Browsed by
Category: Business

North Korea: From Hermit Kingdom to Merchant Kingdom? – Article by J. Wiltz

North Korea: From Hermit Kingdom to Merchant Kingdom? – Article by J. Wiltz

Comments 0 Comment
The New Renaissance Hat
J. Wiltz
December 7, 2014
******************************

Toward the end of her remarkable speech at this year’s One Young World Summit in Dublin, North Korean defector and human rights activist Yeon-mi Park listed three ways in which ordinary people can help freedom-seekers in North Korea:

One, educate yourself so you can raise awareness about the human crisis in North Korea. Two, help and support North Korean refugees who are trying to escape to freedom. Three, petition China to stop repatriation.

To this list, Swiss-born businessman Felix Abt might add a fourth suggestion: do business with them. This suggestion forms the heart of Abt’s new book, A Capitalist in North Korea: My Seven Years in the Hermit Kingdom (Tuttle Publishing 2014).

From Hermit Kingdom to Merchant Kingdom

 

Those familiar with the situation in North Korea (officially known as the Democratic People’s Republic of Korea or DPRK) will not find Abt’s title as shocking as it’s probably intended to be. Indeed, as early as 2009, and undoubtedly even before that, Western media outlets were reporting on “the secret capitalist economy of North Korea” (i.e., the black market) which sprung up in response to the famine of the mid-1990s. Writing for the Washington Post in May 2014, Yeon-mi Park herself even referred to the young people currently living in North Korea as the “Jangmadang, or ‘Black Market Generation’.”  These young people, she says, are far more individualistic than their predecessors, far less loyal to the ruling Kim regime, and infinitely more likely to be exposed to outside media and information.

Abt’s book echoes and elaborates on all of these points. Drawing on his personal experience as the foreign head of a North Korean pharmaceutical company, as well as a co-founder of the Pyongyang Business School, he details the DPRK’s early forays into franchising, customer service, online forums(!), bicycle merchants, performance incentives, and even that most un-socialist of all market activities, advertising.

These ideas and practices are still very new to the world’s most notorious “bastion of communism” (Abt’s words), but already the government is being forced to make gradual changes to its market policies. Two quick examples: “More flexible opening hours are allowed for markets, and more companies are permitted to interact with businesses abroad.”

In spite of these positive developments, however, Abt laments, “There appears to be no end in sight for the severe economic problems of the world’s most centrally planned economy.” He divides the blame for these problems among several perpetrators: (1) North Korean military policy; (2) over-dependence on foreign humanitarian aid; and (3) foreign sanctions and embargoes.

“North Korea,” says Abt, “is the most heavily sanctioned nation in the world, and no other people have had to deal with the massive quarantines that Western and Asian powers have enclosed around its economy.”

Two Steps Forward, One Step Back

 

To be sure, arguments against North Korean sanctions are a tough sell, given the country’s well-documented human rights abuses and annual nuclear threats against the United States and South Korea. Several Amazon reviewers have accused Abt of simply parroting North Korean propaganda, calling him “Pyongyang Pete” and “the Kim Dynasty’s useful idiot.”  Even many libertarians, long opposed to the Cuban embargo, can probably agree that many of North Korea’s domestic and international woes are self-inflicted.

For example, in 2006, the former president of South Korea’s largest dairy company came up with the strategy to provide every child in North Korea a daily glass of milk. “Charities and wealthy individuals committed to the project,” Abt writes, “but after Kim Jong Il’s first nuclear test, the prospect quickly vanished.”

Abt also notes that in 2007, the website DailyNK reported that North Korea spends up to 40 percent of its annual budget on monuments and celebrations dedicated to the Kim regime. Abt recounts how he “gasped” at the sheer size of these monuments, as well as other buildings like the Koryo Hotel where “up to 1000 guests can stay in 504 rooms on 45 floors.”

But read to the end of A Capitalist in North Korea and you’ll find that “fewer than a third of all hotel rooms are occupied during most weeks.” Pyongyang tourist videos on YouTube corroborate this point. On almost every day of any given year, the 504 rooms of the Koryo Hotel sit empty (a predictable side effect of the DPRK’s notoriously tight travel restrictions). This is not what an efficient allocation of resources looks like.

Moreover, the North Korean government sometimes reacts to the market activities of its foreign investors with repression and cronyism. In 2006, a Chinese-run pharmacy was closed because it posed a threat to the socialist public health system. Several years later, a German internet provider was able to lobby the government, making it impossible for other foreign-invested businesses to install their own satellite dishes.

“So how will reform come about?”

 

And yet, not one of these things — not the nuclear tests, the empty hotels, or the shady business dealings — could in any way be prevented by sanctions that target foreign banks, farm equipment, fertilizer, mobile phones, alcoholic drinks, French cheese, or luxury items. “The current sanctions have not only failed to curtail the nuclear ambitions and human rights abuses of the ambitious North Korean leader,” says Emma Campbell in a May 2013 article for East Asia Forum, “they are also constraining the actions of humanitarian NGOs trying to carry out life-saving activities inside the DPRK.”

Among these life-saving activities is the development of a market-minded merchant class that is less dependent on the regime and better able to conduct business with the outside world in a peaceful, profitable manner. While Abt is clear that doing business in North Korea is by no means a guaranteed success, he rightly sees it as one of the best methods for improving the lives of millions of North Koreans caught between domestic and foreign repression. “Business,” he writes, “is the way forward for Kim’s country … a promising way to open and change the hitherto isolated country and the course of things for the better.”

The decades-long task of opening North Korea to the outside world may very well be accomplished by first opening the outside world to North Korea.

J. Wiltz writes from Anyang, South Korea, where he teaches English and blogs at A Day with J.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Ludd vs. Schumpeter: Fear of Robot Labor is Fear of the Free Market – Article by Wendy McElroy

Ludd vs. Schumpeter: Fear of Robot Labor is Fear of the Free Market – Article by Wendy McElroy

Comments 0 Comment
The New Renaissance Hat
Wendy McElroy
September 18, 2014
******************************

“Report Suggests Nearly Half of U.S. Jobs Are Vulnerable to Computerization,” screams a headline. The cry of “robots are coming to take our jobs!” is ringing across North America. But the concern reveals nothing so much as a fear—and misunderstanding—of the free market.

In the short term, robotics will cause some job dislocation; in the long term, labor patterns will simply shift. The use of robotics to increase productivity while decreasing costs works basically the same way as past technological advances, like the production line, have worked. Those advances improved the quality of life of billions of people and created new forms of employment that were unimaginable at the time.

Given that reality, the cry that should be heard is, “Beware of monopolies controlling technology through restrictive patents or other government-granted privilege.”

The robots are coming!

Actually, they are here already. Technological advance is an inherent aspect of a free market in which innovators seeks to produce more value at a lower cost. Entrepreneurs want a market edge. Computerization, industrial control systems, and robotics have become an integral part of that quest. Many manual jobs, such as factory-line assembly, have been phased out and replaced by others, such jobs related to technology, the Internet, and games. For a number of reasons, however, robots are poised to become villains of unemployment. Two reasons come to mind:

1. Robots are now highly developed and less expensive. Such traits make them an increasingly popular option. The Banque de Luxembourg News offered a snapshot:

The currently-estimated average unit cost of around $50,000 should certainly decrease further with the arrival of “low-cost” robots on the market. This is particularly the case for “Baxter,” the humanoid robot with evolving artificial intelligence from the US company Rethink Robotics, or “Universal 5” from the Danish company Universal Robots, priced at just $22,000 and $34,000 respectively.

Better, faster, and cheaper are the bases of increased productivity.

2. Robots will be interacting more directly with the general public. The fast-food industry is a good example. People may be accustomed to ATMs, but a robotic kiosk that asks, “Do you want fries with that?” will occasion widespread public comment, albeit temporarily.

Comment from displaced fast-food restaurant workers may not be so transient. NBC News recently described a strike by workers in an estimated 150 cities. The workers’ main demand was a $15 minimum wage, but they also called for better working conditions. The protesters, ironically, are speeding up their own unemployment by making themselves expensive and difficult to manage.

Labor costs

Compared to humans, robots are cheaper to employ—partly for natural reasons and partly because of government intervention.

Among the natural costs are training, safety needs, overtime, and personnel problems such as hiring, firing and on-the-job theft. Now, according to Singularity Hub, robots can also be more productive in certain roles. They  “can make a burger in 10 seconds (360/hr). Fast yes, but also superior quality. Because the restaurant is free to spend its savings on better ingredients, it can make gourmet burgers at fast food prices.”

Government-imposed costs include minimum-wage laws and mandated benefits, as well as discrimination, liability, and other employment lawsuits. The employment advisory Workforce explained, “Defending a case through discovery and a ruling on a motion for summary judgment can cost an employer between $75,000 and $125,000. If an employer loses summary judgment—which, much more often than not, is the case—the employer can expect to spend a total of $175,000 to $250,000 to take a case to a jury verdict at trial.”

At some point, human labor will make sense only to restaurants that wish to preserve the “personal touch” or to fill a niche.

The underlying message of robotechnophobia

The tech site Motherboard aptly commented, “The coming age of robot workers chiefly reflects a tension that’s been around since the first common lands were enclosed by landowners who declared them private property: that between labour and the owners of capital. The future of labour in the robot age has everything to do with capitalism.”

Ironically, Motherboard points to one critic of capitalism who defended technological advances in production: none other than Karl Marx. He called machines “fixed capital.” The defense occurs in a segment called “The Fragment on Machines”  in the unfinished but published manuscript Grundrisse der Kritik der Politischen Ökonomie (Outlines of the Critique of Political Economy).

Marx believed the “variable capital” (workers) dislocated by machines would be freed from the exploitation of their “surplus labor,” the difference between their wages and the selling price of a product, which the capitalist pockets as profit. Machines would benefit “emancipated labour” because capitalists would “employ people upon something not directly and immediately productive, e.g. in the erection of machinery.” The relationship change would revolutionize society and hasten the end of capitalism itself.

Never mind that the idea of “surplus labor” is intellectually bankrupt, technology ended up strengthening capitalism. But Marx was right about one thing: Many workers have been emancipated from soul-deadening, repetitive labor. Many who feared technology did so because they viewed society as static. The free market is the opposite. It is a dynamic, quick-response ecosystem of value. Internet pioneer Vint Cerf argues, “Historically, technology has created more jobs than it destroys and there is no reason to think otherwise in this case.”

Forbes pointed out that U.S. unemployment rates have changed little over the past 120 years (1890 to 2014) despite massive advances in workplace technology:

There have been three major spikes in unemployment, all caused by financiers, not by engineers: the railroad and bank failures of the Panic of 1893, the bank failures of the Great Depression, and finally the Great Recession of our era, also stemming from bank failures. And each time, once the bankers and policymakers got their houses in order, businesses, engineers, and entrepreneurs restored growth and employment.

The drive to make society static is powerful obstacle to that restored employment. How does society become static? A key word in the answer is “monopoly.” But we should not equivocate on two forms of monopoly.

A monopoly established by aggressive innovation and excellence will dominate only as long as it produces better or less expensive goods than others can. Monopolies created by crony capitalism are entrenched expressions of privilege that serve elite interests. Crony capitalism is the economic arrangement by which business success depends upon having a close relationship with government, including legal privileges.

Restrictive patents are a basic building block of crony capitalism because they grant a business the “right” to exclude competition. Many libertarians deny the legitimacy of any patents. The nineteenth century classical liberal Eugen von Böhm-Bawerk rejected patents on classically Austrian grounds. He called them “legally compulsive relationships of patronage which are based on a vendor’s exclusive right of sale”: in short, a government-granted privilege that violated every man’s right to compete freely. Modern critics of patents include the Austrian economist Murray Rothbard and intellectual property attorney Stephan Kinsella.

Pharmaceuticals and technology are particularly patent-hungry. The extent of the hunger can be gauged by how much money companies spend to protect their intellectual property rights. In 2011, Apple and Google reportedly spent more on patent lawsuits and purchases than on research and development. A New York Times article addressed the costs imposed on tech companies by “patent trolls”—people who do not produce or supply services based on patents they own but use them only to collect licensing fees and legal settlements. “Litigation costs in the United States related to patent assertion entities [trolls],” the article claimed, “totaled nearly $30 billion in 2011, more than four times the costs in 2005.” These costs and associated ones, like patent infringement insurance, harm a society’s productivity by creating stasis and  preventing competition.

Dean Baker, co-director of the progressive Center for Economic Policy Research, described the difference between robots produced on the marketplace and robots produced by monopoly. Private producers “won’t directly get rich” because “robots will presumably be relatively cheap to make. After all, we can have robots make them. If the owners of robots get really rich it will be because the government has given them patent monopolies so that they can collect lots of money from anyone who wants to buy or build a robot.”  The monopoly “tax” will be passed on to impoverish both consumers and employees.

Conclusion

Ultimately, we should return again to the wisdom of Joseph Schumpeter, who reminds us that technological progress, while it can change the patterns of production, tends to free up resources for new uses, making life better over the long term. In other words, the displacement of workers by robots is just creative destruction in action. Just as the car starter replaced the buggy whip, the robot might replace the burger-flipper. Perhaps the burger-flipper will migrate to a new profession, such as caring for an elderly person or cleaning homes for busy professionals. But there are always new ways to create value.

An increased use of robots will cause labor dislocation, which will be painful for many workers in the near term. But if market forces are allowed to function, the dislocation will be temporary. And if history is a guide, the replacement jobs will require skills that better express what it means to be human: communication, problem-solving, creation, and caregiving.

Wendy McElroy (wendy@wendymcelroy.com) is an author, editor of ifeminists.com, and Research Fellow at The Independent Institute (independent.org).

This article was originally published by The Foundation for Economic Education.

The Strengths and Weaknesses of “Atlas Shrugged: Part III” – Video by G. Stolyarov II

The Strengths and Weaknesses of “Atlas Shrugged: Part III” – Video by G. Stolyarov II

Comments 0 Comment
The New Renaissance Hat
G. Stolyarov II
September 16, 2014
******************************

Mr. Stolyarov reviews the final installment in the “Atlas Shrugged” film trilogy.

Although Mr. Stolyarov favorably reviewed the first two installments, in his view the third film fails to do full justice to the culmination of Ayn Rand’s magnum opus, where one would expect to witness the coalescence into an integrated worldview of all of the philosophical and plot pieces that Rand meticulously introduced during the first two parts. Atlas Shrugged: Part III is not without its merits, and it is inspiring in certain respects – especially in its conveyance of Rand’s passionate defense of the creator-individualist. However, the film is also not a great one, and the creators could have made Rand’s source material shine consistently instead of glowing dimly while occasionally emitting a bright flicker.

References

– “The Accomplishments of ‘Atlas Shrugged: Part I’” – Article by G. Stolyarov II
– “Rejecting the Purveyors of Pull: The Lessons of ‘Atlas Shrugged: Part II‘” – Article by G. Stolyarov II
– “The Strengths and Weaknesses of ‘Atlas Shrugged: Part III’” – Article by G. Stolyarov II

The Strengths and Weaknesses of “Atlas Shrugged: Part III” – Article by G. Stolyarov II

The Strengths and Weaknesses of “Atlas Shrugged: Part III” – Article by G. Stolyarov II

Comments 0 Comment
The New Renaissance Hat
G. Stolyarov II
September 13, 2014
******************************

In my reviews of Part I and Part II of the Atlas Shrugged film trilogy, I expressed largely favorable reactions to those films’ message and execution. Naturally, I was eager to see Part III and the completion of the long-awaited Atlas Shrugged trilogy. After I watched it, though, my response to this conclusion is more muted. The film fails to do full justice to the culmination of Ayn Rand’s magnum opus, where one would expect to witness the coalescence into an integrated worldview of all of the philosophical and plot pieces that Rand meticulously introduced during the first two parts. Atlas Shrugged: Part III is not without its merits, and it is inspiring in certain respects – especially in its conveyance of Rand’s passionate defense of the creator-individualist. However, the film is also not a great one, and the creators could have made Rand’s source material shine consistently instead of glowing dimly while occasionally emitting a bright flicker.

Strength 1: There is now a complete film series spanning the entire story arc of Atlas Shrugged. What Ayn Rand herself and many successive filmmakers could not achieve, producers Harmon Kaslow and John Aglialoro have been able to bring into existence. For decades, admirers of Ayn Rand’s work have lamented that no Atlas Shrugged movie had been made. The fact that this particular lament is obsolete constitutes major progress for Objectivism (where the rate of progress is admittedly extremely slow).

Weakness 1: Part III is, in my view, the most poorly executed of the three Atlas Shrugged movies, even though it had the potential to be the best. The extreme brevity of Part III – a mere 90 minutes, compared to 102 minutes for Part I and 112 minutes for Part II – orphaned many of the events of the film from their contexts, as compared to the meticulous rationale for each of Ayn Rand’s decisions in the novel. John Galt’s speech – which received some 70 pages in the novel – had been cut to bare bones and lacks the deep, rigorous, philosophical exposition that Ayn Rand saw as the substance and culmination of the novel.

Strength 2: As was the case with the previous installments, the film’s creators conveyed a plausible sense that the events of Atlas Shrugged could happen in our own world, or at least in a world that greatly resembles ours, as opposed to the world of 1957. In this sense, the film’s creators succeeded in conveying the universality of Atlas Shrugged’s moral message.

Weakness 2: Changes in directors and the entire cast for every single one of the Atlas Shrugged films greatly detract from the continuity of the story, especially for viewers who may watch the films back to back, once all of them are available on DVDs or other media.

Strength 3: The reactions to Galt’s Speech by Ron Paul, Sean Hannity, and Glenn Beck added authenticity and relevance to the film and reinforced the message that the conflict between value-creators and “looters” (cronyists or purveyors of political pull) is very much present in our era. In addition, whether one agrees or disagrees with these notable figures, it was amusing to see them in a dramatization of Ayn Rand’s literary world.

Weakness 3: The film fails to do justice to many important plot elements in Part Three of the book. Hank Rearden – my favorite character from the book and the most compelling character in Part II – barely makes an appearance. Cheryl Taggart’s suicide is only expressed in retrospectives of her realizations that drove her to this desperate act – while she is not actually shown taking any steps toward it. The fate of Eddie Willers at the end of the film is almost completely unaddressed, with a mere intimation that the protagonists have another man in mind for whom they plan to stop – but no validation that this would indeed be Eddie Willers. The treatment of Eddie Willers in the novel is ambiguous; Ayn Rand leaves him beside a broken-down Taggart Transcontinental train engine, abandoned by the railroad workers. He might be rescued, or he might perish – but he has not yet been invited into Galt’s Gulch. The film creators neither pose the ambiguity nor attempt to resolve it. For me, the fate of Eddie Willers – a sincere, moral, hard-working man who respects the achievements of heroic individualists but is not (according to Rand) one of them – is a key concern in Atlas Shrugged. I think Rand treated him with undeserving harshness, considering that people like Eddie Willers, especially if there are millions of them, can be tremendous contributors to human flourishing. The film creators missed an opportunity to vindicate Eddie and give him some more serious hope of finding a place in the new world created by the inhabitants of Galt’s Gulch. In Galt’s Gulch, the film shows Dagny explaining her plan to have a short railroad built to service Francisco d’Anconia’s new copper mine. But who would actually physically build the railroad and do the job well, if not people like Eddie Willers?

Strength 4: The film’s narrator does a decent job at bridging the events of the previous two installments and the plot of Part III. The events in the film begin with Dagny Taggart crash-landing in Galt’s Gulch, and even those who did not read the book or watch the preceding two films would be able to follow how and why she got there. The film is also excellent in displaying the corruption, incompetence, spitefulness, and callous scheming of the crony corporatist establishment that Rand despised – and that we should despise today. The smoky back-room scene where the economic planners toast to the destruction of Minnesota is one of the film’s high marks – a memorable illustration of what the mentality of “sacrificing the parts” for the whole actually looks like.

Weakness 4: While moderately effective at conveying narratives of events and generally decent in its treatment of ethics and politics, the film does not do justice to the ideas on metaphysics and epistemology also featured prominently in Atlas Shrugged. Furthermore, the previous two films were generally superior in regard to showing, in addition to telling, the fruits of the creative efforts of rational individualists, as well as the consequences for a society that shackles these creators. In the Part III film, many of the scenes utilized to illustrate these effects seemed more peripheral than central to the book’s message. Much of the footage hinted at the national and world events that take place in the book, but did not explicitly show them.

Amid these strengths and weaknesses remains an opportunity to continue the discussion about the undoubtedly crucial implications of Ayn Rand’s message to today’s political and societal climate – where there looms the question of how much longer the creator-individualists who power the motor of the world can keep moving forward in spite of the increasingly gargantuan obstacles placed in their way by legacy institutions. Any work that can pose these questions for consideration by wider numbers of people is welcome in an environment where far too many are distracted by the “bread and circuses” of mindless entertainment. Atlas Shrugged: Part III is a film with intellectual substance and relevance and so is worthy of a relatively short time commitment from anyone interested in Ayn Rand, Objectivism, philosophy, and current events. However, those who watch the film should also be sure to read the novel, if they have not already done so, in order to experience much greater depth of both plot and philosophical ideas.

Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

Heterogeneity: A Capital Idea! – Article by Sanford Ikeda

Comments 0 Comment
The New Renaissance Hat
Sanford Ikeda
June 26, 2014
******************************

When Thomas Piketty’s Capital in the 21st Century was released in English earlier this year it sparked vigorous debate on the issue of wealth inequality. Despite the prominence of the word in the title, however, capital has not itself become a hot topic. Apparently none of his defenders have taken the opportunity to explore capital theory, and, with a few exceptions, neither have his critics.

To prepare to read Mr. Piketty’s book I’ve been studying Ludwig Lachmann’s Capital and Its Structure, which, along with Israel M. Kirzner’s Essay on Capital, is among the clearest expositions of Austrian capital theory around. A hundred years ago the “Austrian economists”—i.e. scholars such as Eugen von Böhm-Bawerk who worked in the tradition of Carl Menger—were renowned for their contributions to the theory of capital. Today capital theory is still an essential part of modern Austrian economics, but few others delve into its complexities. Why bother?

Capital is Heterogeneous

 

Among the Austrians, Böhm-Bawerk viewed capital as “produced means of production” and for Ludwig von Mises “capital goods are intermediary steps on the way toward a definite goal.” (Israel Kirzner uses the metaphor of a “half-baked cake.”)  Lachmann then places capital goods in the context of a person’s plan: “production plans are the primary object of the theory of capital.” You can combine capital goods in only a limited number of ways within a particular plan. Capital goods then aren’t perfect substitutes for one another. Capital is heterogeneous.

Now, mainstream economics treats capital as a homogenous glob. For instance, both micro- and macroeconomists typically assume Output (Q) is a mathematical function of several factor inputs, e.g. Labor (L) and Capital (K) or

Q = f(L,K).

In this function, not only is output homogenous (whether we’re talking about ball-bearings produced by one firm or all the goods produced by all firms in an economy) but so are all labor inputs and all capital inputs used to produce them. In particular, any capital good can substitute perfectly for any other capital good in a firm or across all firms. A hammer can perfectly replace, say, a helicopter or even a harbor.

On the other hand, capital heterogeneity implies several things.

First, according to Mises, heterogeneity means that, “All capital goods have a more or less specific character.” A capital good can’t be used for just any purpose:  A hammer generally can’t be used as a harbor. Second, to make a capital good productive a person needs to combine it with other capital goods in ways that are complementary within her plan: Hammers and harbors could be used together to help repair a boat. And third, heterogeneity means that capital goods have no common unit of measurement, which poses a problem if you want to add up how much capital you have:  One tractor plus two computers plus three nails doesn’t give you “six units” of capital.

Isn’t “money capital” homogeneous? The monetary equivalent of one’s stock of capital, say $50,000, may be useful for accounting purposes, but that sum isn’t itself a combination of capital goods in a production process. If you want to buy $50,000 worth of capital you don’t go to the store and order “Six units of capital please!” Instead, you buy specific units of capital according to your business plan.

At first blush it might seem that labor is also heterogeneous. After all, you can’t substitute a chemical engineer for a pediatrician, can you? But in economics we differentiate between pure “labor” from the specific skills and know-how a person possesses. Take those away—what we call “human capital”—and then indeed one unit of labor could substitute for any other. The same goes for other inputs such as land. What prevents an input from substituting for another, other than distance in time and space, is precisely its capital character.

One more thing. We’re talking about the subjective not the objective properties of a capital good. That is, what makes an object a hammer and not something else is the use to which you put it. That means that physical heterogeneity is not the point, but rather heterogeneity in use. As Lachmann puts it, “Even in a building which consisted of stones completely alike these stones would have different functions.” Some stones serve as wall elements, others as foundation, etc. By the same token, physically dissimilar capital goods might be substitutes for each other. A chair might sometimes also make a good stepladder.

But, again, what practical difference does it make whether we treat capital as heterogeneous or homogenous? Here, briefly, are a few consequences.

Investment Capital and Income Flows

 

When economists talk about “returns to capital” they often do so as if income “flows” automatically from an investment in capital goods. As Lachmann says:

In most of the theories currently in fashion economic progress is apparently regarded as the automatic outcome of capital investment, “autonomous” or otherwise. Perhaps we should not be surprised at this fact: mechanistic theories are bound to produce results that look automatic.

But if capital goods are heterogeneous, then whether or not you earn an income from them depends crucially on what kinds of capital goods you buy and exactly how you combine them, and in turn how that combination has to complement the combinations that others have put together. You build an office-cleaning business in the hopes that someone else has built an office to clean.

There’s nothing automatic about it; error is always a possibility. Which brings up another implication.

Entrepreneurship

 

Lachmann:

We are living in a world of unexpected change; hence capital combinations, and with them the capital structure, will be ever changing, will be dissolved and re-formed. In this activity we find the real function of the entrepreneur.

We don’t invest blindly. We combine capital goods using, among other things, the prices of inputs and outputs that we note from the past and the prices of those things we expect to see in the future. Again, it’s not automatic. It takes entrepreneurship, including awareness and vision. But in the real world—a world very different from the models of too many economists—unexpected change happens. And when it happens the entrepreneur has to adjust appropriately, otherwise the usefulness of her capital combinations evaporates. But that’s the strength of the market process.

A progressive economy is not an economy in which no capital is ever lost, but an economy which can afford to lose capital because the productive opportunities revealed by the loss are vigorously exploited.

In a dynamic economy, entrepreneurs are able to recombine capital goods to create value faster than it disappears.

Stimulus Spending

 

As the economist Roger Garrison notes, Keynes’s macroeconomics is based on labor, not capital. And when capital does enter his analysis Keynes regarded it the same way as mainstream economics: as a homogeneous glob.

Thus modern Keynesians, such as Paul Krugman, want to cure recessions by government “stimulus” spending, without much or any regard to what it is spent on, whether hammers or harbors. (Here is just one example.)  But the solution to a recession is not to indiscriminately increase overall spending. The solution is to enable people to use their local knowledge to invest in capital goods that complement existing capital combinations, within what Lachmann calls the capital structure, in a way that will satisfy actual demand. (That is why economist Robert Higgs emphasizes “real net private business investment” as an important indicator of economic activity.)  The government doesn’t know what those combinations are, only local entrepreneurs know, but its spending patterns certainly can and do prevent the right capital structures from emerging.

Finally, no one can usefully analyze the real world without abstracting from it. It’s a necessary tradeoff. For some purposes smoothing the heterogeneity out of capital may be helpful. Too often though the cost is just too high.

Sanford Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism.
***
This article was originally published by The Foundation for Economic Education.
“Exploring Capitalist Fiction” – Allen Mendenhall Interviews Edward W. Younkins

“Exploring Capitalist Fiction” – Allen Mendenhall Interviews Edward W. Younkins

Comments 0 Comment
The New Renaissance Hat
Allen Mendenhall and Edward W. Younkins
February 16, 2014
******************************

This interview is reprinted with permission from Allen Mendenhall’s blog.

Read Mr. Stolyarov’s review of Dr. Younkins’s book, Exploring Capitalist Fiction.

***

AM:       Thank you for taking the time to do this interview.  I’d like to start by asking why you chose to write Exploring Capitalist Fiction.  Was there a void you were seeking to fill?

EY:          The origins of this book go back to the Spring of 1992 when I began teaching a course called Business Through Literature in Wheeling Jesuit University’s MBA program.  Exploring Capitalist Fiction is heavily based on my lectures and notes on the novels, plays, and films used in this popular course over the years and on what I have learned from my students in class discussions and in their papers.

The idea to write this book originated a few years ago when one of Wheeling Jesuit University’s MBA graduates, who had taken and enjoyed the Business Through Literature course, proposed that I write a book based on the novels, plays, and films covered in that course.  I agreed as I concluded that the subject matter was important and bookworthy and that the book would be fun for me to write and for others to read.  I went on to select twenty-five works to include in the book out of the more than eighty different ones that had been used in my course over the years.  I have endeavored to select the ones that have been the most influential, are the most relevant, and are the most interesting.  In a few instances, I have chosen works that I believe to be undervalued treasures.

I was not intentionally trying to fill a void as there are a number of similar books by fine authors such as Joseph A. Badaracco, Robert A. Brawer, Robert Coles, Emily Stipes Watts, and Oliver F. Williams, among others.  Of course, I did see my evenhanded study of business and capitalism in literature as a nice complement and supplement to these works.

AM:       I assume that you’ll use this book to teach your own courses, and I suspect other teachers will also use the book in their courses.  Anyone who reads the book will quickly understand the reason you believe that imaginative literature and film have pedagogical value in business courses, but would you mind stating some of those reasons for the benefit of those who haven’t read the book yet?

EY:          The underpinning premise of this book and of my course is that fiction, including novels, plays, and films, can be a powerful force to educate students and employees in ways that lectures, textbooks, articles, case studies, and other traditional teaching approaches cannot.  Works of fiction can address a range of issues and topics, provide detailed real-life descriptions of the organizational contexts in which workers find themselves, and tell interesting, engaging, and memorable stories that are richer and more likely to stay with the reader or viewer longer than lectures and other teaching approaches.  Imaginative literature can enrich business teaching materials and provide an excellent supplement to the theories, concepts, and issues that students experience in their business courses.  Reading novels and plays and watching films are excellent ways to develop critical thinking, to learn about character, and to instill moral values.  It is likely that people who read business novels and plays and watch movies about business will continue to search for more of them as sources of entertainment, inspiration, and education.

AM:       Who are the intended audiences for your new book?

EY:          My target audiences include college students, business teachers, general readers, and people employed in the business world.  My summaries and analyses of twenty-five works are intended to create the feel of what it is like to work in business.  The premise of the book is that fiction can provide a powerful teaching tool to sensitize business students without business experiences and to educate and train managers in real businesses.  Studying fictions of business can provide insights to often inexperienced business students and new employees with respect to real-life situations.

In each of my 25 chapters I provide a sequential summary of the fictional work, interspersed with some commentary that highlights the managerial, economic, and philosophical implications of the ideas found in the work.  My emphasis is on the business applications of the lessons of particular novels, plays, and films.  This book highlights the lessons that an individual can take from each work and apply to his or her own life.  It is not literary analysis for its own sake.

I do not delve deeply into these novels, plays, and films in order to identify previously-covered and previously-uncovered themes in existing scholarship.  My book is essentially a study guide for people interested in becoming familiar with the major relevant themes in significant works of literature and film.  The book can also serve as a guide for professors who desire to expand their teaching approaches beyond the traditional ones employed in schools of business.

Of course, literary scholars can use my book as a starting point, catalyst, or reference work for their own in-depth scholarly studies of these and other works.  For example, I can envision a number of scholars, from a variety of viewpoints, contributing essays to book collections devoted to different literary works.  One possible collection that readily comes to mind would be devoted to David Mamet’s Glengarry Glen Ross.  Other candidates for potential collections might include Howell’s The Rise of Silas Lapham, Norris’s The Octopus, Dreiser’s The Financer, Cahan’s The Rise of David Levinsky, Lewis’s Babbitt, Miller’s Death of a Salesman, Hawley’s Executive Suite, Lodge’s Nice Work, Sterner’s Other People’s Money, among others.  It would be great if some of the contributing literary scholars to these volumes would come from pro-business, pro-capitalist thinkers such as Paul Cantor, Stephen Cox, Ryan McMaken, Sarah Skwire, Amy Willis, Michelle Vachris, and yourself.  As you know most literary critics are from the left.  Those mentioned above celebrate individualism and freedom in place of collectivism and determinism.

AM:       What can be learned from business fiction?

EY:          Fiction can be used to teach, explicate, and illustrate a wide range of business issues and concepts.  Many fictional works address human problems in business such as managing interpersonal conflict and office politics; using different styles of management; the potential loss of one’s individuality as a person tends to become an “organization man”; the stultifying effect of routine in business; the difficulty in balancing work life and home life; hiring and keeping virtuous employees; maintaining one’s personal integrity while satisfying the company’s demands for loyalty, conformity and adaptation to the firm’s culture; communication problems a business may experience; fundamental moral dilemmas; depersonalization and mechanization of human relationships; and so on.  Fictional works tend to describe human behavior and motivations more eloquently, powerfully, and engagingly than texts, articles, or cases typically do.  Literary authors and filmmakers are likely to develop and present ideas through individual characters.  They depict human insights and interests from the perspective of individuals within an organizational setting.  Reading imaginative literature and watching films are excellent ways to develop critical thinking and to learn about values and character.

Many novels, plays, and films are concerned with the actual operation of the business system.  Some deal directly with business problems such as government regulation, cost control, new product development, labor relations, environmental pollution, health and safety, plant openings and closings, tactics used and selection of takeover targets, structuring financial transactions, succession planning, strategic planning, the creation of mission statements, the company’s role in the community, social responsibility, etc.  Assessing fictional situations makes a person more thoughtful, better prepared for situations, and better able to predict the consequences of alternative actions.  Fiction can address both matters of morality and practical issues.  There are many fine selections in literature and film which prompt readers to wrestle with business situations.

Older novels, plays, and films can supply information on the history of a subject or topic.  They can act as historical references for actual past instances and can help students to understand the reasons for successes and failures of the past.  Older literature can provide a good history lesson and can help people to understand the development of our various businesses and industries.  These stories can be inspiring and motivational and can demonstrate how various organizations and managers were able to overcome obstacles, adapt, and survive.  Fictional works are cultural artifacts from different time periods that can be valuable when discussing the history of business.  Many fictional works present history in a form that is more interesting than when one just reads history books.

Imaginative literature reflects a variety of cultural, social, ethical, political, economic, and philosophical perspectives that have been found in American society.  Various images of businessmen have appeared in fictional works.  These include the businessman as Scrooge-like miser, confidence man, robber baron, hero, superman, technocrat, organization man, small businessman, buffoon, rugged individualist, corporate capitalist, financial capitalist, man of integrity, etc.

AM:       How will your teaching approach change in your Business Through Literature course now that you have published your own book on the subject?

EY:          In the past students in this course have read, analyzed, and discussed novels, plays, and films.  Each student prepared a minimum of 6 short papers (2000 words each) on the assigned works.  Grades were based on these papers and class discussions.

I am experimenting this semester using my book in the class for the first time.  I am requiring each student to take notes on each chapter of the book to help them in bringing up topics for class discussion and in participating in class discussions.  Each student is also required to prepare and turn in three essay questions on each chapter.  These are turned in before each relevant class.  Grades for the class are based on class participation and two essay tests.

AM:       Isn’t the reverse also true that literature students ought to study economics or at least gain an understanding of business from something besides imaginative literature and film, which tend not to portray capitalists in a favorable light?

EY:          It would definitely be beneficial for literature students to study classes in business areas such as management, marketing, accounting, and finance.  It would help them somewhat if they took a course or two in economics.  Unfortunately, almost all college-level economics courses are based on Keynesian economics.  I would encourage anyone who takes such courses to read and study Austrian economics in order to gain a more realistic perspective.

AM:       You’ve written a great deal about Ayn Rand, and the chapter on Atlas Shrugged is the longest one in your book.  Rand can be a divisive figure, even, perhaps especially, among what you might call “libertarians” or “free marketers” or “capitalists” and the like.  But even the people in those categories who reject Objectivism tend to praise Rand’s novels.  What do you make of that, and do you think there’s a lesson there about the novel as a medium for transmitting philosophy?

EY:          I suspect that there are a lot of people like me who value “novels of ideas.”  There have been many good philosophical novels but none have been as brilliantly integrated and unified as Atlas Shrugged.  Rand characterizes grand themes and presents an entire and integrated view of how a man should live his life.  Rand’s great power comes from her ability to unify everything in the novel to form an integrated whole.  The theme and the plot are inextricably integrated.  Rand is a superb practitioner of synthesis and unity whose literary style and subject are organically linked and fused to the content of her philosophy.  She unifies the many aspects of Atlas Shrugged according to the principles of reality.  People from the various schools of “free-market” thought are in accord in promoting an appropriate reality-based social system in which each person is free to strive for his personal flourishing and happiness.

AM:       I want to ask about Henry Hazlitt’s Time Will Run Back, the subject of chapter twelve of your book.  Why do you think this book has not received much attention?  It has been, I’d venture to say, all but forgotten or overlooked by even the most ardent fans of Hazlitt.  Is the book lacking something, or are there other factors at play here?

EY:          Hazlitt’s novel may not be “literary” enough for many people.  However, in my opinion, the author does skillfully use fiction to illustrate his teachings on economics.  I think that the book also has a good story line.  Economics professors tend to shy away from using it in their classes.  Some may be so quantitatively oriented that they cannot envision using a novel to teach economics.  Others may perceive the Austrian economics principles found in Time Will Run Back to not fit in with the Keynesian economics principles found in most textbooks (and of course they are right).

AM:       Thank you again for doing this interview.  All the best in 2014.

Exploring_Capitalist_Fiction Edward W. Younkins. Exploring Capitalist Fiction:  Business Through Literature and Film. Lanham, Maryland: Lexington Books, 2014.

***

Dr. Edward W. Younkins is Professor of Accountancy at Wheeling Jesuit University. He is the author of Capitalism and Commerce: Conceptual Foundations of Free Enterprise [Lexington Books, 2002], Philosophers of Capitalism: Menger, Mises, Rand, and Beyond [Lexington Books, 2005] (See Mr. Stolyarov’s review of this book.), and Flourishing and Happiness in a Free Society: Toward a Synthesis of Aristotelianism, Austrian Economics, and Ayn Rand’s Objectivism [Rowman & Littlefield Pub Incorporated, 2011] (See Mr. Stolyarov’s review of this book.). Many of Dr. Younkins’s essays can be found online at his web page at www.quebecoislibre.org. You can contact Dr. Younkins at younkins@wju.edu.

***

Allen Mendenhall is a writer, attorney, editor, speaker, and literary critic.  As of January 2013, he is a staff attorney for Chief Justice Roy S. Moore of the Supreme Court of Alabama.  He holds a B.A. in English from Furman University, M.A. in English from West Virginia University, J.D. from West Virginia University College of Law, and LL.M. in transnational law from Temple University Beasley School of Law.  He is a Ph.D. candidate at Auburn University, where he received a Graduate Dean Fellowship. He is managing editor of the Southern Literary Review and has been an adjunct legal associate at the Cato Institute as well as a Humane Studies Fellow with the Institute for Humane Studies in Arlington, Virginia.  He is a member of The Philadelphia Society and an associate of The Abbeville Institute and soon will serve as an ambassador for the Foundation for Economic Education (FEE).

He has studied at the University of London (Birkbeck College), the Shakespeare Institute of the University of Birmingham, Centro Universitario Vila Velha, Fundacao Getulio Vargas (Direito Rio), and the Tokyo campus of Temple University Beasley School of Law.

He is the author of over 100 publications in such outlets as law reviews, peer-reviewed journals, magazines, newspapers, literary journals and periodicals, and encyclopedias.  He lives in Auburn, Alabama, with his wife, Giuliana, and son, Noah, and blogs at The Literary Lawyer, The Literary Table, Austrian Economics and Literature, and TheMendenhall.

How Time and Uncertainty Can Make Us “Antifragile” – Article by David Howden

How Time and Uncertainty Can Make Us “Antifragile” – Article by David Howden

Comments 0 Comment
The New Renaissance Hat
David Howden
January 26, 2014
******************************

Antifragile: Things that Gain from Disorder, Nassim Nicholas Taleb (New York: Random House, 2012).

No two buzzwords define the present crisis more than “contagion” and “robustness” in the world of economists and policy wonks. The current interrelated nature of the financial system has bred a fragile situation where the success of the greater economy supposedly hinges on its individual components, such as banks that are too big to fail. To combat this fragility, economists have increasingly sought to build robust institutions. Such institutions will remain strong in the face of adverse effects if an individual component of the economy fails — be it subprime mortgages, sovereign debt, deposit-taking institutions or investment banks. This approach to the crisis stresses that if we cannot battle contagion, we had better construct strong institutions to weather future storms.

Nassim Taleb takes great issue with this approach in his new book Antifragile. His view is that constructing such so-called robust institutions is not sufficient as they continually fight yesterday’s battles. Instead the focus should be in building “antifragile” insti­tutions. Although often confused with robustness or resilience, an antifragile institution is not only unharmed by adverse events, but is actually strengthened by them. Building antifragile institutions will not only strengthen the global economic arena, but also have wide-ranging social applications.

Taleb’s latest work builds on two of his previous books, Fooled by Randomness (2001) and The Black Swan (2007). The common theme underlying all three is that there are events which are fundamentally unknowable — true uncertainties — in distinction to merely risky outcomes. Since we cannot know in advance what these events are, or what their effects will be, we should not exert too much effort in constructing contingency plans.

It is at this point that my first quibble with the book arises, and one I had with its predecessor The Black Swan. Taleb bifurcates between two definitions of uncertain events. On the one hand he invokes random or fundamentally unknowable events. Readers of this journal will be sympathetic to this definition of uncertainty, bearing close resemblance to Mises’s own use of “case probabilities”[1] (1949, pp. 110–113), or Shackle’s (1949) use of “non-seriable, non-divisible” events.[2] On the other hand, it is also clear that Taleb also thinks of uncertain events as merely rare events. These are events located on the fat or long tails on a probability distribution. Even though he thinks that these represent true uncertainty, there is no doubt that he is referring to funda­mentally probabilistic events.

This quibble aside, one can apply much of the remaining work cognizant that Taleb’s terminology differs from that of the Austrian economists, and also that the domain of his theory is slightly different than he thinks.

Something is “antifragile” if it gets stronger from a negative event. What are some examples? Taleb applies the prefix of his book liberally to outline what choices we should be pursuing. Indeed, the body of the book gives a long list of antifragile actions that, at least on one level, boil down to doing the exact opposite of what you think you should be doing.

Authors should be shocked to learn that there is almost no news that can harm a writer’s credibility, and that any publicity is good publicity (pp. 51–52). Corporations and governments that try to “reinstill confidence” should not be trusted because they would do so only if they were ultimately doomed (p. 53). Children shouldn’t be on antidepressants as this removes a source of learning from the life experience and thus make individuals less capable of dealing with unwanted events later in life (p. 61). The sinking of the Titanic was a positive disaster as it put shipbuilders on their toes, and possibly avoided an even larger accident later (p. 72). The general theme is that those who make errors are stronger than those who don’t — reliability, or antifragility — only comes when something is regularly tested by an unwanted event.

The theory has merit. Consider this lesson applied to central bank policies. In the wake of the dot-com bust a concerted effort by the world’s central banks flooded the global financial system with liquidity. The liquidation of assets that should have happened never did, and as a result lenders and borrowers didn’t learn their lesson on prudential money management. The seeds were sown for the larger crisis starting in 2007–2008 because a simple lesson was not learned when the financial system’s problems were still in relative infancy.

There is much to learn from this book and much to be wary of. At the end of the day, Taleb reckons the best test of an anti-fragile institution is Mother Nature mixed with a healthy dose of time. In chapter 21 he criticizes the prevailing orthodoxy of “neomania,” the mistaken belief that newer is better. Those institutions that have existed the longest are, in all likelihood, those that will continue to exist into the future. As an example, imagine that the year is 1988 and answer the following: which structure will last the longest, the Berlin Wall or the Great Pyramid of Giza.

In this test, as in much of the book, Taleb asks too much and too little. He asks too much because those institutions with the most longevity were once upon a time also the ones with the least. There must be a better test than longevity, as it only pushes the problem back in time to identify the source of antifragility. It cannot be turtles all the way down.

An applied example relevant to the present financial crisis would involve looking for those institutions that have been strengthened by current affairs. The crisis has taken its toll on many aspects of the financial services industry, but some general types of products have proven surprising resilient, or antifragile. Governments with prudent fiscal policies — e.g., Germany, Switzerland and Singapore — have fared well and indeed been strengthened as finances deteriorate in more profligate countries. Investment funds capitalizing on what were once unorthodox strategies, such as gold and other precious metal holdings, have out-performed more traditional investments as the financial crisis worsens. Readers of this journal will also notice that their stock in Austrian economics has increased in value over the past decade. Question begging and failed policies developed through more mainstream theories have led many former outsiders to the ranks of Austrian economists. An unwanted event caused an offsetting positive outcome in all these scenarios. That is what being antifragile is about.

Taleb asks too little by not exploring the true sources of antifragility. He comes close, alluding in many places that market-based institutions better combat the false security that planned institutions create. Explaining and elaborating on this link would do much to take the fundamental merits of antifragility to the next level. It would be, however, fodder for another book.

References

[1] Mises, Ludwig von. 1949. Human Action: A Treatise on Economics. Auburn, Ala.: Mises Institute, 1998.

[2] Shackle, G. L. S. 1949. Expectations in Economics. Westport, Conn.: Gibson.

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University’s Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute’s Douglas E. French Prize. Send him mail. See David Howden’s article archives.

This article first appeared in the Fall 2013 edition of The Quarterly Journal of Austrian Economics.

Pursuing the Outcomes of a Free Market – Video by G. Stolyarov II

Pursuing the Outcomes of a Free Market – Video by G. Stolyarov II

Comments 0 Comment

What hope is there to actually achieve the ideals of liberty in our lifetimes? There is a promising approach, encapsulated in the following method. Ask yourself: What results would a fully free market, functioning in accordance with the principles of liberty and individual rights, bring about? Now go pursue those results directly, through your individual actions, without waiting for the system to change.

References:
– The Musical Compositions of G. Stolyarov II
– “Occupy Wall Street activists buy $15m of Americans’ personal debt” – Adam Gabbatt – The Guardian – November 12, 2013

Pursuing the Outcomes of a Free Market – Article by G. Stolyarov II

Pursuing the Outcomes of a Free Market – Article by G. Stolyarov II

Comments 0 Comment
The New Renaissance Hat
G. Stolyarov II
November 13, 2013
******************************

            Those of us who love liberty wish to see a free-market society in our lifetimes. But, as a near-term prospect, a society even approximating a thorough respect of individual rights and free exchange is not on the horizon. The best liberty-oriented activism, culminating in the passionate, motivated support for Ron Paul during his 2012 Presidential campaign, has only gained the ideas of liberty the sympathy of perhaps 15% of the United States population, with the ability to attract perhaps a few more percentage points in tactical alliances on specific issues. This is not enough to catalyze system-wide change and turn around the steadily deteriorating political situation. Probably the best near-term hope for the system is some semblance of the 1990s – a glorious time for liberty by comparison to today! This could be achieved if enough people are galvanized to oppose and overturn NSA surveillance, meaningless foreign wars, and the never-ending domestic “wars” on drugs and terror, which have always ultimately turned into wars on innocent, law-abiding Americans. Such an outcome would produce a sigh of relief from the liberty-minded, but it still would not be close to a free market; it would just be somewhat sane and non-totalitarian.

            But if persuasion has not succeeded in convincing even a plurality of the population (at least for now) and if political change in the near term would mostly consist of reversing the most blatant, egregious travesties of justice, then what hope is there to actually achieve the ideals of liberty in our lifetimes? There is a promising approach, encapsulated in the following method. Ask yourself: What results would a fully free market, functioning in accordance with the principles of liberty and individual rights, bring about? Now go pursue those results directly, through your individual actions, without waiting for the system to change.

            Yes, there are limits to this approach. One limit is the law, whose prohibitions and mandates today will certainly constrain certain beneficial courses of action that would have been possible on the free market, while requiring people to spend their time on other courses of action that the free market would have rendered unnecessary. Yet the approach I propose can still do considerable good within the bounds of current laws in any political system less oppressive than that of Oceania in George Orwell’s 1984. Another limit is that the outcomes of a fully free market are not entirely foreseeable. Future discoveries and innovations by free individuals are the currently unseen benefits of voluntary action and exchange, and we cannot always anticipate them in advance. Even with this recognition, though, it is possible to reasonably anticipate that a free market would uplift human beings materially, intellectually, morally, and culturally. People in a free society would be more prosperous, more knowledgeable (and better able to distinguish good ideas from bad), less inclined to aggression against their fellow men, and more inclined to refined tastes (as a result of increased prosperity, leisure time, and sense that life is generally good).

            Direct, peaceful, lawful action by individuals today can bring about many of the results of a free market even without a free market being legally in place or supported by the majority of people. Furthermore, such results can be brought about by actions that are themselves fully consistent with free-market principles, since they would be entirely voluntary and respectful of the rights of others. There is one catch: the activities that would be profitable on a free market would not necessarily be so today. Their cost would need to be absorbed using one’s own resources, and one would need to consider the outcome not a loss, or even a sub-optimal profit, but rather a moral profit that outweighs the material cost, including the opportunity cost, in time and money.

            To give an example, I compose classically inspired music and give recordings away for free online using a Creative Commons license. In a free market, which over time would uplift the tastes of the general public, the production of high music (which would be simultaneously sophisticated and appealing to the human ear) would be much more remunerative than it is today, and the likes of Justin Bieber and Miley Cyrus would be relegated to the ever-thinning ranks of the dregs of society. This hypothesis is supported by history: in prior, far less prosperous but economically freer eras, composers of high music were often seen as celebrities, with Wolfgang Amadeus Mozart, Felix Mendelssohn, Giuseppe Verdi, and Johann Strauss II being just a few examples. Today, creators of good music have to content themselves with far less remuneration than the dubious pop idols, manufactured by politically connected and protected record labels. However, no one inhibits the freedom to compose, and the available tools for doing so are more impressive than ever before. Voluntary private action can increase the abundance of newly produced high culture in music, art, and literature. Similarly, voluntary private research initiatives, ranging from the humanities to mathematics to DIY biology, can hasten the rate of meaningful discoveries in order to more closely approximate the pace of intellectual and technological progress that would occur in a free market. With the hyper-empowerment made  possible through recent electronic technologies, the opportunities for any individual to make a difference in a field today exceed those available to large laboratories, academic departments, workshops, and orchestras in the mid-20th century. Thus, one person with free-market sympathies, acting on his own time with his own resources, can often achieve more than teams of people working through established institutions using old patterns of production, whose obsolescence is becoming glaringly obvious to anyone who pays attention.

            As an added bonus, creating free-market outcomes in accordance with free-market principles will, in any system, highlight the benefits and possibilities of voluntary, private action to those who might otherwise be unconvinced. It appears to me, from observation and experience, that theoretical and abstract arguments for the benefits of liberty are not sufficient to persuade anyone who is not already extremely theoretically inclined – a tiny minority of the human population. For everyone else, practical demonstrations of how freedom would work are far more powerful than the most finely honed theory of liberty. Probably, the majority of people would only come to support free markets once liberty-minded people have, de facto, built an entire free market around them by informally approximating its outcomes and workings. At that time, achieving a formal free market would just be a matter of “flipping the switch” on the entire system and amending the laws (with popular consent) to recognize the kind of societal order that would have already formed in practice.

            Interestingly enough, Rolling Jubilee, a more recent initiative by the Occupy movement, has valuable lessons to teach free-market advocates regarding the approach of pursuing desired outcomes directly. No, I am not referring to physical occupations of public places, but rather the efforts to purchase consumer debt on the secondary market (at deep discounts) and subsequently to abolish such debt, freeing consumers of its burden.  While the economic ideas of members of the Occupy movement often differ from free-market views, this initiative has achieved an objective that free-market advocates should find salutary: the reduction of the total outstanding amount of consumer debt, much of which was the result of a credit bubble fueled by the reckless inflationary monetary policy of the Federal Reserve. Furthermore, much today’s outstanding consumer debt is an outcome of cultural malaise brought about by generations of unfreedom, as a result of which a condition of financial dependency has come to predominate instead of self-reliance and the robustness to contingencies that can only come about due to a buffer of present owned resources. Freer-market cultures tend to be more contemptuous of reliance on personal debt, and it is thus reasonable to expect the total amount of debt on a free market to be less than exists today. The Occupy movement did not wait for authoritative permission, or for majority agreement, or for system-wide change. Rather, members pooled their resources and, by paying $400,000, managed to annul $14 million of consumer debt. It is a drop in the bucket of the entire problem, to be sure, but it is also an invaluable proof of concept for the project of massive societal transformation through voluntary, private action.

            Direct, peaceful, law-abiding action to bring about the outcomes of a free market would also help in another crucial respect by rehabilitating the image of free markets in the eyes of skeptics. The outcome of the course of action I propose would not be profit maximization in the present day; indeed, it would often require working for free on one’s own time and engaging in acts that would be considered charitable or philanthropic by professed opponents of the market. Even businesses that espouse free-market ideas could join in on this project and pursue practices that, while they may not capture every morsel of profit out there for the taking, are more in accord with how a free market would behave. Such businesses could, for instance, voluntarily renounce lobbying for special privileges and barriers to entry that would keep competitors out of the market.  They could also spend resources to improve workplace conditions and surrounding neighborhoods in order to better approximate how workplaces and neighborhoods would look under a prosperous free market. Furthermore, internal salary schedules in such businesses could be based on an approximation of meritocracy as it would emerge on a free market, which would often mean higher compensation for innovative and talented employees (irrespective of age, origin, past socioeconomic circumstances, or connections), resulting in greater retention, improved morale, better products, and long-term competitive advantages for the business that undertakes such a step. To certain onlookers, these behaviors might seem consistent with what is today called “corporate social responsibility” – and perhaps they would be. But by engaging in these practices in the name of striving toward a free-market ideal, liberty-minded businessmen could perhaps for the first time break through to capture the hearts and minds of many present-day detractors.

            What outcomes do you think would be achieved by a free market but are deficient today? Now go work to make them happen.

Free Your Talent and the Rest Will Follow – Article by Orly Lobel

Free Your Talent and the Rest Will Follow – Article by Orly Lobel

Comments 0 Comment
The New Renaissance Hat
Orly Lobel
October 17, 2013
******************************

Imagine two great cities. Both are blessed with world-class universities, high-tech companies, and a concentration of highly educated professionals. Which will grow faster? Which will become the envy and aspiration for industrial hubs all around the world?

Such was the reality for two emerging regions in the 1970s: California’s Silicon Valley and the high-tech hub of Massachusetts Route 128. Each region benefited from established cities (San Francisco and Boston), strong nearby universities (University of California-Berkeley/Stanford and Harvard/MIT), and large pools of talented people.

We’ve all heard about Silicon Valley, but not so much Route 128. Despite their similarities, and despite the Bostonian hub having three times more jobs than Silicon Valley in the 1970s, Silicon Valley eventually overtook Route 128 in number of start-ups, number of jobs, salaries per capita, and invention rates.

The distinguishing factor for Silicon Valley was an economic environment of openness and mobility. For more than a century, dating back to 1872, California has banned post-employment restrictions. The California Business and Professions Code voids every contract that restrains someone from engaging in a lawful profession, trade, or business. This means that unlike most other states, California’s policy favors open competition and the right to move from job to job without constraint. California courts have repeatedly explained that this ban is about freeing up talent, allowing skilled people to move among ventures for the overall gain of California’s economy.

The data confirm this intuition: Silicon Valley is legendary for the success of employees leaving stable jobs to work out of their garages, starting new ventures that make them millionaires overnight. Stories are abundant of entire teams leaving a large corporation to start a competitive firm. Despite these risks, California employers don’t run away. On the contrary, they seek out the Valley as a prime location to do business. Despite not having the ability to require non-compete clauses from their employees, California companies compete lucratively on a global scale. These businesses think of the talent wars as a repeat game and find other ways to retain the talent they need most.

In fact, the competitive talent policy is also supported by a market spirit of openness and collaboration. Even when restrictions are legally possible—for example, in trade secret disputes—Silicon Valley firms frequently choose to look the other way. Sociologist Annalee Saxenian, who studied the industrial cultures of both Silicon Valley and Route 128 in Massachusetts, found that while Boston’s Route 128 developed a culture of secrecy, hierarchy, and a conservative attitude that feared exchanges and viewed every new company as a threat, Silicon Valley developed an opposing ethos of fluidity and networked collaborations. These exchanges of the Valley gave it an edge over the autarkic environment that developed on the East Coast. In Massachusetts, firms are more likely to be vertically integrated—or to have internalized most production functions—and employee movement among firms occurs less frequently.

New research considering these different attitudes and policy approaches toward the talent wars supports California’s modus operandi.

A recent study by the Federal Reserve and the National Bureau of Economic Research examined job mobility in the nation’s top 20 metropolitan areas and found that high-tech communities throughout California—not only Silicon Valley—have greater job mobility than equivalent communities in other states. Network mapping of connections between inventors also reveals that Silicon Valley has rapidly developed denser inventor networks than other high-tech hubs have.

Researching over two million inventors and almost three million patents over three decades, a 2007 Harvard Business School study by Lee Fleming and Keon Frenken observes a dramatic aggregation of the Silicon Valley regional networks at the beginning of the 1990s. Comparing Boston to Northern California, the study finds that Silicon Valley mushroomed into a giant inventor network and a dense superstructure of connectivity, as small isolated networks came together. By the new century, almost half of all inventors in the area were part of the super-network. By contrast, the transition in Boston occurred much later and much less dramatically.

Michigan provides a natural experiment for understanding the consequences of constraining talent mobility. Until the mid-1980s, Michigan, like California, had banned non-competes. In 1985, as part of an overarching antitrust reform, Michigan began allowing non-competes, like most other states. Several new studies led by MIT Sloan professor Matt Marx look at the effects of this change on the Michigan talent pool. The studies find that not only did mobility drop, but that also once non-competes became prevalent, the region experienced a continuous brain drain: Its star inventors became more likely to move elsewhere, mainly to California. In other words, California gained twice: once from its intra-regional mobility supported by a strong policy that favors such flows, and once from its comparative advantage over regions that suppress mobility.

A virtuous cycle can be put into motion geographically where talent mobility supports professional networks, which in turn enhance regional innovation. Firms can learn to love these environments of high risk and even higher gain. Rather than thinking of every employee who leaves the company as a threat and an enemy, smart companies are beginning to think of their former employees as assets, just as universities wish for the success of their alumni. Companies like Microsoft and Capital One have established networks of alumni. They showcase their former employees’ achievements and practicing rehiring of their best talent, hoping that at least some of those who leave will soon realize that the grass is not always greener elsewhere.

Most importantly, motivation and performance are triggered by commitment and positive incentives to stay, rather than threats and legal restrictions against leaving. In behavioral research I’ve conducted with my co-author On Amir, we find that restrictions over mobility can suppress performance and cause people to feel less committed to the task. Cognitive controls over skill, knowledge, and ideas are worse than controls over other forms of intellectual property because they prevent people from using their creative capacities, they don’t just prevent firms from using inventions that are already out there. So instead of requiring non-competes or threatening litigation over intellectual property, California companies use rewards systems, creating the kind of corporate cultures where employees want to work and do well. Again, a double victory.

Unsurprisingly, when Forbes recently looked at the most inventive cities in the country for 2013 using OECD data, the two top cities were in California: bio-tech haven San Diego, and the legendary home of Silicon Valley, San Francisco. Boston, still vibrant and highly innovative despite its most restrictive attitudes, came in third. Competition is the lifeblood of any economy, and fierce competition over people is the essence of the knowledge economy.

Orly Lobel is the Don Weckstein Professor of Law at the University of San Diego and founding faculty member of the Center for Intellectual Property and Markets. Her latest book is Talent Wants to be Free: Why We Should Learn to Love Leaks, Raids, and Free-Riding (Yale University Press, September 2013).

This article was originally published by The Foundation for Economic Education.