Stocks rose Wednesday following the Federal Reserve’s announcement of the first interest rate increase since 2006. However, stocks fell just two days later. One reason the positive reaction to the Fed’s announcement did not last long is that the Fed seems to lack confidence in the economy and is unsure what policies it should adopt in the future.

At her Wednesday press conference, Federal Reserve Chair Janet Yellen acknowledged continuing “cyclical weakness” in the job market. She also suggested that future rate increases are likely to be as small, or even smaller, than Wednesday’s. However, she also expressed concerns over increasing inflation, which suggests the Fed may be open to bigger rate increases.

Many investors and those who rely on interest from savings for a substantial part of their income cheered the increase. However, others expressed concern that even this small rate increase will weaken the already fragile job market.

These critics echo the claims of many economists and economic historians who blame past economic crises, including the Great Depression, on ill-timed money tightening by the Fed. While the Federal Reserve is responsible for our boom-bust economy, recessions and depressions are not caused by tight monetary policy. Instead, the real cause of economic crisis is the loose money policies that precede the Fed’s tightening.

When the Fed floods the market with artificially created money, it lowers the interest rates, which are the price of money. As the price of money, interest rates send signals to businesses and investors regarding the wisdom of making certain types of investments. When the rates are artificially lowered by the Fed instead of naturally lowered by the market, businesses and investors receive distorted signals. The result is over-investment in certain sectors of the economy, such as housing.

This creates the temporary illusion of prosperity. However, since the boom is rooted in the Fed’s manipulation of the interest rates, eventually the bubble will burst and the economy will slide into recession. While the Federal Reserve may tighten the money supply before an economic downturn, the tightening is simply a futile attempt to control the inflation resulting from the Fed’s earlier increases in the money supply.

After the bubble inevitably bursts, the Federal Reserve will inevitably try to revive the economy via new money creation, which starts the whole boom-bust cycle all over again. The only way to avoid future crashes is for the Fed to stop creating inflation and bubbles.

Some economists and policy makers claim that the way to stop the Federal Reserve from causing economic chaos is not to end the Fed but to force the Fed to adopt a “rules-based” monetary policy. Adopting rules-based monetary policy may seem like an improvement, but, because it still allows a secretive central bank to manipulate the money supply, it will still result in Fed-created booms and busts.

The only way to restore economic stability and avoid a major economic crisis is to end the Fed, or at least allow Americans to use alternative currencies. Fortunately, more Americans than ever are studying Austrian economics and working to change our monetary system.

Thanks to the efforts of this growing anti-Fed movement, Audit the Fed had twice passed the House of Representatives, and the Senate is scheduled to vote on it on January 12. Auditing the Fed, so the American people can finally learn the full truth about the Fed’s operations, is an important first step in restoring a sound monetary policy. Hopefully, the Senate will take that step and pass Audit the Fed in January.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

If You Want Security, Pursue Liberty – Article by Ron Paul

If You Want Security, Pursue Liberty – Article by Ron Paul

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Judging by his prime-time speech in early December 2015, the final year of Barack Obama’s presidency will be marked by increased militarism abroad and authoritarianism at home. The centerpiece of the president’s speech was his demand for a new law forbidding anyone on the federal government’s terrorist watch list from purchasing a firearm. There has never been a mass shooter who was on the terrorist watch list, so this proposal will not increase security. However, it will decrease liberty.

Federal officials can have an American citizen placed on the terrorist watch list based solely on their suspicions that the individual might be involved in terrorist activity. Individuals placed on the list are not informed that they have been labeled as suspected terrorists, much less given an opportunity to challenge that designation, until a Transportation Security Administration agent stops them from boarding a plane.

Individuals can be placed on the list if their Facebook or Twitter posts seem “suspicious” to a federal agent. You can also be placed on the list if your behavior somehow suggests that you are a “representative” of a terrorist group (even if you have no associations with any terrorist organizations). Individuals can even be put on the list because the FBI wants to interview them about friends or family members!

Thousands of Americans, including several members of Congress and many employees of the Department of Homeland Security, have been mistakenly placed on the terrorist watch list. Some Americans are placed on the list because they happen to have the same names as terrorist suspects. Those mistakenly placed on the terrorist watch list must go through a lengthy “redress” process to clear their names.

It is likely that some Americans are on the list solely because of their political views and activities. Anyone who doubts this should consider the long history of federal agencies, such as the IRS and the FBI, using their power to harass political movements that challenge the status quo. Are the American people really so desperate for the illusion of security that they will support a law that results in some Americans losing their Second Amendment rights because of a bureaucratic error or because of their political beliefs?

President Obama is also preparing an executive order expanding the federal background check system. Expanding background checks will not keep guns out of the hands of criminals or terrorists. However, it will make obtaining a firearm more difficult for those needing, for example, to defend themselves against abusive spouses.

Sadly, many who understand that new gun-control laws will leave us less free and less safe support expanding the surveillance state. Like those promoting gun control, people calling for expanded surveillance do not let facts deter their efforts to take more of our liberties. There is no evidence that mass surveillance has prevented even one terrorist attack.

France’s mass-surveillance system is much more widespread and intrusive than ours. Yet it failed to prevent the recent attacks. France’s gun-control laws, which are much more restrictive than ours, not only failed to keep guns out of the hands of their attackers, they left victims defenseless. It is thus amazing that many American politicians want to make us more like France by taking away our Second and Fourth Amendment rights.

Expanding the federal government’s power will not increase our safety; it will only diminish our freedom. Americans will have neither liberty nor security until they abandon the fantasy that the US government can provide economic security, personal security, and global security.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.